Landmark American Insurance Company v. Deerfield Construction, Inc. et al
Filing
149
MEMORANDUM Opinion and Order. Signed by the Honorable Ruben Castillo on 1/12/2017. Mailed notice. (kp, )
-flA
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
LANDMARK AMERICAN
INSURANCE COMPANY,
Plaintiff,
No. 15 C 1785
v.
DEERFIELD CONSTRUCTION,
INC., and SHAWN GRAFF,
Chief Judge Rub6n Castillo
Defendants.
DEERFIELD CONSTRUCTION,
INC., and SHAWN GRAFF,
Th
ird-Party Plaintiffs,
v.
AMERICAN STATES INSURANCE
COMPANY, LAW OFFICES OF
MEACHUM, STARCK, BOYLE &
TRAFMAN, and DAVID OLMSTEAD
Third-Party Defendants.
MEMORANDUM OPINION AND ORDER
Following the entry of an adverse judgment in a personal injury case, secondary
insurance provider Landmark American Insurance Company ("Landmark") brought this action
against Deerfield Construction, Inc., and its employee Shawn Graff (collectively, "Deerfield")
seeking a declaratory judgment that Deerfield is not entitled to coverage under the Landmark
insurance policy. (R.
l, Compl.)
Presently before the Court are Landmark's motion for summary
judgment pursuant to Federal Rule of Civil Procedure 56, (R. 86, Mot. for Summ. J.), and
Deerfield's motion for disqualification and sanctions against Landmark and its law firm, Traub
Lieberman Straus & Shrewsberry LLP ("Traub"), (R. 128, Mot. to Disqualify). For the reasons
stated below. both motions are denied.
RELEVANT FACTS
The following facts are undisputed unless otherwise stated.l Deerfield took out two
commercial automobile liability policies effective March 1,2007 , to March
l,
2008: a primary
insurance policy from American States Insurance Company ("American States") with a policy
limit of $ I million, and
a
"follow-form" secondary insurance policy, which adopts the terms and
conditions of the primary insurance policy, from Landmark with a policy limit of $10 million.
(R.
l2l,
Deerfield's Resp. to Facts flfl l-2.)
On January 16,2008, Deerfield's employee Shawn Graff was involved in an automobile
accident with third-party Ryan Keeping ("Keeping").(ld. fl 8.) On December 22,2009, Keeping
filed a personal injury lawsuit (the "Keeping case") against Deerfield in the Circuit Court of
Cook County, Illinois, and served notice on Deerfield shortly thereafter. (ld.nn 9-10.) Shortly
after receiving notice of the lawsuit, Deerfield provided notice to American States and Arthur J.
Gallagher Risk Management Services, Inc. ("AJG"), the insurance broker Landmark used to
procure its insurance policies. (ld. n
ll;
id., Deerfield's Add'l Facts fl 6.) Between December
2009 and December 2014, Deerfield did not directly communicate with Landmark regarding the
Keeping case or provide it with any related documents, nor did American States or AJG take
such actions. (1d., Deerfield's Resp. to Facts flfl l3-16.) Landmark first received direct notice
of
the accident and the Keeping case on December 5,2014. (ld. n20.)
I
For unknown reasons, Landmark failed to provide any response to Deerfield's proposed additional facts.
l2l, Deerfield's Add'l Facts.) Therefore, these facts are deemed admitted. See N.D. ILL. L.R.
56.1(b)(3XB); Bordelon v. Chi. Sch. Reform Bd. of Trs.,233 F.3d524,52]. (7th Cir.2000).
(See R.
From 2009 to 2014, the parties in the Keeping case engaged in discovery. (ld. fl 17.)
Throughout this period, Deerfield was represented by David Olmstead ("Olmstead"), an attorney
with the firm of Meachum, Starck, Boyle & Trafman, who was assigned to the defense by
American States. (ld.,Deerfreld's Add'l Facts fl 3.) At all times prior to the entry of a verdict in
the Keeping case, American States and Olmstead believed that Deerfield would probably receive
a
verdict in its favor and believed that damages, if awarded, would be less than the
$l million
policy limit of the American States policy. (ld. n 4.)
On December 5, 2014, Tiffany Krueger of AJG notified Landmark of the Keeping case.
Ud. n 6.) It is common industry practice for an excess insurer to receive notice of accidents and
Iawsuits through the broker or insurance agent, and it is Landmark's custom and practice to
receive notification in this manner and to communicate with its insureds using brokers and
agents rather than directly. (ld. fl 7.) Landmark does not intend for its insureds to give notice
of
every claim, but instead only those where the excess policy is implicated. (ld.)
Landmark was informed that Keeping had made a demand of $1.25 million, $250,000
more than the limit of the American States policy. Ud
nq
On December 10, John Graham
("Graham"), a vice president of Landmark, spoke with Lisa Cruser ("Cruser") from American
States. (ld. n 8.) After consulting with Cruser, Graham requested a pretrial report and informed
Cruser that he did not see the Keeping case exceeding American States's policy limits, so he
would not follow the case and would close his file on it. (ld.) Later that day, Cruser emailed
Graham the pretrial report, and he responded that he had changed his mind and would keep his
file open. (Id. n9.)
Graham assigned the claim to Kevin O'Connor ("O'Connor"). (ld.) On December 12,
O'Connor emailed a letter to AJG-but not to Deerfield-acknowledging receipt of the claim.
Ud. n 10.) On the same day, O'Connor informed Cruser that Landmark "has the excess coverage
for this loss" and requested copies of all Olmstead's reports on the Keeping case going forward.
(ld.
1l I
l.) Landmark was provided access to anything
needed to evaluate the claim.
(ld.) Afler
reviewing these materials, O'Connor evaluated the case as having a settlement value of between
$500,000 and $750,000, and Landmark set a reserve of one dollar on tire Keeping case, which is
the minimum requirement for any open claim. (ld. n D.)
The Keeping case went to trial on January 12,2015. (1d., Deerfield's Resp. to Facts,'1T21.)
On January 16, the final day of trial, O'Connor emailed Cruser and asked whether the trial had
begun; in response, Cruser provided an independent adjuster's trial reports to O'Connor. (1d.,
Deerfield's Add'l Facts fl 14.) O'Connor evaluated the trial and suggested that further settlement
discussions occur. (1d ) Cruser attempted to negotiate a high-low settlement with Keeping to set a
maximum and minimum award regardless of the jury's verdict. (ld. n 15.) The parties agreed on
a high
of $1 million, but could not agree to
$75,000 and Keeping last demanded
$
a
minimum verdict . (ld ) Cruser offered a low
of
175,000 as a low. (/d ) Cruser asked Landmark whether
it
was willing to contribute to the high-low settlement, but it did not offer any money. (ld. n rc.)
Graham suggested that Cruser settle the case for "$100k-$500k or $750k first" and, if necessary,
$l million. (ld.) At no point during trial did Landmark
demand that mediation occur, demand
that Olmstead be replaced as counsel, request that the trial be continued, or offer money to
contribute toward a settlement. (Id. n 13.) O'Connor and Graham later testified that, if Landmark
had received notice earlier, the only thing they would have done differently would be to receive
litigation reports earlier and encourage that dispute resolution or mediation occur. (Id. n D.)
On January 16,2015, the jury returned a verdict in Keeping's favor for $2,368,000. (1d.,
Deerfield's Resp. to Facts 1122.) Cruser informed O'Connor of the verdict on January 19, and
4
O'Connor replied to this email informing her that he was "assigning counsel to review the case
for us." (ld.,Deerfreld's Add'l Facts fl 22.) After learning of the verdict, O'Connor conducted "a
lengthy phone conference" with an AJG employee. (Id.) On January 19, O'Connor assigned
Traub to meet with Olmstead and to review the case, trial, post-trial motions, and any appealable
issues. (ld.
nn.)
O'Connor also assigned Traub to provide him with a report of Olmstead's files
and to identify any coverage issues. (ld. n 24.) Sometime between January 1 9 and January 27
,
Traub attorneys met with Olmstead, reviewed his file, and provided a lengthy report and analysis
of the file to Landmark. (1d.125.) On January 27, Cruser wrote to O'Connor and informed him
that Olmstead had identified issues for a post-trial motion and appeal and asked that Landmark
contact him to work with him for Deerfield. (Id. n26.) Cruser also asked whether Landmark
wished to take over the handling of the Keeping case. (/d )
On January 29,2015, Landmark notified Deerfield for the first time through a letter
authored by O'Connor and Traub attorneys that it was reserving its rights to deny coverage due
to late notice. (ld. n28-29.) According to Deerfield, Landmark had never directly communicated
with Deerfield prior to this reservation of rights letter.2 (ld. n28.) Cruser later testified that, if she
knew that O'Connor had assigned Traub as coverage counsel, she would not have authorized
Olmstead to provide his files or work product to Traub. (1d.1127.)
PROCEDURAL HISTORY
On February 27,2015, Landmark filed its complaint in this case, seeking declaratory
judgment that it was not required to indemnify Deerfield because of late notice. (R. 1, Compl.)
Deerfield filed its amended answer and counterclaim on June 24,2015, (R. 22, Am. Answer &
Countercl.), and on July 22,2075, filed a third-party complaint against American States, AJG,
2
As noted below, there is evidence in the record that Landmark communicated directly with Deerfield on
one occasion in a February 2010 email. (R. 136-2, Underwriting File at 7.)
Olmstead, and Meachum, Starck, Boyle & Trafman, (R. 28, Third-Party Compl.). On September
18, 2015, third-party defendant AJG filed a motion to dismiss the third-party complaint, (R. 55,
AJG's Mot. to Dismiss), which was joined by Olmstead and Meachum, (R. 59, Olmstead's Mot.
to Dismiss), and American States, (R. 75, American States's Joinder). On May 19, 2016, this
Court entered a memorandum opinion and order dismissing all counts of the third-party
complaint against AJG but denying the motions with respect to the other third-party defendants.
(R. 105, Mem. Op.& Order.)
On January 19,2016, Landmark filed the present motion for summary judgment. (R. 86,
Mot. for Summ. J.) Landmark argues that, based on the undisputed sequence of events in the
Keeping case, it is entitled to summary judgment as Deerfield did not provide it with timely
notice of the accident or the Keeping case. Landmark argues that its secondary insurance policy,
which adopts all the terms of the American States policy, requires that it be given "prompt"
notice of an accident and that Deerfield "immediately" provide Landmark with information
regarding a suit. (R. 87, Mem. at 5-8.) Because the Landmark policy does not specify that only
claims "reasonably likely" to implicate the policy must be reported, Landmark argues that
Deerfield had no discretion regarding whether to report the claim and that reporting the lawsuit
to Landmark five years after its initiation-just one month before trial-was per se unreasonable.
(ld. at 8-l L) Due to the "extreme delay" in reporting the claim, Landmark argues that it need not
establish prejudice from Deerfield's alleged tardiness; even if required to show prejudice,
however, Landmark argues that its late entry into the case deprived it of the opportunities to
investigate the claim, take part in discovery, and engage in early settlement discussions . (ld. at
12-14.) At a motion hearing on February 17,2016, this Court entered and continued Landmark's
6
motion until the close of discovery, which was ultimately extended until August 31,2016. (R.
99, Min. Entry; R. I17, Min. Entry.)
On September 16, 2016, Deerfield filed its response. (R. I19, Deerfield's Resp.)
Deerfield argues that AJG was Landmark's agent for purposes of notification on either an
express or apparent theory of agency. (R. 120, Mem. in Opp'n at 3.) First, Deerfield argues that
the American States policy designated AJG as American States's agent; by adopting all the terms
of that policy without identifying its own authorized representative, Deerfield claims that
Landmark adopted AJG as its actual agent. (ld. at 3-4.) Alternatively, Deerfield argues that
notice to AJG was effective on Landmark under the doctrine of apparent agency. (ld. at 4-6.)
Based on Landmark's alleged practice of communicating with Deerfield exclusively through
AJG, Deerfield contends that a reasonable insured would believe that AJG was Landmark's
agent for purposes of notice. (ld. at 5-6.) Even if AJG was not Landmark's actual or apparent
agent, Deerfield argues that the notice Landmark received in December 2014 was reasonable as
to an excess insurer. (ld. at 6-14.) Deerfield contends that under Illinois law, excess policies
allow the insured more discretion when to report claims than primary policies. (ld. at8.)
Deerfield points out that O'Connor testified in his deposition that Landmark does not intend for
its insureds to automatically give it notice of every claim, but instead only those claims that
implicate the excess policy. (ld.;.see R.
l2l, Deerfield's Add'l
Facts fl 7.) Because no party
involved in the Keeping case reasonably believed that the Landmark policy would be implicated,
and because Deerfield contends that Landmark suffered no prejudice from the late notice,
Deerfield argues that its pretrial notice was reasonable.3 (R. 120, Mem. in Opp'n at 10-12.)
Finally, Deerfield argues that Landmark is estopped from denying coverage because it failed to
3
American States also filed a response to Landmark's motion for summary judgment on September 16,
2016, which forwards similar arguments that notice to Landmark was reasonable under the circumstances
and that Landmark suffered no prejudice from any delay. (See R. 124.)
notify Deerfield of its intent to do so when settlement negotiations were proceeding. (ld. at 141
s.)
Landmark replied on October 7,2016. (R. 136, Reply.) Landmark argues that it
adopt AJG as its agent through its follow-form policy, and that its use of and sole
communication with Deerfield through its own agent, McAuley Woods, demonstrates that it
granted no authority to AJG. (ld. at 8-16.) Landmark further argues that the policy language on
its face granted Deerfield no discretion in when to report the claim, superceding Illinois law
regarding the differences between primary and excess insurance. (ld. at2l-28.) It also contends
that Deerfield's notice was unreasonably late under the circumstances and that it is not required
to show prejudice from the delay. (ld. at 28-33.) Finally, Landmark argues that it is not estopped
from raising a late-notice coverage defense as it had no obligation to disclose its coverage
defense and Deerfield did not detrimentally rely on Landmark providing coverage, especially as
the breakdown in settlement negotiations was over the "low" of the high-low settlement, with the
"high" agreed to at the American
States
policy's limit. (ld. at 16-20.)
On September 28, 2016, Deerfield filed its motion to disqualify Traub and to impose
sanctions on Traub and Landmark. (R. 128, Mot. to Disqualify.) Deerfield argues that, by
simultaneously assisting with post-trial issues and investigating coverage defenses on
Landmark's behalf, Traub violated its ethical obligations under ABA Model Rules
of
Professional Conduct 1.7 and 1.9, which prohibit conflicts of interest against current clients and
former clients, respectively- (ld. at 4-5.) Deerfield further argues that Traub intentionally violated
its attorney-client obligations in bad faith, obtaining access to confidential information in
Olmstead's case file by misrepresenting that it was acting only in Deerfield's interest.a (ld. at8e.)
Landmark and Traub responded separately on November 1,2016, raising similar issues.
(R. 143, Landmark's Resp.; R. 144, Traub's Resp.) Landmark argues that there was no
impropriety in its gaining access to the Keeping case file, as it had a right to access the file under
Illinois law. (R. 143, Landmark's Resp. at 6-7.) Further, because Landmark argues its late-notice
defense does not rely upon any privileged materials from Olmstead's file,
it contends that
Deerfield has failed to show any prejudice from the alleged conduct. (ld. at 7-9.) Finally, even
if
Traub did misrepresent its intentions as Deerfield claims, Landmark argues that any such
misrepresentation occurred without Landmark's direction as there is no evidence that it
instructed Traub to lie, but instead that Landmark retained Traub to promote Landmark's own
interests in the Deerfield matter. (Id. at 9-l
l.) Traub concurs that it was retained solely to
represent Landmark's interests, not Deerfield's, and that it did not state otherwise to Deerfield.
(R. 144, Traub's Resp. at2-3.) Traub argues further that it never formed an attorney-client
relationship with Deerfield, which was unaware of Traub's involvement in the case, and thus that
it cannot have violated the Model Rules regarding conflicts of interest between clients. (Id. at 48.) Traub also contends that it did not obtain any confidential information from Olmstead's file,
as Landmark had a
right to access these materials and they were not relevant to the controversy
before this Court. (ld. at I 1 - I 5.)
a
Deerfield also moved to stay briefing on the motion for summary judgment untilthe motion to
disqualifu had been ruled upon, arguing that there was a danger that Landmark would submit or rely upon
improperly obtained materials from its case file in supporting its case. (R. 134, Mot. to Stay.) This Lourt
denied that motion, finding that Deerfield's motion was untimely, coming days before Lanimark,s reply
brief was due when all the facts relied upon in the motion to disquali$, had been in the record for months.
(R. 137, Min. Entry.)
In its reply, Deerfield argues that Traub created an attorney-client relationship by
suggesting to Olmstead that it was assisting in Deerfield's post-trial defense and performing
work on its behalf. (R. 147, Reply at 5-8.) Deerfield argues that the discoverability of Olmstead's
file is beside the point,
as the alleged ethical
violation arises from obtaining access to the file
under the false pretenses that Traub was representing Deerfield and "[a]ny information gained
from that disclosure is the result of unethical conduct and may have caused Landmark to deny
coverage." (ld. at 8.) Finally, Deerfield contends that it was prejudiced in various ways:
(l) if
Traub was assigned to review the case file to determine whether to deny coverage, "then the
review of Olmstead's file was important to Landmark's decision to file this lawsuit against
Deerfield," (id. at l0); (2) violation of Model Rules 1.7 and I .9 "in and of itself[] prejudices
Deerfield," (id. at I I ); (3) Traub was materially limited in its assignment to assist in Deerfield's
defense by its simultaneous assignment to identify coverage issues,
(id.);
and (4) Traub's
"conduct, in and of itself, prejudices Deerfield because it sows distrust in the members of the
bar," (id.).
LEGAL STANDARI)
Rule 56 provides that "[t]he court shall grant summary judgment if the movant shows that
there is no genuine dispute as to any material fact and the movant is entitled to judgment as a
matter of law." FEo. R. Ctv. P. 56(a). Summary judgment is proper
"if the pleadings, depositions,
answers to interrogatories, and admissions on file, together with the affidavits,
if any, show that
there is no genuine issue as to any material fact and that the moving party is entitled to a
judgment as a matter of law.'o Celotex Corp. v. Catrett, 477 tJ.S. 317, 322 (1936) (citation
omitted). "A genuine dispute as to any material fact exists if the evidence is such that a
reasonable
jury could return
a verdict for the nonmoving party."
l0
Kvapil v. Chippewa Cty.,752
F.3d 708, 712 (7th Cir.2014) (citation and intemal quotation marks omitted). In deciding
whether a dispute exists, the Court must "construe all facts and reasonable inferences in the light
most favorable to the non-moving party.'' Nat'l Am. Ins. Co. v. Artison
& Truckers Cas. Co.,796
F.3d 717,723 (7th Cir. 2015) (citation omitted).
Under Rule 56, the movant has the initial burden of establishing that a trial is not
necessary. Sterk v. Redbox Automated Retail, LLC,770 F.3d 6l 8, 627 (7th
Cir. 2Ol4). "That
burden may be discharged by showing . . . that there is an absence of evidence to support the
nonmoving party's case." Id. (intemal quotation marks and citation omitted). If the movant
carries this burden, the nonmovant "must make a showing sufficient to establish the existence
of
an element essential to that party's case." Id. (citationand internal quotation marks omitted). The
nonmovant oomust go beyond the pleadings (e.g., produce affidavits, depositions, answers to
interrogatories, or admissions on file) to demonstrate that there is evidence upon which
a
jury
could properly proceed to find a verdict in [their] favor." Id. (intemal quotation marks and
citation omitted). "The existence of a mere scintilla of evidence, however, is insufficient to fulfill
this requirement." wheeler v. Lowson,539 F.3d 629,634 (7th
cir. 200g).
At this juncture, the Court cannot weigh conflicting evidence,
assess the
credibility of the
witnesses, or determine the ultimate truth of the matter, as these are functions of the jury.
Anderson v. Liberty Lobby, Inc., 477 IJ.S. 242,255 (1936); Omnicare, Inc. v. UnitedHealth Grp..
Inc., 629 F .3d
697
, 704-05 (7th Cir.
20ll).In
other words, "summary judgment cannot be used
to resolve swearing contests between litigants." Payne v. Pauley,337 F.3d 767,770 (7th Cir.
2003).lnstead, the Court's role is simply "to determine whether there is a genuine issue for
trial." Tolanv. Cotton,l34 S. Ct. 1861, 1866 (2014) (quoting Anderson,477 U.S. at24g).
ll
ANALYSIS
Currently pending before this Court are Landmark's motion for summary judgment and
Deerfield's motion for disqualification and sanctions. The Court will address each in turn below.
I.
Motion for Summary Judgment
The ultimate question in this case is whether Deerfield provided notice of Graff s
accident and the Keeping case to Landmark in accordance with the notice provisions of the
policy. In its motion, Landmark states that "[t]here is no dispute that Defendants (and their
agents and representatives) waited nearly seven years to provide Landmark with notice of the
Accident and nearly five years to provide Landmark with notice of the Underlying Lawsuit." (R.
87, Mem. at 2 (footnotes omitted).) Accordingly, Landmark's motion for summary judgment
focuses on whether Deerfield provided'oprompt" notice of the January 2008 accident or
"immediate[]" notice of the lawsuit filed December 2009 in light of the fact that Landmark
learned of both for the first time on December 5,2014. (ld. at 5.)
In its response, Deerfield contends that its notice was sufficient as to an excess insurer,
principally arguing that notice was not required until it was reasonably likely that Landmark's
coverage would be implicated. (R. 120, Mem. in Opp'n at6-14.) In addition, Deerfield argues
that Landmark received sufficient notice shortly after the accident when Deerfield notified AJG.
(ld. at 3-6.) Deerfield argues that, by issuing
American States's policy, Landmark
a
ooassumes
"follow-form" policy that adopts the terms in
the designation of AJG as its agent for purposes
of notice." (ld. at 3.) The American States policy provides that Deerfield must, "[i]n the event
of
'accident,' claim, 'suit' or 'loss,' . . . give us or our authorized representative prompt notice." (R.
l-3, American States Policy at 49.) Although "our authorized representative" is not defined in
the policy, the American States policy identifies AJG as its "Agent" and provides AJG's contact
12
information. (R. 120, Mem. in Opp'n at 3.) Deerfield argues that by adopting the terms and
conditions of the American States policy without designating its own authorized representative,
Landmark also adopted its designation of AJG as an authorized representative able to receive
notice on its behalf. (ld.)Even if Landmark did not intend that AJG would serve as its agent,
Deerfield argues that Landmark's course of conduct, particularly by communicating with
Deerfield exclusively through AJG, created an apparent agency . (ld. at 4-6.)
In its reply, Landmark argues that AJG was neither an express nor an apparent agent of
Landmark. (R. 136, Reply at 8-16.) Landmark states that, unlike American States, it did not enter
into any agency agreement with AJG, instead authorizing McAuley Woods as its agent in
connection with the Landmark policy. (ld. at 8-10.) Landmark further denies that its follow-form
policy adopted AJG as an authorized representative and that Landmark vested AJG with any
apparent authority. (ld. at I 0- 16.) As Landmark notes, the American States policy defines the
terms'o\,Iy'e,"
"us," and "our" to mean "the company providing this Insurance," which is
American States. (ld. at I I (quoting R. 1-3 at 43).) The Landmark policy, meanwhile, specifies
that these terms refer to "the COMPANY shown in the DECLARATIONS," that is, Landmark.s
(1cl.
(quoting R. l-4 at 3).) Landmark argues that the notice provision, as incorporated in the
Landmark policy, means that Deerfield must give notice to Landmart s authorized
representative, not American States's. (/d.)
5
In the interest of accuracy, the Court notes that the Landmark policy only specifically states that..we"
and'ous" refer to Landmark without mentioning "our." (R. l-4, Landmark Policy at 3.) The Court declines
to attach any significance to this omission, as under Illinois law contracts must be read as a whole. United
States v. Rogers Cartage Co.,794 F.3d 854,861 (7th Cir.20l5) (citation omitted). Because "our" must
refer to the insurer operating the policy for it to operate as the parties intended, the Court finds that this is
the only reasonable interpretation of the policy. (See, e.g., R. l-3 at 50 ("At our option, we may: a. pay
for, repair or replace damaged or stolen property; b. Return the stolen property, at our
We will
"*p"nr".
pay for any damage that results to the "auto" from the theft[.]").)
l3
Under Illinois law, "[a]n insurance policy is a contract, and its construction is reviewed
de novo as a question of law."6 Barth v. State Farm
Fire & Cas. Co.,886 N.E.2d 976,
g82
(Ill.
2008). In interpreting an insurance policy, 'oa court's primary objective is to ascertain and give
effect to the intentions of the parties as expressed by the words of the policy." Cent. Ill. Light Co.
v. Home Ins. Co., 821 N.E.2d206,213
(Ill. 2004). The policy must beooconstrued as a whole,
giving effect to every provision, if possible, because it must be assumed that every provision was
intended to serve a purpose."
ld
Additionally, "[i]f the words used in the policy are clear and
unambiguous, they must be given their plain, ordinary, and popular meaning." Id. Conversely,
"if
the words used in the policy are reasonably susceptible to more than one meaning, they are
ambiguous and will be strictly construed against the drafter." Id.; see also Outboard Marine
Corp. v. Liberty Mut. Ins. Co.,607 N.E.2d 1204,1217 (Ill. 1992) ("Ambiguous terms are
construed strictly against the drafter of the [insurance] policy and in favor of coverage.").
As a preliminary matter, the Court finds that Landmark did not adopt AJG as its
authorized representative by issuing its follow-form policy. Although the parties argue at length
about the policy's particular wording and inferences that can be drawn from it, neither party
seems to recognize that Landmark did
explicitly identifu its own authorized representative. The
pages setting forth the Landmark policy's terms are signed by two principals from RSUI
Indemnity Company, Landmark's parent company. (R. l-4, Landmark Policy at 4.) Immediately
before these signatures, the policy states: "This policy is not valid unless countersigned on the
Declaration page by our fully authorized representative." (ld.) The declaration page is signed by
a James
A. Dixon over a line labeled "Authorized Representative." (ld. at 7.) The American
States contract does not define or identify any "authorized representative," and thus
6
it is
The parties agree for purposes of the present motion that Illinois law applies. (See R. 42,Def.,sMem. at
6 n.3; R. 48, Pl.'s Resp. at 8-l
l.)
t4
reasonable to believe that AJG, which is listed as
"Your Independent Safeco Agent" on the
policy, should be interpreted as that representative. (R. l-3, American States Policy at
9.)However, the Landmark policy only follows form as to'othe same terms, conditions,
agreements, exclusions and definitions as the 'Underlying Insurance,' except: . . . (2) With
respect to any provisions to the contrary contained in this insurance." (R.
at 3.) By clearly indicating in the policy itself that
l-4, Landmark Policy
it had assigned its own authorized
representative, Landmark avoids the ambiguity of the American States policy. Viewing the
Landmark policy as a whole, there can be no ambiguity that Landmark did not adopt AJG as its
authorized representative for purposes of the notice provision.
Further, the Court finds that even
if Landmark
had adopted AJG as its authorized
representative as Deerfield argues, this alone would not suffice to establish that Deerfield
complied with the policy's notice provision. The notice provision has several subsections and
specifies that Landmark has "no duty to provide coverage under this policy unless there has been
full compliance with" each; subsection (a) requires Deerfield to give notice of the accident to "us
or our authorized representative," but subsection (b) states: "Additionally, you and any other
involved 'insured' must: . . .(2\ immediately send as copies of any request, demand, order,
notice, summons or legal paper received concerning the claim or 'suit.' " (R. l-3, American
States Policy at 49 (emphasis added).) In short, Deerfield was required to give notice to
Landmark or its representative, but it was also required to provide any legal documents to
Landmark itself, by the plain language of the policy. The only mention in the policy of an
authorized representative is in the subsection of the notice provision requiring notice that an
accident occurred or a claim exists. The requirement to provide legal documents does not fall
under this subsection in such a way that the policy could be read to allow notice to be given to
l5
such a representative; instead,
it is separated into
a new subsection which is
"[a]dditional[]" to
the preceding notice of an accident and specifies on its own part that the legal documents must
be given to Landmark. (ld.) Thus, even assuming that Landmark adopted AJG as its authorized
representative under the policy, Deerfield would still be obligated to provide any legal
documents "immediately" to Landmark, not AJG, in order to comply with the notice provision.
Because Deerfield did not do this, whether Landmark adopted AJG as its authorized
representative or not does not determine this case.
If AJG was Landmark's
agent, however, then notice to AJG would constitute notice to
Landmark, satisfying both subsections of the policy's notice provision. See First Chi. Ins. Co.
Molda,36 N.E.3d 400,487-88 (lll. App. Ct.2015) (notice given to an agent is imputed to
v.
a
principal when the agent has no adverse interest). Landmark notes in its reply that, although
American States entered into an agency agreement with AJG, Landmark did not have any such
formal agreement. (R. 136, Reply at 8-10.) Instead, Landmark used its own insurance broker,
McAuley Woods, to communicate with AJG. (ld. at 13-14: see also R. 136-2 at20,22,42
(emails showing Landmark communicating with McAuley Woods as its agent in negotiating the
policy with Deerfield).) Because Deerfield has failed to produce any contrary evidence that
Landmark appointed AJG as its agent, the Court finds that AJG was not Landmark's actual
agent.
Even if Landmark did not explicitly vest AJG with authority to act as its agent, however,
Deerfield argues that Landmark's conduct would lead a reasonable insured to believe that AJG
was Landmark's agent for purposes of notice under the doctrine of apparent agency. (R. 120,
Mem. in Opp'n at3-6.) Under Illinois law, an insurance broker is typically considered to be the
agent of the insured rather than the agent of the insurance company unless the broker is a general
t6
agent of the insurance company. Molda,36 N.E.3d
at4l5. However, depending on the facts of
a
particular case, a broker may also serve as the agent of the insurer, or both the insured and the
insurer. State Sec. Ins. Co. v. Burgos,583 N.E.2d 547,551
(Ill. l99l). Even when
does not explicitly grant a broker authority to act on its behall the insurer
an insurer
still may invest the
broker with apparent authority to act as its agent, including for purposes of notice. Molda,36
N.E.3d at 415. Thus, where the insurer "creates, through words or conduct, the reasonable
impression that the putative agent has been granted authority to perform certain acts," the insurer
''will
be bound by the authority
litl
appears to give to another, as well as that authority which [it]
actually gives." Burgos,583 N.E.2d at 551. Apparent authority is based on the actions of the
insurer, not the broker, and is "that authority which a reasonably prudent person . . . would
naturally suppose the agent to possess." Id. Accordingly, to establish apparent agency a party
oomust
prove that
(l)
the principal or its agent acted in a manner that would lead a reasonable
person to believe that the individual allegedly at fault was an employee or agent of the principal;
(2) the principal had knowledge of and acquiesced in the acts of the agent; and (3) the injured
party acted in reliance upon the conduct of the principal or its agent, consistent with ordinary
care and prudence." Molda,36 N.E.3d at 416.
In cases concerning the authority ofinsurance brokers to act on behalfofinsurers, and
insurer may be estopped from denying that a broker is its agent "[w]here an insurer's manner
of
dealing with the broker in regard to the insured would lead the insured to believe that the broker
had the authority to perform the acts in question." Id. (citation omitted). The broker has apparent
authority "where the insurer knowingly causes or permits the broker to act so as to justify the
insured in believing that the broker possesses the authority exercised." Burgos, 583 N.E.2d at
551. Ultimately,
"[i]t
is not necessary that the insurer be aware of the particular acts being
l7
performed by the broker; once the insurer has created the appearance of authority, the insurer is
estopped to deny it, even though the insurer may be ignorant of its exercise." Id.
Landmark cites several cases to establish that, under Illinois law, AJG was only a broker
and not its agent. First, Landmark references a series of cases distinguishing between insurance
brokers and agents of insurers; in essence, these cases establish that a broker is a "middleman
between the insured and the insurer" who procures insurance "under no employment from any
special company." (R. 136, Reply at 14 (quotingLazzarav. Howard A. Esser, Lnc.,802F.2d260,
264 (7th Cir. 1986)).) Further, Landmark suggests that "[w]hether an insurance broker is an
agent of an insurer can be decided as a matter of law when the evidence clearly indicates that the
broker is the agent of the insured." (ld. at l5 (citing Am. Safety Cas. Ins. Co. v. City o./'
Waukegan,2009 WL 855795, at t7 (N.D. Ill. Mar. 30, 2009)).) Landmark accurately notes that,
in determining whether an insurance intermediary is an agent or a broker, Illinois courts consider
four factors:
"(l) who put the agent in motion;
(2) who controls the agent's actions; (3) who pays
the agent; and (4) whose interest does the agent represent." (ld. (citing Geneva Assurance
Syndicate. Inc. v. Associated Agencies, Inc.,1999 WL 731788,at *3 (N.D. Ill. Aug. 30, 1999)).)
Landmark argues that these factors militate against finding that AJG was its agent, as ..Landmark
did not put AJG in motion, did not retain or pay AJG, and . . . AJG has never represented the
interests of Landmark." (ld.)
However, these arguments are irrelevant to whether AJG was Landmark's apparenr
agent; all the cited cases concern whether a broker was an actual agent. While these cases would
have a bearing on whether Landmark had explicitly entered into an agency relationship with AJG
or whether AJG was its agent based on a continuing business relationship, they are misleading
when scattered throughout Landmark's argument that AJG was not its apparent agent. Whether
18
actual agency exists is a question of control, business relationships, and the actions of the agent,
Geneva Assurance Syndicate, 1999
WL 731788, at *3; whether apparent agency exists is a
question of the principal's actions and whether they would lead a reasonable third party to
believe an agency relationship exists, regardless of the underlying business structure, Molda,36
N.E.3d at 416. Landmark has put forth the more demanding tests that apply in actual agency
contexts as though they also govern apparent agency cases. For these reasons, the Court finds
these arguments to be unpersuasive.
Landmark also argues that it did not establish apparent agency by communicating with
Deerfield through AJG because "[a]s is clear from the underwriting file, Landmark never
corresponded directly with AJG. Instead, Landmark['s] own insurance broker, McAuley Woods,
communicated with AJG." (R. 136, Reply at 13.) Landmark further argues that "[n]o reasonable
insured would believe AJG to be Landmark's agent, especially given the fact that the only direct
communication between AJG and Landmark occurred at the time of notice in December 2014.-
(ld. at 13-14.) Again, while Landmark may be correct that
a
bird's-eye view of all the relevant
documents governing Landmark's relationship with AJG would not lead a reasonable insured to
infer that AJG was its agent, Landmark neglects that this information was not all available to the
insured at the relevant time. While the underwriting file might counter a perception that
Landmark treated AJG as its agent, insureds do not typically have access to their underwriting
file, which is composed of the insurance company's internal documentation. Similarly, the fact
that Landmark allegedly sent its policy, notices, and other communications to AJG via its agent
McAuley Woods was not necessarily evident to Deerfield. There is no evidence that Deerfield
was ever aware that McAuley Woods was involved in its Landmark policy at all.
It is quite
possible that, from Deerfield's perspective, it received all correspondence related to its policy
19
through AJG; whether it passed through anyone else's hands in the process may not have been
evident. Landmark is correct that, if apparent agency existed, it must have been established
through its actions. Molda,36 N.E.3d at416. However, it fails to acknowledge that the standard
for apparent agency focuses on the principal's actions as perceived by the third party. See
Petrovich v. Share Health Plan of lll., lnc.,719 N.E.2d 756,767
(lll.
1999) (recognizing the
"general rule" that private instructions, limitations, or arrangements do not control a claim of
apparent agency). The question is not whether Landmark's private or internal actions gave
Deerfield reason to believe AJG was Landmark's agent; it is whether Landmark's actions, from
Deerfield's perspective, would lead a reasonable insured to believe that Landmark treated AJG
as its agent.
It is less significant that Landmark did not correspond directly with AJG than it is
that all correspondence to Deerfield apparently took place through AJG.
Deerfield argues that, under State Security Insurance Co. v. Burgos,583 N.E.2d 547,
Landmark's actions were sufficient to create an apparent agency relationship with AJG from
Deerfield's perspective.In Burgos, the insured, Ramon Soto Burgos, purchased liability
insurance for his grocery store through a broker, Raymond Patis. Id. at 549. When a customer
was shot outside the store, Burgos notified Patis immediately and Patis stated that "he would take
care of the situation" although he believed Burgos would not be liable for the shooting and thus
the policy would not apply.
Id
Patis first notified the insurance company, State Security
Insurance Co. ("State") of the incident when he forwarded the complaint and summons the
insured received two years later. Id. After receiving the complaint, State issued a reservation
of
rights and filed a declaratory judgment to determine whether it was obligated to indemnify
Burgos, alleging that he had failed to comply with the policy's provision requiring that notice
20
of
o'as
an occulrence be given
soon as practicable." Id. The
Illinois Supreme Court summarized the
relationship between the parties:
The policy in question was procured for the Burgoses by Patis, the
Burgoses' insurance broker. Patis had been handling all of the Burgoses'
insurance needs for over 20 years prior to this occurrence. The policy was issued
by the plaintiff insurance company through its agent, Guild Insurance Agency
(Guild). Guild transmitted the policy to Patis, who delivered the policy to the
Burgoses. The Burgoses paid all premiums on the policy to Patis, who forwarded
them to Guild. All notices regarding cancellation, premium changes and renewals
were sent by Guild to Patis, who forwarded them to the Burgoses. All
communication between plaintiff or Guild and the Burgoses was conducted
through Patis. Patis received a commission from Guild for placing the Burgoses'
insurance with plaintiff.
Id. at 549-50. In addition, the policy's declarations page listed Guild as the "Agent or Broker"
for State, but Patis, before sending the policy to Burgos, placed a sticker with his own business's
contact information over Guild's name and address. Id. at 550.
The Illinois Supreme Court found that State's "manner of dealing with Patis and the
Burgoses created the appearance that Patis had authority to accept notice of occurren ces." Id. ar
552. Specifically, State communicated with Burgos solely through Patis; even though it could
have contacted Burgos directly, State's "decision to use Patis as its intermediary for every aspect
of its transactions with the Burgoses" made it "reasonable for the Burgoses to believe that patis
was authorized to receive notice on plaintiff s behalf." Id.Inparticular, State sent all notices to
its own agent, Guild, who forwarded them to Patis, who then sent them to Burgos. 1d Although
the role of an insurance broker is typically to simply negotiate and obtain a policy for the
insured, "[w]hen a 'broker' performs the additional functions of delivering the policy to the
insured and collecting premiums on behalf of the insurer, he is generally considered to be doing
so as an agent of the insurer."
ld
Ultimately, "[t]here is no magic in the term 'broker' that will
2t
permit an insurance company to hide behind him in case of a loss and insist that he is the
representative of the [insured]."7 Id. lcitation omitted).
Landmark argues that Burgos is inapposite, as "[t]here is no testimony or evidence that
Landmark relied on AJG to deliver policies, bill or collect premiums, or to mail notices of any
sort." (R. 136, Reply at 16.) Instead, it cites two later Seventh Circuit cases interpreting Illinois
law, Archer Daniels Midland Co. v. Hartford Fire Insurance Co.,243
and Mizuho Corporate Bank (uSA) v. Cory
F
.3d 369 (7th Cir. 2001),
& Associates, Inc., 341 F.3d 644 (7th Cir. 2003),
where insurance brokers were found not to be apparent agents despite playing some intermediate
role between the insurer and the insured. (R. 136, Reply at 15.) Landmark argues that "[t]he
connection between Landmark and AJG here is more tenuous than the relationships between the
insurer and the purported broker" in these cases, "requiring a finding that there is no agency
relationship." (ld.)
As an initial matter, Landmark's suggestion that its relation to AJG is less direct than
those in Archer Daniels Midland and Mizuho seems to rely on its aforementioned argument that
it only interacted with AJG through its retained agent, McAuley Woods. As noted above, the
existence of intermediaries that are invisible to the insured would not be relevant to determining
whether Landmark vested AJG with apparent agency. Further, the Court notes that Burgos,
which found apparent agency based on a course of dealing with the insured through the broker,
also involved an intermediary agent through which the insurer communicated with the broker.
Burgos,583 N.E.2d at 549-50. Because the Illinois Supreme Court did not attach any
7
The Illinois Supreme Court described several additional factors supporting its conclusion that State had
imbued Patis with apparent authority, including the ambiguity of the policy's language regarding the
identity of State's "agent or broker," the foreseeability of Patis listing himself as the representative, and
the customary practice of insureds tendering notice through brokers to whom they pay their premiums.Id.
at 553-55. However, the court was clear that these "additional" reasons "further strengthened" its
conclusion that Patis had apparent agency, and that State's practice of communicating with Burgos solely
through Patis was sufficient on its own. Id. at 553-54.
22
significance to the use of this intervening agent, neither will this Court when applying Illinois
law.
Further, Landmark's cases do not overcome the striking similarities between this case
and
Burgos.ln Archer Daniels Midland, the court found that the broker simply receiving the
policy from the insurer and transferring the premium from the insured to the insurer was not
sufficient to establish apparent agency to make underwriting decisions .243 F.3d at 373-74. The
court noted in particular that the insured o'must establish not simply that [the broker] had
authority to receive money and shuffle (or even sign) papers on [the insurer's] behalf but also
that it was [the insurer's] agent for the purpose of deciding what risks to accept, and at what
price." Id. at373.lf the insured "really thought that [the broker]
had,
that authority, then [the
insured] must have believed that the world was its oyster." Id.Inother words, while a history of
mediating transactions could indicate apparent authority for some typically administrative
purposes, such as accepting payment or signing papers, it was not reasonable for the insured in
Archer Daniels Midland to believe that the broker had been given authority to actually make
high-level business decisions on behalf of the insurer. Although the court did not discuss where
accepting notice would fall on this scale, it seems clear that accepting notice of a claim is much
closer to assistive administrative tasks than to substantive strategy decisions. The Seventh Circuit
also found it significant that, although brokers may sometimes serve as the agents for both
parties, in that case the insured "was shopping in an international market, and it hired
[the
brokerl to be its long-term champion. Only an exceedingly foolish insurer would have deemed
[the broker] its agent in the same transactions[.]" Id. The court concluded that the insured, a
major corporation that was seeking to take out a $50 to $100 million insurance policy, was .,too
sophisticated to believe that for a big-stakes transaction an insurer would appoint as its agent a
23
firm that had already promised to put [the insured's] interests first." /d. While the Seventh
Circuit did find that merely acting
as an
intermediary was insufficient to create apparent
authority in that case, this finding was influenced by the nature of the authority at issue and the
high sophistication of the insured. In the present case, the authority in question was specifically
authority to act as an intermediary for purposes of notice, and there is no evidence before this
Court that Deerfield or any of its employees had any particular sophistication with insurance
matters. Archer Daniels Midland, therefore, does not carry the day for Landmark.
ln Mizuho, also cited by Landmark, the Seventh Circuit held that where an insurer "relied
exclusively on [the broker] for communication of policy information during the negotiation
phase" but "did no more," the insurer did not vest the broker with apparent authority. 341 F.3d at
656. In deciding Mizuho, however, the Seventh Circuit explicitly contrasted that case with
Burgos; while it distinguished Burgos, it did so on the grounds that the Burgos insurer engaged
in a "course of dealing" in which the insurer communicated consistently with the insured only
through the broker "long after the procurement process was completed." Id. at 655-56. The
insurer in Mizuho, by contrast, only used the broker as an intermediary during the initial
negotiation phase. Id. at 656. Because the primary role of insurance brokers is to negotiate and
deliver policies to their customers, the Seventh Circuit declined to expand Burgos to situations
where brokers only performed their core functions; instead, it recognized that Burgos'sholding
remained intact in situations where brokers continued acting as an intermediary on a continuing
basis once the insurer and insured had already entered into a business relationship . Ict.
Whether Burgos or Mizuho governs the present case depends on the nature
at 656.
of
communications between Landmark and Deerfield. If AJG merely performed traditional broker
services, such as procuring and initially negotiating the policy, then Mizuho suggests that
24
Landmark did not vest AJG with apparent authority for purposes of receiving notice. If,
however, Landmark used AJG as its intermediary for all its interactions with Deerfield, then
Burgos would militate the finding that Landmark's actions created apparent authority.
As Deerfield's apparent-agency argument is an affirmative defense, Deerfield would bear
the burden of proving it at trial. Accordingly, in order to survive summary judgment, Deerfield
must put forth sufficient evidence to create an issue of fact on this affirmative defense. See
Celotex Corp. v. Catrett, 477 U.S. at 324; see also Springfield
914 F. Supp. 258,264 (N.D.
Ill. 1996) ("[Defendant]
Oil
Servs., Inc. v. Mermelstein,
bears the burden of proof on this
affirmative defense, and must present at least some evidence in support of it to defeat
[Plaintiff s] motion for summary judgment.").
Construing the record in Deerfield's favor and affording it every favorable inference, the
Court finds sufficient evidence for a reasonable jury to conclude that Landmark dressed AJG
with apparent authority under Burgos. Nowhere in the record, either in Landmark's underwriting
file or in the submitted depositions, is it established how Landmark customarily communicated
with Deerfield on a routine basis, such as delivery of billing statements and collections of
premiums. There is only a single demonstrated instance in which Landmark communicated
directly with Deerfield: when Deerfield requested a copy of its loss history with Landmark in
February 2010, Landmark's parent company RSUI sent the requested information directly to
25
Deerfield.s (R. 136-2, Underwriting File at 7.) Apart from this single email, all communications
between Landmark and Deerfield appear to have taken place through AJG and McAuley Woods.
(See, e.g., id.
at 19-27 (negotiating policy limit increases in June 2007).) After receiving actual
notice of the lawsuit from AJG in December 2014, Landmark acknowledged receipt of notice
directly to AJG without contacting Deerfield. (R.
l2l,
Def.'s SOF
tT
12.) Further, RSUI's Vice
President of Excess Claims Kevin O'Connor acknowledged in his deposition that Landmark
would "more often" discuss matters with the broker than with clients directly. (R.
l2l-2,
O'Connor Dep. at 109.) He also testified that, when Landmark issued policies, he knew that they
were issued to the brokers but did not know whether they were provided to the insureds. (Id. at
164.)
Landmark offers no evidence that it ever communicated directly with Deerfield except
for the single 2010 email mentioned above. Landmark acknowledges that "[t]here is no
testimony or evidence that Landmark relied on AJG to deliver policies, bill or collect premiums,
or to mail notices of any sort," but it also fails to provide any evidence concerning these
communications. (R. 136, Reply at 16.) Further, by failing to respond to Deerfield's statement
of
additional facts, Landmark has admitted that it never communicated directly with Deerfield. (R.
l2l.
Deerfield's Add'l Facts !J28.)
Although the record does not directly establish how Landmark handled its more day-to-
day interactions with Deerfield, the Court finds that a reasonable jury may infer that Landmark,s
8
Deerfield's original request was not sent directly to Landmark, however. lnstead, Deerfield forwarded
its request (addressed to Landmark) to Tracy Holcomb of Laurus Strategies, who sent it to Jean Busch of
Westrope, who sent it to Bryant Rhyne of an undisclosed organization, who sent it to peggy Miller who
is
also unidentified. (R. 136-2, Underwriting File at 9- 16.) Shortly thereafter, Cindy Vadner of RSUI sent
the requested information directly to Deerfield . (Id. at 7.) The record does not rehect who any of these
individuals or organizations or whether they are associated with any of the parties in this cu.i. At on"
point years earlier, Tracy Holcombe forwarded information from one AJG imployee to another in the
process of seeking a higher insurance limit for Deerfield, suggesting that Laurus Strategies and AJG
worked closely together at some point. (Id. at 33-35.)
26
history of communicating with Deerfield through AJG persisted throughout their business
relationship, which under Burgos would establish that AJG was Landmark's apparent agent for
purposes of notice. Landmark has failed to show that there is no genuine issue of material fact
regarding its communications with Deerfield. Because this factual dispute is potentially
dispositive of this suit, the Court must deny Landmark's motion for summary judgment.
II.
Motion to Disqualiff and for Sanctions
A.
Disqualification
Deerfield seeks to disqualify Traub from continuing to represent Landmark in this case.
Deerfield argues that Traub violated ABA Model Rules of Professional Conduct 1.7 and 1.9,
which forbid attorneys from representing a client if it would create a concurrent conflict
of
interest or a conflict of interest with a former client, respectively.
A two-step analysis guides a court's consideration of a motion to disqualify counsel:
"First, the court considers whether an ethical violation has occurred. Second, if the Court finds
such a violation, the court then determines whether disqualification is the appropriate remedy."
Metro. Li/b Ins. Co. v. Guardian Life Ins. Co. of Am.,No.06 C 5812,2009 WL 1439717,at*2
(N.D. Ill. May 18,2009). Even if there has been an ethical violation, disqualification does not
automatically follow, but falls within the Court's discretion. Id.; see also Jang v. Woo Lae Oak.
Inc. Chi., No. l2-CV-00782,2013 WL 3270649, at *4 (N.D. Ill. June 27,2013) (collecting
cases). In considering motions to disqualify, courts must balance "the sacrosanct privacy of the
attorney-client relationship (and the professional integrity implicated by that relationship) and
the prerogative of a party to proceed with counsel of its choice." Schiessle v. Stephens,
7
417, 420 (7th Cir. 1983). "Although courts have a duty to safeguard the attorney-client
relationship, it must also be recognized that disqualification, as a prophylactic device for
27
17
F
.2d
protecting the attorney-client relationship, is a drastic measure which courts should hesitate to
impose except when absolutely necessary." Bartlett v. Bartlett, No. l6 CV 6595, 2016 WL
7374276, at * I (N.D. Ill. Dec. 20,2016) (intemal quotation marks omitted) (citing Cromley v.
Bd. of Educ. of Lockport Twp. High Sch. Dist. 205,17 F.3d 1059, 1066 (7th Cir. l99a)).
Local Rule 83.50 adopts the ABA Model Rules of Professional Conduct such that they
apply to attorneys practicing in this District. N.D.lt-t-. L.R.83.50. Model Rule 1.7 provides that,
unless each client provides informed consent, "a lawyer shall not represent a client
if
the
representation involves a conculrent conflict of interest," which exists if "the representation
one client
will
be directly adverse to another client" or
of
if "there is a significant risk that the
representation of one or more clients will be materially limited by the lawyer's responsibilities to
another client, a former client, or a third person." Moopt Rul-Es oF PRoF'L CoNpucr r. 1.7.
Model Rule 1.9 mandates that "[a] lawyer who has formerly represented a client in a matter shall
not thereafter represent another person in the same or a substantially related matter in which that
person's interests are materially adverse to the interests of the former client unless the former
client gives informed consent." MoDEL Rur-Es oF PRoF'L CoNoucr r. 1.9.
Deerfield argues that, by reviewing the Keeping case file to identify any appealable
issues, Traub acted as a lawyer in its defense and entered into an attorney/client relationship with
Deerfield. Deerfield appears to argue that Traub violated Model Rule 1.7 by representing
Deerfield for purposes of appeal and representing Landmark for purposes of investigating
coverage issues at the same time, and also that Traub violated Model Rule 1.9 by representing
Landmark in the current litigation after previously representing an adverse party, Deerfield.
Because Model Rule I .7 and Model Rule 1 .9 are both prohibitions against representing
multiple clients in different circumstances, the Court must first establish whether Traub entered
28
into an attorney-client relationship with Deerfield at all. Typically, an attorney-client relationship
is created through an express contract. However, "[e]ven where no express contract has been
entered into or where no fees are paid, an
'implied' attorney-client relationship may be shown
if
aparty submitted confidential information to a lawyer with the reasonable belief that the lawyer
was acting as the party's attorney." Metamorfux, L.L.C. v. Belkin Componenfs, No. 02 C 0771,
2002WL 1308633, at *3 (N.D. Ill. June 14,2002). Deerfield argues that just such an implied
professional relationship was created here when Traub allegedly undertook to aid in Deerfield's
defense before representing Landmark in this coverage dispute. Deerfield cites in particular
Westinghouse Electric Corp. v. Kerr-McGee Corp., 580 F.2d 131I (7th
Cir. 1978), which
identified several instances creating an implied professional relationship, including that: "When
an insurer retains an attorney to investigate the circumstances of a claim and the insured,
pursuant to a cooperation clause in the policy, cooperates with the attorney, the attorney may not
thereafter represent a third party suing the insured nor indeed continue to represent the insurer
once a conflict of interest surfaces." Id. at 1319. However, as has been acknowledged repeatedly
since, the Westinghouse court noted immediately after the quoted language that this professional
relationship "hinges upon the client's belief that he is consulting a lawyer in that capacity and his
manifested intention to seek professional legal advice." 1d (citation omitted); see also Domanus
v. Lewicki, No. 08 C
4922,2012wL
6568227, at *5 (N.D.
Ill. Dec. 14,2012) (Westinghouse
merely addresses the narrow circumstances under which an implied attorney-client relationship
has been established. . . .
[A]n implied attorney-client relationship exists only if the client's
subjective beliefs are reasonable."); Metamorfix,2002 WL 1308633, at *3 (recognizing that, in
Westinghouse,
"[t]he deciding factor [for establishing an implied professional relationship] is
what the prospective client thought when he made the disclosure, not what the lawyer thought"
29
(quoting Westinghou,se, 580 F.2d at 1320 n.l4\); In re Maruiage of Stephenson,g55 N.E.2d 618,
627 (Ill. App. Ct. 201 I ) (finding that Westinghouse did not apply where the alleged client "did
not consult [the lawyer] directly," did not know the lawyer would be consulted, and did not
manifest his intention that the lawyer be consulted). Even if Traub stated to Olmstead or
American States that it was retained by Landmark to assist with the defense, there is no evidence
before this Court that Deerfield believed that Traub was representing Deerfield. In fact,
Deerfield's president, Christopher Bunch, testified in an affidavit that
"l was never advised by
anyone . . . that [Traub] requested and was given access to Deerfield's file," that
"l
was never
informed by anyone as to why [Traub] wanted to review Deerfield's file in the Underlying
Litigation," and that
"l never waived Deerfield's
attorney-client privilege and never authorized
[Traub] to access David Olmstead's fiIe." (R. 128-6, Bunch Aff. at l-2; see also R.128, Mot. to
Disqualify at 4 ("Deerfield never consented to [Traub's] review of its attorneys' fiIe.").)
Whatever Traub said, it did not say anything to Deerfield, and Deerfield thus could not have had
the required subjective belief about Traub's role.e Thus, the Court finds that Traub never
represented Deerfield and, even
if it investigated potential post-trial
issues,
it did so solely as the
representative of Landmark, which shared an independent interest in the outcome of the Keeping
litigation.
e
Although Deerfield does not confront this difficulty, it makes a passing reference in its reply to how ..the
conduct and actions of Deerfield's agent and attorney, David Olmstead, as wellas Lisa Cruser suggests
that they believed [Traub] had been assigned to represent Deerfield." (R. 147, Reply at 6.) While iiis
conceivable that an agent and attorney could manifest the belief and intentiors n".i.sury to create an
implicit professional obligation, the Courl declines to extend this doctrine so far. Deerfield bears the
burden of demonstrating the existence of a current or former attorney-client relationsh ip. Sailsbery v. Vilt.
of Sauk Vill.,No.l5 C 10564,2016WL 1402291,at*4 (N.D. Ill. Apr. I1,2016). Deerfield has provided
no argument or case law to support this position, and the Court finds that premising a conflict of interest
on the implicit attorney-client relationship created by the subjective beliefs of an agent is far too
attenuated to j ustif, disqualifi cation.
30
Even
if Deerfield were able to establish that it had an attorney-client relationship with
Traub, it has not demonstrated that Traub violated Model Rule 1.9. Model Rule 1.9 does not
apply in this situation because Deerfield was, if anything, a current client when the conflict
of
interest arose, and Model Rule 1.9 concems a conflict of interest with former clients. Although
Deerfield does not differentiate between the two in its briefing, Deerfield presumably sees a
Model Rule 1.7 conflict when Traub investigated post-trial issues and coverage issues at the
same time, and a Model Rule 1.9 conflict when Traub initiated this lawsuit in representing
Landmark. However, a current client is not made into a former client simply by the initiation of a
new lawsuit. There must first be a breaking off of the attorney-client relationship, and
undertaking adverse representation alone does not suffice. See, e.g., SWS Fin. Fund A v. Salomon
Bros. Inc., 790 F . Supp. 1392, 1399 (N.D.
lll. 1992) (finding that law firm,
which began adverse
representation within two months of its last work for its original client, still had a current-client
conflict when it filed an adverse complaint six months later because there had been no
"terminating events"); see also alfaCTP Sys., Inc. v. Nierman, No. l5-cv-933g,2016
wL
687281, at *4-5 (N.D. Ill. Feb. 19,2016) (finding that client was not a current client after fiveyear lapse in services and two years of "overtly adverse acts and statements"). Because Model
Rule 1.9 prohibits conflicts of interest withformer clients, the fact that Deerfield was at most a
current client forecloses any violation of Model Rule 1.9.
The Court need not resolve whether Traub's investigation of coverage issues while also
investigating post-trial issues would constitute a conflict of interest under Model Rule 1.7
because
it has found that Traub never created an attorney-client relationship with Deerfield,
either explicitly or implicitly. Even if Traub had violated Model Rule 1.7, however, Deerfield
has not established that disqualification would be an appropriate remedy. Model
3l
Rule 1.7 has
two fundamental purposes: "First, it serves as a prophylactic to protect confidences that a client
may have shared with his or her attorney." SWS Fin. Fund,790
F
. Supp.
at l40l . Its second
purpose "is to safeguard loyalty as a feature of the lawyer-client relationship. A client should not
wake up one morning to discover that his lawyer, whom he had trusted to protect his legal
affairs, has sued him." Id. The present case does not implicate either of these purposes.
Traub's alleged conduct did not endanger the confidentiality of Deerfield's attorneyclient relationship with Olmstead, as Landmark had the right to inspect the Keeping case file. As
Landmark and Traub note in their responses, Waste Management, Inc. v. International Surplus
Lines Insurance Co.,579 N.E.2d 322
(lll.l99l),
7;R.144 at I l-13.) In that case, the Illinois
provides the governing rule here. (See R. 143 at
Supreme Court found that an insurer was entitled to
litigation files based on the policy's cooperation clause and on the common-interest doctrine.
at 326-29. The cooperation clause in Landmark's policy is narrower than the one
1rl.
in Waste
Management, which was "without limitation or qualification." Id. at328. Here, by contrast, the
cooperation clause only requires the insured to cooperate "in the investigation or settlement
of
the claim or defense against the 'suit.' " (R. l-3, American States Policy at 49.) However, the
common-interest doctrine as set fonh in Waste Managemenr establishes that the litigation file
was not confidential as to Landmark. Where "both insurers and insureds ha[ve] a common
interest either in defeating or settling the claim against insureds" and "the communication by
insureds with defense counsel is of a kind reasonably calculated to protect or to further those
common interests," those communications are not privileged. Waste Mgmt.,579 N.E.2d at328.
This is true even "where the attomey, though neither retained by nor in direct communication
with the insurer, acts for the mutual benefit of the insured and the insurer." Id. at329. After all,
"counsel for insured did represent both insureds and insurers in [the underlying litigation] since
32
insurers were ultimately liable for payment if the plaintiffs in the underlying action received
either a favorable verdict or settlement." Id.
Deerfield attempts to distinguish Woste Management by arguing that it involved a
discovery dispute arising after the insured knew that the insurer was acting against its interests.
(R. 147, Reply at 9.) Deerfield concludes that "[w]hile Olmstead's file may ultimately be
discoverable in this litigation, [Traub] should not have obtained the file before litigation under
the pretense that it was assisting in Deerfield's defense while actually advising Landmark to
deny insurance coverage." (ld.) Deerfield misreads l{oste Management.The Illinois Supreme
Court noted that the parties in that case spent the bulk of their briefs discussing relevance and
other discovery justifications for circumventing attorney-client privilege, but ultimately held that
due to the cooperation clause and common-interest doctrine "the attorney-client privilege has no
application in this case" and therefore found that discussion of discovery theories "would only be
superfluous." Waste Mgmt., 579 N.E.2d at 327.
The issue before this Court is not whether Landmark and Traub have a right to the files
nov' and illicitly accessed them then, as Deerfield suggests. Instead, under the common-interest
doctrine, Landmark has had a right to examine the Keeping case file throughout, and thus the file
does not constitute confidential information regardless of whether Traub was representing
Deerfield. Beyond the case file in the underlying lawsuit, Deerfield has not identified any
allegedly confidential information to which Traub gained access.'0 Disqualiffing Traub would
r0
Deerfield argues that "[i]t is Landmark's responsibility to rebut the presumption that this access
provided it with knowledge of Deerfield's confidential information." (R. 128, Mot. to Disqualifu at 9.)
The case on which Deerfield relies, however, states only that it is presumed that an attorniy hai
knowledge of confidential information possessed by his lctw firnt, not that it is presumed that law firms
will communicate privileged information to clients. Freeman v. Chi. Musical Instrument Co., 689 F.2d
715,723 (7th Cir. 1982).
-r -,
not serve to protect the confidences Deerfield allegedly entrusted to Traub, because the litigation
files were not confidential as to Landmark.
Neither is disqualification warranted to "safeguard loyalty" by punishing an attorney's
betrayal of long-established trust. According to Deerfield's president, Christopher Bunch,
Deerfield was not even aware that Traub had become involved in the case until after Landmark's
reservation of rights letter was received. (R. 128-6, Bunch Aff. at l-2.) This is not a case, then,
where Deerfield's "expectations of loyalty were so cavalierly trampled that disqualification is
warranted as a sanction." SIZS Fin. Fund,790
F
. Supp.
at 1402. Although the betrayal of
a trust
may walrant such steps, Deerfield's utter lack of any interaction with Traub means that the
integrity of the trust central to the attorney-client relationship is not at issue in this case. See id.
(finding disqualification inappropriate in a case that "is at the polar extreme from the case in
which an individual has a personal relationship with a particular attorney who provides for all or
substantially all of that client's legal needs").
Even if Traub had violated the Model Rules of Professional Conduct, disqualifying Traub
as Landmark's counsel would not serve any purpose protected by the rules governing conflicts
of
interest. Disqualification would not protect confidential disclosures to a former attomey, nor
would it vindicate an egregious betrayal of trust. Despite Deerfield's protestations that violating
the Model Rules "in and of itself[] prejudices Deerfield" and that it "in and of itself[] prejudices
Deerfield because it sows distrust in the members of the bar," (R. 147, Reply at 1l), the Court
cannot discern any particular advantage to any party in this case from taking this drastic step.
Because Traub never entered into an attorney-client relationship with Deerfield, never gained
access to any confidential information, and Deerfield has not established any actual prejudice
would suffer from Traub's continued representation of Landmark, this Court declines to
34
it
disqualify Traub. See, e.g., Jang,2013 WL 3270649, at *5 (declining to disqualify counsel
where former client would suffer no harm and attomeys received no confidential information);
McCook Metals L.L.C. v. Alcoa,No.99 C 3856,2001 WL 58959, at *3 (N.D. Ill. Jan. 18,2001)
(refusing to disqualify counsel where confidences had not been breached and the moving party
failed to establish how it would have been harmed by the representation). For these reasons, the
Court denies Deerfield's motion to disqualifu.
B.
Sanctions
In addition to seeking disqualification, Deerfield also moves for sanctions against Traub
and Landmark. Deerfield seeks the following relief with regard to Traub's alleged violations
the Model Rules of Professional Conduct:
(l)
of
the production of all communications between
Landmark and Traub prior to the filing of this declaratory judgment action; (2) disqualification
of Traub from this litigation; (3) dismissal of Landmark's complaint; (4) monetary sanctions
against Landmark and Traub, including attorneys' fees for defending this action; and (5) any
other relief this court deems appropriate. (R. 128, Mot. to Disqualifu at 9.)
This Court has the "inherent authority" to take "actions that protect and vindicate the
judicial process and the judicial institution itself," including to "discipline attorneys for
misconduct.'; Carlson v. United Stotes,837 F.3d 753, 771 (7th Cir. 2016). In determining
whether sanctions for ethical violations are appropriate, this Court considers "the seriousness
the violations and whether the violations were intentional, as well as the nature and extent
of
of
prejudice suffered or likely to be suffered by the parties in the future as a result of the violation.,'
Tomasian v. C.D. Peacock,.Izc., No. 09 C 5665,2012WL2590493,at
*l I (citation
omitted).
After careful consideration of these factors, the Court has concluded that granting the
requested relief would not be appropriate in this case. In particular, the Court finds that Deerfleld
35
has provided no evidence that Landmark acted in bad faith to intentionally harm Deerfield.l
I
Further, the Court observes that Deerfield has failed to identify any credible prejudice that it has
suffered as a result of Traub's alleged conduct. Deerfield attempts to dance around this issue,
arguing that Landmark would not have assigned Traub to review the file
if
such a review would
not prejudice Deerfield. (R. 147, Reply at 10.) It also suggests that Traub's conduct "in and
of
itself[] prejudices Deerfield because it sows distrust in the members of the bar." (ld. at I l.) But
Deerfield fails to identify a single way in which Traub's alleged conduct has harmed Deerfield,
as a party, or any specific information that Traub could have accessed that would be relevant to
this case. After considering the record, this Court finds that sanctions are not appropriate.
Accordingly, Deerfield's motion for sanctions is denied.
CONCLUSION
For the foregoing reasons, Landmark's motion for summary judgment (R. 86) is
DENIED and Deerfield's motion for disqualification and sanctions (R. 128) is DENIED. The
parties are DIRECTED to reevaluate their settlement positions in light of this opinion and to
exhaust all efforts to settle the case.
If the parties do not settle, then this Court will
proceed with a potential expedited,
bifurcated trial. First, the parties will try the issue of apparent agency to determine whether
notice to AJG immediately after the Keeping accident was effective on Landmark, focusing
rr
Deerfield posits that Landmark was on notice that hiring the same counsel for defense and coverage
purposes was inappropriate based on the ruling in West Side Salvage, Inc. v. RSUI Indemnity Co.,No.
3:13-cv-00363-MJR-PMF,2013 WL 6169927 (S.D. Ill. Nov. 23,2013), where Landmark's cousin
company also used Traub to represent it in both capacities. (R. 128, Mot. to Disqualifo at 8-9.) Deerfield
argues that this conduct was "prohibited" in that case and that Traub "failed to heed" the ruling when it
was "wamed" that such conduct was unacceptable. (Id. at *9.) Because that case solely concerned the
discoverability of the insurer's correspondence with Traub and did not involve any consideration of the
Model Rules of Professional Conduct or sanctions, the Court finds that West Side Salvage only put Traub
on notice that its correspondences with the insurer may be discoverable as the attorney-client privilege
does not attach as against its insured.
36
evidence on the business relationships between Landmark, AJG, and Deerfield. If this first phase
does not resolve this case, the second phase of the trial
will focus on whether notice to Landmark
in December 2014 was reasonable as to an excess insurer in light of the facts of the Keeping
case, as
well as on the third-party claims.
The parties shall appear for a status hearing on February 7 ,2017, at 9:45 a.m.
ENTERED,
Z&
Chief Judge Rub6n Castillo
United States District Court
Dated: January l2r20l7
37
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