Vita Food Products, Inc. v. Navigators Insurance Company

Filing 31

MEMORANDUM Opinion and Order Signed by the Honorable Marvin E. Aspen on 6/2/2017: Navigators' motion for judgment on the pleadings 22 is granted in part and denied in part pursuant to Rule 12(c). The motion is granted with respect to Vita&# 039;s claim for coverage under the 2009 Policy, and Count I of the complaint is accordingly dismissed. The motion is denied as to Vita's claims under the 2007 Policy as set forth in Count II. Vita's motion to strike Navigators' affirma tive defenses 19 is granted in part and denied in part. The motion is granted as to Navigators First, Second, and Fourth Affirmative Defenses, which are hereby stricken, without prejudice. Navigators is granted leave to file an amended answer on or before July 5, 2017. Vita's motion to strike Navigators' Third, Seventh, Eighth, Ninth, Tenth, and Eleventh Affirmative Defenses is denied.Mailed notice(mad, )

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
VITA FOOD PRODUCTS, INC.,
Plaintiff,
v.
NAVIGATORS INSURANCE
COMPANY,
Defendant.

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No. 16 C 08210
Hon. Marvin E. Aspen

MEMORANDUM OPINION AND ORDER
MARVIN E. ASPEN, District Judge:
Plaintiff Vita Food Products, Inc. (“Vita”) filed this declaratory judgment action to
adjudicate the rights and obligations of the parties with respect to Vita’s demand for defense and
indemnity under two insurance policies Defendant Navigators Insurance Company
(“Navigators”) issued to Vita. Presently before us is Navigators’ motion for judgment on the
pleadings. (Dkt. No. 22.) Also before us is Vita’s motion to strike Navigators’ affirmative
defenses. (Dkt. No. 19.) For the reasons stated below, both motions are granted in part and
denied in part.
BACKGROUND
On October 2, 2009, two dozen of Vita’s former shareholders filed a complaint asserting
claims against six of Vita’s directors (the “underlying lawsuit”). (Compl. ¶ 6; see also
Underlying Compl. (Dkt No. 1–1).) The plaintiff-shareholders in the underlying lawsuit asserted
federal racketeering claims, as well as state-law breach of fiduciary duty and negligence claims
arising out of a 2009 merger under which Vita’s outstanding shares were sold to one of the

underlying defendants, Howard Bedford, for an allegedly inadequate price. (Compl. ¶ 7.) The
underlying complaint alleged that Bedford, one of Vita’s directors, engaged in a “fraudulent
scheme to steal the business and assets of a profitable company, VITA . . ., by paying
substantially less for that business and those assets than their true value.” (Underlying
Compl. ¶ 1.) The underlying lawsuit claimed “[t]hrough fraud, deceit, breaches of fiduciary
duties, self-dealing, and other acts,” Bedford and five other Vita directors formed an enterprise
“to steal the business and assets of VITA through engaging in a pattern of racketeering.”
(Id. ¶ 3.) The alleged “integral ingredients of Bedford’s scheme” included (1) taking effective
control of Vita through an additional contribution to its capital; (2) replacing members of the
Board of Directors of VITA with individuals who would participate in carrying out the corrupt
enterprise; (3) issuing public financial reports, which contrary to internal reports, would show
VITA to be experiencing continuing, long-term difficulties; (4) arranging to merge VITA into a
corporation, all of the stock of which would be wholly owned, directly or indirectly, by Bedford;
(5) carrying out an elaborate process which would fraudulently make it appear that the terms of
the merger were fair to VITA; (6) completing the merger of VITA into the Bedford corporation.
(Id. ¶ 34.)
Shortly after the defendants were served with the underlying lawsuit, Vita demanded that
Navigators provide coverage under a “claims made” Directors and Officers Liability Insurance
Policy Navigators issued to Vita, as amended, for the policy period January 17, 2009 to
April 23, 2014 (the “2009 Policy”). (Compl. ¶¶ 11, 15; 2009 Policy, Compl., Ex. C
(Dkt. No. 1–3).) By letter dated October 26, 2009, Navigators denied coverage. (Compl. ¶ 16;
see also Denial Letter, Compl., Ex. D (Dkt. No. 1–4).) Specifically, Navigators stated that

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pursuant to Section IV.B, the 2009 Policy did not apply. (Compl. ¶¶ 16–17.) Section IV.B of
the 2009 Policy provides:
Section IV. Exclusions
The Insurer shall not be liable to make any payment for Loss in connection with any
Claim made against any Insured:
...
B. based upon, arising out of, relating to, directly or indirectly resulting from or in
consequence of, or in any way involving any Wrongful Act or Related Wrongful
Act or any fact, circumstance or situation which has been the subject of any notice
or Claim given under any other policy of which this Policy is a renewal or
replacement.
(Id. (emphasis in original).) Navigators asserted Section IV.B barred coverage because the
underlying lawsuit was based on alleged wrongful acts that were the subject of a prior claim
reported by Vita to Navigators in 2007. (Id. ¶ 18.)
Navigators contended Vita previously reported a claim made by Vita shareholder
Michael N. Kreiger under the Directors and Officers Liability Insurance Policy issued to Vita for
the policy period of January 17, 2007 to January 17, 2008 (the “2007 Policy”). (See 2007 Policy,
Compl., Ex. F (Dkt. No. 1–6).) Kreiger, via his attorney, sent correspondence dated
April 24, 2007 to Vita’s directors (the “Kreiger letter”), alleging that in April 2007 Vita reached
an agreement in principle to issue common stock and warrants to Bedford at “very favorable
prices and terms.” (Compl. ¶ 18; see also Kreiger Letter, Compl. Ex. E (Dkt. No. 1–5).)
Specifically, the letter referenced Vita’s Form 10-K for the fiscal year ending on
December 31, 2006, wherein Vita reported its agreement with Bedford, including:

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Possible Subsequent Event – Additional Equity Issuance
The Company has reached an agreement in principle, with Howard Bedford, a
Company director, pursuant to which Mr. Bedford would invest $3,000,000 in the
Company. Substantially all of these funds would be used for working capital
requirements. In consideration for his investment, Mr. Bedford would receive
2,400,000 shares of Common Stock; two year warrants to purchase 500,000 shares
of Common Stock at an exercise price of $1.25 per share; three-year warrants to
purchase 500,000 shares of Common Stock at an exercise price of $1.50 per share;
four-year warrants to purchase 500,000 shares of Common Stock at an exercise
price of $1.50 per share; and five-year warrants to purchase 500,000 shares of
Common Stock at an exercise price of $1.75 per share. The warrants would be
exercisable immediately. Subsequent to this transaction, Mr. Bedford would own
approximately 38.2% of the Company’s outstanding common stock and warrants to
acquire another 10.3%. On April 10, 2007, $1,000,000 has been invested.
(Counterclaim (Dkt. No. 17) ¶ 12 (emphasis in original).) The Kreiger letter advised Vita that
“[g]iven the relationship of Mr. Bedford to the Company and what appears to be very favorable
prices and terms, both my client and I believe that Vita’s board of directors has violated its
fiduciary duties to Mr. Kreiger and other Vita shareholders under both federal, state and common
law.” (Kreiger Letter at 1.) The letter urged Vita to make adjustments to the terms of the
financing, requested that Vita provide documentation supporting the Bedford deal as the
“proposal, as it currently stands, does not treat the shareholders fairly,” and requested that Vita
furnish “the requisite documentation supporting this proposed financing including board
resolutions and fairness options, if any.” (Id. at 2.)
Navigators claims it acknowledged receipt of the Kreiger letter as notice of circumstances
that might give rise to a claim under the 2007 Policy. (Counterclaim ¶ 14.) Like
the 2009 Policy, the 2007 policy is an indemnity policy, which provides in relevant part, “[t]he
insurer shall pay on behalf of the Company all Loss which the Insured Persons shall be legally
obligated to pay as a result of a Claim . . . first made against the Insured Persons during the
Policy Period or the Discovery Period for a Wrongful Act, but only to the extent the Company is

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required or permitted by law to indemnify the Insured Persons.” (2007 Policy at Section I.B
(“Insuring Agreements”); see also 2009 Policy (same).)
The parties point to different provisions of both policies in support of their respective
positions regarding whether Navigators must provide coverage and pay the costs of defending
the underlying lawsuit. Vita filed the instant complaint on August 19, 2016, seeking declaratory
relief. In Count I, Vita claims that it is entitled to coverage for the underlying lawsuit under
the 2009 Policy, and Navigators therefore has an obligation to pay all of Vita’s costs of defense
of the underlying suit, together with interest. (Compl. ¶¶ 39–44.) In the alternative, Vita asserts
in Count II that Navigators must cover the costs of defending the underlying lawsuit pursuant to
the terms of the 2007 Policy. (Id. ¶¶ 45–46.) Vita also argues that Navigators is estopped from
raising any defenses to coverage under the policies because it improperly denied coverage and
refused to advance the costs of defending the underlying lawsuit. (Id. ¶¶ 23–26.)
Navigators filed an answer and counterclaim on January 17, 2017, attaching several
documents, including the Kreiger letter and related correspondence. (Dkt. No. 17.) Navigators’
counterclaim seeks a declaration that the 2009 Policy does not afford coverage because the
underlying lawsuit is not a claim first made during the 2009 policy period.
(Counterclaim ¶¶ 3, 40–48. Navigators also seeks a declaration that coverage is precluded under
both the 2007 and 2009 policies, because Section IV.H of both policies, as modified by
Endorsement Nos. 3, 4 and 20, bars coverage for any claim made against an insured by any
security holder, officer, or director. (Id. ¶¶ 4–5, 49–61.)

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ANALYSIS
I.

MOTION FOR JUDGMENT ON THE PLEADINGS
Navigators’ motion for judgment on the pleadings is brought pursuant to Federal Rule of

Civil Procedure 12(c). Rule 12(c) provides that a party may seek judgment on the pleadings
“[a]fter the pleadings have closed—but early enough not to delay trial.” Fed. R. Civ. P. 12(c).
When reviewing Rule 12(c) motions, we employ the same standards applicable to motions
brought under Rule 12(b)(6). Landmark Am. Ins. Co. v. Hilger, 838 F.3d 821, 824
(7th Cir. 2016); Buchanan-Moore v. Cty. of Milwaukee, 570 F.3d 824, 827 (7th Cir. 2009) (citing
Pisciotta v. Old Nat. Bancorp, 499 F.3d 629, 633 (7th Cir. 2007)). The complaint must state a
claim that is plausible on its face. St. John v. Cach, LLC, 822 F.3d 388, 389 (7th Cir. 2016)
(citing Vinson v. Vermilion Cnty., Ill., 776 F.3d 924, 928 (7th Cir. 2015)). “A claim has facial
plausibility when 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, 129 S. Ct. 1937, 1949 (2009). We accept all well-pleaded allegations in the
complaint as true and draw all reasonable inferences in the plaintiff’s favor. St. John,
822 F.3d at 389.
The parties agree Illinois law governs their dispute. See Auto-Owners Ins. Co. v. Websolv
Computing, Inc., 580 F.3d 543, 547 (7th Cir. 2009) (“Courts do not worry about conflict of laws
unless the parties disagree on which state’s law applies.” (internal citation and quotations
omitted)). Accordingly, we apply the law that “the Supreme Court of Illinois would apply if the
case were before that tribunal rather than before this court.” Help at Home, Inc. v. Med.
Capital, LLC, 260 F.3d 748, 753 (7th Cir. 2001). The construction of an insurance policy is a
question of law. Country Mut. Ins. Co. v. Livorsi Marine, Inc., 222 Ill. 2d 303, 311,

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856 N.E.2d 338, 342 (Ill. 2006); Travelers Ins. Co. v. Eljer Mfg., Inc., 197 Ill. 2d 278, 292,
757 N.E.2d 481, 491 (Ill. 2001); Crum & Forster Managers Corp. v. Resolution Trust Corp.,
156 Ill. 2d 384, 391, 620 N.E.2d 1073, 1079 (Ill. 1993). “When construing the language of an
insurance policy, a 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.,
213 Ill. 2d 141, 153, 821 N.E.2d 206, 213 (Ill. 2004). An insurance policy is to be construed as a
whole, “giving effect to every provision, if possible, because it must be assumed that every
provision was intended to serve a purpose.” Valley Forge Ins. Co. v. Swiderski Elecs., Inc.,
223 Ill. 2d 352, 362, 860 N.E.2d 307, 314 (Ill. 2006) (citing Cent. Ill. Light, 213 Ill. 2d at 153,
821 N.E.2d at 213). “If the words used in the policy are clear and unambiguous, they must be
given their plain, ordinary, and popular meaning.” Cent. Ill. Light, 213 Ill. 2d at 153,
821 N.E.2d at 213 (citing Outboard Marine Corp. v. Liberty Mutual Ins. Co., 154 Ill. 2d 90, 102,
607 N.E.2d 1204, 1212 (Ill. 1992)); Crum & Forster, 156 Ill. 2d at 391, 620 N.E.2d at 1078.
“Although insurance policies are construed liberally in favor of coverage, this rule of
construction comes into play only when the policy language is ambiguous.” Livorsi Marine,
222 Ill. 2d at 311, 856 N.E.2d at 343; accord. Swiderski Elecs., 233 Ill. 2d at 363,
860 N.E.2d at 314 (“[I]f the words used in the policy are ambiguous, they will be strictly
construed against the drafter.”).
A.

Estoppel

Vita argues Navigators is estopped from raising any policy defenses because it did not
provide a defense required under the policy pursuant to a reservation of rights, nor did it seek a
declaratory judgment that no coverage exists. (Resp. (Dkt. No. 27) at 2.) Vita acknowledges
the 2009 Policy and the 2007 Policy do not “requir[e] a prototypical ‘duty to defend,’” but

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instead argues the policies placed a duty on Navigators to “advance the Costs of Defense prior to
the final disposition of any Claim.” (Id. at 3.) Vita contends that this duty to advance the costs
of defense is analogous to the duty to defend, arguing that in both cases the insurer’s duty is to
provide some of the resources for the defense of the lawsuit “in order to enable the policyholder
to battle the underlying claim without the additional burden of the cost of counsel for that suit.”
(Id.)
“The general rule of estoppel provides that an insurer which takes the position that a
complaint potentially alleging coverage is not covered under a policy that includes a duty to
defend may not simply refuse to defend the insured.” Employers Ins. of Wausau v. Ehlco
Liquidating Trust, 186 Ill. 2d 127, 150, 708 N.E.2d 1122, 1134 (Ill. 1999). “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.” Id. at 150–51, 708 N.E.2d at 1134–35. 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. Id.; accord. Title Indus.
Assurance Co., R.R.G. v. First Am. Title Ins. Co., 853 F.3d 876, 883 (7th Cir. 2017) (“An insurer
that fails to take either of these actions does so at its peril. If a court later finds that the insurer
breached its duty to defend, the insurer will be estopped from asserting policy defenses to
coverage.”). “In deciding whether an insurer breached its duty, Illinois courts ordinarily apply
the ‘eight-corners’ rule: ‘the court compares the four corners of the underlying complaint with
the four corners of the insurance policy to determine whether facts alleged in the underlying
complaint fall within or potentially within coverage.’” Title Indus. Assurance Co.,
853 F.3d at 883 (quoting Am. Alternative Ins. Corp. v. Metro Paramedic Servs., Inc.,
829 F.3d 509, 513–14 (7th Cir. 2016)).

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The “estoppel doctrine applies only where an insurer has breached its duty to defend.”
Ehlco Liquidating Trust, 186 Ill.2d at 151, 708 N.E.2d at 1135 (further explaining “[a]pplication
of the estoppel doctrine is not appropriate if the insurer had no duty to defend. . . .”). “The
insurer’s duty to defend its insured arises from the undertaking to defend as stated in the contract
of insurance.” Zurich Ins. Co. v. Raymark Indus., Inc., 118 Ill. 2d 23, 48, 514 N.E.2d 150, 161
(Ill. 1987). Under Section VII.B of both the 2009 Policy and the 2007 Policy, “[t]he Insureds,
and not the insurer, have the duty to defend all Claims.” (2009 Policy at VII.B; 2007 Policy
(same).) Section VII.E of the policies provides the “Insurer shall advance Costs of Defense prior
to the final disposition of any Claim, provided such Claim is covered by this Policy.”
(Id. at Section VII.E.)
There is no dispute that Section VII.B expressly disclaims Navigators’ duty to defend.
Notwithstanding this unambiguous language, Vita argues that Navigators’ duty to advance the
costs of defense under Section VII.E is analogous to a duty to defend, and therefore, the estoppel
doctrine applies. (Resp. at 3.) It is not clear that a “duty to defend” and a “duty to advance
defense costs” are interchangeable. Compare Seeger v. Gulf Underwriters Ins. Co.,
No. 04 C 7176, 2005 WL 6772545, at *2 (N.D. Ill. Mar. 17, 2005) (refusing to apply “duty to
defend” case law where although the policy provided for a permissive duty to advance defense
costs, the policy also, as here, explicitly disclaimed the insurer’s duty to defend), with
Welch v. Agric. Excess & Surplus Ins. Co., No. 00 C 5725, 2001 WL 1155249, at *4–5
(N.D. Ill. Sept. 28, 2001) (finding “duty to defend” principles served as persuasive authority
where the policy was silent as to the insurer’s duty to defend, but provided the insurer “shall

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advance Costs of Defense”).1 Vita’s position that policy language establishing a duty to advance
defense costs for covered claims equates to a duty to defend is contrary to the plain language of
the contract when read as a whole. The policies unambiguously state the “Insureds, and not the
Insurer, have the duty to defend all Claims.” (2009 Policy, Section VII.B; 2007 Policy (same).)
At the same time, the policies establish Navigators’ obligation to advance the costs of defense for
covered claims. (Id. at Section VII.E.) The two provisions are not mutually exclusive.
Accordingly, because the policies do not “include[] a duty to defend,” Navigators is not estopped
from refusing to defend or raising defenses to Vita’s demand for defense costs. Ehlco
Liquidating Trust, 186 Ill. 2d at 150, 708 N.E.2d at 1134.
B.

Policy Defenses

Navigators raises several defenses in support of its position that the policies do not cover
Vita’s claim for coverage of the underlying lawsuit. First, Navigators contends that the
underlying lawsuit is not a claim first made during the 2009 policy period, and therefore, Vita
has no cause of action under the 2009 Policy. (Mot. at 10–12.) Similarly, Navigators asserts that
the 2009 Policy’s “prior notice” exclusion bars coverage for the underlying lawsuit. (Id. at 12.)
Finally, Navigators contends that Vita’s claim for coverage of the underlying lawsuit is not
actionable under either policy because the “Security Holder/Insured v. Insured Exclusion”
precludes claims against an insured by the company’s security holders, directors, or officers.
(Id. at 12–15.)

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Navigators contends we should follow Seeger and conclude it had no duty to defend or advance
costs here. (Reply Br. at 3.) However, the policy in Seeger vested the defendant-insurer with the
discretion to decide whether to advance defense costs, unlike here, where the policy states the
“Insurer shall advance Costs of Defense” for covered claims. (2009 Policy at Section VII.E
(emphasis added).)
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1.

Coverage Under the 2009 Policy

Navigators first argues the underlying lawsuit arose out of and involves the same
wrongful acts alleged in the Kreiger letter, and is therefore only covered under the 2007 Policy,
if at all. (Mot. at 10.) Under the 2007 Policy’s “relation back” provision, when an insured “first
becomes aware of a specific Wrongful Act” and gives notice to the insurer, then any subsequent
claim arising out of the same wrongful act “shall be deemed to have been made at the time the
Insurer received such written notice from the Insured.” (2007 Policy at Section VIII.B.)
Navigators argues the underlying lawsuit—containing the same factual predicate as the Kreiger
letter—was “deemed to have been made” at the time Navigators received written notice of the
Kreiger letter during the 2007 Policy period. (Mot. at 10; Reply at 5.) As such, Navigators
argues coverage of the underlying lawsuit is barred under the 2009 Policy’s “prior notice”
exclusion, which states the insurer
shall not be liable to make any payment for Loss in connection with any Claim
made against any Insured . . . based upon, arising out of, relating to, directly or
indirectly resulting from or in consequence of, or in any way involving any
Wrongful Act or Related Wrongful Act or any fact, circumstance or situation which
has been the subject of any notice or Claim given under any other policy of which
this Policy is a renewal or a replacement.
(2009 Policy at Section IV.B.)
First, Vita states in a footnote that the Kreiger letter is not a “claim” as that term is
defined in the policies.2 (Resp. at 6, n.2.) Rather, Vita contends the Kreiger letter only
constituted “notice of circumstance that might give rise to a claim” under the 2007 Policy. (Id.)

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Vita’s brief footnote argument risks waiver, but we find it minimally well-developed enough to
address it herein. See Harmon v. Gordon, 712 F.3d 1044, 1053 (7th Cir. 2013) (citations
omitted) (“We have often said that a party can waive an argument by presenting it only in an
undeveloped footnote.”); Hernandez v. Cook Cnty. Sheriff’s Office, 634 F.3d 906, 913
(7th Cir. 2011) (“It is well established in our precedents that ‘skeletal’ arguments may be
properly treated as waived.”).
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Vita tendered the Kreiger letter to Navigators on April 25, 2007, stating “[a]ttached please find a
potential notice of loss in regards to the captioned account for your file and review.”
(Answer, Ex. B (Dkt. No. 17–2) at PageID#: 439; see also id. at PageID#: 440 (attaching the
Kreiger letter and stating “[p]lease review and forward to the carrier as a notice of potential
claim”).) Indeed, according to Navigators’ response letter, Navigators acknowledged the
Kreiger letter as “notice of circumstances that might subsequently give rise to a Claim,” and
instructed Vita to advise if “an actual Claim, as defined in the Policy, has been made, or if this
matter subsequently develops into a Claim . . . so that a coverage analysis may be made at that
time.” (Answer, Ex. C (Dkt. No. 17–3) (further instructing Vita to “advise us immediately if an
actual Claim is made”).) Notwithstanding the parties’ contemporaneous correspondence that
may support a finding that they did not intend to treat the Kreiger letter as a claim under the
policy, we are bound to apply the unambiguous contract language. Cent. Ill. Light,
213 Ill. 2d at 162–63, 821 N.E.2d at 213–14 (explaining that words must be given their “plain,
ordinary, and popular meaning” if they are clear and unambiguous, and cautioning that a
“contract is not rendered ambiguous merely because the parties disagree on its meaning”). The
policies define a “claim” as including a “written demand for monetary or non-monetary relief
made against any Insured and reported to the Insurer pursuant to Section VIII.A(1).”
(2007 Policy at Section III.A(1).) The Kreiger letter conveyed the belief that Vita’s Board of
Directors had violated its fiduciary obligations to its shareholders, demanded non-monetary relief
from Vita in the form of documentation supporting Vita’s proposed financing to Bedford, and
was reported to Navigators during the 2007 Policy period. (See Kreiger Letter at 1–2.) The
Kreiger letter therefore constituted a “claim” under the unambiguous terms of the 2007 Policy.

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Having determined the Kreiger letter was a claim made under the 2007 Policy, we next
consider whether the underlying lawsuit arose out of the same “Wrongful Act or Related
Wrongful Act,” thus barring coverage of the lawsuit under the 2009 Policy. The policies define
a “Wrongful Act” as including “any actual or alleged act, omission, error, misstatement,
misleading statement, neglect or breach of duty . . . by any Insured Persons in their capacity with
the Company.” (2009 Policy at Section III.R; 2007 Policy (same).) Likewise, a “Related
Wrongful Act” is defined broadly as any “Wrongful Acts which are logically or causally
connected by reason of any common fact, circumstance, situation, transaction, casualty, event, or
decision.” (Id. at Section III.O.)
Both the underlying lawsuit and the Kreiger letter allege Vita’s Board of Directors
breached its fiduciary duties to shareholders by accepting Bedford’s offer to invest $3,000,000 in
Vita in exchange for more than 2,400,000 shares of Vita at below market prices. (Underlying
Compl. ¶¶ 40–43; Kreiger Letter at 2.) The underlying complaint relied on the transaction raised
in the Kreiger letter as evidence of Bedford’s allegedly fraudulent scheme to seize Vita’s
business and assets. (Underlying Compl. ¶¶ 1, 33–34, 40–43.) The underlying complaint
alleged that “[k]nowing VITA’s vulnerability and need for immediate cash infusion, Bedford
also proceeded with his plan to seize the business and assets of VITA for wholly inadequate
consideration by offering to make an additional investment in VITA,” namely, Bedford
volunteered the $3,000,000 investment in exchange for “an irrevocable proxy to vote all of
Rubin’s VITA stock plus receive an option to purchase 2,650,000 additional shares of VITA at a
price starting at $1.25 per share and increasing to $1.75 per share.” (Id. ¶ 41.) It further alleged
that “[b]ased on acceptance of [Bedford’s] demands,” Vita agreed to the transaction, “allowing
him effectively to control VITA.” (Id. ¶ 43; see also id. ¶ 34 (alleging one of the “integral

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ingredients” of Bedford’s scheme included “taking effective control of VITA through an
additional contribution to its capital”).)
The underlying lawsuit unquestionably arose out of the same circumstances giving rise to
the concerns first raised in the Kreiger letter. Thus, the Kreiger letter and the underlying lawsuit
involve the “same Wrongful Act or Related Wrongful Act” and constitute a claim made under
the 2007 Policy. Under Section VIII.B, Vita’s claim for coverage of the underlying lawsuit is
“deemed to have been made” during the 2007 Policy period and is not covered by the 2009
Policy. Likewise, Section IV.B of the 2009 Policy excludes the underlying lawsuit from
coverage for the same reasons. Consequently, we grant Navigators’ motion for judgment on the
pleadings with respect to Vita’s claim for coverage under the 2009 Policy, and we dismiss
Count I of Vita’s complaint.
2.

Security Holder/Insured v. Insured Exclusion

Navigators also contends that both the 2009 Policy and the 2007 Policy exclude from
coverage claims asserted against an insured brought by a security holder or a director of the
company, and these exclusions bar coverage of the underlying lawsuit in its entirety.3
(Mot. at 12.) The so-called insured versus insured exclusion set forth in Section IV.H states
Navigators “shall not be liable to make any payment for Loss in connection with any Claim
made against any Insured . . . by or on behalf of the Company, or any security holder of the
Company, or any Directors or Officers.” (2007 Policy at Section IV.H.) The provision contains
an exception, which provides, “however, this exclusion shall not apply to: . . . any Claim brought
by any security holder of the Company whether directly or derivatively, if the security holder

3

As we have already determined the underlying lawsuit is excluded from coverage under the
2009 Policy, we consider Navigators’ motion with respect to the 2007 Policy only, though the
relevant policy language is the same.
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bringing such Claim is acting totally independent of, and without the solicitation, assistance,
active participation or intervention of any Director or Officer or the Company.”
(Id. at Section IV.H(3) (the “security holder exception”).)
Insured versus insured exclusions are “standard” in insurance policies such as the one at
issue here. Miller v. St. Paul Mercury Ins. Co., 683 F.3d 871, 874 (7th Cir. 2012), order
clarified (Aug. 3, 2012) (citing Level 3 Commc’ns, Inc. v. Fed. Ins. Co., 168 F.3d 956, 957–58
(7th Cir. 1999)). The Seventh Circuit has explained such exclusions are designed to
exclude from coverage losses for claims brought by one “insured” against another
“insured,” often defined to include current and former corporate directors and
officers as well as the corporation itself. The exclusion serves to limit moral
hazard. Without such an exclusion, a [Directors and Officers liability insurance]
policy could require the insurer to pay for the business mistakes of insured directors
and officers if the corporation (also an insured) or if former officers or directors
brought suit, collusive or otherwise, against them. Complications arise, however,
when insured defendants are sued by a group of plaintiffs where some are insured
and some are not. . . .
Id. at 872; see also Amerisure Ins. Co. v. Nat’l Sur. Corp., 695 F.3d 632, 635 (7th Cir. 2012)
(explaining that without such an exclusion, “parties insured under the same policy would have no
disincentive to sue one another, since only the insurance company would ultimately bear the cost
of the judgment. This sets up what is known to economists as a moral hazard, because the party
taking the risk will not bear the costs of its behavior. The Exclusion counteracts that problem by
eliminating the possibility of a third party’s subsidization of such a lawsuit.”); Level 3
Commc’ns, 168 F.3d at 958 (an insured versus insured exclusion prevents collusion, “such as
suits in which a corporation sues its officers and directors in an effort to recoup the consequences
of their business mistakes . . . , thus turning liability insurance into business-loss insurance”).
The underlying lawsuit was filed by 24 former Vita shareholders who owned more
than 30 percent of the issued and outstanding shares of Vita. (Underlying Compl. ¶¶ 5, 8.) Two

15

of the plaintiffs, Stephen Rubin and John Seramur, were also Vita directors. (Mot. at 2.) The
defendants in the underlying lawsuit included Bedford and other members of the Vita Board of
Directors. (Underlying Compl. ¶ 6.) Thus, Navigators argues that because at least some of the
plaintiffs in the underlying lawsuit qualify as “security holders” or directors, the entire claim is
barred under the insured versus insured exclusion. (Id. at 14–15.) Navigators further argues the
security holder exception in Section IV.H(3) does not save the claim because Rubin and
Seramur, as Vita directors, actively participated and assisted in the underlying litigation, and the
“majority of the allegations in the Underlying Lawsuit concern Bedford’s manipulation of Rubin;
Bedford’s removal of Rubin as Chairman of Vita’s Board of Directors; Rubin’s exclusion from
the Special Committee; and both Rubin’s and Seramur’s insistence that their Vita shares should
not be voted in favor of Bedford’s fraudulent merger scheme.” (Id. (citing Underlying
Compl. ¶¶ 39, 49, 52, 60, 112–13).)
Vita does not dispute that Rubin and Seramur fall within the definition of “Director”
under the 2007 Policy, and therefore are subject to the insured versus insured exclusion.4
(See 2007 Policy at Section III.D (defining “Directors” as “all persons who were, now are, or
shall be directors” of Vita).) However, Vita argues that the lawsuit was also brought by 22 other
former shareholders who should not be considered “security holders” under the plain language of
the policy, and who are therefore not subject to the insured versus insured exclusion.
(Resp. at 9–10.) Vita contends Navigators was required to advance defense costs with respect to
the claims of these former shareholders on an allocated basis. (Id. at 10–11.) Thus, the parties
dispute whether the underlying plaintiff-shareholders qualify as “security holders” under
4

Vita disputed whether the claims made by Seramur fall within the 2009 Policy’s insured versus
insured exclusion or whether they instead are subject to an exception for claims made by
directors more than two years after they leave office. (Resp. at 9, n.3.) For the reasons stated
above, the 2009 Policy does not apply, so the dispute is immaterial.
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the 2007 Policy and if so, whether their presence contaminates the entire underlying lawsuit or
whether Vita is still entitled to allocated coverage under the policy.
a)

Allocation

The presence of both covered and non-covered plaintiffs in the underlying lawsuit “does
not automatically bar coverage for the entire suit nor automatically allow coverage for all
claims.” Strategic Capital Bancorp Inc. v. St. Paul Mercury Ins. Co.,
723 F. Supp. 2d 1053, 1059 (C.D. Ill. 2010). Rather, “[w]hat is well established is that if there is
an Insured making a claim against another Insured and the insurance policy has an unambiguous
Insured vs. Insured exclusion clause, the claims brought by the Insured will not be covered.”
Id. (citing Level 3 Commc’ns, 168 F.3d at 956; Sphinx Int’l, Inc. v. Nat’l Union Fire Ins. Co. of
Pittsburgh, PA., 412 F.3d 1224, 1230 (11th Cir. 2005)). The Navigators policies contain an
allocation clause, which states that if “a Claim made against any Insured includes both covered
and uncovered matters, or is made against any Insured and others, the Insured and the Insurer
recognize that there must be an allocation between insured and uninsured Loss.” (2007 Policy
at Section VII.D.)
The policy’s allocation provision is materially the same as the allocation clauses given
effect in other cases. See Miller, 683 F.3d at 873 (considering allocation clause stating “[i]f on
account of any Claim . . . the Insureds incur an amount consisting of both Loss covered by this
Policy and loss not covered by this Policy because the Claim includes both covered and
uncovered matters, such amount shall be allocated between covered Loss and uncovered loss
based upon the relative legal exposures of the parties to covered and uncovered matters”);
Level 3 Commc’ns, 168 F.3d at 960 (requiring allocation of covered and uncovered losses where
the policy provided that if “a Claim against the Insured Persons includes both covered and

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uncovered matters, . . . the Insureds and the [Insurance] Company shall use their best efforts to
agree upon a fair and proper allocation of such amount between covered Loss and uncovered
loss”). Accordingly, we “apply the allocation clause of the [Directors and Officers] policy to
provide indemnity for losses on claims by non-insured plaintiffs but not for losses on claims by
insured plaintiffs.” Miller, 683 F.3d at 875. This result “minimizes the risk of arbitrary results
and discourages efforts to manipulate the result by the ways in which individual claims happen
to be combined or separated,” and has the “advantage of conforming to the parties’ reasonable
expectations: the insurer owes no duty to indemnify for claims brought by insured plaintiffs but
does owe that duty for claims brought by others.” Id.
Navigators nevertheless contends that the security holder exception language makes this
case materially different from Miller and Level 3 Communications. We are unconvinced by the
cases Navigators cites in support of its argument and urges us to follow. For example, in Sphinx,
while the security holder exception language—excluding claims by security holders unless they
are acting “totally independent of” and without the “active participation of” any director—is the
same here, Sphinx did not involve an allocation clause, and the court based its decision on the
fact that the policy language unambiguously did not require segregation of claims based on the
percentage attributable to each litigant. 412 F.3d at 1230–31. Navigators ignores the presence of
the allocation provision, which is “a dispositive factor,” and for this reason, its reliance on
AMERCO v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, No. 13 C 2588, 2014 WL 2094198
(D. Ariz. May 20, 2014) is also mistaken. See id. at * 7 (observing “other courts have found the
presence of an allocation [clause] to be a dispositive factor” and declining to find that allocation
is “appropriate” even in the absence of an allocation provision in the policy); see also Home Fed.
Sav. & Loan Ass’n of Niles v. Fed. Ins. Co., No. 06 C 3053, 2007 WL 2713060, at *5

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(N.D. Ohio Sept. 14, 2007) (“This Court finds that when interpreted under their plain meaning
and especially after considering the allocation provision, the policy covers the non-insured
plaintiffs’ claims.”); Megavail v. Ill. Union Ins. Co., No. 05 C 1374, 2006 WL 2045862, at *3
(D. Or. July 19, 2006) (“[I]f the exclusionary clause is applicable, the allocation clause
establishes the method for addressing claims involving both insured and uninsured plaintiffs. . . .
[A]s contemplated by the Level 3 court, even the presence of an insured who is the primary
plaintiff does not excuse an insurance company’s duty to defend.”); Fed. Ins. Co. v. Infoglide
Corp., No. 05 C 189, 2006 WL 2050694, at *5 (W.D. Tex. July 18, 2006) (“[T]he decisive fact
in Level 3 was the existence of an allocation clause that clearly contemplated cases in which
covered claims could be combined with non-covered claims, and the absence of that sort of
clause was one of the reasons why Sphinx came out differently than Level 3.”).5 We accordingly
apply the allocation clause to Vita’s claim for coverage of the underlying lawsuit under
the 2007 Policy. See Miller, 683 F.3d at 875; Level 3 Commc’ns, 168 F.3d at 960.

5

Navigators cites other cases that are likewise distinguishable. See Bernstein v. Genesis Ins.
Co., 90 F. Supp. 2d 932, 933 (N.D. Ill. 2000) (indicating only in dicta that an insured versus
insured clause may bar coverage in its entirety if just one plaintiff was covered by the exception,
but not actually addressing the issue as the case did not involve covered and uncovered claims);
Jerry’s Enterprises, Inc. v. U.S. Specialty Ins. Co., 845 F.3d 883, 890 (8th Cir. 2017)
(considering a policy that defined a “claim” as a “civil proceeding commenced by service of a
complaint,” which unlike here, unambiguously barred the entirety of the underlying lawsuit);
PowerSports, Inc. v. Royal & Sunalliance Ins. Co., 307 F. Supp. 2d 1355, 1362 (S.D. Fla. 2004),
aff’d sub nom. Powersports, Inc. v. Royal Sunalliance Ins. Co., 128 F. App’x 95 (11th Cir. 2005)
(addressing an insured versus insured exclusion where all of the plaintiffs in the underlying
action were insured persons and explaining “[a]llocation clauses only become relevant in the
event that a loss involves both covered and uncovered claims,” and since the case involved
“uncovered claims only, the allocation question is moot”).

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b)

Security Holder

While it is undisputed that the claims of Rubin and Seramur are excluded under
Section IV.H to the extent they were acting as directors of the company, questions remain as to
whether the other shareholder-plaintiffs in the underlying lawsuit qualify as “security holders”
and also fall under the exclusion. The term “security holder of the Company” as used in
Section IV.H is not a defined term. Vita argues that it can “only be interpreted to include parties
who were shareholders of Vita at the time the relevant complaint was brought,” and since all of
the underlying plaintiffs were former shareholders by that time, none qualify as “security
holders.” (Id. at 10.) Vita concludes that Navigators was therefore required to advance defense
costs with respect to the claims of each of the 22 former shareholders on an allocated basis.
(Id. at 11.)
Generally, a “claims made” policy covers the insured for claims made during the policy
period, irrespective of when those claims arose. Sphinx, 412 F.3d at 1226; Bernstein,
90 F. Supp. 2d at 937 (explaining coverage under a claims made policy “is determined based on
when the claim was filed, not when the underlying actions leading to the claim occurred”).
Navigators argues that application of the relation back provision of Section VIII.B requires the
status of the underlying plaintiff-shareholders to be assessed at the time of the Kreiger Letter.
(Reply at 10–11.) We agree. As set forth above, if Navigators must provide coverage for the
underlying lawsuit, that duty arises out of the claim made in the Kreiger Letter under the
2007 Policy.
However, based on the record before us, whether the plaintiff-shareholders were current
or former shareholders at the time of the Kreiger letter is unclear. If any were present
shareholders at that time, they will be considered “security holders” under the 2007 Policy, and

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are excluded from coverage under Section IV.H. See Bernstein, 90 F. Supp. 2d at 938
(concluding, based on similar policy language, that the “plain and unambiguous meaning of
‘security holder’ is present security holder” (emphasis in original)). Accordingly, we deny
Navigators’ motion with respect to Vita’s claim for coverage under the 2007 Policy. To the
extent that any of the underlying plaintiff-shareholders did not qualify as “security holders” at
the time the Kreiger letter claim was made, they may be entitled to coverage under the 2007
Policy on an allocated basis.
II.

VITA’S MOTION TO STRIKE
As at least some of Vita’s claims remain, we consider its motion to strike all of

Navigators’ affirmative defenses. (Mot. to Strike (Dkt. No. 19).) Vita’s motion is governed by
Federal Rule of Civil Procedure 12(f), which states that “[t]he court may strike from a pleading
an insufficient defense or any redundant, immaterial, impertinent, or scandalous matter.”
Fed. R. Civ. P. 12(f). Motions to strike are generally disfavored because they “potentially serve
only to delay,” and so affirmative defenses “will be stricken only when they are insufficient on
the face of the pleadings.” Heller Fin., Inc. v. Midwhey Powder Co., Inc., 883 F.2d 1286, 1294
(7th Cir. 1989). To survive a motion to strike, an affirmative defense must satisfy a three-part
test: “(1) the matter must be properly pleaded as an affirmative defense; (2) the matter must be
adequately pleaded under the requirements of Federal Rules of Civil Procedure 8 and 9,
and (3) the matter must withstand a Rule 12(b)(6) challenge.” Sarkis’ Cafe, Inc. v. Sarks in the
Park, LLC, 55 F. Supp. 3d 1034, 1039 (N.D. Ill. 2014) (citation omitted). We follow the
majority view of district court decisions in this circuit, which apply the pleading standard set
forth in Bell Atlantic v. Twombly, 550 U.S. 544, 127 S. Ct. 1955 (2007) and Ashcroft v. Iqbal,
556 U.S. 662, 129 S. Ct. 1937 (2009) to affirmative defenses. See Edwards v. Mack Trucks, Inc.,

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310 F.R.D. 382, 386 (N.D. Ill. 2015) (“aligning with the majority of courts in this district” in
applying the Twombly-Iqbal standard); Sarkis’ Cafe, 55 F. Supp. 2d at 1040; Shield Tech.
Corp. v. Paradigm Positioning, LLC, No. 11 C 6183, 2012 WL 4120440, at *8
(N.D. Ill. Sept. 19, 2012) (“[W]e believe that the test applicable to affirmative defenses should
reflect current pleading standards, and therefore adopt the majority view that Twombly and Iqbal
apply to affirmative defenses.”); Riemer v. Chase Bank USA, N.A., 274 F.R.D 637, 639–40
(N.D. Ill. 2011) (collecting cases).
Navigators asserts 11 affirmative defenses in its answer. Vita argues that some of
Navigators’ affirmative defenses are “nothing but boilerplate and the remaining defenses fail to
plausibly assert any affirmative defense.” (Mot. to Strike at 1–2.) In response, Navigators
agreed to withdraw its Second and Fourth Affirmative Defenses, without prejudice. See, e.g.,
Palomares v. Second Fed. Sav. & Loan Ass’n of Chi., No. 10 C 6124, 2011 WL 2111978, at *2
(N.D. Ill. May 25, 2011) (even where a motion to strike is granted, leave to amend the pleading
is to be freely granted as justice requires under Rule 15(a), and a party is not necessarily
precluded from asserting the substantive merits of an affirmative defense later in the case). We
therefore grant Vita’s motion with respect to the Second and Fourth Affirmative Defenses and
address the remaining disputed defenses below.
A.

First Affirmative Defense

Navigators’ First Affirmative Defense alleges only “[t]he Complaint fails to state a claim
upon which relief can be granted.” (Answer at 16.) Navigators contends this bare bones defense
is sufficient because it is supported by the facts stated in its answer and counterclaim, which it
contends are sufficient to place Vita on notice as to Navigators’ position that there is no coverage
for the underlying lawsuit. (Resp. to Mot. to Strike (Dkt. No. 21) at 3.) In the alternative,

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Navigators requests leave to amend the answer to “reiterate the numerous facts pled in its
Counterclaim” that support the defense. (Id.)
Although there is disagreement as to whether failure to state a claim can be properly
asserted as an affirmative defense, “[e]ven assuming that failure to state a claim is an appropriate
defense, Defendants must still adequately plead the defense in accordance with Rule 8, providing
notice as to how and in what portion of the complaint Plaintiff has failed to state a claim upon
which relief may be granted.” Mack Trucks, 310 F.R.D. at 387; accord. Sarkis’ Cafe,
55 F. Supp. 3d at 1034. While affirmative defenses “rarely will be as detailed as a complaint (or
a counterclaim),” a party must do more than assert “boilerplate defenses as mere placeholders
without any apparent factual basis.” Mack Trucks, 310 F.R.D. at 386. Navigators’ one-sentence
defense is insufficient to survive a motion to dismiss, and it is accordingly stricken without
prejudice. Id. at 387; see also Int’l Ins. Co. v. Caja Nacional de Ahorro y Seguro,
No. 00 C 6703, 2001 WL 322005, at *3 (N.D. Ill. Apr. 2, 2001) (“The defense identifies the legal
theory without indicating how it is connected to the present case. While the Federal Rules of
Civil Procedure allow liberal pleadings, they do not allow a claimant to merely recite the
standard for a motion to dismiss under Rule 12(b)(6).”). Navigators is granted leave to amend its
First Affirmative Defense on or before July 5, 2017.
B.

Third Affirmative Defense

Navigators’ Third Affirmative Defense asserts that “[t]o the extent Vita has any covered
Loss, such Loss must be reduced for Vita’s failure to mitigate its damages.” (Answer at 16.)
Although the allegation is bare of factual specificity, “where discovery has barely begun, the
failure to mitigate defense is sufficiently pled without additional facts.” Thomas v. Exxon Mobil
Corp., No. 7 C 7131, 2009 WL 377334, at *4 (N.D. Ill. Feb. 11, 2009) (internal quotation marks

23

omitted) (quoting AAR Int’l, Inc. v. Vacances Heliades S.A., 202 F. Supp. 2d 788, 800
(N.D. Ill. 2002)). Threadbare pleading of a mitigation defense is permitted because defendants
are usually unable to learn the factual specifics of the plaintiff’s mitigation efforts without
discovery. Id. at *2. Navigators’ Third Affirmative Defense sufficiently puts Vita on notice that
its mitigation efforts will be an issue in this case. Id. We therefore deny Vita’s motion to strike
Navigators’ Third Affirmative Defense.
C.

Fifth Through Eleventh Affirmative Defenses

Navigators’ Fifth through Eleventh Affirmative Defenses set forth substantive reasons
why Vita is not entitled to coverage for the underlying lawsuit. (Answer at 16–19.) Vita argues
these defenses should be stricken because they “do nothing more than deny the allegations of
Vita’s complaint.” (Reply to Mot. to Strike (Dkt. No. 26) at 3.) Where an affirmative defense
merely denies the allegations in the complaint, it is inappropriately pleaded as an affirmative
defense. Mack Trucks, 310 F.R.D. at 386 (“[A]ffirmative defenses must introduce a new matter
or allegation that could serve as the basis for a defense and cannot be merely a denial of the
Plaintiff's allegations”); Thomas, 2009 WL 377334, at *2 (granting a motion to strike affirmative
defenses that were “nothing more than a mere denial of the allegations in the complaint”);
Holzer v. Prudential Equity Group LLC, 520 F. Supp. 2d 922, 929 (N.D. Ill. 2007) (“It is
improper to assert something as an affirmative defense that is nothing more than a denial of an
allegation contained in the complaint.” (citation omitted)). Navigators’ affirmative defenses do
more than simply deny the allegations in the complaint, instead relying on policy provisions that
Navigators contends entitle it to relief notwithstanding Vita’s allegations. Likewise, Navigators
sets forth the basis for the defenses in sufficient detail such that it has plausibly stated a claim.

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Accordingly, Vita’s motion to strike Navigators’ Fifth through Eleventh Affirmative Defenses is
denied.
CONCLUSION
For the foregoing reasons, we grant in part and deny in part Navigators’ motion for
judgment on the pleadings pursuant to Rule 12(c). (Dkt. No. 22.) The motion is granted with
respect to Vita’s claim for coverage under the 2009 Policy, and Count I of the complaint is
accordingly dismissed. The motion is denied as to Vita’s claims under the 2007 Policy as set
forth in Count II. In addition, Vita’s motion to strike Navigators’ affirmative defenses is granted
in part and denied in part. (Dkt. No. 19.) The motion is granted as to Navigators First, Second,
and Fourth Affirmative Defenses, which are hereby stricken, without prejudice. Navigators is
granted leave to file an amended answer on or before July 5, 2017. We deny Vita’s motion to
strike Navigators’ Third, Seventh, Eighth, Ninth, Tenth, and Eleventh Affirmative Defenses. It
is so ordered.

____________________________________
Honorable Marvin E. Aspen
United States District Judge
Dated: June 2, 2017
Chicago, Illinois

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