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Universal Underwriters Sanctioned On July 3, 2001, DuPage County Judge Edward Duncan sanctioned Universal Underwriters Group $25,000, the maximum allowable under Section 155 of the Insurance Code, for "vexatious and unreasonable" conduct in refusing to defend and indemnify an insured under its garage liability policy. The court also found that, as a result of the breach of its duty to defend, Universal Underwriters was estopped from denying coverage, and was required to reimburse State Farm Insurance Company the $72,500 settlement State Farm had paid, and all attorney's fees and costs paid by State Farm in representing the insured in the underlying action and in prosecuting the declaratory judgment action against Universal Underwriters.

In the underlying action, a State Farm insured was provided a loaner vehicle owned by an automobile dealership, while her vehicle was being repaired. Universal Underwriters insured the loaner vehicle. After the insured struck a pedestrian while operating the loaner vehicle and was sued, Universal Underwriters refused multiple tenders of defense of the action. Universal Underwriters claimed the driver was not an "insured" under its policy, and later claimed that it was "co-primary" with State Farm. State Farm settled the underlying lawsuit for $72,500, with no contribution from Universal Underwriters.

State Farm pursued a declaratory judgment action against Universal Underwriters, citing the Illinois Supreme Court case of State Farm Mutual Automobile Insurance Company vs. Universal Underwriters Group, 182 Ill. 2d 240, 695 N.E.2d 848 (1998), which held that the insurer of an automobile dealership has the sole primary responsibility to defend and indemnify a test driver involved in an accident while the driver is operating a vehicle owned by the dealership. State Farm also cited the six Illinois Appellate Court decisions that addressed the same or related issues since the Illinois Supreme Court decision, including three in which Universal Underwriters was a party. In each of the cases, the Appellate Courts found the garage policies to be solely primary, with the personal liability policies excess.

The DuPage County case represents the first time since the 1998 Illinois Supreme Court decision that a personal liability insurer has sought a finding of estoppel and penalties, or been awarded fees and costs under the Insurance Code, for a garage liability insurer's failure to accept a tender of defense.

State Farm was represented in the DuPage County case by Mark W. Monroe of the law firm of Momkus McCluskey, LLC, P.O. Box 9250, Downers Grove, Illinois 60515-9250, (630) 434-0400. Universal Underwriters was represented by John F. Watson of Craig & Craig, P.O. Box 689, Mattoon, Illinois, (217) 234-6481. State Farm vs. Universal Underwriters, DuPage County Court No. 00 MR 00317.