Filed 8/13/08             NO. 4-07-0658

                     IN THE APPELLATE COURT

                           OF ILLINOIS

                         FOURTH DISTRICT

ECONOMY FIRE & CASUALTY COMPANY;       )   Appeal from
ST. PAUL FIRE & MARINE INSURANCE       )   Circuit Court of
COMPANY; METLIFE AUTO & HOME; and      )   Champaign County
METROPOLITAN PROPERTY & CASUALTY       )   No. 00CH118
INSURANCE COMPANY and Its Affiliates, )
Warwrick, Rhode Island,                )
          Plaintiffs and               )
          Counterdefendants-           )
          Appellees and Cross-         )
          Appellants,                  )
          v.                           )
HOLLIS L. BRUMFIELD,                   )
          Defendant and                )
Counterplaintiff-                      )
Appellant and Cross-                   )
Appellee,                              )
          and                          )
MICHAEL J. DREWES; CONSTANCE DREWES;   )
BEAU DREWES; ZACHARY FITZPATRICK; DAN )
FITZPATRICK; CINDY FITZPATRICK;        )
STEVE MILLER, Trustee in Bankruptcy    )
for the Estate of BEAU DREWES and      )
MICHAEL J. DREWES; AMERICAN FAMILY     )
INSURANCE COMPANY; and PERSONALCARE    )   Honorable
HEALTH MANAGEMENT, INC.,               )   Harry E. Clem,
          Defendants.                  )   Judge Presiding.
_________________________________________________________________

          JUSTICE TURNER delivered the opinion of the court:

          This litigation arises from an October 1999 car acci-

dent, in which defendant Beau Drewes, who was driving a vehicle

owned by his father and defendant Michael Drewes, struck a

vehicle driven by defendant and counterplaintiff-appellant and

cross-appellee Hollis L. Brumfield.   Michael's car was insured by

plaintiff and counterdefendant-appellee and cross-appellant
Economy Fire and Casualty Company (Economy Fire), a subsidiary of

St. Paul Fire and Marine Insurance Company (St. Paul).     St. Paul

was sold to Metlife Auto and Home (Metlife), a branch of Metro-

politan Property and Casualty Insurance Company and its affili-

ates (Metropolitan) (St. Paul, Metlife, and Metropolitan are

collectively referred to as counterdefendants).     Brumfield

brought suit and obtained a judgment against Beau.     Economy Fire

had declined to defend Beau and had filed this declaratory-

judgment action.   Beau assigned any cause of action he had

against Economy Fire to Brumfield, who filed a counterclaim in

this case, asserting Economy Fire breached its duty to defend

Beau.

          Brumfield appeals several orders of the Champaign

County circuit court that resulted in him being denied damages

after the court had found Economy Fire breached its duty to

defend Beau.   On appeal, he contends Economy Fire's breach of the

duty to defend Beau caused Beau damages because (1) Beau lost the

opportunity to settle Brumfield's claim against him and (2) the

judgment against Beau would have been less if he had been repre-

sented by counsel.   We affirm.

                           I. BACKGROUND

          At the time of the October 1999 accident, one of Beau's

passengers was defendant Zachary Fitzpatrick, whose parents are

defendants Dan and Cindy Fitzpatrick.     The Fiztpatricks' suit


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against Beau and Michael is not raised by the parties in this

appeal.   Additionally, we note defendant Constance Drewes is

Beau's mother and Michael's wife and was a named insured on the

insurance policy with Economy Fire.

            On January 18, 2000, Brumfield filed a negligence

complaint against Beau based on the October 1999 accident.      The

complaint did list Michael as a respondent in discovery but did

not raise any allegations against him.    Beau's permission to use

Michael's vehicle was not raised by the complaint.    In a January

27, 2000, letter, an insurance agent of St. Paul informed Beau

that, based on his and Michael's statements, it was clear Beau

was not a permissive driver at the time of the October 1999

accident.   Thus, the insurer denied coverage to Beau under his

parents' policy, and the agent informed Beau that "any claims

which may be made against you will be your personal responsibil-

ity."

            In July 2000, Economy Fire filed a declaratory-judgment

action, seeking a judgment that Beau was entitled to neither a

defense nor indemnity in Brumfield's suit because Beau did not

have Michael's permission to drive the vehicle involved in the

accident.   In August 2000, Brumfield filed an amended complaint,

raising negligent-entrustment and spoliation-of-evidence claims

against Michael.   The negligent-entrustment count alleged that

Michael entrusted his vehicle to Beau, "who was, therefore,


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operating said vehicle with the permission of [Michael] at the

time of the collision."    Brumfield attached his amended complaint

to his answer in the declaratory-judgment case.

            In September 2000, Economy Fire and the other

counterdefendants filed a motion for a default judgment against

Michael, Constance, and Beau in the declaratory-judgment action.

Brumfield filed an objection to the default-judgment motion.        In

November 2000, a default judgment was entered against Beau in the

Brumfield suit.    In December 2000, the trial court held a hearing

on Economy Fire's default-judgment motion.      Beau did not appear

at the hearing, but Brumfield did.      The court granted Economy

Fire's motion.

            In January 2002, a jury found in favor of Brumfield on

the negligent-entrustment count and awarded him a $468,958.24

judgment.    Economy Fire paid Brumfield the $100,000 bodily-injury

limit.

            In April 2002, Michael and Beau individually filed for

bankruptcy under chapter 7 of the United States Bankruptcy Code

(11 U.S.C. §§701 through 784 (2000)).      In July 2002, defendant

Steve Miller, the trustee in bankruptcy for Michael's and Beau's

estates, filed a motion for substitution of parties, seeking to

be substituted as a defendant in place of Michael and Beau.      The

parties did not object to the motion, and the trial court allowed

it.   Miller also filed a motion to set aside the default judgment


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against Michael and Beau, which the court granted after a Septem-

ber 2002 hearing.

          In October 2002, Miller filed, inter alia, a counter-

claim against Economy Fire and the other counterdefendants.    The

counterclaim alleged Economy Fire had a duty to provide a defense

for Beau in the Brumfield suit.    That same month, Miller entered

into an agreement with Brumfield, under which Miller assigned any

cause of action the bankruptcy estates may have against Economy

Fire and the other counterdefendants.    In January 2003, the trial

court granted Miller's motion to substitute Brumfield in his

place as counterplaintiff.

          In September 2003, Brumfield filed a first-amended

counterclaim, asserting breach of contract.   Brumfield contended,

inter alia, (1) Economy Fire had a duty to defend Beau, (2)

Economy Fire had a conflict in representing and defending both

Beau and Michael in Brumfield's suit, (3) Economy Fire had a duty

to notify Beau of the conflict and his right to independent

counsel, (4) Economy Fire negligently or in bad faith informed

Beau any claims against him were his personal responsibility, and

(5) Economy Fire had the opportunity to settle the claim against

Beau for $100,000, and thus Beau suffered damages in the amount

of the judgment over $100,000.    That same month, Economy Fire and

the other counterdefendants filed a motion to dismiss the first-

amended counterclaim.


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           In January 2004, the trial court granted the motion to

dismiss with prejudice, finding Brumfield needed to prove Economy

Fire acted in bad faith with Beau in this matter and under no set

of circumstances could Brumfield plead facts constituting bad

faith.   Brumfield appealed, and this court concluded Brumfield

did not need to plead facts alleging Economy Fire acted in bad

faith to recover damages in excess of the policy limits.     Thus,

we reversed the trial court's order on the motion to dismiss and

remanded the cause for further proceedings.   Economy Fire &

Casualty Co. v. Brumfield, No. 4-04-0142 (December 13, 2004)

(unpublished order under Supreme Court Rule 23).

           In January 2006, Economy Fire and the other

counterdefendants filed a motion for summary judgment on

Brumfield's first-amended counterclaim.   That same month,

Brumfield also filed a motion for summary judgment on his coun-

terclaim, asserting Economy Fire breached its duty to defend Beau

because it did not defend Beau or offer to pay for an independent

defense.   In August 2006, the trial court entered a written

judgment on the cross-motions for summary judgment, finding a

conflict of interest existed between Beau and Michael and thus

Economy Fire was obligated to notify Beau and offer to pay for

independent counsel to represent his interests.    The court found

Economy Fire had breached its duty to defend Beau and granted

Brumfield's motion for summary judgment as to that liability


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issue.   It denied (1) the remainder of Brumfield's motion for

summary judgment and (2) Economy Fire and the other

counterdefendants' motion for summary judgment.

           In September 2006, Brumfield filed a motion for summary

determination of major issues, seeking to have the trial court

determine whether he would be permitted to meet his burden of

proving proximate causation of damages by showing Economy Fire's

breach of the duty to defend caused Beau to lose a settlement

opportunity prior to trial.   That same month, counterdefendants

filed a motion for reconsideration of summary judgment.   On

February 27, 2007, the court denied both motions.   Brumfield

filed a motion to reconsider the denial of his motion for summary

determination of major issues, which the court also denied.     In

June 2007, the court held a hearing on the issue of damages.     At

the close of Brumfield's case, Economy Fire and the other

counterdefendants made a motion for a directed verdict, which the

court granted.   On July 6, 2007, the court entered a written

order memorializing the directed-verdict finding.

           On August 2, 2007, Brumfield filed a timely notice of

appeal from the trial court's July 6, 2007, and February 27,

2007, orders.

                           II. ANALYSIS

                  A. Breach of the Duty To Defend

           We first address Economy Fire and the other


                               - 7 -
counterdefendants' argument the trial court erred by granting

Brumfield a partial summary judgment on the issue of breach of

the duty to defend Beau because (1) if the court's ruling was

erroneous, the damages issues would be moot and (2) we may affirm

the trial court's judgment on any basis the record supports

(Stoll v. United Way of Champaign County, Illinois, Inc., 378

Ill. App. 3d 1048, 1051, 883 N.E.2d 575, 578 (2008)).    We review

de novo the trial court's ruling on a motion for summary judg-

ment.   See Governmental Interinsurance Exchange v. Judge, 221

Ill. 2d 195, 215, 850 N.E.2d 183, 195 (2006).

          When determining whether an insurer owes its insured a

duty to defend, courts compare the allegations contained in the

complaint against the insured to the relevant language of the

insurance policy.   General Agents Insurance Co. of America, Inc.

v. Midwest Sporting Goods Co., 215 Ill. 2d 146, 154-55, 828

N.E.2d 1092, 1098 (2005).   In doing so, courts liberally construe

the complaint's allegations in favor of the insured.    Midwest

Sporting Goods, 215 Ill. 2d at 155, 828 N.E.2d at 1098.    If the

facts alleged in the complaint against the insured fall within or

potentially fall within the policy's coverage, the insurer has a

duty to defend the insured "even if the allegations are ground-

less, false[,] or fraudulent."     Midwest Sporting Goods, 215 Ill.

2d at 155, 828 N.E.2d at 1098.    Thus, "[a]n insurer may not

justifiably refuse to defend an action against its insured unless

                                 - 8 -
it is clear from the face of the underlying complaint that the

allegations set forth in that complaint fail to state facts that

bring the case within or potentially within the insured's policy

coverage."    Midwest Sporting Goods, 215 Ill. 2d at 154, 828

N.E.2d at 1098.

            When an insurer takes the position a complaint poten-

tially alleging coverage is not covered by a policy that provides

the insurer has the right and duty to defend any claims brought

against the insured, the insurer cannot simply refuse to defend

the insured but must either (1) defend the suit under a reserva-

tion of rights or (2) seek a declaratory judgment that no cover-

age exists.    Murphy v. Urso, 88 Ill. 2d 444, 451, 430 N.E.2d

1079, 1082 (1981); see also State Farm Fire & Casualty Co. v.

Martin, 186 Ill. 2d 367, 371, 710 N.E.2d 1228, 1230-31 (1999);

Midwest Sporting Goods, 215 Ill. 2d at 155, 828 N.E.2d at 1098.

Our supreme court has emphasized those "are separate and distinct

options."    Martin, 186 Ill. 2d at 373, 710 N.E.2d at 1231.    If

the insurer does not take one of the aforementioned actions, "it

will be estopped from later raising policy defenses to coverage."

Martin, 186 Ill. 2d at 371, 710 N.E.2d at 1231; see also Employ-

ers Insurance of Wausau v. Ehlco Liquidating Trust, 186 Ill. 2d

127, 150-51, 708 N.E.2d 1122, 1134-35 (1999).

            The estoppel doctrine "arose out of the recognition

that an insurer's duty to defend under a liability[-]insurance

                                - 9 -
policy is so fundamental an obligation that a breach of that duty

constitutes a repudiation of the contract."     Ehlco Liquidating

Trust, 186 Ill. 2d at 151, 708 N.E.2d at 1135.    "This estoppel

doctrine applies only where an insurer has breached its duty to

defend."   Ehlco Liquidating Trust, 186 Ill. 2d at 151, 708 N.E.2d

at 1135.

           Our supreme court has recognized a narrow exception to

the estoppel doctrine for "a serious conflict of interest that

precludes the insurer from assuming the insured's defense."

Ehlco Liquidating Trust, 186 Ill. 2d at 156, 708 N.E.2d at 1137,

citing Murphy, 88 Ill.2d at 451-58, 430 N.E.2d at 1082-86;

Thornton v. Paul, 74 Ill. 2d 132, 152, 159, 384 N.E.2d 335, 343,

346 (1978), overruled on other grounds by American Family Mutual

Insurance Co. v. Savickas, 193 Ill. 2d 378, 387, 739 N.E.2d 445,

450-51 (2000).   The reason for this exception is that, in certain

circumstances, the insurer's defense of the insured or putative

insured raises serious ethical problems.     Murphy, 88 Ill. 2d at

453-54, 430 N.E.2d at 1083-84.   When a conflict exists, the

insurer's only option is to decline to defend the putative

insured.   See Murphy, 88 Ill. 2d at 457-58, 430 N.E.2d at 1085.

The insurer remains liable for the costs of whatever defense the

putative insured chooses but is not estopped from denying cover-

age in a later suit on the policy.     See Murphy, 88 Ill. 2d at

457-58, 430 N.E.2d at 1085.

                              - 10 -
          Here, Economy Fire argued no duty to defend based on

statements from the Drewes and not because the allegations in

Brumfield's complaint fell outside of Michael and Constance's

policy coverage.    Thus, Economy Fire could not "justifiably

refuse" to defend Beau (Midwest Sporting Goods, 215 Ill. 2d at

154, 828 N.E.2d at 1098), unless the conflict-of-interest excep-

tion prevented it from defending him (see Ehlco Liquidating

Trust, 186 Ill. 2d at 156, 708 N.E.2d at 1137).    In Brumfield's

January 2000 complaint, Beau was the only named defendant, and

the allegations were all against him.    Michael was noted only as

a respondent in discovery.    "[T]he duty to defend arises as soon

as damages are sought."    Midwest Sporting Goods, 215 Ill. 2d at

165, 828 N.E.2d at 1103.    Since Brumfield did not seek damages

against Michael, Economy Fire did not owe a duty to defend

Michael on Brumfield's original complaint.    Thus, as to the

original complaint, Economy Fire did not have an actual conflict

of interest in defending Beau because it did not owe a duty to

defend Michael at that time.    Accordingly, the conflict-of-

interest exception was not an issue with the original complaint

since the estoppel rule is only relaxed when "actual conflicts of

interest appear."    Murphy, 88 Ill. 2d at 458, 430 N.E.2d at 1086.

           Based on the aforementioned conclusions, if Economy

Fire wanted to question its duty to defend Beau without breaching

the contract, Economy Fire had to defend Beau under a reservation

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of rights or seek a declaratory judgment to avoid a breach of the

duty to defend and the application of the estoppel doctrine.      See

Murphy, 88 Ill. 2d at 451, 430 N.E.2d at 1082.    In July 2000,

Economy Fire did file a declaratory-judgment action, seeking a

declaration it did not have the duty to defend or indemnify Beau.

Therefore, Economy Fire did not breach its duty to defend Beau in

regard to Brumfield's original complaint.

          However, our inquiry does not end there because, in

August 2000, Brumfield filed an amended complaint, asserting

causes of action against both Beau and Michael.    Brumfield

asserts a conflict of interest existed based on the negligent-

entrustment claim against Michael, and thus (1) the declaratory

action was not an appropriate means to address the duty to defend

Beau and (2) Economy Fire was required to give Beau notice of the

conflict and his right to independent counsel.    Economy Fire

contends a conflict of interest did not exist because it had

already declined to defend Beau and filed its declaratory judg-

ment suit.    We agree with Economy Fire.

          Here, Economy Fire had already properly declined to

provide Beau with a defense in the underlying action, and thus

Beau already needed to obtain independent counsel in the underly-

ing action.    Brumfield notes "the duty to defend arises as soon

as damages are sought."    Midwest Sporting Goods, 215 Ill. 2d at

165, 828 N.E.2d at 1103.    That duty remains until the issue of

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coverage is determined.   Midwest Sporting Goods, 215 Ill. 2d at

165-66, 828 N.E.2d at 1103-04.   While Economy Fire still had a

duty to defend Beau, it was not involved in Beau's defense and

thus did not control Beau's interests.   In other words, its duty

to defend was then purely a financial one.   See Eclipse Manufac-

turing Co. v. United States Compliance Co., 381 Ill. App. 3d 127,

135-36, 886 N.E.2d 349, 357 (2007) (noting that, when an insurer

questions its duty to defend by filing a declaratory judgment,

the insurer does not have to act on its duty until the declara-

tory judgment is resolved, at which time it may be liable to

reimburse the insured for any costs of defense the insurer should

have paid).

          We do recognize that, after the amended complaint was

filed, Beau's interests in the underlying suit were in conflict

with both Economy Fire's and Michael's interests.   However, since

Economy Fire was not defending or controlling Beau's interests,

Economy Fire did not have any actual conflicts of interest.    Cf.

Murphy, 88 Ill. 2d at 453, 430 N.E.2d at 1083 (finding conflicts

of interest where the insurer was responsible for the putative

insured's defense and the putative insured's interests were in

opposition to the insurer's as well the insured's, for whose

defense the insurer was also responsible).

          However, Brumfield is correct a problem existed with

the declaratory-judgment action since whether Beau had permission

                              - 13 -
to use his father's vehicle was now at issue in both the

declaratory-judgment action and the underlying suit.     In Murphy,

88 Ill. 2d at 455, 430 N.E.2d at 1084-85, our supreme court noted

that, when the issues in the underlying suit and the declaratory-

judgment action are the same, the question of coverage cannot be

decided in a collateral proceeding because (1) the collateral-

estoppel doctrine would apply, which would result in the declara-

tory judgment controlling the underlying suit, and (2) such a

procedure would be prejudicial to the insurer by forcing upon it,

as plaintiff, the burden of proof.     More recently, the supreme

court has reiterated the aforementioned rule, noting "it is

inappropriate to resolve a declaratory[-]judgment action in such

a manner as would bind the parties in the underlying litigation

on any issues therein."   Savickas, 193 Ill. 2d at 387, 739 N.E.2d

at 451.

          The aforementioned cases simply mean Economy Fire's

declaratory-judgment action should have been stayed until the

permissive-use issue was resolved in the Brumfield matter.     Our

supreme court has recognized an insurer does not breach its duty

to defend because the underlying case proceeded to judgment

before the declaratory judgment action was resolved.     Martin, 186

Ill. 2d at 374, 710 N.E.2d at 1232.     Since a declaratory judgment

may be decided after the underlying suit is resolved without a

breach of the duty to defend, a stay of the declaratory-judgment

                              - 14 -
proceedings until the resolution of Brumfield's case would not

have resulted in a breach of the duty to defend.   Thus, we

decline to find Economy Fire had to do something extra to avoid a

breach of the duty to defend Beau because Brumfield's amended

complaint required a stay of the declaratory-judgment proceed-

ings.

          Accordingly, we find Economy Fire properly declined to

defend Beau by a filing a declaratory-judgment action and

Brumfield's subsequent amended compliant did not create a con-

flict of interest because Economy Fire's duty to defend at that

time was only reimbursement of defense costs, not involvement in

the defense.   Thus, the trial court erred by finding Economy Fire

breached its duty to defend Beau.   However, since the court

entered judgment in counterdefendants' favor, we need not reverse

the cause and may affirm the court's judgment based on the lack

of breach of the duty to defend.

                            B. Damages

          Since we have found Economy Fire did not breach its

duty to defend, Brumfield's damages issues are now moot, and we

decline to address them.   See Condon v. American Telephone &

Telegraph Co., 136 Ill. 2d 95, 100, 554 N.E.2d 206, 208 (1990)

(noting any issue regarding damages was moot after the trial

court granted a directed verdict in the defendant's favor and

refusing to address any such issues).

                              - 15 -
                           III. CONCLUSION

            For the reasons stated, we affirm the trial court's

judgment.

            Affirmed.

            COOK and STEIGMANN, JJ., concur.




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