Stellios Markogiannakis and his wife, Pauline, owned a condominium unit which they had rented to John Mason. On March 19, 1984, Markogiannakis went to the apartment to collect the monthly rent and he was walking away from that apartment when Julia Crawley, an officer in the condominium association, called him into her unit across the hall. Apparently Markogiannakis had not paid the required association fees, and Crawley intercepted him in an attempt to collect them. A heated dispute ensued, and Markogiannakis refused to pay.

He became quite upset, and Crawley was either knocked to the floor by a door in her apartment, or knocked down by Markogiannakis directly. In either case, she suffered physical injuries. The trial judge determined those injuries resulted from Markogiannakis’ negligence.

Her complaint simply alleged her injuries, her medical costs and Markogiannakis’ negligence. It did not indicate any business-related activity connected with the incident. She sought damages of $15,000.

Markogiannakis notified his homeowners insurance carrier, and it wrote the insureds that the matter was being forwarded to their attorneys, but that the company was reserving their rights under the policy "due to intentional act allegations" and also the company suggested that the insured was acting "in a professional capacity" at the time. It indicated the insured should reserve his own attorney because of a possible conflict of interest.

On August 23, 1985, the insureds were advised their policy did not cover the Crawley incident "because Mr. Markogiannakis was acting intentionally and in a professional capacity" at the time. Having refused to defend, the company took no part in the proceedings. About two weeks later, the company filed an action for declaratory judgment that it was not liable, inasmuch as the homeowners policy excluded medical payments to others for conduct "expected or intended" by the insured. It also alleged that the insured’s presence on the premises at that time was "for the purpose of collecting rent." The company concluded that coverage was also excluded under another exclusion for liability "arising out the rental or holding for rental of any premises" by any insured. Later the company amended its complaint to add another count alleging that another exclusion precluded recovery since it provided it would not cover any injury "arising out of any premises owned or rented to any insured" which is not listed in the policy. Judgment was entered in the lower court in favor of Crawley for $17,000 plus costs.

The court in the declaratory judgment action by the company ruled that the company had no duty to defend, indemnify, or reimburse the insured for the costs of the defense in the Crawley action. The trial court specifically found that the business pursuits and rental provisions, as well as the premises exclusion, applied to the incident, preventing any recovery under the policy.

On appeal, the court said a company had three options when requested to defend an action for injuries not covered by its policy: (1) it can seek a declaratory judgment as to its liability in a pending action regarding those injuries, or can do so before such an action is filed: (2) defend its insured under a reservations of its rights, or (3) refuse either to defend or seek a declaratory judgment, but this is at its peril since once the company violates its duty to defend, it cannot deny coverage in a subsequent lawsuit.

It is also possible (and usual) for a company to seek a declaratory judgment and also defend under a reservation of its rights. In this case, the company filed its action for declaratory judgment within one month of its refusal to defend. The evidence showed that the insureds had been renting the condominium unit to Mason for about three years. The court found that the insured had gone to the building that day for the sole purpose of collecting the rent (as was his custom) and he was intercepted by Crawley immediately after he had done so and was leaving that apartment. The court agreed with the trial court’s finding that Crawley’s injuries arose "out of business pursuits of the insured or the rental or holding for rental" of premises by the insured. The court further agreed with the finding that the exception to that provision for "activities which are ordinarily incident to non-business pursuits" did not apply.

The higher court pointed out that the insured had engaged in a business pursuit by renting an investment property over a continuous three-year period for the purpose of obtaining profit. The dispute with Crawley related to the unit which the insured had rented and related to one aspect of the control and management of the building. The payment of fees by owners of condominium units was part of the rental operation.

However, the court found that the premises exclusion did not apply. The only question remaining before the higher court was whether the insured could recover his defense costs.

[Editor’s note: Citation regarding construing ambiguities in favor of the insured deleted]

In the Crawley complaint, there was nothing to even hint that the insured’s conduct was related to a business activity. It was clear that the company learned this from other sources. The location of the incident was clear from the complaint and the description of the events inside her apartment, but the company did not, at that time, rely upon the "premises exclusion."

The court, on appeal, found that the Crawley complaint contained allegations which brought her claim potentially within the policy coverages and, therefore, it established the company’s duty to defend its insured. This obligation, in this case, must be satisfied by reimbursing the insured for his defense costs.

The judgment of the lower court granting summary judgment to the company finding it had no duty to defend, indemnify, or reimburse the insured was affirmed so far as the finding that Crawley’s injuries were not covered under its policy, and reversed and remanded as to the finding that the company had no duty to defend or reimburse its insured for his costs in the Crawley action.

[Editor’s note: Ending, redundant paragraph deleted.]

Insurance Company of Illinois, Appellee v. Stellios Markogiannakis et al., Appellants – Nos. 1-87-2758: 1-87-2789 - Appellate Court of Illinois, First District, Fifth Division – Filed September 9, 1989-544 North Eastern Reporter 2d 1082 (Rough Notes Magazine, March, 1990)