An Insurer Cannot Safely Refuse Defense and Indemnity in Illinois

Illinois Finds Failure to File a Declaratory Relief Action Vexatious

The Valuable Dead Dog

Country Mutual Insurance Company appealed the trial court’s grant of summary judgment to plaintiff, Sabas Soto, finding defendant acted vexatiously and unreasonably and awarding plaintiff attorney fees under section 155 of the Illinois Insurance Code (Code)). Plaintiff cross-appealed, arguing that the court erred in reducing the attorney-fee award and in failing to award him additional statutory damages.

In Soto v. Country Mutual Insurance Company and Stephen Tallitsch and Gavin Wilson, Not Reported in N.E.3d, Appellate Court of Illinois, No. 2-16-0720, 2017 IL App (2d) 160720-U (May 11, 2017) a second appeal for the loss of a valuable dog was asked to give more attorneys fees and punish the insurer for denying the claim for not filling a declaratory relief action to find its decision to deny correct.


This is the second appeal originating from the death of Boris, plaintiff’s pure-bred giant schnauzer. While in the Country Side Pet Motel’s care, Boris was struck and killed by an automobile. Plaintiff sued the Pet Motel for negligence, alleging that, while Boris was in its “exclusive care, custody, and control,” the Pet Motel failed to exercise reasonable care for his safety, directly resulting in his death. The complaint requested $30,000 in damages (in part based upon the loss of Boris’s future “stud services”).

The Pet Motel submitted the lawsuit to defendant, requesting defense and indemnification under an existing policy. On September 11, 2012, defendant wrote to the Pet Motel, denying coverage and declining to hire an attorney to represent it or to pay for any settlement, judgment, or verdict amount. According to the rejection letter, because of a policy exclusion that did not cover “personal property” in the insured’s “care, custody, or control,” there was no coverage for the alleged negligence under the policy’s “Commercial General Liability Coverage.” However, according to defendant, the “Building and Personal Property Coverage Form, Coverage Extensions” provided for a “personal property of others” payment to plaintiff in the maximum amount of $2500.

Accordingly, plaintiff sued defendant, alleging breach of contract by virtue of its failure to defend or indemnify the Pet Motel in the negligence lawsuit. The trial court (1) found that defendant had a duty to defend the Pet Motel in plaintiff’s negligence action; (2) found that it breached its duty to defend and was, therefore, estopped from asserting any policy defenses in the coverage dispute; and (3) entered judgment against defendant and in plaintiff’s favor in the amount of $60,810.72.

After hearing argument, the court granted summary judgment in plaintiff’s favor and denied defendant’s cross-motion for summary judgment. The trial court concluded that the insurer ignored a clear potential for coverage. Additionally, defendant needlessly made discovery difficult by not voluntarily presenting an employee who could provide information requested by the assignee. The court further decided to “use its discretion” to not impose any of the additional sanctions available.

The court awarded attorney fees in the amount of $49,000. In doing so, it reduced the award from the requested $65,794.50.


Defendant argued on appeal that the trial court erred in awarding attorney fees to plaintiff. Defendant argued that the issue of estoppel differs from the vexatious-and unreasonable standard.

An insurer will not be liable for fees and costs merely because it litigated and lost the issue of insurance coverage. If a bona fide dispute existed regarding insurance coverage, the insurer’s delay in settling a claim does not violate the statute. In determining whether the statute applies, the trial court must consider the totality of the circumstances, including the insurer’s attitude, whether the insured was forced to sue to recover, and whether the insured was deprived of the use of her or his property.

The trial court’s ultimate ruling, deciding that defendant’s actions satisfied the statute and justified attorney fees, but not additional sanctions, reflected an exercise of discretion.

The court could not conclude that the trial court abused its discretion in finding that, under the totality of circumstances, defendant’s failure to defend under a reservation of rights or file a declaratory judgment action was vexatious and unreasonable. Here, there was no bona fide (i.e., real or genuine) challenge because defendant did not engage in one. It simply denied coverage and informed its insured that it would not defend or pay for any settlement, judgment, or verdict amount (although it offered $2500 under the policy).

Although a second appeal no court litigated or ruled that defendant believed it had a bona fide defense to coverage.

Because the legitimacy or merits of defendant’s alleged coverage defenses have not been squarely before any court, the issue here concerns whether defendant’s decision that it was clearly not required to seek declaratory relief or defend under a reservation of rights was unreasonable and vexatious (not whether its position that there was no actual coverage was bona fide).

Noting that the duty-to-defend threshold is low: the complaint need present only the possibility, not probability, of recovery under the policy. Thus, even though the threshold is low and the complaint and policy should be compared liberally in the insured’s favor to consider whether there is a potential for coverage, defendant determined, under the circumstances of this case, that it was so clear that there was no potential for coverage that it did not need a neutral arbiter to decide whether its interpretation was correct.

The court of appeal could not dispute or find an abuse of discretion in the trial court’s finding that defendant’s application of that authority under the facts of this particular case was vexatious (annoying and frustrating) and unreasonable.

Here, defendant issued a liability policy to a dog kennel, a business which boards and cares for animals belonging to others. The complaint alleged negligence due to the death of an animal boarded there. The policy here covers negligence and property damage, but then has various exclusions and other inclusions which resulted in it not being “clear” that there was “no potential coverage.”

Even if it were likely that there was no actual coverage under the policy, defendant’s actions to not defend or seek relief from defending through a declaratory action were improvident because the nature of the policy, business purposes of the insured, and the complaint allegations were simply not, under these circumstances, clearly divorced from any potential of coverage.

Contrary to defendant’s suggestion, affirming the trial court’s ruling here is not equivalent to a finding that, as a matter of law, behavior that results in estoppel automatically constitutes vexatious and unreasonable conduct. Rather, the court of appeal held that it was not an abuse of discretion for the trial court to find, under the totality of the circumstances here, that defendant’s decision not to seek declaratory relief or defend under a reservation of rights was vexatious and unreasonable.

Further, the circumstances reflect that defendant’s sole response to its insured was to offer $2500, less than 10% of the damages the insured was facing in the complaint alone, let alone any attorney fees or costs.

The trial court further found, based upon its knowledge of the case, that defendant was vexatious and unreasonable during discovery. Accordingly, the court’s attorney-fees award was not an abuse of discretion.


The untimely death of Boris the schnauzer resulted in two lawsuits and two appeals which clearly cost more than the stud value of the dog. The insurer, feeling there was a clear and unambiguous exclusion, refused to defend and indemnify. Whether the insurer was correct was never litigated.  With 20/20 hindsight the trial and appellate courts found the denial to be vexatious and assessed sanctions. Therefore, in Illinois, an insurer cannot deny a claim and refuse to defend without seeking advice of a court or be punished.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide

The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at

Mr. Zalma’s three new e-books  were recently added and are available at

Mr. Zalma’s reports can be found on Tumbler at,  on Facebook at and you can follow him on Twitter at

Legal Disclaimer:

The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.



About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
This entry was posted in Zalma on Insurance. Bookmark the permalink.