The John Marshall Law School v. National Union Fire Insurance Company of Pittsburgh, PA.

Filing 32

MEMORANDUM OPINION AND ORDER signed by the Honorable Matthew F. Kennelly on 12/26/2016: For the reasons stated in the accompanying Memorandum Opinion and Order, the Court denies defendant's motion to dismiss [dkt. no. 15] and directs defendant to answer the complaint by no later than January 9, 2017. Rule 26(a)(1) disclosures are to be made by January 13, 2016. The case is set for a status hearing on January 19, 2017 at 8:30 a.m. for the purpose of setting a discovery and pretrial schedule. Counsel are directed to confer to attempt to agree on a schedule to propose to the Court. (mk)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

JOHN MARSHALL LAW SCHOOL,

)
)
Plaintiff,
)
)
vs.
)
)
NATIONAL UNION FIRE INSURANCE )
COMPANY OF PITTSBURGH, PA,
)
)
Defendant.
)

Case No. 16 C 5753

MEMORANDUM OPINION AND ORDER
MATTHEW F. KENNELLY, District Judge:
John Marshall Law School (JMLS) alleges that its liability insurer National Union
Fire Insurance Company wrongfully denied it coverage in connection with an
employment discrimination lawsuit against JMLS. JMLS has filed a three-count
complaint against National Union. Count 1 is a claim for breach of contract; JMLS
alleges that National Union breached its obligations under the insurance policy by
denying coverage for the lawsuit and refusing to advance defense costs. In Count 2,
JMLS seeks a declaratory judgment that National Union is estopped from raising policy
defenses due to its wrongful denial of coverage. Count 3 is a claim for vexatious refusal
to pay under an Illinois statute, 215 ILCS 5/155. National Union removed this lawsuit to
federal court based on the diversity of citizenship and has now moved to dismiss
JMLS's complaint for failure to state a claim.
Background
On December 31, 2013, Joel Cornwell, a JMLS professor, filed an employment

discrimination lawsuit against JMLS alleging discrimination based on disability. Before
filing suit in court, Cornwell filed a charge with the Equal Employment Opportunity
Commission on October 30, 2013, naming JMLS as the respondent. The EEOC issued
Cornwell a "Notice of Right to Sue" on November 6, 2013. The notice stated that any
lawsuit by Cornwell under the Americans with Disabilities Act (or other statutes) had to
be filed within 90 days of his receipt of the notice, or his right to sue based on his EEOC
charge would be lost. Def.'s Mot. to Dismiss, Ex. 2 (Cornwell lawsuit), Ex. B. The
EEOC sent a copy of the notice to JMLS.
National Union issued JMLS a liability insurance policy for the period from
November 15, 2013 through November 15, 2014. The policy was a "claims made"
policy, meaning that it covered losses "arising from a Claim first made against [the]
Insured during the policy period . . . ." Case No. 16 C 5753, dkt. no. 1-1 at 43. JMLS
received Cornwell's complaint on January 8, 2014, and it notified its insurance broker of
the lawsuit on February 14, 2014. The broker then reported the suit to National Union.
On April 21, 2014, National Union sent JMLS a letter denying coverage. JMLS ended
up settling Cornwell's lawsuit.
In the present lawsuit, JMLS alleges that the denial of coverage was wrongful
because Cornwell's claim—which, JMLS says, is the lawsuit that he filed in court—was
first made within the period covered by the National Union policy. National Union
contends that Cornwell's claim was first made when he filed his EEOC charge and that
this happened outside the policy period. It has moved to dismiss JMLS's breach of
contract claim on this basis and has also moved to dismiss JMLS's other claims.

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Discussion
When considering a motion to dismiss under Federal Rule of Civil Procedure
12(b)(6), the Court accepts the plaintiff's allegations as true and draws reasonable
inferences in the plaintiff's favor. Parish v. City of Elkhart, 614 F.3d 677, 679 (7th Cir.
2010). The plaintiff is required to allege "only enough facts to state a claim to relief that
is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A claim
is plausible on its face if "the plaintiff pleads 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).
A.

Breach of contract claim
National Union seeks dismissal of JMLS's breach of contract claim on the ground

that Cornwell's claim was "first made" outside the policy period and thus JMLS is not
entitled to coverage. Resolution of this question involves construction of the insurance
policy, which is a question of law. Traveler’s Ins. Co. v. Eljer Mfg., Inc., 197 Ill. 2d 278,
757 N.E.2d 481, 491 (2001). A court reads the policy as a whole and gives the policy's
clear and unambiguous terms their plain and ordinary meaning. Id. at 293, 757 N.E.2d
at 491. "Conversely, if the language of the policy is susceptible to more than one
meaning, it is considered ambiguous and will be construed strictly against the insurer
who drafted the policy and in favor of the insured." Id. A court should not, however,
strain to find an ambiguity where none exists. Id.
Cornwell's claim is covered, if at all, under the Employment Practices Liability
Coverage section of the National Union policy. That section states:
This policy shall pay the Loss of each and every Insured arising from a
Claim first made against such Insured during the Policy Period . . . and
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reported to the Insurer pursuant to the terms of this policy for any
Wrongful Act. The Insurer shall, in accordance with and subject to
Clause 4 of this Coverage Section advance Defense Costs of such
Claim prior to its final disposition.
Case No. 16 C 5753, dkt. no. 1-1 at 43. Each of the terms in bold print is defined in the
policy, including in Endorsement 6, which amends certain definitions. The pertinent
section of that endorsement defines "claim" as follows:
III.

AMENDMENTS TO THE EPL COVERAGE SECTION

1.
In Clause 2, "DEFINITIONS" of the EPL Coverage Section,
Paragraphs (a) and (c) are deleted in their entirety and replaced with the
following:
(a)

"Claim" means:

(i)
a written demand for monetary relief or non-monetary
relief (including any request to toll or waive any state of limitations);
or
(ii)
a civil, administrative, regulatory or arbitration
proceeding for monetary relief or non-monetary relief which is
commenced by:
(1)

service of a complaint or similar pleading;

(2)
return of an indictment, information or similar
document (in the case of a criminal proceeding); or
(3)

receipt or filing of a notice of charges; or

(iii)
an administrative or regulatory investigation when
conducted by the Equal Employment Opportunity Commission
("EEOC") or Office of Federal Contract Compliance ("OFCCP"), or
similar state, local or foreign agency, which is commenced by the
filling of a notice of charges, service of a complaint or similar
document of which notice has been given to the Insured.
However, in no event shall the term "Claim" include any labor or
grievance proceeding which is subject to a collective bargaining
agreement.
Id. at 68-69.
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The parties' present dispute does not turn on whether Cornwell's lawsuit is a
"claim" within the meaning of the policy. It quite plainly was, under section III.1.(a).(ii) of
Endorsement 6. And the same is true of Cornwell's EEOC charge, under section
III.1.(a).(ii) or (iii). 1
Rather, the question is whether Cornwell's lawsuit is a claim "first made" within
the policy period. That is essentially the same as asking whether the EEOC charge and
the lawsuit are two claims as the policy defines that term, or just one. If they are the
same claim—in other words, if Cornwell is considered to have a single claim, first made
when he filed the EEOC charge—National Union is entitled to dismissal of the suit. If
they are different claims, then National Union is not entitled to dismissal.
The term "first made" is not defined in the insurance policy. That is not
necessarily fatal to National Union's argument. If the policy language is unambiguous,
then the policy is applied as written. See, e.g., Nationwide Agribusiness Ins. Co. v.
Dugan, 810 F.3d 446, 450 (7th Cir. 2015). But as noted earlier, if a policy term is
ambiguous, the ambiguity is resolved against the insurer and in favor of coverage. Id. at
451. "Whether an ambiguity exists turns on whether the policy language is susceptible
to more than one reasonable interpretation." Id.
JMLS argues that because each alternative definition of "claim" in the policy is
separated by the word "or," the disjunctive indicates that a lawsuit (subparagraph ii) is a

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The Court notes that the EEOC charge, on its face, is neither a demand nor a
proceeding for monetary or non-monetary relief; the charge contains no request for
relief but simply states an accusation. See Charge of Discrimination Form,
https://www.eeoc.gov/eeoc/foia/forms/upload/form_5.pdf (last visited Dec. 26, 2016).
The EEOC can, ultimately, file a judicial or administrative case itself and pursue relief
for the claimant, or it can attempt to get the claimant relief via mediation, but neither of
those things appears to have happened in Cornwell's case.
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separate claim from an administrative investigation begun by the filing of a charge
(subparagraph iii). For its part, National Union says that because the filing of an EEOC
charge in the scenario presented in Cornwell's case is a prerequisite to filing suit in
court, the two are the same claim.
The flaw in National Union's argument is that it is not tied to the policy language.
The policy language does not provide how one determines, in a situation there are two
legal proceedings that arise from the same underlying conduct, when a claim is
considered to have been "first made." National Union is certainly right that Cornwell
had to file an EEOC charge and get a right to sue letter before he could sue in court, but
that by itself does not mean that under the insurance policy as National Union drafted it,
there is a single "claim" that was first made when Cornwell filed the EEOC charge.
Although a lawsuit must be preceded by an administrative charge, the converse is not
true: not every administrative charge ends up as a lawsuit. Some charges are
abandoned, some result in a settlement, and so on. To put it another way, an EEOC
charge does not inevitably lead to a lawsuit in court.
If the definition of "claim" contained language similar to that quoted in one of the
cases relied on by National Union, National Union Fire Insurance Co. of Pittsburgh v.
Baker & McKenzie, 997 F.2d 305 (7th Cir. 1993), National Union would have a better
argument. In that case, as described by the court of appeals, the policy said that a
claim is first made during the policy period if, during that period, either a claim alleges
damages that are payable under the policy, or the insured acquires knowledge or
becomes aware of an act or omission that could reasonably be expected to give rise to
a claim. See id. at 306. But National Union cites no such language in the present

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policy. And, as the Court has indicated, National Union cites no policy term defining
when a claim is "first made," which is the critical language in this case.
The Court finds persuasive the decision in Lodgenet Entertainment Corp. v.
American International Specialty Lines Insurance Co., 299 F. Supp. 2d 987 (D.S.D.
2003), which dealt with a similar scenario and virtually identical insurance policy terms.
In Lodgenet, as in this case, an EEOC charge was filed against the plaintiff before the
term of the claims-made liability policy issued by the defendant, but the plaintiff notified
the defendant only after a lawsuit was filed in court during the policy's term. The policy,
like the one in this case, provided coverage for a "claim first made" during the policy
term, and it defined "claim" in a way virtually identical to the definition in the present
policy. See id. at 990, 991. The court noted that the policy contained no language
indicating that all proceedings arising out of the same facts are considered the same
claim and therefore looked to other policy provisions to resolve the point. It examined
two particular policy provisions. One provision said, in substance, that if written notice
of a claim has been given, then "any claim which is subsequently made" arising out of
the same facts is considered to have been made at the time the original notice was
given. The court concluded that this language contemplated that two different "claims"
could arise from the same set of facts. Id. at 992. The court also identified a policy
exclusion stating that the insurer is not liable in connection with a claim against an
insured arising from the same employment practices violation alleged in a claim
reported in an earlier policy term. Again, the court concluded, this provision
contemplated that multiple "claims" could arise from the same set of facts. Id. at 99293. The court noted that given the purpose of a claims-made liability policy, "immediate

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notice of the possibility of a claim is generally required," but it concluded that the policy
at issue "does not require notice of the possibility of a claim." Id. at 993. Comparison of
the general purpose of a claims-made policy against the language of the policy at issue,
the court determined, revealed an ambiguity. Id. This required the court to construe the
disputed policy term against the insurer—in the same way that JMLS advocates in the
present case. Id.
Lodgenet Entertainment was decided under South Dakota law, but National
Union has offered no basis to believe that insurance policies are interpreted differently
in Illinois than they are in South Dakota. And essentially the same policy provisions that
the court in Lodgenet Entertainment cited exist in this case. The "Notice/Claim
Reporting Provisions" section of JMLS's policy states that
[i]f written notice of a Claim has been given to the Insurer pursuant to
Clause 7(a) above, then any Claim which is subsequently made against
the Insureds and reported to the Insurer alleging, arising out of, based
upon or attributable to the facts alleged in the Claim for which such notice
has been given, or alleging any Wrongful Act which is the same as or is a
Related Wrongful Act to that alleged in the Claim of which such notice has
been given, shall be considered made at the time such notice was given.
Case No. 16 C 5753, dkt. no. 1-1 at 30. This term, like the parallel term in Lodgenet
Entertainment, specifically contemplates that multiple "claims" can arise from the same
facts. As the court in that case stated, "there would be no need for [this term] if the
phrase 'a Claim' was intended to encompass all types of proceedings arising out of the
same facts." Lodgenet Ent'mt, 299 F. Supp. 2d at 992. The policy in this case also
contains an exclusion, like the one addressed in Lodgenet Entertainment, stating that
the insurer is not liable to pay for a loss "in connection with a Claim made against an
insured . . . alleging, arising out of, based upon or attributable to the facts alleged, or to

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the same or Related Wrongful Act alleged or contained in any Claim" reported under an
earlier policy of which the current policy is a renewal. Case No. 16 C 5753, dkt. no. 1-1
at 27. This term similarly contemplates that multiple "claims" can arise from the same
facts.
In short, there is no question that the policy reasonably may be read as
contemplating that an administrative investigation/charge and a lawsuit arising from the
same facts are two different claims. Indeed, in the Court's view, this is the most
reasonable reading of the policy. At best, from National Union's perspective, the policy
is ambiguous in this regard, as the court in Lodgenet Entertainment concluded. But
even were this the case, the Court would be required to construe the policy against
National Union, in favor of coverage.
To recap: (1) there is no provision defining when a claim is "first made"; (2) there
is no provision stating or hinting that multiple claims arising from the same facts are
considered a single "claim"; (3) there are provisions that specifically contemplate that
more than one "claim" can arise from a set of facts; and (4) an administrative
proceeding like Cornwell's EEOC charge and his subsequent lawsuit are both "claims"
under the policy's definition of that term. JMLS sought coverage for the lawsuit, which
the complaint adequately alleges was a claim first made within the policy's term.
For these reasons, the Court declines to dismiss JMLS's breach of contract
claim.
B.

Declaratory judgment claim
In Count 2, JMLS seeks a declaratory judgment that National Union is estopped

from raising policy defenses due to its wrongful denial of coverage for the Cornwall

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lawsuit. Under Illinois law, an insurer that contends that a lawsuit potentially alleging
coverage is not actually covered under a policy that includes a duty to defend the
insured
may not simply refuse to defend the insured. Rather, the insurer has two
options: (1) defend the suit under a reservation of rights or (2) seek a
declaratory judgment that there is no coverage. If the insurer fails to take
either of these steps and is later found to have wrongfully denied
coverage, the insurer is estopped from raising policy defenses to
coverage.
Employers Ins. of Wausau v. Ehlco Liquidating Trust, 186 Ill. 2d 127, 150, 708 N.E.2d
1122, 1134-35 (1999).
National Union contends that the policy does not include a duty to defend. It
cites language in the policy stating that National Union "does not assume any duty to
defend. The Insureds shall defend and contest any Claim made against them." Case
No. 16 C 5753, dkt. no. 1-1 at 45. The same term goes on to say, however, that
[n]otwithstanding the foregoing, the Insureds shall have the right to tender
the defense of the Claim to the Insurer, which right shall be exercised in
writing . . . pursuant to the notice provisions of Clause 7 of the General
Terms and Conditions. This right shall terminate if not exercised within
thirty (30) days of the date the Claim is first made against an Insured,
pursuant to Clause 7 of the General Terms and Conditions.
Id. This language is sufficient under Illinois law to give rise to a duty to defend. See
Uhlich Children's Advantage Network v. Nat'l Union Fire Co. of Pittsburgh, PA, 398 Ill.
App. 3d 710, 721, 929 N.E.2d 531, 542 (2010).
In its reply brief, National Union argues that JMLS did not give timely notice of
Cornwell's lawsuit under the provision just quoted. This argument is forfeited for
purposes of the motion to dismiss because it was not made in National Union's opening
brief.

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C.

Vexatious refusal to pay claim
National Union argues that Count 3, JMLS's claim for vexatious refusal to pay,

fails to state a claim. The Court disagrees; JMLS has sufficiently alleged that National
Union had no bona fide basis to deny coverage.
Conclusion
For the reasons stated above, the Court denies defendant's motion to dismiss
[dkt. no. 15] and directs defendant to answer the complaint by no later than January 9,
2017. Rule 26(a)(1) disclosures are to be made by January 13, 2016. The case is set
for a status hearing on January 19, 2017 at 8:30 a.m. for the purpose of setting a
discovery and pretrial schedule. Counsel are directed to confer to attempt to agree on a
schedule to propose to the Court.
Date: December 26, 2016
________________________________
MATTHEW F. KENNELLY
United States District Judge

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