FIFTH DIVISION
MARCH 29, 2002

PRESIDING JUSTICE CAMPBELL delivered the opinion of the court:

This appeal involves an action for declaratory judgment filed by one insurance companyagainst another for costs incurred in connection with the defense of a lawsuit. Plaintiff, U. S.Fire Insurance Company (U.S. Fire), appeals from: (1) an order of the circuit court of CookCounty granting summary judgment on count I of U.S. Fire's second amended complaint in favorof defendant, Zurich Insurance Company (Zurich); and (2) from an order dismissing counts IIthrough IV of U.S. Fire's second amended complaint. For the following reasons, we affirm thejudgment of the trial court.

U.S. Fire filed an action for declaratory judgment against Zurich for claims arising out ofa civil action known as Eastbank Ltd. Partnership v. Laticrete International (Eastbank), formerlypending in the circuit court for Kent County, Michigan. At the time of the Eastbank litigation,Laticrete International (Laticrete) was insured under a Zurich primary policy and under a U.S.Fire excess policy. U.S. Fire sought to recover (a) defense costs it incurred defending a portionof the Eastbank action (count I) and (b) monies U.S. Fire allegedly paid to settle the Eastbankaction (counts II through IV).

The following chronology of events is provided as an introduction to the facts as revealedin the record:

1989        Construction commenced on high rise building in Grand Rapids, Michigan.

1991       Spring 1991: Construction completed on building.
               Serious leakage begins; entire building recaulked.

1992        Exterior wall of building appears damaged.

               November 16, 1992: Zurich assumes Laticrete's defense.

1993       25 parties involved in litigation in Wisconsin and Michigan.

               July 1993: Zurich's internal liability report estimates potential verdict against 
               Laticrete between $18 million and $30 million.

1994        Trial court suspends discovery and orders mediation.

1995       February 1995: Endispute mediation begins. At mediation 
               conference, Zurich offers $250,000 toward settlement. Mediator 
               advises Zurich that its required contribution is in the "mid-
               millions." Eastbank settles with all defendants except Laticrete.

               Building owner implements remedial construction (completed in 1997).

1999       June 23, 1999: Zurich completes defense of Laticrete upon 
               entering into a settlement and limited release. Zurich pays 
               Eastbank $956,648.11 and Laticrete pays Eastbank $6,043,351,89.

               July 1, 1999: Zurich advises U.S. Fire that it has withdrawn from
               Eastbank case.

               August 1999: U.S. Fire assumes Laticrete's defense and files one-
               count complaint against Zurich.

               September 2, 1999: Laticrete settles with Eastbank. Amountpaid 
               by U.S. Fire exceeded limits of excess policy.

2000        May 19, 2000: U.S. Fire files second amended complaint.

                September 8, 2000: Trial court grants Zurich's motion for summary judgment.

                October 6, 2000: Hearing on Zurich's motion to dismiss counts II through IV.

                October 13, 2000: Trial court dismisses counts II through IV.

The record reveals the following relevant facts. In 1989, a private limited partnershipknown as Eastbank Limited Partners (Eastbank) commenced construction of the largest buildingin Grand Rapids, Michigan. The 33-story mixed-use residential high-rise included a hotel, rentalapartments and condominiums and was completed in 1991.

The building began to experience serious leakage at the moment of occupancy,manifested by interior walls and floors becoming soaked after rainstorms. In 1991, the entirebuilding was recaulked between panel and window joints. Nevertheless, leaking continued. Further examination of interior surfaces revealed serious defects in the cementitious backer boardpanels which comprised the exterior curtain of the building. The backer boards and theirwaterproofing membrane and adhesive mortar covering were supplied by Laticrete.

In December 1992, Eastbank brought an action against the building contractors includingLaticrete. Laticrete sued the general contractor and owner for nonpayment. By 1993, manyrelated claims were pending in both Wisconsin and Michigan.

Laticrete was insured under a Zurich primary policy containing an aggregate limit of $1 million, and a U.S. Fire excess (umbrella) policy containing an aggregate limit of $10 million, inexcess of Zurich's policy. As the primary insurer, Zurich undertook Laticrete's defense in theEastbank action and notified U.S. Fire of the action in June 1993.

Zurich's policy states that its duty to defend ended "when we [Zurich] had used up theapplicable limit of insurance in the payment of judgments or settlements under Coverages A or Bor medical expenses under Coverage C." U.S. Fire's excess policy states that its duty to defendwas triggered when the applicable limits of the underlying insurance had "been exhausted bypayments."

By mid-1994, 25 parties, including Laticrete, were involved in the Eastbank action andthe trial court suspended discovery to allow all parties to participate in mediation. In preparationfor mediation, the parties submitted summaries which described the nature and extent of theiralleged claims and defenses. Zurich advised U.S. Fire that it was reviewing the summaries inorder to prepare an evaluation of the case and offered U.S. Fire the opportunity to view thesummaries and any other documents at Zurich's offices. Eastbank's mediation summary claimeddamages in excess of $39 million and identified Laticrete as one of the primary defendants.

Zurich undertook Laticrete's defense in the Eastbank action subject to a reservation ofrights. Zurich advised U.S. Fire that the curtain wall problems were resolved, that the curtainwall problems were attributable to other codefendants, and that Laticrete's true exposure waswithin Zurich's policy limit. Zurich specifically informed U.S. Fire that it continued to view theEastbank action as a case of "no liability" and that it would offer no more than $250,000 at themediation. U.S. Fire alleged that at this point in time Zurich should have realized, and didrealize, that Laticrete's exposure would exceed Zurich's primary policy limits based ondocuments in Zurich's possession. Prior to the mediation, Zurich advised U.S. Fire that its(U.S.Fire's) presence at the mediation was unnecessary.

At the mediation, in compliance with its reports to U.S. Fire, Zurich offered to contribute$250,000 toward a global settlement of the Eastbank action. However, the mediator advisedZurich that its offer was inadequate and the mediator suggested that an offer in the "mid-millions" would be more appropriate. Zurich declined to increase its offer at that point, and themediator ordered Zurich to withdraw from the mediation. Subsequently, Eastbank entered into asettlement with all defendants except Laticrete for $8,500,000; individual defendantcontributions ranged between $1,500,000 and $4 million.

Laticrete, Zurich and Eastbank began settlement negotiations in June 1999. During the negotiations, Zurich postponed the performance of certain expert witness services (tests) whichwere recommended by defense counsel for Laticrete. Defense counsel for Laticrete also notifiedZurich that the tests could potentially damage the defense of Laticrete and that "substituteevidence" potentially existed. On June 23, 1999, Laticrete and Zurich settled with Eastbank.Under this settlement, Laticrete paid Eastbank $6,043,351.89 and Zurich paid Eastbank$956,648.11, the remaining aggregate limit at the time, in exchange for a covenant not to enforceany judgment Eastbank obtained in Eastbank's action against the assets of Laticrete or Zurich. As part of this settlement, Laticrete executed a limited release in favor of Zurich. After Zurichexhausted its policy limits through the settlement, U.S. Fire assumed the defense of the Eastbankaction, which was scheduled for trial in September 1999. U.S. Fire settled the Eastbank actionprior to trial.

On September 2, 1999, U.S. Fire and Eastbank reached an agreement extinguishingEastbank's remaining claims. The amount paid by U.S. Fire to extinguish Eastbank's claimsexceeded the limits of U.S. Fire's excess policy

Meanwhile, on August 5, 1999, U.S. Fire filed its complaint for declaratory judgmentagainst Zurich in one count, seeking recovery of U.S. Fire's defense costs incurred followingZurich's withdrawal in June of 1999. On January 14, 2000, U.S. Fire filed a first amendedcomplaint, re-alleging count I of the original complaint and adding count II, seeking recovery ofsettlement monies paid by U.S. Fire in the Eastbank litigation based on Zurich's direct duty toU.S. Fire according to the case Schal Bovis, Inc. v. Casualty Insurance Co., 314 Ill. App. 3d 562,732 N.E. 2d 1179 (1999). The trial court granted U.S. Fire's motion to compel discovery as tocount I of the first amended complaint and stayed discovery on the issues raised in count II.

On February 14, 2000, Zurich filed a motion to dismiss count II of the first amendedcomplaint. On March 23, 2000, Zurich filed a motion for summary judgment on count I of thefirst amended complaint.

On May 19, 2000, U.S. Fire filed its second amended complaint, in four counts. In countI, U.S. Fire sought to recover attorney fees and expenses incurred by U.S. Fire in its defense ofthe Eastbank action, and added a claim that Zurich improperly shifted costs to U.S. Fire bypostponing necessary defense preparations and testing by Laticrete's liability experts in order tosave costs while negotiating with Eastbank for its withdrawal from the case. In count II, U.S.Fire alleged that Zurich owed it direct common-law and fiduciary duties "in the conduct of thedefense and settlement negotiations" for the Eastbank action. Count III stated a cause of actionfor the same relief as in count II, but based upon U.S. Fire's standing as an equitable andcontractual subrogee for Laticrete, alleging that by virtue of its settlement of the Eastbank action,U.S. Fire was subrogated to the duties that Zurich owed Laticrete "in the conduct of the defenseand settlement negotiations." Count IV stated a claim against Zurich for negligent performanceof common law duties "in performing its review and evaluation" of the Eastbank action andinforming U.S. Fire of its findings relevant to the mediation process. In counts II through IV,U.S. Fire pleaded that Zurich's conduct denied U.S. Fire the opportunity to settle the Eastbankaction during the mediation for an amount less than the limits of the excess policy.

On May 24, 2000, Zurich renewed its motion seeking summary judgment on U.S. Fire'sclaim for defense costs. On June 16, 2000, Zurich filed a motion to dismiss counts II through IVpursuant to section 2-615 of the Illinois Code of Civil Procedure (735 ILCS 5/2-615 (West1998)) arguing that the counts were insufficient to state a factual or legal claim to recovery.

On June 19, 2000, U.S. Fire filed a motion to vacate the discovery stay pertinent to theissues raised in count II of the first amended complaint, which were now raised in counts IIthrough IV of the second amended complaint. On June 28, 2000, following a hearing, the trialcourt denied U.S. Fire's motion to vacate the stay of discovery.

A hearing commenced on Zurich's motion for summary judgment on August 23, 2000. On September 8, 2000, the trial court granted summary judgment in favor of Zurich on count I ofU.S. Fire's second amended complaint. On October 13, 2000, after hearing arguments onZurich's motion to dismiss counts II through IV of the second amended complaint, the trial courtgranted Zurich's motion.

U.S. Fire filed its timely notice of appeal of the following orders of the trial court onNovember 9, 2000: (1) the September 8, 2000, order granting summary judgment in favor ofZurich; (2) the order of October 13, 2000, dismissing counts II through IV of the secondamended complaint; (3) the January 14, 2000, order staying discovery; and (4) the June 30, 2000,order denying U.S. Fire's motion to vacate the stay of discovery.

Initially, U.S. Fire argues that this court need not engage in conflicts of law analysis andthat the choice of law should not affect the outcome of either of Zurich's motions.

Absent an express choice of law, insurance policy provisions are generally "'governed bythe location of the subject matter, the place of delivery of the contract, the domicile of the insuredor of the insurer, the place of the last act to give rise to a valid contract, the place of performance,or other place bearing a rational relationship to the general contract.'" Lapham-Hickey SteelCorp. v. Protection Mut. Insurance. Co., 166 Ill. 2d 520, 655 N.E.2d 842 (1995), quoting Hofeldv. Nationwide Life Insurance Co., 59 Ill. 2d 522, 528, 322 N.E.2d 454 (1975). This court hasspecifically held that an insurance policy is governed by the law of the state where the policy wasissued or delivered or by the law of the place of the last act to give rise to a valid contract: UnitedStates Fire Insurance Co. v. CNA Insurance Cos., 213 Ill. App. 3d 568, 575, 572 N.E.2d 1124(1991), and Jadczak v. Modern Service Insurance Co., 151 Ill. App. 3d 589, 593, 503 N.E.2d794 (1987).

U.S. Fire lists four possible states as possible choices of law in the disposition of thismatter:

(1) Illinois. Illinois is the domicile of defendant Zurich, the primary insurer, thelocation of the formation and issuance of Zurich's primary policy, the situs of Zurich's actionsand decisions relevant to the dispute, and the forum of the present litigation;

(2) Connecticut. Laticrete is domiciled in Connecticut and is the place whereperformance of the Zurich and U.S. Fire policies would occur;

(3) New York. New York is the domicile of U.S. Fire, the location of the formationand issuance of its excess policy, and the situs of U.S. Fire's material actions and decisionspertaining to the present action; or

(4) Michigan. Michigan is the situs of the construction project and the forum of theunderlying litigation.

U.S. Fire explains that all four states support U.S. Fire's claim to recover its defense costsand fees, as alleged in count I, and that Illinois, New York and Michigan recognize the right of anexcess insurer to bring a direct action against a primary insurer for negligent defense orsettlement of an underlying action, as alleged in counts II through IV. U.S. Fire states thatConnecticut has no reported cases dealing with the direct action issue, and therefore Illinois lawcontrols.

Zurich agrees that this court need not engage in a conflicts of law analysis, but firstresponds that New York law is not an appropriate forum for this action. Zurich explains thatneither the second amended complaint nor any of its predecessors allege either that the excessinsurance policy was formed and issued in New York or that all of U.S. Fire's material actionsand decisions were made in new York. Zurich states that the record shows that some decisionstranspired through U.S. Fire's office in New Jersey and that some decisions pertaining to theformation of U.S. Fire policy occurred in Massachusetts and Connecticut. Zurich argues that thiscourt should not give any credence to assertions not incorporated into the pleadings in ruling on asection 2-15 motion. 735 ILCS 5/2-615 (West 1998); In re Chicago Flood Litigation, 176 Ill. 2d179, 206, 680 N.E.2d 26 (1997).

Zurich further asserts that New York law is also inapplicable because count I concernsZurich's and U.S. Fire's duty to defend a Connecticut insured in a Michigan lawsuit, and counts IIthrough IV concern duties allegedly owed by Zurich to U.S. Fire, which were allegedly triggeredby Zurich's contract with a Connecticut insured regarding a Michigan lawsuit.

Zurich also dismisses Illinois as an appropriate forum for the substantive issues raised inthe complaint. Zurich maintains that the notwithstanding the facts that Illinois is Zurich'sprincipal place of business and that U.S. Fire is authorized to conduct business in Illinois, Illinoislaw neither governs Zurich's duties to a Connecticut insured nor alleges duties to an excessinsurer arising out of a Michigan lawsuit.

Zurich urges this court to apply Connecticut law, as Connecticut in fact rendered adecision regarding what duties, if any a primary insurer owes an excess insurer. See, e.g. InfinityInsurance Co. v. Worcester Insurance. Co., No. CV000597436 (Conn. Super. December 4,2000):

"There is no Connecticut authority directly on pointsupporting the plaintiff's position that a direct duty exists betweena primary and an excess insurer.

"Connecticut recognizes a cause of action based uponequitable subrogation. * * * Equitable subrogation 'is broad enoughto include every instance in which one person, not acting as a merevolunteer or intruder, pays a debt for which another is primarilyliable, and which in equity and good conscience should have beendischarged by the latter.'" Infinity Insurance, slip op. at 2.

Zurich alternatively argues that this court should use the law of either Connecticut or Michiganas the forum of the underlying action.

U.S. Fire replies that neither the Zurich nor the U.S. Fire policy contains a choice of lawprovision and notes that Zurich relied heavily on Illinois law in support of its arguments fordismissal. The pleadings allege that U.S. Fire is incorporated and has its principal place ofbusiness in New York and that New York is the location where U.S. Fire's excess policy wasissued and countersigned. Based on the criteria set forth in Lapham-Hickey, U.S. Fire argues thateither Illinois or New York law appropriately governs this case.

U.S. Fire further replies that Michigan meets none of the criteria of Lapham-Hickey andis an inappropriate forum for the case. U.S. Fire argues that Michigan's only nexus with thepresent case is the underlying litigation and that Michigan has no significant contacts or interestin the outcome of this case. The Michigan case has been settled and dismissed. The Zurich andU.S. Fire policies both provided liability coverage to Laticrete wherever its operations wereconducted throughout the United States.

It is clear that the parties would elect different state laws to apply based on which stateendorses a primary insurer's direct duty to an excess insurer with regard to settlement of anunderlying action. Notwithstanding the parties' arguments, the record shows that neither partyexplicitly attempted to secure a ruling from the trial court determining the choice of law and thatthe trial court made no such determination. There is nothing in the record to suggest that the trialcourt entered its orders in this matter based on anything other than Illinois law. We thereforedecide the issues raised on appeal based on applicable Illinois law and make no determination regarding the choice of law.

U.S. Fire contends that the trial court erred in granting summary judgment in favor ofZurich on count I of U.S. Fire's second amended complaint. U.S. Fire argues that a genuine issueof material fact exists as to whether Zurich actually fulfilled its duty to defend in settling theEastbank case.

Summary judgment is appropriate only when there is no genuine issue of material factand the moving party's right is clear and free from doubt. In re Estate of Hoover, 155 Ill. 2d 402,410, 615 N.E. 2d 736 (1993). Our review is de novo. Mandziara v. Canulli, 299 Ill. App. 3d593, 596, 701 N.E. 2d 127 (1998).

U.S. Fire initially argues that the June 1999 "arrangement" was not a settlement of thecase but rather, an "abandonment of the insured" because: (1) the litigation against Laticretecontinued after the agreement; and (2) no release of Zurich's duty to defend was obtained.

It is well established in Illinois that the primary insurer has a broad duty to defend itsinsured. See Outboard Marine Corp. v. Liberty Mutual Insurance Co., 154 Ill. 2d 90, 607 N.E.2d1204 (1992). The applicable provision of the Zurich policy regarding defense of Laticrete,Coverage A, section 1(a)(2), provides as follows:

"Our right and duty to defend end when we have used up theapplicable limit of insurance in the payment of judgments orsettlements under Coverages A or B or medical expenses underCoverage C."

Zurich responds that its payment to Eastbank on behalf of Laticrete was, in fact, a settlement.Citing authority primarily outside Illinois' jurisdiction, Zurich states that its policy with Laticreteterminated when Zurich exhausted the applicable limit of insurance in the payment of judgmentsor settlements (see, e.g., Teigen v. Jelco of Wisconsin, Inc., 124 Wis. 2d 1, 8, 367 N.W.2d 806,810 (1985)), and that its payment to Eastbank on behalf of Laticrete in the amount of$956,648.11 exhausted Zurich's remaining policy limit. In addition, Zurich notes that inexchange for payment of $7 million dollars, Eastbank provided a covenant not to execute anyjudgment it might receive in the Eastbank action against either Laticrete or Zurich, therebyprotecting Laticrete from any and all financial exposure or obligation in connection with theEastbank action. Zurich argues that U.S. Fire is incorrect in framing the question of whetherit fulfilled its duty to defend Laticrete in settling with Eastbank as one of fact; Zurich argues thatthis question is one of law: "The determination of the rights and obligations under an insurancepolicy is a question of law that is appropriate for disposition by way of summary judgment." Douglas v. Allied American Insurance, 312 Ill. App. 3d 535, 538, 727 N.E. 2d 376 (2000).

In support, Zurich cites California Casualty Insurance Co. v. State Farm MutualAutomobile Insurance Co., 185 Ariz. 165, 913 P.2d 505 (1996). There, the primary insurersettled a claim for its policy limit in exchange for a covenant not to execute against the insured'spersonal assets, although the plaintiff was still free to pursue a claim against the excess insurer. The tort plaintiff did not sign the covenant not to execute for two years and the court held that theprimary insurer's duty to defend terminated at the time of the executed covenant, whichconstituted a settlement. Thus, the primary insurer was required to reimburse the excess insureronly for defense costs incurred prior to the execution of the covenant. Zurich argues that U.S.Fire is similarly not entitled to reimbursement for defense costs incurred after execution of thesettlement and covenant.

Zurich also relies on Teigen. There, the Wisconsin Supreme Court held that a primaryinsurer's settlement with the tort plaintiff (Teigen), in exchange for a release of liability of theprimary insurer (Rural) and the insured (Jelco), minus the proceeds of the excess insurer's policy,satisfied the primary insurer's duties to its insured. The court found that the settlement satisfiedthe primary insurer's duty to defend and obligation of good faith to its insured because theinsured was fully protected by the plaintiff's release of all claims to the insured other than thosecovered by the excess policy.

U.S. Fire distinguishes Teigen from the facts of the present case, arguing that the courtthere examined the factual circumstances surrounding the settlement from the standpoint ofwhether the settlement was fair to the excess carrier. In Teigen, the court stated that the primarycarrier's arrangement would not prejudice the excess carrier because it would receive a credit forthe amount paid by the primary carrier against any subsequent judgment or settlement against theinsured. Teigen, 124 Wis. 2d at 5, 367 N.W.2d at 808.

U.S. Fire essentially responds that this issue is controlled by Schal Bovis.⁽¹⁾ There, thiscourt held that an excess insurance carrier (Northbrook Property & Casualty Company) stated avalid cause of action against two primary insurance carriers (Wausau Insurance Company andGreat American Insurance Company) which failed to settle a claim within their respective policylimits thereby causing Northbrook, the excess insurer, and Schal, the insured, to incur liabilityfollowing a jury verdict: "The insured, primary carrier and excess carriers must therefore actreasonably and in good faith towards one another in considering the others' interests innegotiating a settlement." Schal Bovis, 314 Ill. App. 3d at 572.

Schal Bovis is distinguishable from the present case. While it is true that in Schal Bovisthis court rejected the trial court's determination that a primary insurer has no duty toward anexcess carrier ("A cause of action in favor of the excess carrier is therefore in the public interestas the settlement of good-faith disputes at or near the amount of an expected judgment will bepromoted, with the consequence of less litigation over disputes that logically should not belitigated, as well as the result of lower insurance premiums for excess coverage" (Schal Bovis,314 Ill. App. 3d at 573), the holding of that case was limited as follows:

"Our holding today only requires that a primary insurer estimate ingood faith the expected verdict of the litigation threatening itsinsured and offer that amount in support of a proposed settlement -- at least to the extent consistent with the terms of its policy. Theexistence of other insurance is simply not relevant to the primaryinsurer's duty to offer its support to a settlement when it is reasonable to do so." (Emphasis added) Schal Bovis, 314 Ill. App. 3d at574.

The Schal Bovis court remanded the matter to the trial court to allow the plaintiff to repleadsufficient facts in its allegations to withstand a motion to dismiss.

In the present case, the record reflects an agreement between Zurich, Eastbank, and theinsured, Laticrete, which resulted in a settlement and no ability to enforce a judgment againstLaticrete. Zurich notes that Laticrete entered into the settlement in full knowledge that itsinsurance coverage could be diminished.

U.S. Fire further argues, based on Siligato v. Welch, 607 F. Supp. 743 (D. Conn. 1985),that the agreement (settlement) discharged Zurich's duty to indemnify but not its duty to defend. Siligato involved an automobile accident. Prior to judgment, the primary insurer, MetropolitanProperty & Liability, struck a deal with the plaintiff, obtaining a release for itself and a covenantnot to enforce any judgment against the assets of its insured. The plaintiff reserved its right toproceed against the insured, the Welches, and collect any judgment or settlement from an excesspolicy issued by Allstate. Allstate declined to defend the Welches, and the Welches filed anaction in federal court against Allstate for declaratory judgment. The federal court ruled thatAllstate was obligated to defend under the circumstances and that Metropolitan's arrangementwith the plaintiff did not extinguish its duty to defend:

"The excess carrier's duty to defend is secondary to the duty of theprimary insurer, but it is no less real a duty. *** Metropolitans'settlement with Siligato may have discharged its duty to indemnify,and its concomitant duty to settle, but it did not terminate its dutyto defend its insured to the conclusion of the claims which arewithin the coverage. [Citation.] The settlement may have escalatedthe immediacy and the degree of Allstate's participation in itsinsured's defense. In any default of the primary carrier's defense oftheir two insurers' joint insured, Allstate may be obligated toassume up to the total defense of the insured subject to its right tobe indemnified by the primary insurer for its expenses incurred bythe excess insurer in discharging the primary insurer's duty todefend." Siligato, 607 F. Supp. at 746.

Siligato is distinguishable. The court there failed to analyze or discuss what actionsterminated the primary insurer's duty to defend; the above passage is dicta.

In the present case, U.S. Fire claims it should be reimbursed for the defense expenses itincurred in discharging Zurich's duty to defend. Zurich argues that the record shows that thedefense expenses incurred by U.S. Fire were incurred in discharging its own duty to defend, notZurich's duty to defend, because the settlement agreement terminated Zurich's duty to defend. U.S. Fire's duty to defend is provided in its policy with Laticrete as follows:

"II. DEFENSE SETTLEMENT

(1) We shall have the right and duty to defend any'Claim' or 'Suit' seeking damages covered by theterms and conditions of this policy when:

(a) the applicable limits of insurance of the underlyinginsurance policies set forth in Schedule A and to bemaintained by you in accordance with Condition M of thispolicy (the 'Underlying Insurance'), plus the applicablelimits of other insurance have been exhausted by payments* * * ."

Zurich notes that this duty-to-defend provision requires exhaustion by "payments" and does notspecify by "settlement." Under this policy, U.S. Fire had the duty to defend Laticrete in theEastbank action after Zurich exhausted its applicable policy limit via settlement. Our supremecourt has held that an insurance provider has a duty to act in good faith in responding tosettlement offers. Haddick v. Valor Insurance, 198 Ill. 2d 409 (2000) (Emphasis added); see alsoTwin City Fire Insurance Co. v. Country Mutual Insurance Co., 23 F.3d 1175, 1178-79 (7th Cir.1994) (no direct duty exists between primary and excess insurer). As such, Zurich owed noindependent duty to U.S. Fire to approve expert testing or to continue discovery duringsettlement negotiations.

Finally, U.S. Fire contends that Zurich shifted defense costs to U.S. Fire by suspendingnecessary defense preparation prior to "abandoning" Laticrete's defense. U.S. Fire relies upon theaffidavit of Rochelle C. Jaffe, a principal of the engineering firm CTL, retained by Zurich in1996, to investigate the causes of the curtain wall failure. Jaffe averred that environmentaltesting costing $210,000 was necessary to prepare for trial. U.S. Fire fails to cite to any caseauthority in support of its contention.

Under these facts, the record supports the existence of a proper settlement betweenZurich, Laticrete and Eastbank. No outstanding material issue of fact remains on this issue.

V. DISMISSAL OF COUNTS I THROUGH IV OFU.S. FIRE'S SECOND AMENDED COMPLAINT

Next, U.S. Fire contends that the trial court erred in dismissing counts II through IV of itssecond amended complaint for failure to state a claim pursuant to section 2-615 of the IllinoisCode of Civil Procedure.

The record shows that U.S. Fire appealed the dismissal of counts I through IV of itssecond amended complaint without requesting leave to file a third amended complaint. In itsdismissal order, the trial court stated that its decision to dismiss counts I through IV was basedupon the motions and memoranda submitted by the parties and the subsequent oral arguments atthe hearing.

A motion to dismiss under section 2-615 tests the legal sufficiency of a pleading. Doe v.Calumet City, 161 Ill. 2d 374, 384, 641 N.E.2d 498 (1994). In determining the legal sufficiencyof a complaint, all well-pleaded facts are taken as being true and all reasonable inferences fromthose facts are drawn in favor of the plaintiff. Connick v. Suzuki Motor Co., 174 Ill. 2d 482,490, 675 N.E.2d 584 (1996). The question on appeal from the granting of a section 2-615motion is whether the allegations in the complaint, when viewed in a light most favorable to theplaintiff, are sufficient to state a cause of action upon which relief can be granted. Connick, 174Ill. 2d at 490. The sufficiency of a complaint is an issue of law which we review de novo. Peopleex rel. Devine v. $30,700.00 United States Currency, 316 Ill. App. 3d 464, 474, 736 N.E.2d 137(2000).

In count II, U.S. Fire alleged that a primary insurer owes direct duties to an excessinsurer. U.S. Fire relies on Schal Bovis, as cited in its prior argument. Schal Bovis does not holdthat a primary insurer owes a direct duty to an excess insurer, as explained above. Rather, SchalBovis, in dicta, "predicted" that Illinois would recognize such a duty:

"[W]e find that there is a duty which runs from Wausau andGreat American [primary insurers] to Northbrook [excess insurer]to act reasonably and in good faith in attempting to settle claimswithin their respective policy limits. The leading case finding sucha duty is Transit Casualty Co. v. Sprink Co., 94 Cal. App. 3d 124,156 Cal. Rptr. 360 (1979), which recognized a three-wayrelationship between the policyholder, the primary insurer and theexcess insurer. This relationship creates reciprocal duties of carein the conduct of settlement negotiations.

"[W]hile federal courts do not bind our State courts in suchmatters, we note that at least two federal decisions have predictedthat Illinois would recognize such a duty. American CentennialInsurance Co. v. American Home Insurance co., 729 F. Supp.1228, 1231-32 (N.D. Ill. 1990); Ranger Insurance Co. v. HomeIndemnity Co., 714 F. Supp. 956 (N.D. Ill. 1989). Schal, 314 Ill.App. 3d at 571-72.

In American Centennial Insurance Co. v. American Home Assurance Co., 729 F. Supp. 1228(N.D. Ill. 1990), the District Court for the Northern District of Illinois similarly "predicted" theposition of the Illinois courts as follows:

"This court believes that if the Illinois Supreme Court werefaced with the issue, it would adopt the reasoning of the Rangercourt and hold that a primary carrier does owe a direct duty of careto an excess carrier while conducting settlement negotiations ofclaims against the insured when it knows of the excess carrier'sexistence at the time of the negotiations." American Centennial,729 F. Supp. at 1232.

U.S. Fire notes that New York courts have held that a primary insurer owes a directfiduciary duty to its excess insurer to exercise good faith in handling the defense of claims and tosafeguard the rights and interests of the excess insurer (see, e.g., Argonaut Insurance Co. v.Hartford Accident & Indemnity Insurance Co., 687 F. Supp. 911 (S.D.N.Y. 1988)), and theMichigan Supreme Court has "signaled its intention" to recognize a direct duty, while decliningto do so. (Commercial Union Insurance Co. v. Medical Protective Co., 426 Mich. 109, 123-24,393 N.W.2d 479, 485 (1986) (holding that the case "does not present itself as the best vehicle forrecognition of a direct duty cause of action in tort between a primary insurer and excessinsurer")). U.S. Fire states that there is no reported case interpreting Connecticut law on thesubject of a direct duty (despite the case cited by Zurich in issue I), so that if Connecticut lawcontrols, the choice of law should revert to Illinois law.

Zurich responds that the case of Twin City Fire Insurance Co. v. Country MutualInsurance Co., 23 F.3d 1175, 1180 (7th Cir. 1994), negated both the American Centennial andRanger decisions. There, the Seventh Circuit court of Appeals held that an primary insurer doesnot have a tort duty to the excess insurer because it has a contractual remedy against the primaryinsurer, finding that "it would be quite a leap to suppose that Illinois, not yet having evenconfronted the issue of a derivative duty, would recognize a direct duty." Twin City, 23 F.3d at1179.

Zurich further relies on Walbrook Insurance Co. v. UNARCO Industries, Inc., No. 90 A519 (N.D. Ill. June 23, 1992), which held that "in the absence of a relationship, contractual orotherwise, between the primary and excess insurers, the court does not believe the IllinoisSupreme Court would impose a direct duty upon the primary insurer." Walbrook, slip op. at 3.

Illinois does not impose a duty by the primary insurer to the excess carrier, despite the "predictions" of the various courts and authority outside Illinois' jurisdiction. A sufficientpleading necessitates supporting authority that is lacking in U.S. Fire's allegations of count II. We therefore find that the trial court properly dismissed count II of its second amendedcomplaint.

In count III, U.S. Fire alleged that Zurich breached its duties as the equitable andcontractual subrogee of Laticrete. U.S. Fire alleged that the settlement with Eastbank allowedU.S. Fire to step into the shoes of Laticrete and allowed it to invoke Zurich's duties to Laticrete. U.S. Fire argues that it paid a "substantial amount of money" to extinguish Laticrete's liability toEastbank and that, by doing so, it became subrogated to the rights of Laticrete arising from theEastbank litigation, including any claim that Laticrete had against Zurich for negligent defense orsettlement or the underlying litigation.

As a subrogee of Laticrete, U.S. Fire was subrogated to the position of Laticrete andacquired no lesser or greater rights than those held by Laticrete as to Zurich. The complaintpleaded that Laticrete consented to the settlement with Eastbank, contributed its own money tothe settlement and executed a limited release of Zurich. These actions thus barred any bad-faithclaim by Laticrete against Zurich arising out of Zurich's conduct in the Eastbank action anddefeated U.S. Fire's subrogated claim against Zurich. See Westchester Fire Insurance Co. v.General Star Indemnity Co., 183 F.3d 578, 583 (7th Cir. 1999) (an insured's consent can bar anexcess insurer's claim). U.S. Fire provided only "conclusory" allegations in support of itscontention, and the trial court noted that at oral arguments.

U.S. Fire has failed to show that Zurich breached any duties owed to Laticrete therefore itcannot show that Zurich breached any duties owed to U.S. Fire. This count, too, was properlydismissed.

U.S. Fire also contends that the trial court erred in dismissing count IV for "breach ofcommon law duties voluntarily assumed." U.S. Fire alleged that Zurich failed to reviewmediation materials and perform an evaluation of Laticrete's potential exposure based upon thosematerials. U.S. Fire alleged that Zurich failed to inform it of the mediator's demand for a largercontribution from Zurich at mediation or to advise U.S. Fire that its interests were at stake.

Zurich responds that it did not assume a duty toward U.S. Fire to evaluate the Eastbankaction and advise U.S. Fire of that evaluation. Zurich admits that while it did respond to a letterby U.S. Fire requesting information, and reply that it would be preparing an evaluation forZurich, a request for information does not create a duty. Furtak v. Moffett, 284 Ill. App. 3d 255,257-58, 671 N.E.2d 827 (1996) (procedures instituted to determine whether insureds were underinsured was not an assumption of a duty to warn insureds of inadequate insurance).

The trial court properly dismissed count IV for failure to plead a breach of the allegedassumed duty to U.S. Fire.

For all of the reasons stated above, we affirm the judgment of the trial court. In light ofour holding, we need not address the trial court's rulings entered pertinent to the stay ofdiscovery.

Affirmed.

REID, J., concurs.

GREIMAN, J., dissents.

JUSTICE GREIMAN, specially concurring in part and dissenting in part:

I must respectfully dissent from the majority's conclusions as to count II of U.S. Fire'scomplaint. Our courts have long provided that a primary insurer has a duty to act in good faithtowards its own insured and that such duty to act in good faith extends to the settlement anddisposition of cases generally.

Admittedly, it is less clear whether the primary carrier has a corresponding duty of goodfaith to an excess carrier.

However, contrary to the majority's suggestion, this court in Schal Bovis, Inc. v. CasualtyInsurance Co., 314 Ill. App. 3d 562 (1999), held that such a duty exists in Illinois. Although themajority opinion states that Schal Bovis merely predicted that the Illinois courts would imposesuch a duty, the clear implications of Schal Bovis is that such a duty, in fact, exists. There thecourt opined that:

"there is a duty that runs from [the primary insurer to the excess insurer] to act reasonably and in good faith in attempting to settle claims within their respective policy limits." Schal Bovis, 314 Ill. App. 3d at 572.

It is difficult to imagine how the Schal Bovis court (of which the authoring judge herewas a concurring member) could have been more explicit. They further cite a California caseTransit Casualty v. Sprink Co., 94 Cal. App. 3d 124, 134, 156 Cal. Rptr. 360, 366 (1979), which"recognized a three-way relationship between the policholder, the primary insurer and the excessinsurer." Additionally, Schal Bovis noted that two previous federal decisions predicted thatIllinois would recognize such a duty. American Centennial Insurance Co. v. American HomeAssurance Co., 729 F. Supp. 1228 (N.D. Ill. 1990); Ranger Insurance Co. v. Home IndemnityCo., 714 F. Supp. 956 (N.D. Ill. 1989).

The only limitation expressed in Schal Bovis was that it be remanded to the trial court toallow the plaintiff to file an amended complaint setting out the evil facts of which the primaryinsurer was accused.

Illinois is not alone in recognizing a cause of action for the primary insurer's failure toexercise good faith with respect to the interest of the excess carrier. California, Florida,Louisiana, Massachusetts, Michigan and Texas have so held.⁽²⁾

It is interesting to note that the majority gives more credence to a federal district courtcase, Walbrook Ins. Co. v. UNARCO Industries, Inc., than it does to a decision of this court suchas Schal Bovis. The Walbuck case, however, is distinguished by its facts and the acts of theprimary insurer.

U.S. Fire alleges in count II, among other things, that during the mediation process,extensive mediation summaries and voluminous exhibits were provided to Zurich showingdamage exceeding $39 million and that the insured was a primary target of the defendants. Additionally, Zurich had in its possession a substantial number of other documents indicating theinsured's likely exposure to the claim including inspection reports, expert opinions, complaints,letters from representatives of the insured, correspondence from various subcontractors, andreports from experts. Additionally, U.S. Fire alleges that internal liability reports of Zurichestimated the verdict potential against the insured between $1.8 million and $3 million, none ofwhich was shared with U.S. Fire prior to the mediation conference.

U.S. Fire further alleges that although the insured was joined as a defendant in December1992, U.S. Fire received no notice from Zurich of the pendency of the lawsuit until June 1993. U.S. Fire repeatedly requested that Zurich provide it with periodic status reports regarding theprogress of litigation and evaluations of the insured's exposure. These requested items were notappropriately forthcoming and Zurich failed to appraise U.S. Fire of the nature and extent of theinsured's potential exposure.

At the time of the mediation conference, U.S. Fire claims Zurich stated it would offer nomore than $250,000 and the mediator essentially threw it out of the mediation process. All ofthese matters were not passed on to U.S. Fire.

In reliance upon Zurich's evaluation and its direct suggestion, U.S. Fire did not attend orparticipate in the mediation conference.

At the conclusion of the mediation conference, the plaintiffs in the underlying caseentered into settlements with all of the defendants except the insured. All of the claims againstthe other defendants being assigned to the underlying plaintiff.

Finally, apparently realizing its difficult position, Zurich arranged for a settlement ofclaims against itself and exoneration of the primary insured by paying about $1 million on itsbehalf and $6 million by the insured with a covenant not to levy and execute upon their propertyleaving U.S. Fire with a huge, unsuspected and unexpected liability. Talk about "good faith"!

Zurich sought to control the entire defense without providing U.S. Fire with appropriateinformation and, in fact, lulling U.S. Fire to be misled with respect to the course of mediation. The $250,000 Zurich believed would settle the case turned in a settlement of $7 million.

Some writers have suggested:

"Extending an insurer's fiduciary duty to include an excess carrier is a logical step. Although only the first district has expressly done so, primary insurers would be wise to assume that Schal Bovis will be followed and extended. Exactly what constitutes bad faith will be defined and further developed as more courts address this issue." B. Boggs & D. McLaughlin, Primary Insurers' Duty to Exercise Good Faith Toward Excess-Insurance Carriers, Vol. 90, No. 1 Ill. B.J.18, 23 (January 2002).

I believe liability in this case is that logical step and that U.S. Fire has adequately alleged bad faith in count II. I would affirm with respect to theother counts.