An Illinois Appellate Court, applying Illinois law, has held that a professional liability insurer had no duty to indemnify its insured because the insured was not "legally obligated to pay" any amount under the settlement agreement for the underlying action. Rather, the insured assigned his claims to the claimant, and the settlement specified that the insured was not obligated to pay anything. ISMIE Mut. Ins. Co. v. Pergament, 2025 WL 1679934 (Ill. App. Ct. June 16, 2025).
The coverage dispute arose from medical advice by an insured geneticist relating to an erroneous test result for a rare genetic disorder. The professional liability insurer defended the geneticist under a reservation of rights. While the underlying lawsuit was pending, and following a settlement demand from the claimant, the carrier advised that "at this time" it would continue to defend its insured under a reservation of rights and denied that it had a duty to indemnify its insured. Two years later, the insured geneticist settled the underlying litigation and assigned his rights under the professional liability policy to the claimant, but the settlement agreement specifically provided that no amount of money would be paid by the geneticist. Thereafter, the claimant sued the insurer, and the insurer filed a declaratory judgment action. The trial court ruled for the insurer, and the claimant appealed.
The appellate court held that the insurer did not breach the duty to indemnify by taking the position two years before settlement that it did not yet have a duty to indemnify the geneticist. The appellate court concluded that the insurer could not breach the duty to indemnify when the geneticist had not incurred any liability for indemnification at that point. Rejecting the claimant's argument that the policy's "legally obligated to pay" language should be liberally construed in its favor, the appellate court concluded that such liberal construction only applied where an insurer had breached the duty to defend. Because the insurer had defended the geneticist and had not breached a duty to indemnify, the appellate court applied the "legally obligated to pay" language as written and concluded that the insurer had no indemnity obligation because its insured had not incurred any amount. The appellate court also rejected the claimant's counterclaim that the insurer violated section 155 of the Illinois Insurance Code because the parties' bona fide dispute as to coverage precluded liability under that statute.
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