Nos. 1-99-2965 & 1-99-4491 (consolidated)

PRESIDING JUSTICE QUINN delivered the opinion of the court:

This consolidated appeal arises out of a declaratory judgmentaction filed by plaintiff, Hartford Fire Insurance Company(Hartford), against defendants, Whitehall Convalescent and Nursing Home(Whitehall), Whitehall North Convalescent and Nursing Home (Whitehall North),North & Woodbine Corporation (Woodbine), Steven Management Company (StevenManagement), and Paul Mulder (Mulder) (collectively defendants). Hartford fileda motion for judgment on the pleadings which the trial court granted, findingthat Hartford had no duty to defend or indemnify defendants in the underlyingaction. The trial court also denied defendants' motion for partial judgment onHartford's pleadings. Following the trial court's rulings, Hartford filed amotion for reimbursement of costs it expended in defending defendants in theunderlying action. The trial court granted Hartford's motion for reimbursementof defense costs in the amount of $102,985.34. Defendants appeal the trialcourt's rulings and contend that the trial court erred in: (1) finding thatHartford did not have a duty to defend; (2) denying defendants relief as totheir affirmative defenses of estoppel and waiver; (3) dismissing defendants'counterclaims for breach of contract, statutory consumer fraud and common lawfraud; and (4) granting Hartford's motion for reimbursement of defense costswhere Hartford's reservation of rights failed to explicitly indicate itsintention to seek reimbursement. For the following reasons, we reverse.

Defendants are each involved in the business of providinghousing and care for elderly and infirm persons. Arthur Arenson is the executorof the estate of Sol Arenson, who is deceased and joined as a party as thedesignated representative of the class of persons who have been residents ofWhitehall, Whitehall North, and Woodbine. On January 7, 1993, Arenson,individually and as a representative of the class of persons who have beenresidents and or sponsors of Whitehall, Whitehall North or Woodbine, commencedan action (the Arenson complaint) against defendants. The Arenson complaintalleged that residents of the three nursing homes are not permitted to purchaseand use medications on their own; rather, the individual who sponsors orguarantees payment of all amounts incurred by the resident signs a contract andagrees to be responsible for charges relating to prescriptions and medicalsupplies. Residents and/or sponsors also receive a document entitled"Schedule of Charges" which states that they will be billed formedications at the current rate charged by Weber Automated Systems, Inc.(Weber), the pharmacy and medical supply company used by defendants. The Arensoncomplaint alleged that since 1989, Whitehall, Whitehall North and Woodbine haveconsistently charged their residents and/or sponsors an amount in excess of whatthe nursing homes actually paid Weber for the prescriptions and medicalsupplies. The Arenson complaint further alleged that defendants accomplishedthis by creating two sets of invoices for the products - one indicating theamount for which defendants had been billed and another reflecting inflatedfigures for defendants to present to their residents and/or sponsors. Accordingto the complaint, this conduct was done with the intention to defraud theresidents by misrepresenting the expenses they incurred in purchasing theproducts from Weber.

Counts I and II of the Arenson complaint sought recoveryunder the Racketeer Influenced and Corrupt Organizations Act (18 U.S.C. 1961 etseq.(1994)). Counts VII and IX asserted violations of the IllinoisConsumer Fraud and Deceptive Business Practices Act (815 ILCS 505/1 et seq.(West1198)) and common law fraud. Count X alleged breach of contract againstdefendants due to dishonest billing for residents' medications.

Hartford issued health care facility professional liabilitypolicies and umbrella policies to defendants. Hartford's Health Care FacilityProfessional Liability Coverage provided coverage as follows:

"1. Insuring Agreement

We will pay those sums that the insured becomes legally obligated to pay as damages because of injury to which this insurance applies. No other obligation or liability to pay sums or perform acts or services is covered unless explicitly provided for under SUPPLEMENTARY PAYMENTS - COVERAGE. This insurance applies only to 'medical incidents' which occur during the policy period. The injury must be caused by a 'medical incident.' The 'medical incident' must take place in the 'coverage territory.' We will have the right and duty to defend any 'suit' seeking these damages."

The policy defined "medical incident" in pertinentpart as follows:

'Medical Incident' means any act or omission in the furnishing of professional health care services to any person, including:

a. The furnishing of food, beverages, medications or appliances in connection with such services;

***

e. Failure to comply with any right of a health care facility resident under any state law regulating your business as a resident health care facility;

f. Failure to comply with any right of a resident as included in the United States Department of Health and Human Services regulation governing participation of intermediate care facilities and skilled nursing facilities regardless of whether your business is subject to such regulations; ***

***

Any such act or omission together with all related acts or omissions in the furnishing of such services shall be considered one 'medical incident'."

The limits of insurance for each medical incident under thepolicy was $1 million. The medical incident aggregate limit was $2 million.

Defendants tendered the Arenson complaint to American ZurichInsurance Company (Zurich), which assumed defense of the Arenson litigation onJanuary 21, 1993, for the period November 30, 1992, to November 30, 1993.Defendants issued notice of the Arenson complaint to Hartford on January 28,1993, and Hartford acknowledged its receipt on February 3, 1993. On April 28,1993, Hartford informed defendants that it was denying coverage. In its denial,Hartford stated that to "trigger coverage," the allegations must plead"an occurrence resulting in bodily injury or property damage."Hartford specifically set forth the definitions of the terms"occurrence," "bodily injury," and "propertydamage" with the statement that "[t]he allegations [in the complaint]do not plead same."

Upon its discovery that health care professional liabilitycoverage had been mistakenly omitted from the policy issued to defendants,Hartford withdrew its denial of coverage for the claim on August 13, 1993, andstated that it would provide a defense subject to a reservation of rights,specifically stating the following:

"Please be advised that your Hartford policy was effective from 11/30/91 to '92. We will provide coverage for medical incidents which occurred during that period."

Hartford's letter made reference to punitive damages andinjunctive relief as two areas for which the policy did not provide coverage.Hartford's letter also indicated that it would contribute 50% of Whitehall'sdefense costs and agreed to reimburse defendants for half of the defense costsit had incurred since January 1, 1993.

In the spring of 1994, the Arenson complaint was voluntarilydismissed with prejudice from state court. The Arenson complaint wassubsequently filed in federal district court on April 2, 1994, and containedallegations similar to those contained in the state court complaint. Hartforddid not issue another reservation of rights letter regarding its involvement inthe federal action.

On July 1, 1996, Hartford sent a letter to defendants againdenying coverage because the underlying action did not involve a "medicalincident" and stated that Hartford's participation in the defense wassubject to a "strict reservation of rights." The letter furtherstated:

"Based upon the foregoing, we must continue toreserve all of our rights with respect to this matter. Further, please be advised that in continuing to contribute to the defense of the underlying action, we do not waive any of the defenses available to us. Rather, we reserve all our rights, including the right to assert additional or alternative defenses which may be applicable."

On January 31, 1997, Hartford filed its complaint fordeclaratory judgment. On March 21, 1997, Hartford filed an amended complaint fordeclaratory judgment and requested a declaration that: (1) the underlyingallegations of the Arenson complaint did not involve a "medicalincident" under the insuring agreement; (2) it had a duty neither to defendnor indemnify Whitehall, Whitehall North, Woodbine, Steven Management or Mulderin connection with the underlying action; and (3) the underlying action involvedcriminal or quasi-criminal conduct on the part of Steven Management and Mulder,and therefore Hartford had no duty to defend or indemnify them. Hartford thenalleged that, because the underlying action involved acts or omissions of aprofessional nature on the part of Mulder, coverage was precluded under thepolicy's exclusion provision.

The Arenson litigation subsequently settled for $1 million.Defendants contributed $850,000 to the settlement and accepted a $150,000settlement payment from Zurich. On July 16, 1999, the trial court denieddefendants' motion for judgment on Hartford's pleadings and as to defendants'affirmative defenses of estoppel and waiver. Defendants also filed acounterclaim for declaratory relief alleging that Hartford breached itscontractual obligations to defend and indemnify them.

Following argument from both parties, the court ruled thatHartford did not owe defendants a duty to defend the Arenson litigation becausethe complaint fell outside the scope of coverage provided by Hartford's healthcare professional liability policy. On August 13, 1999, defendants filed anotice of appeal of the circuit court's July 16, 1999, judgment in favor ofHartford (No. 1-99-2965).

On August 16, 1999, Hartford filed a motion for prove-up anda request for reimbursement of costs. Hartford alleged that it had expended$102,895.34 in the defense of the underlying action. Hartford further allegedthat because the court found that it had no duty to defend or indemnifydefendants, it was entitled to a reimbursement of the costs that it advanced indefending the Arenson action.

In response, defendants asserted, as they do on appeal, thatinsurers are not entitled to reimbursement of underlying defense costs unlessthey issue a reservation of rights letter that specifically reserves the rightto seek reimbursement in the event that a court later determines in adeclaratory judgment action that no duty to defend exists. Defendants assertedthat in this case, Hartford never reserved the right to seek reimbursement ofdefense costs.

On September 7, 1999, the circuit court ruled as follows:

"Admittedly, Plaintiff's correspondence to the insured does not expressly state that it intended to seek reimbursement for defense costs. It does, however, strongly state that it did not believe there was coverage."

The court found that Hartford's July 1, 1996, letter todefendants sufficiently contemplated seeking reimbursement of costs. The courtfurther ruled that assuming arguendo the reservation of rights was notspecific enough, defendants were on implied notice that they would not beentitled to a free defense for intentional misconduct under a theory of unjustenrichment. The court stated: "[t]o reward the insured with a free defensefor its obvious intentional misconduct would be violative of public policy. ThisCourt exercises its equitable powers by granting Plaintiff's Motion forCosts."

Following the circuit court's denial of its motion forreconsideration, defendants filed a notice of appeal of the grant of Hartford'smotion for reimbursement of costs on December 16, 1999 (No. 1-99-4491). On April28, 2000, Hartford filed a motion to dismiss appeal No. 1-99-2965 on the groundthat this court lacked jurisdiction. This motion was taken with the case.

Before addressing the merits of the issues raised, we firstaddress whether defendants' notice of appeal filed in Appeal No. 1-99-2965 issufficient to confer jurisdiction on this court. Every final judgment of acircuit court in a civil case is appealable pursuant to Supreme Court Rule 301(155 Ill. 2d R. 301), and the filing of a notice of appeal vests jurisdiction inthe appellate court to hear the appeals of such orders. In re Application ofCounty Treasurer & Ex-Officio County Collector of Cook County, Illinois, forJudgment & Order of Sale Against Real Estate Returned Delinquent for theNonpayment of General Taxes for 1984, 208 Ill. App. 3d 561, 567, 567 N.E.2d486 (1990).

The time for filing a notice of appeal is governed by SupremeCourt Rule 303 (155 Ill. 2d R. 303), which provides:

"Except as provided in paragraph(b) below, the notice of appeal must be filed with the clerk of the circuit court within 30 days after the entry of the final judgment appealed from, or, if a timely post-trial motion directed against the judgment is filed, whether in a jury or a nonjury case, within 30 days after the entry of the order disposing of the last pending post-judgment motion." 155 Ill. 2d R. 303.

A final order or judgment is a determination by the court onthe issues presented by the pleadings which ascertains and fixes absolutely therights of the parties to the litigation. Towns v. Yellow Cab Co., 73 Ill.2d 113, 382 N.E.2d 1217 (1978).

Supreme Court Rule 304(a) (155 Ill. 2d R.304(a)) governs thetiming of appeals from final orders not disposing of all matters presented tothe court and states in pertinent part:

"If multiple parties or multiple claims for relief are involved in an action, an appeal may be taken from a final judgment as to one or more but fewer than all of the parties or claims only if the trial court has made an express written finding that there is no just reason for delaying either enforcement or appeal or both. *** In the absence of such a finding, any judgment that adjudicates fewer than all the claims or the rights and liabilities of fewer than all the parties is not enforceable or appealable and is subject to revision at any time before the entry of a judgment adjudicating all the claims, rights, and liabilities of all the parties." 155 Ill. 2d R.304(a).

A Rule 304(a) finding is not required where a claim for feesis made after the principal action has been decided. Servio v. Paul RobertsAuto Sales, Inc., 211 Ill. App. 3d 751, 759 (1991).

Hartford asserts that because its motion for reimbursement ofdefense costs was still pending when defendants filed their notice of appeal asto the declaratory judgment action, defendants' notice of appeal was prematureand failed to confer appellate jurisdiction upon this court. In response,defendants assert that because Hartford filed its motion for reimbursement ofdefense costs after a decision was reached in the principal declaratory judgmentaction, its claim for fees is incidental or collateral and does not affect thefinality or appealability of the July 16, 1999, judgment. In support of theirassertion, defendants rely on Physicians Insurance Exchange v. Jennings,316 Ill. App. 3d 443, 736 N.E.2d 179 (2000). In Physicians Insurance Exchange,the plaintiff, Physicians, and Continental Insurance Company (Continental) fileda declaratory judgment action seeking a determination as to coverage underprofessional liability policies issued to the defendant, Jennings. The trialcourt found that the defendant was entitled to coverage under the Physicianspolicy, but not under Continental's policy. Physicians filed a notice of appealon July 23, 1999. Following the filing of Physicians' notice of appeal,Continental filed a motion to tax costs pursuant to section 5-109 of the Code ofCivil Procedure (735 ILCS 5/5-109 (West 1998)). Pursuant to Physicians andContinental's stipulation, the trial court entered an order to dismissPhysicians' July 23, 1999, notice of appeal without prejudice to refile it. OnAugust 31, 1999, the court awarded Continental costs. On September 29, 1999,Physicians filed a second notice of appeal from both the declaratory judgmentorder and the order granting Continental costs.

On appeal, this court reviewed whether the order grantingdeclaratory judgment was a final order. Continental contended that becausePhysicians dismissed the July 23, 1999, notice of appeal, the notice of appealfiled on September 29, 1999, vested this court with jurisdiction only as to theorder granting Continental costs. Continental further claimed that its motionfor costs was not a posttrial motion that extended the time for filing a noticeof appeal. This court held:

"Here, Continental's motion sought costsaccrued in the course of taking depositions. The declaratory judgment order related to medical malpractice coverage under competing insurance policies. The trial court's granting of Continental's motion did not result in modifying its original judgment. Therefore, Continental's motion was not directed against the declaratory judgment order. As in Marsh, the trial court's decision on the issue of deposition costs had no bearing on the effect of the trial court's declaratory judgment order. Continental's motion for costs did not directly challenge the judgment that was the basis of Physicians' first notice of appeal. Therefore, Physicians' first notice of appeal was timely and vested this court with jurisdiction over the trial court's declaratory judgment order." Physicians Insurance Exchange, 316 Ill. App. 3d at 452.

Hartford argues that Physicians Insurance Exchange isdistinguishable because it involved a statutory request for costs entirelyseparate and collateral to the judgment. Hartford asserts that unlike PhysiciansInsurance Exchange, its motion for reimbursement of defense funding in theArenson action was "solidly intertwined with the circuit court's July 16,1999, judgment. Hartford also relies on cases involving motions for attorneyfees and costs as a sanction under Supreme Court Rule 137 (Marsh v.Evangelical Covenant Church, 138 Ill. 2d 458 (1990)), or a fees requestclaimed in the pleadings of the principal action (F.H. Prince & Co. v.Towers Financial Corp., 266 Ill. App. 3d 977 (1994)). We find Hartford'sreliance on these cases to be misplaced and hold that Physicians InsuranceExchange is analogous to the case at bar. Here, the circuit court grantedHartford's motion for declaratory judgment on July 16, 1999. On August 13, 1999,defendants filed a notice of appeal (No. 1-99-2965) from this judgment. OnAugust 16, 1999, Hartford filed a motion for reimbursement of defense costs. AsHartford filed its claim for reimbursement of defense costs after the trialcourt ruled on the declaratory judgment action, it was not made a part of theprincipal action, nor was it pending or at issue at the time defendants filedtheir notice of appeal from the declaratory judgment. Accordingly, a Rule 304(a)finding was not required and this court has jurisdiction over all matters in thecase that were resolved in the declaratory judgment order of July 16, 1999.

We now turn to the merits of the case. Defendants firstcontend that the trial court erred in entering judgment on the pleadings inHartford's favor because according to the allegations contained in the Arensoncomplaint, Hartford had a duty to defend or indemnify defendants.

An insurer's duty to defend its insured is broader than itsduty to indemnify. Outboard Marine Corp. v. Liberty Mutual Insurance Co.,154 Ill. 2d 90, 125, 607 N.E.2d 1204 (1992). In determining whether an insurerowes its insured a duty to defend, the court must look to the allegations of theunderlying complaint in comparison to the relevant insurance policy provisions. CountryMutual Insurance Co. v. Hagan, 298 Ill. App. 3d 495, 500, 698 N.E.2d 271(1998). If the underlying complaint alleges facts within or potentially withinpolicy coverage, the insurer is obligated to defend its insured, even if theallegations are groundless, false or fraudulent. United States Fidelity &Guaranty Co. v. Wilkin Insulation Co., 144 Ill. 2d 64, 73, 578 N.E.2d 926(1991). In order for the insurer to justifiably refuse to defend the insured, itmust be clear from the face of the underlying complaint that the allegationsfail to state facts which bring the cause within or potentially within coverage.Furthermore, if the insurer relies on an exclusionary provision, it must beclear and free from doubt that the policy's exclusion prevents coverage. BituminousCasualty Corp. v. Fulkerson, 212 Ill. App. 3d 556, 564, 571 N.E.2d 256(1991). Additionally, we must liberally construe the underlying complaint andthe insurance policy in favor of the insured. United States Fidelity &Guaranty Co., 144 Ill. 2d at 74.

In accordance with the above propositions of law, we mustfirst analyze whether Hartford had a duty to defend and if so, whether itbreached this duty. Defendants assert that under the estoppel doctrine, Hartforddenied coverage without seeking a timely declaratory ruling of no coverage.

The estoppel doctrine provides that an insurer which assertsthat a complaint potentially alleging coverage is not covered under a policythat includes a duty to defend may not refuse to defend the insured. The insurermust defend that suit under a reservation of rights or seek a declaratoryjudgment that there is no coverage. If the insurer fails to do this, it isestopped from later raising any policy defenses to coverage. WasteManagement, Inc. v. International Surplus Lines Insurance Co., 144 Ill. 2d178, 207-08, 579 N.E.2d 322 (1991).

We hold that estoppel does not apply in this case becauseHartford did comply with its duty to defend. While Hartford initially deniedcoverage, it later accepted its duty to defend subject to a strict reservationof rights. Hartford then filed a declaratory judgment action seeking adetermination of whether there was coverage under the policy.

We next assess the underlying complaint in light of theapplicable policy provisions to determine whether the claim is within orpotentially within coverage. The policy language at issue provided that Hartfordwould furnish coverage for injuries caused by a "medical incident."The Hartford policy defined "medical incident" as "any act oromission in the furnishing of professional health care services to anyperson", including: (a) the furnishing of food, beverages, medications, orappliances in connection with such services; or (b) the failure to comply withany right of a health care facility resident under any state law regulating theresident health care facility business. Defendants argue that the policylanguage "in connection with" coupled with the allegations in theunderlying complaint bring the case at least potentially within the policy'scoverage. Hartford asserts that a claim for false billing is not plainly withinthe scope of the health care professional liability policy.

The phrase "in connection with" as used in theHartford policy has been construed as being broad as well as vague. Sportmart,Inc. v. Daisy Manufacturing Co., 268 Ill. App. 3d 974, 977, 645 N.E.2d 360(1994). Therefore, it must be construed strictly against the insurer. IllinoisFounders Insurance Co. v. Smith, 231 Ill. App. 3d 269, 275, 596 N.E.2d 59(1992).

The Arenson complaint alleged that in connection with theprovision of medical treatment, defendants falsely billed their residents and/orsponsors. The complaint alleged that defendants promised and agreed thatresidents' prescription drugs and pharmaceutical supplies would be charged inthe amount Weber actually charged defendants for them. According to thecomplaint, defendants published and distributed a "Schedule ofCharges" in which they represented that residents and/or sponsors would bebilled at the rate charged by Weber. The complaint further alleged thatdefendants and Weber produced two different sets of invoices to deceive andcheat residents and/or sponsors by fraudulently misrepresenting the amountdefendants paid for medical and pharmaceutical supplies. In our view, theseallegations constituted a "medical incident" as defined by theHartford policy. The Hartford policy provided coverage for the rendering ofprofessional medical treatment to its residents. Under the policy, thefurnishing of medications in connection with the rendering of such professionalmedical treatment is defined as a "medical incident." Contrary toHartford's contention, there is nothing in the policy to indicate that coverageis limited solely to the provision of health care services.

Finally, in light of our holding that the Hartford policyprovided coverage, we find it is unnecessary to reach defendants' contentionsregarding their counterclaim or Hartford's motion for reimbursement of defensecosts.

For the aforementioned reasons, the judgment of the circuitcourt of Cook County is reversed and remanded for proceedings not inconsistentwith this opinion.

Reversed and remanded.

GREIMAN, and THEIS, JJ., concur.