Insured Bankruptcy Doesn't Release Insurer From Third-Party Obligation

Commercial Liability	Bankruptcy
Conditions	Self-Insured Retention

Carl Hooper (Hooper) was hurt on January 27, 1989, while working on a dye casting and injection molding machine manufactured by Lester Engineering Corporation (LEC). LEC had a one-year liability and product liability insurance policy from Home Insurance (Home), effective on February 14, 1988. The policy had a $1 million limit per occurrence but also included a Self-Insured Retention (SIR) of $250,000 per incident and a total limit of $750,000.

The reduction provision was as follows: "With regard to such insurance as is afforded by this policy, it shall be a condition precedent to the company's liability . . . that the Named Insured make actual payment, by way of settlement or judgment of damages, of the amounts stated . . . as the Named Insured's Self-Insured Retentions . . . . "

On May 4, 1990, Mr. and Mrs. Hooper filed a complaint against multiple defendants, including LEC, under the theory of strict product liability and negligence. Soon after, LEC declared bankruptcy. Subsequently, Home requested permission to initiate a declaratory judgment action regarding its obligation to indemnify LEC, unless LEC paid the full $250,000 per occurrence SIR.

In November 1994, Home filed a lawsuit that sought declaratory judgment. Home also requested a declaration that it had no drop-down obligation to pay LEC’s SIR of $250,000, even if it was liable for any amount exceeding that sum.

The trial court determined that LEC's SIR obligation was a condition precedent and issued a judgment in favor of Home. The Hoopers appealed.

The higher court noted that the Illinois Insurance Code (215 ILCS 5/388 West l944) stated that the insolvency or bankruptcy of the insured did not release the insurance company from paying damages for injuries or losses that happened during the policy's coverage period. The court concluded that the policy language conflicted with the statute. Additionally, an endorsement attached to the policy required Home to indemnify any part of a judgment or settlement that exceeded $250,000, regardless of LEC's inability to pay the SIR amount.

Finally, the appellate court determined that Home was obligated to pay any judgment in excess of $250,000 but was not responsible for the first $250,000.

The appellate court partially reversed and partially affirmed the trial court's judgment in favor of Home, then remanded it with instructions.

Home Insurance Company of Illinois v. Carl Hooper et al.--No. 1-95-3056--Appellate Court of Illinois, First District, Sixth Division--January 23, 1998--691 North Eastern Reporter 2d 65.