American Family Mutual Insurance Co. v. Krop

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American Family Mutual Insurance Co. v. Krop, 2017 IL App (1st) 161071

Appellate Court AMERICAN FAMILY MUTUAL INSURANCE COMPANY,
Caption Plaintiff-Counterdefendant-Appellee, v. WALTER KROP,
Individually and as Father and Next Friend of T.K., a Minor; LISA
KROP and MARY ANDRELOAS, as Next Best Friend of A.A., a
Minor; Defendants-Counterplaintiffs-Third-Party Defendants-
Appellants, (Andy Vargas, Third-Party Defendant-Appellee).

District & No. First District, Third Division
Docket No. 1-16-1071

Filed May 10, 2017
Rehearing denied June 29, 2017

Decision Under Appeal from the Circuit Court of Cook County, No. 14-CH-17305; the
Review Hon. Neil Cohen, Judge, presiding.

Judgment Reversed and remanded.

Counsel on Kristin L. Matej, of Taylor Miller LLC, of Chicago, for appellants.
Appeal
Patti M. Deuel, of Leahy, Eisenberg & Fraenkel, Ltd., of Chicago, for
appellee American Family Mutual Insurance Company.

Hinshaw & Culbertson LLP, of Chicago (Stephen R. Swofford and
Kent J. Cummings, of counsel), for other appellee.
 Panel JUSTICE COBBS delivered the judgment of the court, with opinion.
Presiding Justice Fitzgerald Smith and Justice Lavin concurred in the
judgment and opinion.

OPINION

¶1 Plaintiff American Family Mutual Insurance Company (American Family) brought a
complaint for declaratory judgment against Walter Krop and Lisa Krop (collectively, the
Krops) seeking a declaration that the Krops were not entitled to coverage or protection under
its home insurance policy procured in 2012. In response, the Krops brought a counterclaim
against American Family and a third-party complaint against American Family agent Andy
Vargas. Both American Family and Vargas moved to dismiss the counterclaim and third-party
complaint pursuant to sections 2-615 and 2-619 of the Illinois Code of Civil Procedure (the
Code). 735 ILCS 5/2-615, 2-619 (West 2014). The trial court granted their motions pursuant to
section 2-619 and made no ruling as to section 2-615. For the reasons that follow, we reverse
and remand.

¶2 I. BACKGROUND
¶3 This appeal arises from the dismissal of defendants’ counterclaim and third-party
complaint. Before considering the issues raised on appeal, we first set out the relevant facts as
alleged in the counterclaim and third-party complaint.
¶4 In March 2012, Walter and Lisa Krop met with Vargas, an American Family sales agent,
regarding their homeowner’s insurance. At that time, the Krops were insured through
Travelers Insurance Company. The Travelers policy provided coverage for certain intentional
acts, bodily injury, property damage, and personal injury. Under the Travelers policy, personal
injury included libel, slander, defamation of character, and invasion of privacy. The Krops
expressed to Vargas that they wanted an insurance policy with equivalent coverage to the
Travelers policy. The Krops alleged Vargas stated that American Family could provide
equivalent coverage at a lower or comparable rate.
¶5 American Family issued its homeowner’s policy to the Krops on March 21, 2012. The
American Family policy includes coverage for bodily injury and property damage. The policy
does not provide coverage for personal injury, injury resulting from intentional acts, or abuse.
After receiving the policy in 2012, the Krops did not complain about the limits of coverage and
subsequently renewed the policy in 2013, 2014, and again in 2015.
¶6 On May 14, 2014, the Krops’ son, T.K., was sued by Mary Andreloas, as next best friend of
A.A., a minor, in the circuit court of Cook County. The Andreloas complaint sought damages
for defamation, invasion of privacy, and intentional infliction of emotional distress as the result
of alleged harassment and bullying by minor defendants including T.K. The Krops made a
claim for coverage under the American Family policy. Their request was denied on August 20,
2014.
¶7 In the six-page denial letter sent to the Krops, American Family restated the limitations of
the Krops’ policy, specifically, citing the policy’s definition of “bodily harm,” which did not
include “emotional or mental distress, mental anguish, mental injury, or any similar injury

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 unless it arises out of actual bodily harm to the person” and the exclusion of coverage for
damages or injury resulting from abuse or intentional conduct. American Family also stated
that the facts that gave rise to the complaint occurred in 2011, thus predating the Krops’
policy.1
¶8 On October 30, 2014, American Family filed a complaint seeking a declaratory judgment
regarding coverage for the Krops under the homeowner’s insurance policy. Specifically,
American Family sought a declaration that the allegations in the Andreloas complaint fell
within the exclusions of the Krops’ insurance policy, thus requiring no coverage or protection.
¶9 The Krops filed a counterclaim against American Family and a third-party complaint
against Vargas on September 22, 2015. The Krops alleged that Vargas, as an agent of
American Family, negligently failed to procure the level of insurance coverage they requested.
Subsequently, both American Family and Vargas filed motions to dismiss alleging that the
Krops’ claims were filed after the two-year statute of limitations for actions against insurers
and thus barred. On February 4, 2016, the trial court granted American Family’s and Vargas’s
motions, finding that the Krops’ counterclaim and third-party complaint were filed outside of
the two-year statute of limitations.

¶ 10 II. ANALYSIS
¶ 11 On appeal, the Krops argue that both their counterclaim and third-party complaint are
timely because the discovery rule tolled the statute of limitations. Specifically, the Krops argue
the statute of limitations did not start to run until they were denied coverage in August 2014. In
its response, American Family asserts that the Krops’ claims were untimely because the statute
of limitations began to run once the Krops received the policy in 2012. American Family
further argues that the discovery rule is inapplicable to the Krops’ claims because they had a
duty to read their policy. Vargas filed a separate response making similar arguments. He also
argues that the discovery rule does not apply to cases where the alleged deficiency of the policy
plainly appeared on the face of the policy.
¶ 12 American Family and Vargas brought their motions to dismiss defendant’s counterclaim
and third-party complaint pursuant to sections 2-615 and 2-619(a)(9) of the Code. A motion to
dismiss under section 2-619 admits the legal sufficiency of the complaint but asserts
affirmative matters outside of the complaint barring the claim. DeLuna v. Burciaga, 223 Ill. 2d
49, 59 (2006). A section 2-619 motion admits as true all well-pleaded facts, along with
reasonable inferences that can be gleaned from those facts. Piser v. State Farm Mutual
Automobile Insurance Co., 405 Ill. App. 3d 341, 344 (2010). The purpose of a section 2-619
motion to dismiss is to dispose of issues of law and easily proved issues of fact at the outset of
litigation. Thurman v. Champaign Park District, 2011 IL App (4th) 101024, ¶ 18. Specifically,
subsection 2-619(a)(9) of the Code permits a court to dismiss a complaint if it was not
commenced within the time limited by law. The court should grant a section 2-619 motion if,
after construing the documents in the light most favorable to the nonmoving party, there are no
disputed issues of material fact. See Perelman v. Fisher, 298 Ill. App. 3d 1007, 1013 (1998).
We review the dismissal of a cause of action pursuant to section 2-619 de novo. Id.

1
On appeal, American Family makes no argument regarding the underlying complaint which gave
rise to the insurance claim. Thus, we do not address it.

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¶ 13 In their counterclaim and third-party complaint, the Krops allege that Vargas failed to
procure the level of insurance they requested in violation of section 2-2201(d) of the Code. 735
ILCS 5/2-2201(d) (West 2014).2 Defendants respond that any claims for a violation of the
Code are time barred for having not been brought within the applicable two-year limitations
period.3
¶ 14 Here, the parties do not dispute that claims against an insurance producer must be brought
within two years of the date the cause of action accrues. Neither do they dispute that the
discovery rule may extend the limitations period based upon when an insured knew or
reasonably should have known of his injury. The parties differ, however, on when, in this case,
the insureds knew or reasonably should have known of their injury so as to trigger the running
of the statute of limitations.
¶ 15 Our supreme court has distinguished when a cause of action accrues for tort and contract
actions. See West American Insurance Co. v. Sal E. Lobianco & Son Co., 69 Ill. 2d 126 (1977).
When the cause of action alleges tortious conduct, the cause of action generally accrues when
the plaintiff suffers injury. Id. at 129-30. In breach of contract actions and torts arising out of
contractual relationships, the cause of action accrues at the time of the breach, not when the
party sustains damages. Id. at 132. Such was the case in Indiana Insurance Co. v. Machon &
Machon, Inc., 324 Ill. App. 3d 300, 303 (2001), in which an insurer sued its agent.
¶ 16 Historically, Illinois has recognized that the relationship between an insured and his
broker, acting as the insured’s agent, is a fiduciary one. See Garrick v. Mesirow Financial
Holdings, Inc., 2013 Il App (1st) 122228, ¶ 31; DOD Technologies v. Mesirow Insurance
Services, Inc., 381 Ill. App. 3d 1042, 1046 (2008); AYH Holdings, Inc. v. Avreco, Inc., 357 Ill.
App. 3d 17, 32 (2005); Perelman, 298 Ill. App. 3d at 1011. Thus, for cases in which an insured
alleges tortious conduct by its agent, although the cause of action accrues at the time of the
breach, the statute of limitations is subject to tolling by application of the discovery rule.
Broadnax v. Morrow, 326 Ill. App. 3d 1074, 1079 (2002). Accordingly, commencement of the
statute of limitations is delayed until the plaintiff knows or reasonably should know of his
injury and that it was wrongfully caused. Id.; see also Knox College v. Celotex Corp., 88 Ill. 2d
407, 415 (1981).
¶ 17 Defendants assert that this court’s decision in Hoover v. Country Mutual Insurance Co.,
2012 IL App (1st) 110939, a case involving claims brought by an insured against its agent, is
dispositive. In Hoover, the plaintiffs contacted an agent from Country Mutual Insurance for the
purpose of obtaining additional homeowner’s insurance coverage sufficient to cover the
replacement costs of their home and its contents in the event of a loss. Id. ¶ 20. In May 2007,
2
Section 2-2201(d) provides: “While limiting the scope of liability of an insurance producer,
registered firm, or limited insurance representative under standards governing the conduct of a
fiduciary or a fiduciary relationship, the provisions of this Section do not limit or release an insurance
producer, registered firm, or limited insurance representative from liability for negligence concerning
the sale, placement, procurement, renewal, binding, cancellation of, or failure to procure any policy of
insurance.” 735 ILCS 5/2-2201(d) (West 2014).
3
Section 13-214.4 of the Code provides that “[a]ll causes of action brought by any person or entity
under any statute or any legal or equitable theory against an insurance producer, registered firm, or
limited insurance representative concerning the sale placement, procurement, renewal, cancellation of,
or failure to procure any policy of insurance shall be brought within 2 years of the date the cause of
action accrues.” 735 ILCS 5/13-214.4 (West 2014).

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 Country Mutual delivered a new policy to the plaintiffs. Id. ¶ 4. In January 2008, the home was
destroyed by an explosion, which prompted the Hoovers’ claim for coverage. Id. ¶ 13. After
making several payments on the claim, the agent for Country Mutual informed the Hoovers
that no further payments would be forthcoming as, under the terms of the policy, they were not
entitled to full replacement cost coverage. Id. ¶¶ 16-17.
¶ 18 In March 2010, the Hoovers sued both the agent and Country Mutual, alleging breach of
contract, bad faith, and negligence. Id. ¶ 18. Both Country Mutual and the agent separately
moved to dismiss the complaint, asserting, inter alia, that the action was time barred. Id.
¶¶ 23-24. In response, the Hoovers argued that the statute of limitations was tolled until they
actually learned of their injury, which, they maintained, was not until Country Mutual denied
additional payment on their claim. Id. ¶ 26. The trial court dismissed all claims as time barred.
Id. ¶ 27.
¶ 19 A division of this court, sitting in the First District, affirmed the trial court’s dismissal. Id.
¶ 56. In so doing, the court held that when Country Mutual provided the plaintiff with a copy of
the policy, they “knew or should have known” of the policies’ deficiencies. Rejecting the
Hoovers’ argument that the discovery rule tolled the statute of limitations, the court found that
because the plaintiffs received the policy more than two years before they filed their complaint,
the statute of limitations precluded their claims. Id. ¶ 61.
¶ 20 Illinois cases decided prior to Hoover have applied the discovery rule to toll the statute of
limitations in cases like the one now before us. See, e.g., Broadnax, 326 Ill. App. 3d 1074;
General Casualty Co. of Illinois v. Carroll Tiling Service, Inc., 342 Ill. App. 3d 883 (2003). In
Broadnax, the case upon which the Krops rely, the plaintiff insured alleged that the defendant
insurer was negligent in failing to procure an insurance policy that met his coverage needs with
respect to a parcel of property the plaintiff intended to renovate. Broadnax, 326 Ill. App. 3d at
1076. When a fire destroyed the property prior to its renovation, the plaintiff brought a
declaratory judgment action against the insurance company regarding coverage. The trial court
granted summary judgment in favor of the defendant insurer, citing the plaintiff’s failure to
comply with the relevant provisions of the policy, which was affirmed on appeal. Id.
¶ 21 The plaintiff subsequently filed a separate negligence action against the insurance agent.
Id. at 1077. The defendants moved to dismiss, asserting the two-year statute of limitations bar.
The trial court granted the motion to dismiss, and on appeal to this court, sitting in the Fourth
District, we affirmed.
¶ 22 In its analysis, the court distinguished Indiana Insurance, the case upon which the
insurance agents relied. The court noted that in Indiana Insurance, the claims were brought by
the insurer against its own agent and, therefore, the cause of action as well as the relationship
between the parties differed from those in Broadnax. Id. at 1079. Although the plaintiff in
Broadnax did not ultimately prevail, the court noted that the defendant’s relationship to the
plaintiff, as insurance broker and agent, was that of a fiduciary. Id. The court likened the case
to legal malpractice cases in which the discovery rule applies to delay commencement of the
statute of limitations. Accordingly, the court held that the plaintiff insured’s claim against the
insurance agent accrued at the time of the denial of coverage as opposed to after damages were
sustained as a result of the denial of coverage. Id. at 1081.
¶ 23 With the exception of Hoover, Broadnax has been followed in several cases to hold that a
cause of action brought by an insured against an insurance agent accrues when coverage is
denied. See, e.g., State Farm Fire & Casualty Co. v. John J. Rickhoff Sheet Metal Co., 394 Ill.

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 App. 3d 548 (2009); General Casualty, 342 Ill. App. 3d at 899-900; see also Commonwealth
Insurance Co. v. Stone Container Corp., 323 F.3d 507, 510-11 (7th Cir. 2003) (comparing
Broadnax and Indiana Insurance to the law in other jurisdictions and finding nothing “outside
the norm”); but see Wallace Auto Parts & Service, Inc. v. Charles L. Crane Agency Co., No.
14-1377-SMY-DGW, 2015 WL 8606429 (S.D. Ill. Dec. 14, 2015) (expressly rejecting
Broadnax and following the reasoning in this court’s decision in Hoover).
¶ 24 In this case, the trial court rejected the Fourth District’s decision in Broadnax, 326 Ill. App.
3d 1074, as well as State Farm Fire & Casualty, 394 Ill. App. 3d 548, as factually inapposite
and found the First District’s decision in Hoover, this court’s “most recent pronouncement,” to
be on point.
¶ 25 More recently, in Scottsdale Insurance Co. v. Lakeside Community Committee, 2016 IL
App (1st) 141845, a different division of this court, sitting in the First District, found reason
not to follow Hoover. In so doing, the court reaffirmed that long line of Illinois cases which
hold that the cause of action in these types of cases accrues when the insured learns that its
insurer is denying coverage, not when the policy was procured.
¶ 26 In Scottsdale, the Cook County public guardian sued the Lakeside community committee
for the wrongful death of young Angel Hill, a ward of the court. Lakeside agreed to a consent
judgment and assigned its claims against its insurer, Scottsdale Insurance Company, and its
insurance broker, W.A. George Insurance Agency, to the public guardian. Scottsdale denied
coverage and filed a declaratory judgment action. The public guardian then filed a third-party
complaint against W.A. George, alleging fraud, negligence, breach of contract, and breach of
fiduciary duty in procuring the insurance policy. Id. ¶ 2. The trial court, finding that Lakeside
knew or should have known that W.A. George obtained the wrong type of insurance policy
when the policy was procured more than two years before the third-party complaint was filed,
dismissed the complaint as time barred. Id. Lakeside appealed.
¶ 27 On appeal, Lakeside, relying on the discovery rule, contended that the statute of limitations
did not begin to run until such time as Scottsdale denied coverage. Id. ¶ 21. Contrarily, W.A.
George contended that, as in Hoover, the discovery rule should not be applied to toll the statute
of limitations because Lakeside was put on notice that the policy was inadequate on the date it
was first issued. Id. In its analysis, the court found Hoover distinguishable, noting first that the
circumstances in which Lakeside acquired its policy differed from the circumstances in
Hoover. Id. ¶ 36. In Hoover, the plaintiffs “already had a homeowners’ policy and were
negotiating directly with a Country Mutual agent to amend just one portion.” Id. Further,
although “the specific type of loss that could occur *** was unknown, the plaintiffs in Hoover
were seeking a specific provision.” Id.
¶ 28 Conversely, Lakeside hired W.A. George to procure a policy that would cover multiple
types of claims. Id. ¶ 37. Even had Lakeside representatives read the policy in advance, they
would not know in advance that a claim involving the murder of a child in Department of
Children and Family Services custody was not covered until the claim was denied. Id. Relying
on that line of cases which hold that the discovery rule applies to toll the running of the statute
until the insured has knowledge that coverage has been denied, the court reversed the trial
court’s dismissal of Lakeside’s third-party complaint against W.A. George and remanded for
further proceedings. Id. ¶ 38.
¶ 29 Like Scottsdale, we also decline to follow Hoover but for a different reason. The weight of
authority in Illinois remains that the cause of action for claims of negligence between an

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 insured and the insured’s agent accrues at the time coverage is denied. A review of the analysis
in Perelman, 298 Ill. App. 3d 1007, also a First District case, is instructive.
¶ 30 In Perelman, the plaintiff retained an insurance broker for the purpose of procuring a
disability insurance policy that would contain a provision that would increase the amount of
disability payments in order to meet increases in inflation. Id. at 1008. The broker offered, and
the plaintiff accepted, a policy with a monthly disability benefit of $4000. Upon issuance of the
policy, an accompanying transmittal letter requested that the plaintiff review the policy and
contact the broker if the plaintiff had any questions regarding his coverage. Id.
¶ 31 The policy as issued did not contain a provision that would keep pace with inflation. In a
sworn statement, the agent averred that he explained to plaintiff prior to issuance of the policy
that it did not contain a cost of living adjustment. However, plaintiff averred that during
negotiation of the policy, the agent told plaintiff that he was purchasing a “ ‘premier’ ” policy,
which was the “ ‘best’ ” policy available at the time. The plaintiff alleged that when he
received the policy, he “ ‘skimmed’ ” through it to confirm the monthly disability benefit was
for the amount requested. Id. at 1008-09.
¶ 32 Sometime later, the plaintiff suffered a disability and sought coverage, which was provided
but without any future increases for inflation. Id. at 1009. When the policy benefits did not
increase with inflation, the plaintiff filed claims against the broker for breach of contract and
negligent misrepresentation. Id. Defendant filed a motion to dismiss under section 2-619 of the
Code. In support, the defendants argued that when the plaintiff received the policy he
reasonably knew or should have known, for the purpose of commencing the limitation period
under the discovery rule, that the policy did not contain a provision for an annual increase of
benefits to meet the inflation rate. Id. at 1009-10.
¶ 33 The policy, having been issued more than two years prior to the filing of the complaint, was
dismissed on the agent’s motion as time barred. Id. at 1010. This court reversed. Citing our
earlier decision in Foster v. Crum & Forster Insurance Cos., 36 Ill. App. 3d 595, 598 (1976),
we first reaffirmed that in an action where the insured sues his insurer “after failing to note a
discrepancy between the policy issued and received versus the policy requested or expected,
the insured will be bound by the contract terms because he or she is under a duty to read the
policy and inform the insurer of any discrepancy so that a prompt correction may be made
without prejudicing the rights of either party.” In such cases, plaintiffs are not excused from
their burden of knowing the contents of the policy when there are no allegations that the
language of the policy was ambiguous. Perelman, 298 Ill. App. 3d at 1011.
¶ 34 That said, the court then noted the distinction between an action brought by an insured
against the insurer, who issues the policy, and one brought by an insured against the agent, who
procures the policy. In the latter, the relationship between the parties is one of fiduciary. Id. at
1011. Relying on the reasoning and the holdings in Black v. Illinois Fair Plan Ass’n, 87 Ill.
App. 3d 1106 (1980), and Economy Fire & Casualty Co. v. Bassett, 170 Ill. App. 3d 765
(1988), the court held that the trial court erred in dismissing the plaintiff’s case because a
genuine issue of material fact existed as to when the plaintiff knew or should have known that
the policy was defective. Perelman, 298 Ill. App. 3d at 1013. Significantly, in Perelman, the
court noted that the insured’s failure to read and understand the terms of a policy procured by
his broker was not an absolute bar to the insured’s right to recover against his broker for breach
of the broker’s fiduciary duty. Id.

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¶ 35 As Perelman makes clear and Broadnax affirms, it is the relationship between the parties
that defines their respective duties and, thus, also defines the point in time when the cause of
action accrues. Put another way, when an insurance agent owes a fiduciary duty to an insured,
a cause of action for breach of that duty accrues at the time of the breach, but the statute of
limitations is subject to tolling by application of the discovery rule. General Casualty, 342 Ill.
App. 3d at 900. The discovery rule inquires of the plaintiff when he or she knew or reasonably
should have known of their injury. Hermitage Corp. v. Contractors Adjustment Co., 166 Ill. 2d
72, 77 (1995). This court has consistently held that in the case of an insured’s claim against its
agent, the plaintiff knows or reasonably should know of the injury at the moment when
coverage is denied. State Farm Fire & Casualty, 394 Ill. App. 3d at 566; Broadnax, 326 Ill.
App. 3d at 1081; Indiana Insurance, 324 Ill. App. 3d at 304.
¶ 36 In this case, the Krops, as insureds, filed a claim under the insurance policy procured for
them by their agent. On August 20, 2014, coverage was denied. Accordingly, consistent with
Perelman and its progeny, the Krops knew or reasonably should have known of their injury on
August 20, 2014. The Krops filed their third-party complaint against the agent, Vargas, and
American Family on September 22, 2015. Thus, their claims are not time barred.

¶ 37 CONCLUSION
¶ 38 For the foregoing reasons, we find that defendants’ counterclaim and third-party complaint
were not time barred, as the cause of action accrued upon denial of coverage. Accordingly, we
reverse the decision of the circuit court of Cook County granting plaintiff’s motion to dismiss
and remand for further proceedings. Because the trial court did not rule on plaintiff’s section
2-615 motion to dismiss, we do not address it here.

¶ 39 Reversed and remanded.

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