TRESPASS CAN QUALIFY AS 'ACCIDENT' UNDER HOMEOWNER'S POLICY

July 16, 2004

Steven P. Garmisa
Hoey & Farina Attorney
garmisa@hoeyfarina.com
1-888-425-1212

A trespass committed by building a structure that crosses onto a neighbor's property can qualify as an "accident" under the trespasser's homeowner's insurance. Lyons v. State Farm Fire and Casualty Co., No. 5-02-0597 (5th Dist., May 27).

Ronnie Lyons allegedly constructed a levee that allegedly trespassed on property owned by his neighbors, Tony and Deena Rendleman.

Hit with a trespass claim, Lyons asked for coverage under a homeowner's policy issued by State Farm Fire and Casualty Co.
State Farm refused to defend Lyons, and he shot back with a complaint for declaratory judgment. Ruling against the insurance company, the Williamson County Circuit Court concluded that State Farm was obligated to defend and indemnify Lyons.

The Appellate Court affirmed on the duty to defend but reversed the ruling on indemnification as premature.

Here are some highlights of Justice Melissa A. Chapman's opinion (with various omissions not noted in the quoted text):

"First, we review the well-settled law regarding the construction of insurance policies as it relates to the rights and obligations of the parties. It is the general rule that the duty of the insurer is determined by the allegations of the underlying complaint. A duty to defend arises if the complaint's allegations fall within or potentially within the coverage provisions of the policy. This is true even if the allegations are groundless, false or fraudulent, or if only one of several theories advanced is potentially within policy coverage.

"The threshold requirements for the complaint's allegations are low. In a court's determination of the duty to defend, the underlying complaint is to be liberally construed in favor of the insured, and doubts and ambiguities are to be construed in favor of the insured.

"A determination regarding an exclusionary clause is subject to the same liberal standard. The factual allegations of the complaint, rather than the legal theories, determine a duty to defend.

"An insurer may not justifiably refuse to defend an action against its insured unless it is clear from the face of the underlying complaints that the allegations fail to state facts which bring the case within, or potentially within, the policy's coverage."

Coverage Provisions

According to Chapman, "Lyons' liability policy provides coverage for 'damages because of bodily injury or property damage to which this coverage applies, caused by an occurrence.' It excludes coverage for property damage that 'is either expected or intended by the insured.'

"The policy defines 'occurrence' as 'an accident, including exposure to conditions, which results in a. bodily injury or b. property damage.'

"The policy also states as follows: ' "[P]roperty damage" means physical damage to or destruction of tangible property, including loss of use of this property. Theft or conversion of property by any insured is not property damage.'

"State Farm argues that the act of constructing levees was intentional and therefore was not an 'occurrence' within the meaning of the policy, which defines 'occurrence' as 'an accident.'

"It further argues that the levees are the 'natural and ordinary consequences' of the act of construction and therefore do not constitute 'an accident.' "

Defining "Accident"

"In determining what constitutes an accident," Chapman noted, "Illinois adheres to the rule of law promulgated by the U.S. Supreme Court more than a century ago in United States Mutual Accident Association v. Barry, 131 U.S. 100 (1889). In the Barry case three men jumped to the ground from a platform several feet high. The three men were physicians who had just finished visiting a patient and were attempting to take a shortcut to their next destination.

"Two of the men landed safely; however, Dr. Barry landed awkwardly. He immediately became ill and died a few days later from a twisted duodenum caused by his bad landing. His insurer raised a policy defense contending that Dr. Barry's death was not accidental within the meaning of the policy.

"At the trial a jury found that the event had occurred accidentally.

"The U.S. Supreme Court upheld the verdict, approving the following instructions with regard to finding an accident under the policy: 'The court properly instructed [the jurors] that the jumping off the platform was the means by which the injury, if any was sustained, was caused; that the question was whether there was anything accidental, unforeseen, involuntary, unexpected, in the act of jumping, from the time the deceased left the platform until he alighted on the ground; that the term "accidental" was used in the policy in its ordinary, popular sense, as meaning "happening by chance, unexpectedly taking place, not according to the usual course of things, or not as expected"; that if a result is such as follows from ordinary means, voluntarily employed, in a not unusual or unexpected way, it cannot be called a result effected by accidental means; but that if, in the act which precedes the injury, something unforeseen, unexpected, unusual, occurs which produces the injury, then the injury has resulted through accidental means.'

"The court reasoned that while Dr. Barry intended to jump, he believed and intended that he would land safely from the jump; the fact that he did not land safely as expected constituted the accident.
"The Illinois Supreme Court adopted the Barry interpretation of 'accident' in Christ v. Pacific Mutual Life Insurance Co., 312 Ill. 525 (1924).

"Some 60 years after Barry, the Illinois Supreme Court summarized the rule promulgated in the Barry case, in the case of Yates v. Bankers Life & Casualty Co., 415 Ill. 16 (1953): '[I]f an act is performed with the intention of accomplishing a certain result, and if, in the attempt to accomplish that result, another result, unintended and unexpected, and not the rational and probable consequence of the intended act, in fact, occurs, such unintended result is deemed to be caused by accidental means.' "

Expected or Intended

"Here," Chapman held, "we find that State Farm's application of the definition of an accident is misunderstood. The focus of the inquiry in determining whether an occurrence is an accident is whether the injury is expected or intended by the insured, not whether the acts were performed intentionally.

"There is no question that Lyons intended to build levees surrounding his pond. The question determining policy coverage is whether he intended to build a part of the levees over the property line onto the Rendlemans' property. If Lyons did not intend to build a part of the levees onto the Rendlemans' property, then the result can be said to be unintended or unexpected. If answered in the affirmative, then he intended the injury, i.e., the trespass, and coverage would not apply.

"State Farm's corollary argument -- that because the levees were the natural and ordinary consequence of Lyons' conduct (the intentional act of construction), they do not constitute an accident -- is equally unavailing.

"If the focus of that inquiry had been injury- or result-oriented, the question then becomes whether building a part of the levees onto the Rendlemans' property is the 'natural and ordinary consequence' of the act of constructing levees. We believe that this question can obviously be answered in the negative.

"Further, the extension of coverage from 'accident' to 'occurrence,' as in this policy, has generally been considered to broaden coverage.

"We have reviewed the underlying complaint and are unable to find any allegations that even suggest that Lyons expected or intended to build the levees so that they extended onto the Rendlemans' property.

"Nevertheless, State Farm argues that because the complaint characterizes the intrusion upon the Rendlemans' property as a trespass, intent is implied as a necessary element of that tort. State Farm further contends that trespass cannot be premised upon negligent conduct, citing to the Illinois Supreme Court case of Dial v. City of O'Fallon, 81 Ill.2d 548 (1980).

"We reject outright State Farm's assertion that trespass cannot be based on negligent conduct. Contrary to State Farm's claim, the Dial court stated, '[O]ne can be liable under present-day trespass for causing a thing or a third person to enter the land of another either through a negligent act or [through] an intentional act.'

"This legal premise comports with Prosser on Torts: 'The defendant is liable for an intentional entry although he has acted in good faith, under the mistaken belief, however reasonable, that he is committing no wrong. Thus he is a trespasser although he believes that the land is his own. The interest of the landowner is protected at the expense of those who make innocent mistakes.' W. Prosser, Torts, section 13, at 74 (4th ed. 1971).

"Moreover, it is the factual allegations of the complaint, rather than the legal theories, that determine a duty to defend."

The Moorman Doctrine

"Finally," Chapman recounted, "State Farm contends that the application of the Moorman doctrine prohibits recovery. Moorman Manufacturing Co. v. National Tank Co., 91 Ill.2d 69 (1982). State Farm argues that under the Moorman doctrine, in general, a tort does not lie absent an accident defined as a sudden and calamitous event.

"This argument mischaracterizes the doctrine. In Moorman Manufacturing Co., the plaintiff brought a product liability suit alleging that a defect in a grain-storage tank had caused it to crack. The Illinois Supreme Court held that solely economic losses are not recoverable in tort actions for product liability.

"The court then quoted with favor this definition of 'economic loss': 'damages for inadequate value, costs of repair and replacement of the defective product, or consequent loss of profits -- without any claim of personal injury or damage to other property.'

"In the instant case we find that the Rendlemans' complaint seeks consequential damages directly related to the damage caused by the trespass. A trespass is an invasion in the exclusive possession and physical condition of land. Depending upon the nature of the trespass, it can be said to be purely an injury to land.

"Here, the destruction of the Rendlemans' property caused by the building of levees can be considered a pure injury to land. Additionally, the Rendlemans' complaint alleges that they have been dispossessed of their property. Because we find that the complaint does not seek solely economic damages, we have no need to consider State Farm's argument that the instant case does not come within one of the exceptions recognized under Moorman Manufacturing Co.

"Construing the policy and complaint liberally and resolving all doubts in favor of the insured, we conclude that the allegations of the underlying complaint are potentially within the coverage under the policy."

Estoppel

"We have found that State Farm had a duty to defend Lyons in the underlying action," Chapman and her colleagues reasoned. "We further find that State Farm breached that duty by failing to pursue the appropriate legal options, and we hold that State Farm is estopped from raising any policy defenses.

"Well-established Illinois law requires that an insurer that questions policy coverage must either (1) seek a declaratory judgment or (2) defend under a reservation of rights.

"Where a duty to defend exists but the insurer fails to take either course of action, its failure to defend is unjustified, and in a subsequent action by the insured against it, it is barred from asserting its defenses to coverage.

"A recent Illinois Supreme Court case emphasized the importance of the estoppel doctrine in insurance coverage cases. 'It [the estoppel doctrine] arose out of the recognition that an insurer's duty to defend under a liability insurance policy is so fundamental an obligation that a breach of that duty constitutes a repudiation of the contract.' Employers Insurance of Wausau v. Ehlco Liquidating Trust, 186 Ill.2d 127, 151 (1999).

"In declaring that an insurer cannot simply choose to refuse to defend, the court went on to state: '[T]he insurer must either defend the suit under a reservation of rights or seek a declaratory judgment that there is no coverage. If the insurer fails to take either of these actions, the estoppel doctrine applies.'

"The doctrine bars the insurer even from raising those defenses that might have been successful had the insurer not breached its duty to defend. The courts have only recognized one exception to the estoppel doctrine, i.e., a serious conflict of interest, which does not apply to the case before us.

"We conclude that the estoppel doctrine applies to the case before us, barring State Farm from asserting any policy defenses."

Indemnity

"Finally, State Farm contends that the trial court erred in entering a final judgment which included a duty to indemnify," Chapman noted. "State Farm argues that the court's finding that it had a duty to defend is not dispositive of whether it also had a duty to indemnify. We agree that a finding of a duty to indemnify was premature.
"Because we found that the underlying cause of action presented a case of potential coverage, the general rule of estoppel was triggered. Having breached its duty to defend, State Farm is consequently estopped from raising policy defenses at subsequent proceedings involving the underlying cause of action. However, we stop short of ruling on a duty to indemnify, pending the outcome of the Rendlemans' lawsuit.

"While State Farm can no longer argue, due to estoppel, that the resulting loss or damage was not covered or was excluded, a duty to indemnify the insured for a particular liability is only ripe for consideration if the insured has already incurred liability in the underlying claim against it. A declaratory judgment action to determine indemnification is premature if brought before a determination of the insured's liability."

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