delivered the opinion of the court:
Plaintiff, William Elas, a minor, by A. T. Elas, his father and next friend, appeals from the judgment of the Circuit Court of Rock Island County granting a motion for summary judgment in favor of State Farm Mutual Automobile Insurance Company. The lawsuit was instituted as a result of personal injuries suffered by the minor William Elas in an automobile accident in Mercer County when Elas was riding in a car driven by defendant Nancy J. Smith, when the vehicle went off the road and struck a utility pole. Mrs. Smith was taking the Elas boy, her own child, and four other youngsters to a birthday party at the time of the accident.
The automobile involved in the accident was owned by Mrs. Smith’s father, Francis Peterson. Plaintiff, by his father and next friend, filed suit against Mrs. Smith and the Petersons for damages. Farmers Automobile Insurance Association (hereinafter called FAIA), insurers of the Peterson automobile, became involved in the litigation. State Farm Mutual, asserted to be Mrs. Smith’s insurer, denied any coverage under its policy and refused to defend Mrs. Smith.
Pursuant to court approval, plaintiff entered into a settlement with Mrs. Smith, the Petersons, and FAIA, whereby FAIA agreed to pay out its policy limit of *20,000, and plaintiff agreed to hold the settling parties harmless against recovery above that amount, reserving all rights against State Farm as Mrs. Smith’s insurer. Following this settlement, the cause proceeded to trial without a jury, and the court awarded plaintiff *100,000 in damages. Plaintiff then filed the action now before us for declaratory judgment against State Farm Mutual for determination that State Farm was hable for plaintiffs injuries under the terms of its insurance policy covering Mrs. Smith.
State Farm initially resisted the complaint on the ground that the policy was issued to Stuart Smith, the father-in-law of Nancy Smith, and that Nancy was, therefore, not the insured person under the policy. It appears, however, that the policy was intended to cover Nancy and her husband, and their 1963 Chevrolet, and was placed in Stuart Smith’s name at the suggestion of the State Farm agent to keep their premiums low. State Farm does not press this issue on appeal, and for our consideration we assume that Nancy Smith was an insured under the State Farm policy.
State Farm then filed a motion for summary judgment, and argued that the 1964 Mercury owned by the Petersons and involved in the accident was a car “furnished or available for the frequent or regular use” of Nancy Smith and that her operation of the automobile was not covered by the State Farm policy by reason of a clause therein excluding such vehicles. Based on the depositions of Nancy Smith and her parents, the trial court in the instant case determined defendant’s assertion to be correct as a matter of law and granted summary judgment. It is from such judgment that plaintiff now appeals to this Court.
There are two basic issues before us on appeal: (1) whether the trial court was correct in holding that Nancy Smith was not covered by the State Farm policy when driving her parent’s automobile (which involves an interpretation of the policy provisions and the depositions of the parties, and a second issue which we believe to be dispositive of the issues in the case), and (2) whether or not State Farm had a duty to defend Mrs. Smith, and if it had such duty, what are the consequences of the failure of State Farm to perform that duty.
The liability of State Farm on the policy would be under the portion denominated “Insuring Agreement II” which covers the insured party while operating a nonowned automobile (defined as one other than the named vehicle which is neither owned by, registered in the name of, or furnished or available for the frequent or regular use of the insured). Under the term of “Coverages A and B,” incorporated by reference in Insuring Agreement II, State Farm obligates itself to defend the insured in any litigation alleging bodily injury caused by the insured’s operation of a nonowned automobile.
The courts of this State have determined that the liability insurer’s duty to defend a suit in such case is determined by the allegations of the complaint. If the complaint states facts which bring the claim potentially within the coverage of the policy, the insurer is obligated to defend. It can safely and justifiably refuse to defend only when the allegations of the complaint clearly show that the claim is beyond the policy coverage. When an insurer unjustifiably refuses to afford a defense for the insured, it is later estopped from raising the defense of noncoverage in a suit against it to enforce a judgment against the insured. Palmer v. Sunberg (3rd Dist. 1966), 71 Ill. App. 2d 22, 217 N.E.2d 463; Tiffiny Decorating Co. v. General Accident Fire & Life Assurance Corp. (1st Dist. 1973), 12 Ill. App. 3d 597, 299 N.E.2d 378; McFadyen v. North River Insurance Co. (2d Dist. 1965), 62 Ill. App. 2d 164, 209 N.E.2d 833; Sims v. Illinois National Casualty (1963), 43 Ill. App. 2d 184, 193 N.E.2d 123.
This rule has been recognized by the Supreme Court of this State recently in cases where its validity and application were not challenged by the parties. Weiss v. Bituminous Casualty Co. (1974), 59 Ill. 2d 165, 169, 319 N.E.2d 491; Wheeler v. Aetna Casualty and Surety Co. (1974), 57 Ill. 2d 184, 187-188, 311 N.E.2d 134; see also 7A Appleman, Insurance Law and Practice, §§4683, 4686, 4690 (1962).
Plaintiff thus takes the position that, by its refusal to defend, State Farm has estopped itself from now claiming that the injuries suffered in the accident were not covered by Mrs. Smith’s policy. State Farm responds that its non-owned automobile coverage is only excess insurance and the FAIA, as primary insurer of the Peterson vehicle, had the obligation to defend Mrs. Smith, which it did. Automobile Underwriters, Inc. v. Hardware Mutual Casualty Co. (1971), 49 Ill. 2d 108, 273 N.E.2d 360; New Amsterdam Casualty Co. v. Certain Underwriters at Lloyds, London (1966), 34 Ill. 2d 424, 216 N.E.2d 665. See also the discussion in Putnam v. New Amsterdam Casualty Co. (1st Dist. 1969), 110 Ill. App. 2d 103, 249 N.E.2d 159, aff'd, 48 Ill. 2d 71 (1970).
As plaintiff points out, however, defendant’s cited cases hold only that the primary insurer has the primary, not sole, duty to defend. After State Farm’s initial refusal to defend Nancy Smith, and following the settlement between plaintiff and FAIA, FAIA informed State Farm that it had agreed to pay off its full policy limit and again requested, together with Nancy Smith, that State Farm undertake or participate in any further defense. It was clear at this point, that FAIA had paid in full and that any further recovery would be sought against State Farm as the excess insurer. State Farm thus had effectively become a primary insurer, and we conclude that the duty to defend thereafter could no longer be avoided by State Farm and solely imposed upon FAIA. State Farm at this time also had an opportunity to clearly protect its own interest.
Defendant State Farm further argues that the plaintiff could not settle with the insured and covenant not to sue her, and then hold a sham trial to establish further damages which are then sought to be recovered from the insurer. (We should say parenthetically that a trial, jury-waived, before the trial court could hardly be denominated a “sham trial”.) The agreement, however, among plaintiff, Mrs. Smith and the Petersons and FAIA was not that plaintiff would not sue. It was an agreement that plaintiff would not seek to execute any judgment recovered against those particular defendants, but rather would execute only as against State Farm which carried excess coverage. It was a covenant insulating the assets of the insured parties and of FAIA from the judgment which might be recovered, with the exception of *20,000 which FAIA had agreed to pay. Rights against State Farm were expressly reserved.
Ample authority exists holding that when an insurer refuses to defend the suit against its insured, the insured may settle with other parties in the case and protect himself or herself against further liability without waiving the insured’s rights or the rights of the injured plaintiff to continue the proceedings against the insurer. De Luxe Motor Stages v. Hartford Accident & Indemnity (1st Dist. 1967), 88 Ill. App. 2d 188, 193, 232 N.E.2d 141; Krutsinger v. Illinois Casualty Co. (1956), 10 Ill. App. 2d 344, 135 N.E.2d 180, aff’d, 10 Ill. 2d 518, 527, 141 N.E.2d 16 (1957); 7A Appleman, §4690, at 492, and §4714, at 591-592.
Defendant cites Childress v. State Farm Mutual Automobile Insurance Co. (4th Dist. 1968), 97 Ill. App. 2d 112, 239 N.E.2d 492, as authority to the contrary. The rationale of that case may seem obscure, but the court there seems to rely principally on the asserted fact that there was no contractual relationship between the insured and the insurer. Be that as it may, there was clearly a contractual relationship in the case before us, and we do not believe that Childress is convincing authority in face of the general rule to which we have referred in this opinion.
We thus conclude that State Farm’s continued refusal to defend, or participate in the defense of, Mrs. Smith entitled her and the original primary insurer, to make a partial settlement of the case and protect their own interests without waiving the rights of Mrs. Smith or of the plaintiff to establish liability and damages, and proceed against the excess insurer, State Farm. Once State Farm again refused to defend or participate in the defense, even after notice that FAIA intended to settle for the full amount of its policy, it had apparently breached its duty to participate in the defense as set forth in the policy itself. Defendant does not argue that the complaint by plaintiff in the original damage suit against Mrs. Smith does not set forth a claim potentially within the policy coverage, nor does it argue that the complaint on its face clearly shows the claim to be outside the policy coverage.
By breaching its duty to participate in the defense, the insurer rendered itself liable for the judgment entered against the insured, if there were no other modifying factors. (Palmer v. Sunberg (3rd Dist. 1966), 71 Ill. App. 2d 22, 33, 217 N.E.2d 463.) Though some authorities indicate that the insurer could be liable for the entire judgment even if it exceeds the policy limits, we believe that such rule should apply only when the insured has suffered, or potentially might suffer, actual damages in such amount, or (if arrangements are made reserving rights against the insurer), to the extent that rights are reserved as against the insurer. In the cause before us, since Mrs. Smith has insulated her assets from the judgment, by agreement with Elas, we believe that State Farm should be liable only in the amount of its policy limits of *30,000, upon which plaintiff and Mrs. Smith relied in making the settlement. The result announced here (limiting recovery to the amount of policy coverage) would apply only in cases where facts exist, as in the present case, involving a settlement reliance upon a specific amount of supplementary insurance by an insurer, who wrongfully refuses to defend. We should also note that no issue of payment of attorney’s fees and expenses incurred by the insured or others is presented here, and, therefore, nothing herein contained should operate to limit the right of the insured to recover costs and expenses of conducting a defense, even though such sums will be required to be paid by the insuring company beyond its 'policy limits.
As pointed out in the Sims case (Sims v. Illinois National Casualty Co. (1963), 43 Ill. App. 2d 184, 193 N.E.2d 123), and observed again in Palmer v. Sunberg, the insurer is not left without an opportunity to assert noncoverage since it may defend on the reservation of rights (if the insured will agree to such reservation) or the insurer may seek a declaration of its rights and duties in a separate declaratory judgment action before or pending trial of the original action instituted by plaintiff against the insured. State Farm did neither. It refused to participate in the defense and disposition of the case and did not take action to establish noncoverage by declaratory judgment. It thus had its opportunity to assert noncoverage. On the basis of the ruling requiring participation in a defense by an insurer under penalty of not thereafter being able to raise the issue of noncoverage, defendant State Farm may not, after trial of the damage case, raise the issue of noncoverage in defense in the instant case. The rule to which we have referred has been deemed by the courts of many states to be essential in protecting insured people from arbitrary rejection of participation in defense by insurers.
We conclude that the trial court erred in granting defendant’s motion for summary judgment, where the motion was based on a claim of noncoverage following defendant’s refusal to participate in the defense of Mrs. Smith, since the complaint showed that plaintiff’s action was ostensibly within the coverage of the policy.
The judgment of the Rock Island County Circuit Court is, therefore, reversed and the cause is remanded for further proceedings consistent with this opinion.
Reversed and remanded.
STOUDER, J., concurs.