It is not uncommon for a defendant to settle a dispute for a sum certain where the plaintiff agrees only to pursue the defendant’s insurer. This settlement option just got trickier in Illinois in Pergament.

When settling a case through the assignment of insurance rights to another party, don’t run afoul of the policy’s “legally obligated to pay” requirement. In ISMIE Mutual Insurance Company v. Pergament, 2025 IL App (1st) 230787, two parties in a negligence suit entered a settlement agreement: Pergament, the defendant, assigned his insurance policy rights to plaintiffs, the Kessels. In exchange, the Kessels fully released him from any obligation to pay the settlement amount.

By letting Pergament off the hook, the Kessels unintentionally released the insurer, too. On June 16, 2025, the First District Court of Illinois found that, as specified in Pergament’s insurance policy, ISMIE Mutual was not required to indemnify him for any amount that he wasn’t “legally obligated to pay.” Therefore, the Kessels could not collect the settlement amount from ISMIE.

The court’s decision heavily relied upon Guillen ex rel. Guillen v. Potomac Insurance Company of Illinois, 203 Ill. 2d 141, 785 N.E.2d 1 (2003), an Illinois Supreme Court case that ruled against an insurer in similar circumstances. According to the First District, Guillen differed from Pergament for two reasons. First, the Guillen settlement technically did not release the insured from their obligation to pay the plaintiff. Second, and more importantly, the insurer had breached its duty to defend the insured; therefore, the Guillen court construed the “legally obligated to pay” clause liberally in favor of the insured. In contrast, the Kessels’ settlement nullified Pergament’s obligation to pay, and ISMIE did provide defense to Pergament. Thus, the Pergament court read the “legally obligated to pay” clause more narrowly: ISMIE was not required to indemnify Pergament and pay the Kessels.

ISMIE offers a cautionary tale for parties to a settlement involving the assignment of right to proceed against the defendant’s insurer: be sure that the insured party remains “legally obligated to pay” the plaintiff!

Disclaimer: This case summary is provided for informational purposes only and does not constitute legal advice. Polales Horton & Leonardi LLP is experienced in handling insurance coverage matters on behalf of policyholders. To discuss your specific insurance coverage issue, please contact Jacob M. Mihm.