                                    2019 IL App (1st) 181501

                                                                            FIRST DISTRICT
                                                                            SIXTH DIVISION
                                                                            May 3, 2019


No. 1-18-1501

XTREME PROTECTION SERVICES, LLC,                )            Appeal from the
                                                )            Circuit Court of
     Plaintiff and Counterdefendant-Appellee, )              Cook County.
                                                )
v.                                              )            No. 17 CH 4818
                                                )
STEADFAST INSURANCE COMPANY,                    )            Honorable
                                                )            Diane J. Larsen,
      Defendant and Counterplaintiff-Appellant. )            Judge Presiding.

       JUSTICE HARRIS delivered the judgment of the court, with opinion.
       Justices Cunningham and Connors concurred in the judgment and opinion.

                                            OPINION

¶1     Defendant, Steadfast Insurance Company (Steadfast), appeals the order of the trial court

finding that plaintiff, Xtreme Protection Services, LLC (Xtreme), had the right to select an

independent attorney to defend it in the underlying action due to a conflict of interest with

Steadfast. On appeal, Steadfast contends that the court’s determination was erroneous where

(1) no conflict of interest existed because Steadfast waived every coverage defense other than

noncoverage for punitive damages and (2) Xtreme forfeited its right to a defense by breaching its

duty to cooperate. For the following reasons, we affirm.

¶2                                      I. JURISDICTION

¶3     On April 16, 2018, the trial court entered a declaratory judgment on the pleadings as to

count I of Xtreme’s first amended complaint and Steadfast’s first amended counterclaim. On

June 12, 2018, the trial court granted Steadfast’s motion for a finding of appealability pursuant to

Illinois Supreme Court Rule 304(a) (eff. Mar. 8, 2016). Accordingly, this court has jurisdiction
No. 1-18-1501


pursuant to Rule 304(a) governing appeals from final judgments as to fewer than all parties or

claims.

¶4                                     II. BACKGROUND

¶5        In September 2016, David Israel filed a complaint, Israel v. Bucon, No. 16 L 9348 (Cir.

Ct. Cook County) (Sept. 22, 2016), alleging assault and intentional infliction of emotional

distress against Michael Bucon. The complaint alleged that Bucon placed listening devices in

Israel’s office, attached GPS devices to his vehicles, and sent threatening or harassing text

messages. As a result, Israel “sustained severe and permanent injuries, endured great pain and

suffering, incurred medical expenses, lost time from work,” and suffered “severe emotional

distress.” Israel sought compensatory damages in an amount greater than $50,000 and

unspecified punitive damages.

¶6        On October 20, 2016, Israel filed a first amended complaint (Israel v. Bucon, No. 16 L

9348 (Cir. Ct. Cook County) (Oct. 20, 2016)) that added two defendants—Xtreme and its sole

member-manager, James Adams. The complaint alleged that Bucon acted as an agent of Xtreme

and Adams, and it asserted Israel’s claims against all three defendants. The complaint again

sought compensatory damages in an amount greater than $50,000, along with unspecified

punitive damages. On February 22, 2017, Israel filed a second amended complaint (Israel v.

Bucon, No. 16 L 9348 (Cir. Ct. Cook County) (Feb. 22, 2017)) that added a claim for

eavesdropping.

¶7        On August 9, 2017, Israel filed a third amended complaint (Israel v. Bucon, No. 17 L

6026 (Cir. Ct. Cook County) (Aug. 9, 2017)), which was the ultimate pleading the trial court

considered when it granted Xtreme’s motion for judgment on the pleadings. The third amended

complaint alleged claims of electronic eavesdropping, surveillance and sending threatening or



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harassing text messages, federal wiretapping, eavesdropping, intrusion upon seclusion,

intentional infliction of emotional distress, and trespass. The complaint alleged the following

damages:

       Claim                                                 Damages

       I. Eavesdropping                                      “an amount not less than $30,000”

       II. Intentional Infliction of Emotional Distress      “nominal actual damages;” punitive
                                                             damages “not less than $50,000;”

       III. Outrage                                          “nominal actual damages;” punitive
                                                             damages “not less than $50,000”

       IV. Federal Wiretapping                               “an amount not less than $30,000”

       V. Intrusion Upon Seclusion                           “an amount not less than $30,000,
                                                             and punitive damages in the
                                                             amount of $1 million”

       VI. Trespass                                          “an amount not less than $30,000
                                                             and punitive damages in the
                                                             amount of $1 million.”

¶8     During the relevant time period, Xtreme possessed an “armed security services” policy

issued by Steadfast with a policy limit of $1 million. The policy provides that Steadfast would

indemnify Xtreme against (1) “sums that the insured becomes legally obligated to pay as

damages resulting from errors or omissions in the conduct of [Xtreme’s] business” and

(2) liability for “bodily injury and property damage.” The policy also contains two relevant

exclusions. First, coverage does not apply to bodily injury or property damage “expected or

intended from the standpoint of the insured” when there is “a final adjudication or admission by

an Insured that the act or omission was intentional, criminal, fraudulent, malicious or dishonest.”

The policy also excludes coverage for punitive damages. The policy further provides that the

insured must cooperate in the investigation or settlement of the claim or defense against the suit.



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¶9     On December 16, 2016, Xtreme’s counsel tendered the underlying complaint to Steadfast

and requested coverage under the policy. Steadfast informed Xtreme that it would be “retaining

counsel to defend [Xtreme] in the case.” Steadfast made no reservation of rights to deny

coverage. On December 21, 2016, Xtreme’s counsel responded that “the allegations of the

amended complaint and the policy provisions create an inherent conflict” where Steadfast was

required to defend against claims of intentional conduct but would be excused from coverage in

the event the conduct was adjudicated or admitted as “intentional, criminal, fraudulent, malicious

or dishonest.” Xtreme requested permission from Steadfast to choose its own counsel to remedy

the conflict of interest. In response, Steadfast stated that it was “in the midst of retaining counsel

to defend our insured” and wanted to discuss the underlying facts with the insured directly.

Steadfast stated that “the coverage issues referenced could be the subject of reservation of rights

on our part” although Steadfast “may opt to waive these issues.”

¶ 10   On January 17, 2017, Xtreme’s counsel sent an e-mail again referencing the conflict of

interest and Steadfast’s failure to issue a coverage letter or make any reservation of rights. The

letter further stated that “[i]t is now more than a month since the claim was tendered, and Xtreme

and Mr. Adams have been forced to protect their interests in the litigation on their own. They

will continue to do so, but expressly reserve the right to seek reimbursement from [Steadfast] for

all attorneys’ fees, costs, and any other damages from the failure to defend and afford proper

coverage.”

¶ 11   On March 28, 2017, Steadfast sent an e-mail summarizing its coverage of the Israel

litigation. Steadfast specifically noted the policy’s exclusion of coverage for punitive damages.

Steadfast also reserved “all rights and defenses available under the Policy and at law to deny

coverage” and its right “to supplement its coverage position based upon any facts not presently



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in its possession.” Steadfast appointed counsel to defend Xtreme in the underlying action. An

e-mail advised that Steadfast’s designated attorney would be “substituting into the case” and

Steadfast expected Xtreme “to cooperate with our chosen counsel in substituting into the case to

defend [Xtreme].” Xtreme, however, advised Steadfast’s chosen counsel to “take no action”

pending its review of Steadfast’s letter.

¶ 12    Xtreme continued to defend the underlying suit with its chosen attorney and on April 3,

2017, filed a declaratory judgment action. Count I sought a declaration that Xtreme was

authorized to select its own attorney due to a conflict of interest arising from Steadfast’s

reservation of rights regarding intentional acts and punitive damages. On April 14, 2017,

Steadfast sent a letter to Xtreme’s counsel to clarify coverage concerns. In the letter, Steadfast

stated that

        “Steadfast agrees that it will defend and indemnify Xtreme, up to the policy limits, for

        any judgment for compensatory damages *** (subject only to any potential other

        insurance which may provide primary or concurrent coverage awarded, and Xtreme’s

        compliance with the conditions of the [ ] policy). Steadfast will not assert any exclusions

        or other defense to coverage.”

The letter further stated that there is “clearly no conflict between Steadfast and Xtreme with

regard to the defense of the case, and Steadfast has the right to appoint counsel and control the

defense of Xtreme.” The letter also advised that Steadfast reserved its right to deny coverage of

punitive damages.

¶ 13    Steadfast filed a counterclaim for declaratory judgment, alleging that it no longer had to

honor its policy because Xtreme breached the policy’s cooperation clause when it advised

Steadfast’s chosen counsel to “take no action” until further review. Steadfast argued it was



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prejudiced where Xtreme denied it “the right to participate in and control the defense of

[Xtreme] in the underlying Lawsuit.” Steadfast contended that a conflict no longer existed when

it waived all reservation of rights except for punitive damages.

¶ 14    Xtreme filed a motion for judgment on the pleadings, and Steadfast filed a cross-motion

for judgment. The trial court determined that Xtreme was entitled to select its own attorney due

to Steadfast’s reservation of rights regarding punitive damages and the risk of a substantial

punitive damages award. The court denied Steadfast’s cross-motion for judgment on the

pleadings. The trial court also made a finding pursuant to Rule 304(a) that “there is no just

reason for delaying enforcement or appeal,” and Steadfast filed its appeal.

¶ 15    While the appeal was pending, Israel filed a fifth amended complaint, 1 and Steadfast

obtained leave to supplement the record with that complaint. The claims and damages set forth in

the fifth amended complaint are as follows:

        Claim                                                    Damages

        I. Eavesdropping                                         “an amount not less than $200,000”
                                                                 and punitive damages

        II. Intentional Infliction of Emotional Distress         “actual damages, including pain and
                                                                 suffering, and punitive damages
                                                                 not less than $1 million”

        III. Federal Wiretapping                                 “not less than $200,000”

        IV. Intrusion upon Seclusion                             “$200,000, punitive damages in the
                                                                 amount of $1 million”

        V. Trespass                                              “$200,000 and punitive damages in
                                                                 the amount of $1 million”

        VI. Conspiracy                                           “compensatory damages and
                                                                 punitive damages, not less than
                                                                 $1 million.”
        1
          That action remains pending in the Northern District of Illinois. Israel v. Bucon, No. 17 CV 6452
(N.D. Ill. Sept. 7, 2017) (consolidated with Israel v. Israel, No. 17 CV 6643 (N.D. Ill. Sept. 14, 2017)).

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¶ 16                                      III. ANALYSIS

¶ 17   On appeal, Steadfast contends the trial court erred in granting judgment in favor of

Xtreme where no conflict of interest exists that would authorize Xtreme to select its own

attorney. Judgment on the pleadings is granted only if there is no genuine issue of material fact

and the moving party is entitled to judgment as a matter of law. Gillen v. State Farm Mutual

Automobile Insurance Co., 215 Ill. 2d 381, 385 (2005). We review the trial court’s grant of

judgment on the pleadings de novo. M.A.K. v. Rush-Presbyterian-St. Luke’s Medical Center, 198

Ill. 2d 249, 255 (2001).

¶ 18   An insurer has a duty to defend its insured as long as the complaint contains allegations

that are within or potentially within the policy’s coverage. General Agents Insurance Co. of

America, Inc. v. Midwest Sporting Goods Co., 215 Ill. 2d 146, 154-55 (2005). If the underlying

complaint alleges several theories of recovery, the insurer’s duty to defend arises even if only

one of those theories is within the policy’s potential coverage. Id. at 155. Thus, the insurer’s duty

to defend is much broader than its duty to indemnify. Id. at 154.

¶ 19   With the duty to defend comes the insurer’s right to control the defense and protect its

financial interest in the outcome of the litigation. Illinois Masonic Medical Center v. Turegum

Insurance Co., 168 Ill. App. 3d 158, 163 (1988). An attorney retained by the insurer to defend its

insured “owes a fiduciary duty and has the same professional obligations to the insured as would

exist had he or she been personally retained by the insured.” Id. at 163. Courts have

acknowledged, however, that in reality the insurer’s attorney “may have closer ties with the

insurer and a more compelling interest in protecting the insurer’s position.” (Internal quotation

marks omitted.) Nandorf, Inc. v. CNA Insurance Cos., 134 Ill. App. 3d 134, 137 (1985). When

the interests of the insurer and the insured are not aligned, ethical issues regarding the insured’s



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representation may arise. American Family Mutual Insurance Co. v. W.H. McNaughton Builders,

Inc., 363 Ill. App. 3d 505, 511 (2006).

¶ 20   When a conflict of interest exists, it “may be resolved by full disclosure and consent from

the parties.” Nandorf, 134 Ill. App. 3d at 137. However, if the insured rejects the insurer’s offer

to defend under a reservation of rights, courts recognize a limited exception to the general rule

that the insurer has a right to control the defense. Id. In this situation, the insured is entitled to

control the defense and “by reason of its contractual obligation to furnish a defense, the insurer

must underwrite the reasonable costs incurred by the insured in defending the action with

counsel of his own choosing.” Illinois Masonic, 168 Ill. App. 3d at 163. To determine whether a

conflict of interest exists, we compare the allegations in the complaint to the policy and consider

whether the insurer’s interests “would be furthered by providing a less-than-vigorous defense to

those allegations.” Nandorf, 134 Ill. App. 3d at 137.

¶ 21   Courts have found a conflict when the facts to be resolved in the underlying case would

allow the insurer-retained counsel to “lay the groundwork” for a subsequent denial of coverage.

American Family, 363 Ill. App. 3d at 511. In American Family, a conflict existed because the

insurer’s interests would be served by facts showing that the damage to the insured’s home

occurred prior to the policy’s effective date, while the insured’s interests would be served by

showing that the damage occurred after the inception of the policy. Id. at 514. A conflict can also

exist if the underlying suit seeks, in addition to compensatory damages, punitive damages based

on intentional or reckless conduct where the insurer’s policy explicitly denies coverage for such

conduct. In such cases, it is in the interest of the insured to be found negligent because the

resulting damages would be covered by the policy, but it is in the insurer’s interest to have a

finding that the insured acted intentionally or with malice. Maryland Casualty Co. v. Peppers, 64



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Ill. 2d 187, 197 (1976); Illinois Municipal League Risk Management Ass’n v. Seibert, 223 Ill.

App. 3d 864, 877-78 (1992).

¶ 22   Here, the underlying complaint alleges that Israel suffered damages when Xtreme’s

employee placed listening devices in Israel’s office, attached GPS devices to his vehicles, and

sent threatening or harassing text messages. Steadfast’s policy with Xtreme excludes coverage

for “intentional, criminal, fraudulent, malicious or dishonest” acts. Steadfast argues, however,

that no conflict exists because it explicitly waived its right to deny coverage for compensatory

damages based on these acts. While Steadfast’s waiver may have resolved one type of conflict,

Steadfast’s continuing reservation of its right to deny coverage for punitive damages presents

another area of potential conflict.

¶ 23   In Nandorf, the plaintiffs in the underlying complaint alleged that employees of Unique

Thrift Shop seized their persons and “imprisoned and incarcerated said plaintiffs for many hours

against their will and consent.” (Internal quotation marks omitted.) Nandorf, 134 Ill. App. 3d at

135. The complaint sought $5000 in compensatory damages and $100,000 in punitive damages

for each plaintiff. Nandorf tendered the defense of the action to CNA Insurance Companies

(CNA) pursuant to a comprehensive liability insurance policy. CNA retained counsel to defend

the action but informed Nandorf that any award of punitive damages would be Nandorf’s

responsibility since “it is against the public policy of the State of Illinois to provide insurance

coverage for punitive damages.” (Internal quotation marks omitted.) Id. Nandorf retained

independent counsel, who requested that CNA waive its reservation of rights as to punitive

damages or, if it refused to do so, Nandorf’s chosen counsel would take control of the defense.

Id. CNA declined to waive its rights and refused to relinquish control of the litigation or

reimburse Nandorf for the costs of retaining independent counsel. Id. at 135-36. Nandorf sought



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reimbursement and filed a declaratory judgment action, which the trial court dismissed. CNA

eventually settled the underlying suit.

¶ 24    This court reversed the dismissal, finding that a conflict existed where CNA disclaimed

liability for punitive damages and the underlying action sought a large punitive damages amount

and a relatively small amount of compensatory damages. Id. at 138. The court noted that

although Nandorf and CNA “shared a common interest in a finding of no liability,” if Nandorf

was found liable, “their interests diverged” because “CNA’s interests would have been just as

well served by an award of minimal compensatory damages and substantial punitive damages.”

Id. It found such an award “not inconceivable.” Id. Due to its reservation of rights, CNA had an

interest in providing a less than vigorous defense to allegations that would have supported a

claim of punitive damages. As a result, Nandorf was subjected to greater liability. Id.

¶ 25    The court cautioned that its determination does not mean an insured is entitled to

independent counsel whenever the underlying action seeks punitive damages. Rather, in the case

before it where “punitive damages formed a substantial portion of the potential liability in the

[underlying action] and CNA’s disclaimer of liability for punitive damages left Nandorf with the

greater interest and risk in the litigation,” a conflict of interest was created entitling Nandorf to

retain independent counsel paid for by CNA. Id. at 140. See also Mobil Oil Corp. v. Maryland

Casualty Co., 288 Ill. App. 3d 743, 756-57 (1997) (finding that, since the compensatory damages

claims would likely exhaust the policy limits and there was the potential for a large punitive

damages award not covered by the policy, a conflict existed because the insured had an interest

to settle the case before trial whereas the insurer “would have lost nothing by letting the case go

to the jury”).




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¶ 26   Like the insurers in Nandorf and Mobil Oil, Steadfast reserved its right to deny coverage

for punitive damages. To determine whether a conflict exists here, we compare the allegations in

Israel’s complaint to Steadfast’s policy and consider whether Steadfast’s interests “would be

furthered by providing a less-than-vigorous defense to those allegations.” Nandorf, 134 Ill. App.

3d at 137.

¶ 27   The third amended complaint alleges that Israel, who has been engaged in ongoing legal

disputes with his sister over their late father’s estate, discovered electronic listening and

surveillance devices placed in his residence, cars, and office. Over a period of more than two

years, Israel also received threatening and harassing text messages from unknown numbers that

implied he was being watched and would suffer harm. Israel called the police, and they took the

devices into evidence. Israel continued to receive threatening text messages and the police

eventually tracked more than 2000 calls or texts made between July 6 and July 17, 2015, to

numbers belonging to Bucon, Xtreme’s employee.

¶ 28   The complaint further alleges that the continuous stalking and texting caused Israel to

suffer extreme emotional distress and he has changed how he lived his life: he applied for a gun

permit and now has a license for a concealed carry; he has taken self-defense classes to protect

himself; he limits interactions with family because he does not want them exposed to any

violence he may suffer; he reports to his brother Harey so that he can be monitored for safety; he

has retained security experts for protection; and he discusses all legal matters away from his

home and office in case those locations have been bugged. Due to the threats and stalking he has

endured, Israel lives in “a state of constant vigilance and anxiety.”

¶ 29   The third amended complaint seeks no less than $120,000 in compensatory damages and

no less than $2.1 million in punitive damages. Here, as was the case in Nandorf and Mobil Oil,



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the underlying complaint seeks a substantially greater amount of punitive damages than

compensatory damages, but the insurance policy explicitly denies coverage for punitive

damages, and Steadfast has not waived its reservation of rights regarding punitive damages. Such

an award is not inconceivable given the allegations in the underlying complaint. Where punitive

damages form a substantial portion of the potential liability in the underlying action and

Steadfast disclaims liability for punitive damages, Xtreme is left with the greater interest and risk

in the litigation. Therefore, a conflict of interest exists, entitling Xtreme to obtain independent

counsel paid for by Steadfast. Nandorf, 134 Ill. App. 3d at 140.

¶ 30   Also, although the claims for compensatory and punitive damages arise from the same

wrongful conduct, additional evidence is required to recover punitive damages. Punitive

damages “are not awarded as compensation, but serve instead to punish the offender and to deter

that party and others from committing similar acts of wrongdoing in the future.” Loitz v.

Remington Arms Co., 138 Ill. 2d 404, 414 (1990). Punitive damages are proper “when the

defendant’s tortious conduct evinces a high degree of moral culpability, that is, when the tort is

‘committed with fraud, actual malice, deliberate violence or oppression, or when the defendant

acts willfully, or with such gross negligence as to indicate a wanton disregard of the rights of

others.’ ” Slovinski v. Elliott, 237 Ill. 2d 51, 58 (2010) (quoting Kelsay v. Motorola, Inc., 74 Ill.

2d 172, 186 (1978)). Since Steadfast has denied coverage for punitive damages, it has little

interest in defending against Israel’s claims for punitive damages.

¶ 31   Steadfast asks this court to consider Israel’s most recent fifth amended complaint, which

was filed during the pendency of this appeal and which this court took judicial notice of after

granting Steadfast’s motion to supplement the record. We note that the trial court did not

consider the fifth amended complaint in making its determination. However, judicial notice is



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proper where the document in question is part of the public record, contains readily verifiable

facts capable of instant demonstration, and will aid in the efficient disposition of a case. Muller

v. Zollar, 267 Ill. App. 3d 339, 341 (1994). A reviewing court also “may take judicial notice

regardless of whether such notice was sought at the trial court level.” Id. While we do not rely on

the fifth amended complaint for our determination, it does support our finding pursuant to the

third amended complaint.

¶ 32   Steadfast points to the increased amount of compensatory damages sought in the fifth

amended complaint compared to the amount alleged in the third amended complaint. Where the

third amended complaint sought no less than $120,000 in compensatory damages, the fifth

amended complaint now seeks no less than $800,000 in compensatory damages. Steadfast argues

that this proves the potential exists for a significant compensatory damages award so that “[t]here

is no significant disproportion between Israel’s claim for compensatory damages and his claim

for punitive damages,” as was the case in Nandorf.

¶ 33   We disagree. In determining whether a conflict exists, courts should look at who bears

the greater risk and interest in the allegations of the underlying complaint. Nandorf, 134 Ill. App.

3d at 140. While the fifth amended complaint does seek more compensatory damages, it also

seeks more in punitive damages—no less than $4 million. The amount of punitive damages

sought remains substantially greater than the amount sought for compensatory damages, leaving

Xtreme with the greater interest and risk in the litigation. Furthermore, the amount of

compensatory damages alleged in the fifth amended complaint, while much larger, is within

Steadfast’s policy limits. Xtreme, on the other hand, now faces twice the amount of punitive

damages sought in the third amended complaint. As was the case with the third amended

complaint, Xtreme has more of an interest in settling the case prior to trial, whereas Steadfast



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“los[es] nothing in letting the case go to the jury.” Mobil Oil Corp., 288 Ill. App. 3d at 756-57. A

conflict of interest still exists regarding the fifth amended complaint.

¶ 34   Steadfast also contends that Xtreme breached its duty to cooperate and thus has forfeited

its right to coverage under the policy. Steadfast’s argument, however, is based on its right to

appoint defense counsel and control the defense. As we have found, this case presents an

exception to the general rule that the insurer has a right to control the defense. Therefore, Xtreme

was entitled to select its own counsel, and Xtreme’s failure to accept control of the case by

Steadfast’s chosen counsel is not a breach of its duty to cooperate. Furthermore, in order for

Steadfast to avoid responsibility under the policy, Steadfast must show that it was substantially

prejudiced by Xtreme’s failure to cooperate. “Proof of substantial prejudice requires an insurer to

demonstrate that it was actually hampered in its defense by the violation of the cooperation

clause.” M.F.A. Mutual Insurance Co. v. Cheek, 66 Ill. 2d 492, 500 (1977). There is no

“presumption of prejudice when the insurer attempts to avoid responsibility for a breach of the

cooperation clause.” Id. Here, Steadfast merely argues that Xtreme told Steadfast’s chosen

counsel “to take no action,” which hampered its defense. Since Steadfast has not shown how it

was actually hampered in its defense, it cannot deny coverage by claiming a breach of the

cooperation clause.

¶ 35                                    IV. CONCLUSION

¶ 36   For the foregoing reasons, the judgment of the circuit court is affirmed.

¶ 37   Affirmed.




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