Applying The Peppers Doctrine, Illinois Appellate Court Affirms Stay Of Insurer’s Declaratory Judgment Action

In Sentry Ins. v. Cont’l Cas. Co., 2017 IL App (1st) 161785, the Appellate Court of Illinois, First District had occasion to consider whether a trial court properly entered a stay on an insurer’s declaratory judgment action when interpreting the applicability of coverage exclusions would determine an ultimate fact in the underlying litigation.

The underlying cases involve approximately 65 consolidated claims against Northwestern Memorial Hospital. The underlying plaintiffs provided semen and testicular tissue samples to Northwestern for safekeeping. The plaintiffs stored their samples with Northwestern between April and June 2012. Allegedly their samples thawed and were irreversibly damaged due to the failure of a cryopreservation tank.

Northwestern maintained a commercial general liability policy with Sentry Insurance and an excess policy with Continental. On October 16, 2014, Sentry filed a declaratory judgment against Northwestern and Continental, arguing that the Sentry policy did not provide coverage for the underlying claims against Northwestern. Pointing to discovery and various pleadings from the underlying suit, Sentry argued that the “care, custody, or control” and “professional services” exclusions established that the Sentry policy did not afford coverage for the underlying suits. On that basis, Sentry sought a declaratory judgment that it owed no duty to defend or indemnify Northwestern. Sentry further sought reimbursement of the amount spent thus far in defending the underlying lawsuits. Continental was also named a defendant in the declaratory judgment action. Continental filed an answer and counterclaim against Sentry and Northwestern, which contained substantially identical factual allegations as Sentry’s complaint.

On May 19, 2016, the trial court stayed the matter, finding it was too early in the litigation to decide whether Northwestern had exclusive control over the damaged samples or if professional services were required to handle and care for them. Sentry and Continental appealed.  Prior to the appellate court’s decision on the matter, Sentry settled with Northwestern and asked the trial court to dismiss its appeal, leaving only Continental on appeal.

On March 24, 2017, the appellate court affirmed the stay. The appellate court noted that the trial court correctly applied the ruling from the 1976 Illinois Supreme Court case, Maryland Casualty Co. v. Peppers.

In Peppers, the trial court was asked to determine whether an insurer owed a duty to defend its insured in a personal injury action that alleged intentional, negligent, and willful and wanton conduct. After a bench trial, the trial court found that the insured’s actions were intentional and, therefore, there was no coverage under the policy. In reversing the trial court’s decision, the Illinois Supreme Court stated that, under the principle of collateral estoppel, the finding in the declaratory judgment action that the injury was intentionally inflicted “could possibly establish the allegations of the assault count in the complaint and might preclude [the underlying plaintiff’s] right to recover under the other theories alleged.” Later cases aptly referred to this ruling as the Peppers doctrine. Under the Peppers doctrine, “it is generally inappropriate for a court considering a declaratory judgment action to decide issues of ultimate fact that could bind the parties to the underlying litigation.”

The appellate court in Sentry stated that a ruling that either the “care, custody, or control” or the “professional services” exclusion applied would be prejudicial with respect to the underlying case because it could, in effect, serve to estop the underlying plaintiffs from raising a theory of recovery. The court also noted that deciding the applicability of the “care, custody, or control” or the “professional services” exclusions would decide an issue crucial to the insured’s liability in the underlying case. Thus, the appellate court held that a stay was appropriate.

The appellate court also addressed Continental’s argument that, even if the court granted a stay, the trial court should have found there was no duty to defend Northwestern in the underlying matter. In rejecting Continental’s argument, the court noted the possibility of coverage leads to an insurer’s duty to defend. Since there was no way to determine whether the policy exclusions apply (without running afoul of the Peppers doctrine, as discussed above), there was still a possibility of coverage. The court noted the applicably of the policy exclusions “is not free and clear from doubt” and “we must resolve any doubts as to coverage in favor of [Northwestern].” Thus, Continental continued to owe Northwestern a duty to defend.