At Payne & Fears’ Urging, Illinois Federal Court Dismisses Hostile Coverage Action

Payne & Fears (P&F) achieved another significant victory this week on behalf of a national homebuilder by securing the dismissal of a coverage action filed by its subcontractor and insurer in a hostile forum.

The client-homebuilder’s subcontractor’s liability insurer agreed to defend the client-homebuilder as an additional insured against a construction defect lawsuit pending Texas. The subcontractor filed a declaratory judgment action against its insurer in Illinois seeking a ruling that its insurer had no duty to defend the client-homebuilder in the Texas lawsuit. Unlike Texas law, under Illinois law property damage from defective construction is not a covered “occurrence” under general liability policies. The insurer brought the client-homebuilder into the Illinois action as a third-party defendant.  P&F filed a motion to dismiss the entire Illinois action because (1) Illinois courts lack personal jurisdiction over the client-homebuilder and (2) the client-homebuilder was a necessary party to the action without whom the case could not continue.

The U.S. District Court for the Northern District of Illinois granted P&F’s motion (L&W Supply Corp. v. Alabaster Ins. Co., et al. N.D. Ill. Case No. 1:20-cv-03265 (March 18, 2021 Memorandum Opinion and Order)) and dismissed the action. The court found that the insurer had not met its prima facie burden of establishing the court’s personal jurisdiction over the client-homebuilder and that the client-homebuilder was a necessary party to the action because the relief requested by the subcontractor could not be obtained without affecting the client-homebuilder’s rights to insurance coverage.

Scott Thomas and Sarah Odia briefed the successful motion.

This case illustrates an important strategic issue that insureds ignore at their peril: Insureds need to be aware of jurisdictional and choice-of-law considerations when sued by their insurers so they can avoid what could be an unfortunate result if they do not challenge jurisdiction and they end up litigating coverage in a state (like Illinois) whose coverage laws are unfavorable to insureds. Although choice-of- law issues were not decided in this case, the forum in which your coverage action is litigated could have a significant impact on the outcome.