In Sheckler v. Auto-Owners Ins. Co, 2021 IL App (3d) 190500, 2021 Ill. App. LEXIS 593, Auto-Owners Insurance Company (Insurer) paid its insured, Ronald McIntosh (McIntosh), for property damage following a fire in an apartment he rented to Monroe and Dorothy Sheckler (the Shecklers). Insurer filed suit against Wayne Workman (Workman), who performed service work on an oven in the Shecklers’ apartment that leaked gas and resulted in a fire. Workman filed a third-party complaint against the Shecklers for contribution and the Shecklers tendered the defense of the claim to Insurer. Insurer refused the tender and the Shecklers filed a declaratory judgment action. In the court below, the Shecklers argued that, as tenants, they were co-insureds on McIntosh’s property insurance policy. Following a liberal interpretation of precedent from the Supreme Court of Illinois in Dix Mutual Insurance Co. v. LaFramboise, 597 N.E. 2d 622 (Ill. 1992), an Illinois appellate court ruled that Insurer – who provided property insurance – must defend the tenants of a rental property from contribution claims if the tenants are co-insureds under the landlord’s policy.
In Sheckler, the Shecklers hired Workman to fix a broken burner on a gas stove. Finding that additional parts were needed, Workman left while the Shecklers waited inside. While waiting—and despite the smell of gas filling the kitchen—Mr. Sheckler lit the stove. “Kaboom!” wrote the appellate court when describing the scene. A fire erupted and caused substantial damage to the apartment.
In light of these actions, Workman filed a third-party complaint for contribution against the Shecklers. After Insurer rejected the Shecklers’ tender of defense, the Shecklers filed their declaratory judgment action. In the declaratory judgment action, the trial court ruled in favor of Insurer and found that it did not need to defend the Shecklers.
On appeal, the Shecklers argued that they were co-insureds under Insurer’s policy because their rent payment had been used by the landlord, McIntosh, to purchase his insurance. The lease also indicated that the landlord would purchase fire insurance for the property. The appellate court, following Dix, agreed and reversed the lower court.
Finding that the Shecklers’ rent payment made them co-insureds under the landlord’s policy, the appellate court next determined that Insurer had a duty to defend the Shecklers from the Workman claim. The court’s logic rested in fairness stating: “It is inequitable to find that there is no duty to defend in this case … On the facts of this case, finding that the insurer has a duty to defend its co-insured is a natural and necessary extension of Dix to prevent a subversion of its ruling.”
In Illinois, under Dix, absent an express agreement to the contrary, an insurer may not subrogate against its own insured or any person or entity who has the status of a co-insured under the insurance policy. The ruling in Sheckler, relies on equity to prevent subrogating insurers from doing indirectly (recovering from a co-insured) what they cannot do directly. While Insurer attempted to avoid the anti-subrogation rule by allowing Workman to file a third-party claim against the tenant rather than take a setoff based on the Shecklers’ negligence, the appellate court did not accept this approach. In light of Sheckler, subrogation professionals who insure a landlord in Illinois need to consider whether the landlord’s tenants are co-insureds. If so, pursuant to Sheckler, insurer’s pursuing subrogation will need to defend tenants from contribution claims just as they would have to defend contribution claims filed against the landlord