Declaratory Judgment actions are common in extra-contractual litigation and a favorite tool for insurers looking for a perceived, more receptive, forum. Generally, these DJs focus on coverage issues, the applicability of exclusions or the amount of coverage. A new trend may be emerging in which carriers preemptively file declaratory judgment actions asking the court to declare they did not act in bad faith. However, doing so is a misuse of the declaratory judgment statutes as the Illinois Court of Appeals recently pointed out.
United Equitable Ins. Co. v. Steward, 2026 IL App (1st) 250978, 2026 WL 1090181
(Ill. Ct. App. Apr. 22, 2026)
Lakesha Steward was involved in a motor vehicle collision with Tsujiorka Walker in 2015. Walker was operating a motorcycle and was seriously injured. At the time of the wreck, Steward was insured by United Equitable Insurance Company (“United”). Steward’s policy with United provided bodily injury coverage of $25,000 per person.
United’s 1st Declaratory Judgment (2016)
United was informed of the wreck quickly when Walker reached out seeking payment for his injuries. United almost immediately took the position with Steward and Walker that no coverage would be provided for Steward’s liability as United claimed she made material misrepresentations on her application.
United followed up its denial by filing a declaratory judgment action and requesting the Court to find the policy was void and provided no coverage based on Steward’s alleged misrepresentations. The Court disagreed and determined in late 2018 that United owed Steward a defense and indemnity. United initially pursued an appeal but abandoned the appeal after a short time.
Underlying Liability Lawsuit (2017)
During the pendency of United’s 1st DJ, Walker filed a lawsuit against Steward for his injuries. The case was initially stayed while the 1st DJ was pending. The stay was eventually lifted and a jury trial was conducted in 2022. A verdict totaling $827,000 was entered in favor of Walker and against Steward.
United’s 2nd DJ-Early Proceedings (2022)
A month after the verdict was entered against Steward, United filed a second declaratory judgment action. Through this filing, United asked the Court to declare it had not breached any obligation under the policy and that it was only liable for the $25,000 policy limit. United tried
to frame its request by asking the court to declare its coverage obligation under the policy even though everyone agreed the policy limits were $25,000.
The 2nd DJ didn’t get far as it was stayed due to Steward’s bankruptcy filing. Interestingly, United had paid for Steward’s bankruptcy attorney but had not immediately informed the court that Steward had filed for bankruptcy.
2024 Bad Faith Action
During Steward’s bankruptcy action, the court permitted the bankruptcy trustee to assign Steward’s extra-contractual claims against United to Walker. After the assignment, Walker filed a bad faith lawsuit against United. The gist of the allegations involved United’s failure to timely offer the $25,000 policy limits or make any real effort to settle Walker’s claims. Walker sought amounts in excess of the $25,000 bodily injury policy limit as well as punitive damages.
2nd DJ-Later Proceedings
Eventually, the stay was lifted on the 2nd DJ. Walker quickly filed a motion to dismiss United’s petition. Walker’s motion set out various justifications for dismissal with the primary argument being that United’s DJ was a misuse of Illinois’ declaratory judgment act. This was because United was asking the court to declare that its past conduct did not subject it to tort liability.
The court agreed with Walker and dismissed United’s 2nd DJ with prejudice. In its dismissal order, the court noted that United’s liability for bad faith would be determined in the bad faith action.
Appeal
Instead of litigating the issue of bad faith in the Bad Faith Action, United naturally chose to appeal the dismissal of the 2nd DJ. United tried to argue that the 2nd DJ was really a coverage action to determine what was owed under Steward’s policy.
The court saw through this nonsense and described United’s position as an inaccurate framing of the issues. As United had already lost the 1st DJ, there was no dispute concerning coverage and the policy limits were clearly $25,000. Instead, the court was being asked to evaluate whether United’s past conduct opened the door for extra-contractual (tort) liability.
The court pointed out that declaratory judgments are meant to allow parties to “learn the consequences of their actions before acting.” DJ actions are designed to give guidance for future conduct, not to provide relief related to past conduct. Here, United was asking the court to provide its opinion on whether United’s past actions gave rise to extra-contractual liability. This
is not the proper subject of a DJ and should be resolved exclusively in the Bad Faith action. The court ultimately affirmed the dismissal of the 2nd DJ.
United is yet another example of a carrier misusing a DJ action to cut-off an insured’s or claimant’s bad faith action. DJ’s are proper for resolving actual coverage issues and determining duties to defend or indemnify while the underlying claim is going forward. They are not meant to paper over a carrier’s tortious misconduct.
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Kirk Presley enjoys helping individuals and other lawyers with bad faith cases.
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