A federal court in Illinois recently ruled the alleged misuse of Tax Increment Financing Redevelopment Act (the “TIF Act”) monies by the City of Marion, Illinois did not allege covered “loss” under the policy of BatesCarey LLP’s client, U.S. Specialty Insurance Company, even when USSIC withdrew from its initial agreement to provide a defense without a reservation of rights.  City of Marion, Illinois v. U.S. Specialty Insurance Company, Case No. 12-cv-0999-SCW (S.D. Ill.  April 30, 2013).

In October 2008, the Board of Education of Marion Community United School District No. 2 (the “School District”) filed a lawsuit against the City of Marion, Illinois (the “City”).  The School District alleged that, beginning in 1987, the City of Marion, Illinois engaged in at least ten different public redevelopment projects in a manner that misappropriated funds, that was contrary to various plans that had been previously approved for the redevelopment, and that generally violated the Tax Increment Allocation Financing Redevelopment Act (the “TIF Act”).

The City tendered the defense of the lawsuit to its insurer, USSIC.  USSIC appointed defense counsel to defend the City but did not issue a reservation of rights when accepting the defense.  USSIC later advised the City that it had concluded that the gravamen of the case was the School District’s effort to regain the benefit of tax distributions that it had lost through the violations alleged in the complaint.  Because the return of tax revenues are not “loss” under the USSIC Policy, USSIC took the position that the claim was not within the scope of the Policy’s insuring agreement.  USSIC denied coverage and withdrew its defense.

In 2012, the City settled the lawsuit and sued USSIC seeking over $500,000 in defense and indemnity from USSIC.  The City alleged that, because USSIC had agreed to defend without a reservation of rights, but then denied coverage without filing a declaratory judgment, that USSIC was estopped from now challenging coverage.  The court rejected the City’s argument.  In granting summary judgment in favor of USSIC, the court adopted USSIC’s arguments and found that USSIC’s denial without filing a declaratory judgment action or reserving rights was not fatal to its coverage defenses.  The court stated that estoppel does not apply to coverage issues in Illinois unless and until there is a finding that the insurer breached its duty to defend.  In this matter, the court agreed with USSIC that the gravamen of the action was the return of wrongfully obtained tax revenues which is not “loss” under the policy and which is against public policy to insure.  The court therefore concluded that estoppel does not apply where, as was the case here, the underlying lawsuit was outside of the USSIC policy’s insuring agreement.

Adam Fleischer represented U.S. Specialty Insurance Company in the coverage litigation.