Scottsdale Insurance Company v. City Of Waukegan et al

Filing 65

MEMORANDUM Opinion and Order Signed by the Honorable Andrea R. Wood on 2/23/2015. Mailed notice(ef, )

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
SCOTTSDALE INSURANCE COMPANY,
Plaintiff,
v.
CITY OF WAUKEGAN, MICHAEL
URBANCIC, WILLIAM BIANG, PHIL
STEVENSON, MIGUEL JUAREZ, DAVID
DEPREZ, and BENNY STARKS,
Defendants.

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No. 13-cv-03088
Judge Andrea R. Wood

MEMORANDUM OPINION AND ORDER
Defendants Michael Urbancic, William Biang, Phil Stevenson, David Deprez
(collectively, “Individual Insureds”) and the City of Waukegan (“City,” and together with the
Individual Insureds, “Waukegan Insureds”) have asserted a counterclaim for declaratory
judgment against Scottsdale Insurance Company (“Scottsdale”). The Waukegan Insureds seek a
declaration that Scottsdale has a duty to defend and indemnify them in two lawsuits arising out
of alleged malfeasance that led to the imprisonment of Defendant Benny Starks for a crime
Starks did not commit. Scottsdale has filed a motion to dismiss the Waukegan Insureds’
counterclaim (“Motion”). (Dkt. No. 52.) For the reasons stated below, the Court grants the
Motion in part.1

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While the Motion was pending, the Waukegan Insureds filed a First Amended Counterclaim to reflect
the filing of the Fourth Amended Complaint in the underlying litigation. (See Dkt. No. 63.) As the
amendment did not impact the arguments raised in the parties’ briefing, the Court construes the Motion as
directed toward the First Amended Counterclaim. Furthermore, as used in this Memorandum Opinion and
Order, the term “counterclaim” refers to the current version of that pleading.

BACKGROUND2
Scottsdale issued the City four policies for law enforcement liability insurance providing
coverage for damages arising out of performance of the Waukegan Insureds’ duties to provide
law enforcement activities, which were effective from November 1, 1987 until November 1,
1991 (“LEL Policies”). (Countercl. ¶¶ 17-18, Dkt. No. 73.) The LEL Policies each expressly
provide coverage for damages arising from claims of false arrest, detention, imprisonment,
malicious prosecution, and civil rights violations, among other things. (Id. ¶ 20.) The LEL
policies are occurrence policies, i.e., they provide coverage for claims occurring during their
policy periods. (Id. ¶ 19.) Each of the LEL Policies also includes a duty to defend provision. (Id.
¶ 21.)
Starks filed the underlying litigation against the Waukegan Insureds (“Starks Suit”) in
2009, alleging, among other things, that the Waukegan Insureds caused him to be wrongfully
charged, prosecuted, and convicted for the offense of sexual assault. (Id. ¶ 22.) Starks asserts that
they accomplished this by falsifying or improperly altering evidence, by suppressing and
destroying exculpatory evidence, and by giving false testimony. (Id.) His claims arise out of
occurrences on various dates during the time period beginning with his arrest in 1986 and lasting
until the present day. (Id.) Another defendant in the Starks Suit, Sharon Thomas-Boyd, filed a
cross-claim against the City seeking indemnification for any judgment rendered against her, as
well as indemnification for her attorneys’ fees and litigation costs (“Thomas-Boyd Suit”). (Id
¶ 32.) The Waukegan Insureds timely tendered the Starks Suit and the Thomas-Boyd Suit to
Scottsdale for defense and indemnification. (Id. ¶¶ 3-4.) Scottsdale has agreed to provide a
defense for the Starks Suit, but has refused to provide coverage for defense costs in that suit

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The following facts are taken from the Waukegan Insureds’ counterclaim and accepted as true for
the purposes of the Motion.

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despite the deductible on the LELs having been exhausted. (Id. ¶ 5.) Scottsdale has further
declined any obligation to defend or indemnify the Thomas-Boyd Suit. (Id. ¶ 6.)
Scottsdale instituted this action seeking a declaratory judgment that it owes no obligation
under the LEL Policies for the Waukegan Insureds’ potential liability in the Starks Suit or
Thomas-Boyd Suit. The Court previously granted the Waukegan Insureds’ motion to dismiss
several counts of Scottsdale’s original complaint, finding that any determination of the issues
raised in these counts would violate Illinois’s Peppers doctrine, under which a court’s coverage
determination may not determine ultimate facts in controversy that could bind the parties in the
underlying litigation. (See 7/21/2014 Mem. Op. and Order, Dkt. No. 43). After the Court granted
the Waukegan Insureds’ motion to dismiss, Scottsdale filed a second amended complaint (Dkt.
No. 45) and the Waukegan Insureds responded with a counterclaim (Dkt. No. 48). This was
followed by a third amended complaint (Dkt. No. 60) and First Amended Counterclaim (Dkt.
No. 63). In its current incarnation, the counterclaim asks the Court to find the following:


that the Starks Suit entails one or more occurrences or potential occurrences, as
defined under the LEL Policies, thus triggering coverage, including a duty to
defend, under the those policies (Count I);



that the Thomas-Boyd Lawsuit entails one or more occurrences or potential
occurrences, as defined under the LEL Policies, thus triggering coverage,
including a duty to defend, under those policies (Count II);



that by failing to defend the Waukegan Insureds in the Starks Suit, Scottsdale has
breached the provisions of the LEL Policies (Count III); and



that by failing to defend the Waukegan Insureds in the Thomas-Boyd Lawsuit,
Scottsdale has breached the provisions of the LEL Policies (Count IV).

Scottsdale has filed an answer to Counts I and II of the Counterclaim moved to dismiss Counts
III and IV.

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DISCUSSION
“A motion under Rule 12(b)(6) tests whether the [counterclaim] states a claim on which
relief may be granted.” Richards v. Mitcheff, 696 F.3d 635, 637 (7th Cir. 2012). Under Rule
8(a)(2), a counterclaim must include “a short and plain statement of the claim showing that the
pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). The counterclaim must “plead [ ] factual
content that allows the court to draw the reasonable inference that the defendant is liable for the
misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The “[f]actual allegations
must be enough to raise a right to relief above the speculative level.” Bell Atl. v. Twombly, 550
U.S. 544, 555 (2007). The Court construes a counterclaim in the light most favorable to the
plaintiff and accepts all well-pled facts as true. Justice v. Town of Cicero, 577 F.3d 768, 771 (7th
Cir. 2009).
Here, Scottsdale moves to dismiss Counts III and IV of the counterclaim, each of which
asks the Court for a number of different forms of relief. In essence, the Waukegan Insureds seek
three forms of relief with respect to each of the Starks and Thomas-Boyd Suits: (a) a declaration
that Scottsdale breached the LEL Policies by failing to provide a defense to the Waukegan
Insureds; (b) a declaration that Scottsdale is obligated to indemnify the Waukegan Insureds as to
any judgment in either of the underlying lawsuits; and (c) reimbursement for attorneys’ fees and
costs relating to the litigation.
Scottsdale has moved to dismiss Counts III and IV arguing, first, that a determination of
a breach of the duty to defend is inappropriate given the state of the underlying litigation; and
second, that Scottsdale’s duty to indemnify is not ripe for determination. The Court addresses
each of these arguments in turn.

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I.

Breach of Scottsdale’s Duty to Defend
Counts III and IV may proceed to the extent that they ask the Court to determine whether

Scottsdale has breached its duty to defend. Scottsdale argues that this issue is not ripe for
determination. However, according to the allegations in the counterclaim, the Waukegan
Insureds have incurred damages in the form of defense fees and costs that should be subject to
coverage under the LEL Policies. (Countercl. ¶ 62, Dkt. No. 63.) The incurrence of defense fees
in this context makes the breach of the duty to defend ripe. See, e.g., Molex Inc. v. Wyler, 334 F.
Supp. 2d 1083, 1089 (N.D. Ill. 2004); see also Hanover Ins. Group v. Singles Roofing Co., Inc.,
No. 10 C 611, 2012 WL 2368328, at *5 (N.D. Ill June 21, 2012) (breach of contract claim
involving defendant’s duty to indemnify was ripe once plaintiff had incurred expenses relating to
indemnity). In other words, once the Court determines whether Scottsdale has a duty to defend
the Starks Suit or the Thomas-Boyd Suit, it will be in a position to determine whether Scottsdale
has breached these duties, should they exist.
Scottsdale contends that the Peppers doctrine prevents the Court from determining
whether or not Scottsdale has breached its duty to defend, should such a duty exist. Under
Illinois law, the Peppers doctrine provides that “it is generally inappropriate for a court
considering a declaratory judgment action to decide issues of ultimate fact that could bind the
parties to the underlying litigation.” Allstate Ins. Co. v. Kovar, 842 N.E.2d 1268, 1275 (Ill. App.
Ct. 2d Dist. 2006) (citing Maryland Cas. Co. v. Peppers, 355 N.E. 2d 24, 30 (Ill. 1976)).
However, the Peppers doctrine does not prevent a court from determining factual issues
“relevant to an insurer’s duty to defend its insured in a pending and unresolved lawsuit when
those factual determinations do not impact upon the underlying plaintiff’s ability to pursue a
theory of liability or resolve any issue critical to the insured’s liability in the underlying

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litigation.” Fremont Comp. Ins. Co. v. Ace-Chicago Great Dane Corp., 710 N.E.2d 132, 139 (Ill.
App. Ct. 1st Dist. 1999); see also Medline Indus., Inc. v. Ram Med., Inc., 892 F. Supp. 2d 957,
964-65 (N.D. Ill. 2012) (“a claim for breach of duty to defend is ripe during the pendency of the
underlying suit.”) (citing Lear Corp. v. Johnson Elec. Holdings Ltd., 353 F.3d 580, 583 (7th Cir.
2003); Sears, Roebuck & Co. v. Zurich Ins. Co., 422 F.2d 587, 589 (7th Cir. 1970)). Scottsdale
makes general arguments that resolution of whether Scottsdale breached its duty to defend
necessarily includes fact determinations regarding whether all terms of the policy have been met
or whether there is an exclusion barring coverage. (Def.’s Mot. ¶ 16, Dkt. No. 52.) However,
Scottsdale fails to identify any fact relevant to the determination of whether Scottsdale breached
its duty to defend that would impact the underlying litigation. Nor is it apparent to the Court how
determining whether Scottsdale breached any duty to defend could possibly implicate the
Peppers doctrine.
Scottsdale further argues that a determination that it breached its duty to defend is
premature based on a line of cases beginning with Fidelity & Casualty Company of New York v
Envirodyne Engineers, Inc., 461 N.E. 2d 471 (Ill. App. Ct. 1st Dist. 1984). However, Scottsdale
misapprehends Environdyne and its progeny. Under Illinois law, the duty to defend is generally
determined by comparing the allegations of the underlying complaint to the policy language. See
Outboard Marine Corp. v. Liberty Mut. Ins. Co., 607 N.E.2d 1204, 1221 (Ill. 1992). Environdyne
and its progeny hold that an insurer may challenge the existence of its duty to defend by offering
evidence to prove that the insured’s actions fell within the limitations of one of the policy’s
exclusions, so long as that evidence does not tend to determine an issue critical to the
determination of the underlying lawsuit. Envirodyne, 461 N.E.2d at 473-74; see also Fremont
Comp. Ins. Co., 710 N.E.2d at 138; Millers Mut. Ins. Ass’n v. Ainsworth Seed Co., 552 N.E.2d

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254, 256 (Ill. App. Ct. 4th Dist. 1989); Safeco Ins. Co. v. Brimie, 516 N.E.2d 577, 580 (Ill. App.
Ct. 1st Dist. 1987). Contrary to Scottsdale’s suggestion, the Environdyne line of cases concerns a
court’s determination of an insurer’s duty to defend, and does not pertain to a Court’s
determination of whether an insurer has breached such a duty. Thus, while Scottsdale is free to
raise arguments regarding its duty to defend pursuant to Envirodyne at the appropriate stage of
these proceedings, the Court will not construe Envirodyne as precluding the determination of
whether Scottsdale breached any duty to defend it owed the Waukegan Insureds.
II.

Obligation to Indemnify
Counts III and IV of the counterclaim are dismissed to the extent they ask the Court to

find that Scottsdale is obligated to indemnify the Waukegan Insureds. These claims are not ripe
for consideration. “[T]he question of whether the insurer has a duty to indemnify the insured for
a particular liability is only ripe for consideration if the insured has already incurred liability in
the underlying claim against it.” Outboard Marine Corp., 607 N.E.2d at 1221. Because there has
been no determination of liability in the underlying litigation, it is premature for the Court to
determine whether Scottsdale has a duty to indemnify any damages levied against the Waukegan
Insureds in the underlying litigation.
In arguing to the contrary, the Waukegan Insureds rely upon the Seventh Circuit case
Bankers Trust Co. v. Old Republic Insurance Co., 959 F.2d 677 (7th Cir. 1992). That case
acknowledged the general rule that a declaratory judgment action regarding an insurer’s duty to
indemnify “is premature until the insured has been determined to be liable to somebody,” but
nonetheless held that a duty to indemnify claim was justiciable where there was a sufficient
probability that the plaintiff in the underlying action would win a judgment “in excess of the
meager policy limits.” Id. at 680. Bankers Trust is distinguishable, however. In that case, the

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Seventh Circuit looked only to the probability of whether the insured would be found liable and
whether the amount for which it would be found liable would be sufficient to surpass the
insurance policy limits. See Buckley v. Cnty. of Dupage, No. 88 C 1939, 1998 WL 832641, at *6
(N.D. Ill. Nov. 23, 1998) (noting limitations of the Bankers Trust holding). In the case before
this Court, Scottsdale challenges both (1) whether any claims for which the Waukegan Insureds
are found liable fall within the LEL Policies’ coverage and, if so, whether they are barred by
various exclusions; and (2) the timeframe of the claims and whether the wrongdoing alleged in
the underlying litigation took place outside of the timeframes covered by the LEL Policies. As
discussed in the Court’s prior order dismissing Counts III through VII of Scottsdale’s complaint,
determining these issues prior to the resolution of the underlying litigation would violate the
Peppers doctrine. Thus, the duty to indemnify claim is not ripe and must be dismissed.
CONCLUSION
For the foregoing reasons, Scottsdale’s Motion is granted in part. Counts III and IV of the
counterclaim are dismissed to the extent they ask the Court to determine indemnity issues in the
underlying litigation, as requested in sub-part (b) of Counts III and IV. The Waukegan Insureds
are granted leave to refile these claims, if appropriate, after final disposition of the case Starks v.
City of Waukegan, et al., No. 09-CV-00348 (N.D. Ill.). The claims asserted in sub-parts (a) and
(c) of Counts III and IV of the counterclaim may go forward.

ENTERED:

Dated: February 23, 2015

__________________________
Andrea R. Wood
United States District Judge

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