Atain Specialty Insurance Company v. Adventure Facility Concepts and Management, LLC et al

Filing 62

OPINION AND ORDER. Signed by the Honorable Sara L. Ellis on 1/17/2023. Mailed notice(rj, )

Case: 1:22-cv-00482 Document #: 62 Filed: 01/17/23 Page 1 of 9 PageID #:1356

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
ATAIN SPECIALTY INSURANCE
COMPANY,

)
)
)
Plaintiff,
)
)
v.
)
)
ADVENTURE FACILITY CONCEPTS
)
AND MANAGEMENT, LLC, d/b/a
)
FUNTOPIA, and MICHAEL WELLS, as
)
Father and Next Friend of WILLIAM WELLS, )
)
Defendants.
)

No. 22 C 482
Judge Sara L. Ellis

OPINION AND ORDER
Plaintiff Atain Specialty Insurance Company (“Atain”) brings this lawsuit, pursuant to 28
U.S.C. § 1332, for rescission of an insurance policy issued to Defendant Adventure Facility
Concepts and Management, LLC (“Funtopia”) or, alternatively, for a declaratory judgment,
under 28 U.S.C. § 2201, regarding its duty to defend or indemnify Funtopia in a Circuit Court of
Cook County negligence lawsuit filed by Michael Wells. Defendants Funtopia and Wells moved
to dismiss or stay this case on the basis that a ruling on the declaratory judgment action would
require a determination of facts in the underlying state court lawsuit. The Court denied that
motion, concluding that it will not need to determine the “ultimate facts” in the underlying case
in order to decide whether Funtopia provided misrepresentations in its application for insurance
coverage three months prior to the events alleged in the underlying case. Doc. 34. Funtopia then
sought clarification and reconsideration, contending that the exhibits attached to Atain’s first
amended complaint contradicted certain allegations the Court treated as true and so required a
different result. In response, Atain filed a second amended complaint, providing additional

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information concerning Funtopia’s insurance application and related documents. Funtopia,
joined by Wells, has again moved to dismiss, raising similar arguments to those in the motion for
clarification and reconsideration as to why Atain’s claims fail. Because Atain has sufficiently
alleged bases for rescission of the insurance policy and a finding of no coverage, regardless of
whether a Funtopia representative signed the insurance application, the Court denies Funtopia’s
motion to dismiss and finds the motion for clarification and reconsideration moot.
BACKGROUND 1
Defendant Wells filed the underlying lawsuit against Funtopia alleging negligence that
resulted in injuries to his son in August 2018. Wells v. Adventure Facility Concepts & Mgmt.,
LLC, Civil Action No. 2018-L-013411 (Cir. Ct. Cook Cnty.). The underlying lawsuit pleads that
Funtopia owns and operates an indoor children’s amusement center in Glenview, Illinois, that
includes a climbing wall created by a series of suspended ropes. It further alleges that Funtopia
did not place padded mats on the hardwood flooring below the climbing wall. Wells’ son, who
was four years old in 2018, ascended the climbing wall with an untethered safety harness and fell
approximately fifteen feet to the hardwood floor below. The lawsuit alleges that Funtopia
negligently failed to supervise Wells’ son, to properly train him on how to use the equipment, to
follow safety measures, and to place padded safety mats below the climbing wall. Wells seeks
damages for his son’s injuries.
Over three months before the incident, on April 27, 2018, Funtopia completed a climbing
gyms insurance application provided by Veracity Insurance Solutions (“Veracity”), Funtopia’s
insurance broker. In response to the question, “Describe the flooring system in your gym,”
Funtopia answered “bound carpet.” Doc. 50 ¶¶ 17–18. As for where climbing rules and
The Court takes the facts in the background section from Atain’s second amended complaint and the
exhibits attached thereto and presumes them to be true for the purpose of resolving Funtopia’s motion to
dismiss. See Phillips v. Prudential Ins. Co. of Am., 714 F.3d 1017, 1019–20 (7th Cir. 2013).
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warnings would be located, Funtopia answered, “every wall,” and that it would have
“[s]upervision on all walls & activities.” Id. ¶¶ 19–20. Funtopia further stated that staff
“supervises ALL walls & activities with a 1 to 5 and 1 to 10 ratio,” and that the minimum age for
the climbing wall is ten years old. Id. ¶¶ 21–24. The application also included a warranty that
the information Funtopia provided was true and that Funtopia understood that that information
formed “the basis of the policy and [was] deemed incorporated therein should the [insurance]
Company evidence its acceptance of this application by issuance of a policy.” Id. ¶ 25. The
signature line on the application was left blank, although the name of Funtopia’s president,
Yasen Nikolov, was printed on the line above “Print Name” and the application was dated April
27, 2018. 2 Doc. 50-3 at 8. Veracity then submitted the application to Atain, requesting a quote
from Atain in line with the policy Atain had issued to Funtopia’s sister location in Naperville,
Illinois.
Funtopia also submitted several other documents to Atain in connection with its
insurance application, including a document titled “Climbing Minimum Eligibility
Requirements.” This document listed “mandatory insurability requirements,” including that
“[p]articipants must be at least 7 years of age on their last birthday, unless accompanied by a
Parent or Legal Guardian at all times during activities.” Doc. 50-6 at 2. Funtopia agreed to
adhere to these requirements “as a condition for obtaining insurance coverage,” with Nikolov

In its July 11, 2022 Opinion and Order addressing Funtopia’s motion to dismiss the first amended
complaint, the Court stated that Funtopia’s president signed the application. Doc. 34 at 2. While
Funtopia correctly points out that no signature was affixed on the signature line of the application, the fact
of a signature on the application did not influence the Court’s analysis and so does not provide a basis for
reconsideration of the July 11, 2022 Opinion. This is so particularly given that Atain has filed a second
amended complaint addressing Funtopia’s arguments concerning its ability to rely on Funtopia’s
representations as grounds for rescission. The Court fully addresses Funtopia’s arguments concerning the
lack of a signature on the insurance application in connection with its request for dismissal of the second
amended complaint, making Funtopia’s motion for clarification and reconsideration on this basis moot.

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initialing next to each requirement and signing the document on April 27, 2018. 3 Id. On that
date, Nikolov also signed a bind request form, indicating that Funtopia accepted the terms and
conditions of Atain’s insurance proposal.
Based on Funtopia’s representations in its application package, Atain issued Policy No.
CIPLOR202536 to Funtopia for the policy period April 27, 2018 to April 27, 2019 (“the
Policy”). The Policy contains a Commercial General Liability Coverage Form with terms of
indemnification and duty to defend. It also contains a fraud, concealment, and misrepresentation
endorsement, which states in relevant part:
This policy was issued based on the information supplied on an
application and other correspondence, including your claims or
loss history. This information is attached to and considered to be
part of this policy.
You should review this information carefully because the truth of
this information was of paramount importance in influencing our
decision to issue this policy.
You, for all the insureds under this policy, do warrant the truth of
such information to the best of your and their knowledge at the
inception date of this policy.
If such information is false or misleading, it may cause denial of
coverage or voiding the policy. In any such instance, there shall be
no duty to defend or indemnify any insured.
Doc. 50-8 at 8. An endorsement describing the “covered operations” states that only the
enumerated activities, including as relevant here, “employee monitored indoor climbing gym,”
fall under the Policy. Doc. 50 ¶ 44. The Policy also contains an endorsement requiring Funtopia
to comply with certain conditions precedent to coverage, which include signed waivers and strict
The first amended complaint attached a version of the Climbing Minimum Eligibility Requirements
document that Nikolov had signed but not initialed. Doc. 30-3. After Funtopia pointed this out in its
motion for clarification and reconsideration, Atain replaced that version in the second amended complaint
with one that Nikolov both initialed and signed. Doc. 50-6. The existence of an initialed and signed
document moots the remaining portion of Funtopia’s motion for clarification and reconsideration of the
July 11, 2022 Opinion and Order.
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adherence with written safety procedures (the “waiver mandate”). Nikolov signed the waiver
mandate on April 27, 2018.
LEGAL STANDARD
A motion to dismiss under Rule 12(b)(6) challenges the sufficiency of the complaint, not
its merits. Fed. R. Civ. P. 12(b)(6); Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir.
1990). In considering a Rule 12(b)(6) motion, the Court accepts as true all well-pleaded facts in
the plaintiff’s complaint and draws all reasonable inferences from those facts in the plaintiff’s
favor. Kubiak v. City of Chicago, 810 F.3d 476, 480–81 (7th Cir. 2016). To survive a Rule
12(b)(6) motion, the complaint must assert a facially plausible claim and provide fair notice to
the defendant of the claim’s basis. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 555 (2007); Adams v. City of Indianapolis, 742 F.3d 720, 728–29 (7th
Cir. 2014). A claim is facially plausible “when the plaintiff pleads factual content that allows the
court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”
Iqbal, 556 U.S. at 678.
ANALYSIS
I.

Atain’s Reliance on Alleged Misrepresentations as the Basis for Its Claims
Section 154 of the Illinois Insurance Code provides:
No misrepresentation or false warranty made by the insured or in
his behalf in the negotiation for a policy of insurance, or breach of
a condition of such policy shall defeat or avoid the policy or
prevent its attaching unless such misrepresentation, false warranty
or condition shall have been stated in the policy or endorsement or
rider attached thereto, or in the written application therefor. No
such misrepresentation or false warranty shall defeat or avoid the
policy unless it shall have been made with actual intent to deceive
or materially affects either the acceptance of the risk or the hazard
assumed by the company.

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215 Ill. Comp. Stat. 5/154. For its rescission claim, Atain pleads that when Funtopia applied for
insurance, it made material misrepresentations about the nature of its floor coverings and the
minimum age of climbing wall participants. According to Atain, these false answers
misrepresented the risk that it assumed in issuing the Policy and allow Atain to rescind the
Policy. Similarly, Atain grounds its contention that it has no duty to defend or indemnify
Funtopia in part on the Policy’s fraud, concealment, and misrepresentation endorsement,
claiming that Funtopia misrepresented the minimum age requirements for participation in
climbing activities in its insurance application.
Funtopia argues that Atain cannot proceed on these claims because no Funtopia
representative signed the insurance application. Funtopia relies on Lycoming Fire Insurance Co.
v. Jackson, 83 Ill. 302, 305 (1876), to argue that “an insurer may not rely on an unsigned policy
application in seeking rescission of an insurance policy.” Doc. 51 at 3. But Lycoming does not
set forth the bright-line rule that Funtopia advocates. Lycoming addressed a situation where an
agent of the insured signed the application and nothing indicated that the insured authorized the
application or ratified it after its execution. 83 Ill. at 305. The Illinois Supreme Court concluded
that, under those circumstances, the insured could not be bound by any misrepresentations in the
application of which she did not know. 4 Id. Here, although no signature appears above the
signature line in the insurance application, the Court cannot definitively conclude at the pleading
stage that Funtopia did not authorize, adopt, or ratify the application despite the lack of a
signature. Instead, the second amended complaint and the exhibits attached thereto sufficiently
suggest that Funtopia submitted the application with knowledge of its contents, agreeing to be
Funtopia also cites to Direct Auto Insurance Co. v. Thang, 2018 IL App (1st) 180240-U, for support.
But the Thang court did not address whether an application must be signed in order for an insurer to make
out a rescission claim based on false statements in the application. Instead, the court only addressed
whether the insurer had laid a proper foundation for admission of the document it maintained constituted
the insured’s application at trial. Id. ¶¶ 41–42.
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bound by the representations made therein. 5 While discovery may prove otherwise, the lack of a
Funtopia representative’s signature on the signature line of the insurance application does not
defeat Atain’s claims at the pleading stage.
Funtopia alternatively argues that Atain cannot rely on any representations in the
insurance application because the application was not specifically directed to the Policy but
rather was a general application provided by Funtopia’s insurance agent, Veracity. This
argument is a red herring, however, as Funtopia’s agent submitted the application to Atain, and
Atain relied on the application to issue the Policy. Cf. Ill. State Bar Ass’n Mut. Ins. Co. v.
Brooks, Adams & Tarulis, 2014 IL App (1st) 132608, ¶¶ 23–24 (misrepresentation in an
application for an earlier policy could not provide a basis for rescinding a later-issued policy,
stating “[w]e cannot add language to the Code to make one misrepresentation defeat all
subsequent insurance contracts, when the insured made no misrepresentations in its applications
for the subsequent insurance”).
Finally, Funtopia argues that Atain cannot use alleged misrepresentations in the Climbing
Minimum Eligibility Requirements document as a basis for rescission or denial of coverage
because that document was not part of the Policy or application for the Policy. 6 See 215 Ill.

Funtopia also represents that the application states that “‘should [Atain] evidence its acceptance of this
application by the issuance of a policy’ the Application was explicitly to be ‘signed by the undersigned
authorized agent of the Applicant(s).’” Doc. 51 at 4. Funtopia argues that, given this requirement,
because no Funtopia agent signed the application, “no other mode” of acceptance was possible. Id. But
Funtopia improperly strings together portions of two separate sentences to reach its desired result. The
application includes a statement that the applicant warrants “that the information herein is true and that it
shall be the basis of the policy and deemed incorporated therein, should [Atain] evidence its acceptance of
this application by issuance of a policy.” Doc. 50-3 at 8. It goes on to note that the “application is signed
by undersigned authorized agent of the Applicant(s) on behalf of the Applicant(s) and its owners,
partners, directors, officers and employees” but nowhere connects the two statements as Funtopia does in
its motion. Id.
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Funtopia also argues that Atain cannot rely on its signature on the Bind Request Form to disclaim
coverage. The Court understands Atain to use this signature to support its allegations that Funtopia
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Comp. Stat. 5/154 (to void an insurance policy based on a misrepresentation or false warranty,
the misrepresentation or false warranty “shall have been stated in the policy or endorsement or
rider attached thereto, or in the written application therefor”). But Atain alleges that this
document formed part of the application package, and the document itself uses the word
“application” and “applicant.” Doc. 50-6 at 2. At this stage, then, the Court treats the Climbing
Minimum Eligibility Requirements document as part of Funtopia’s application for the Policy on
which it may base its claims for rescission and avoidance of coverage.
II.

Waiver Mandate
Separately, Funtopia challenges whether Atain has set forth grounds for its denial of

coverage for the underlying lawsuit. The second amended complaint lists three grounds that
allegedly bar Funtopia’s request for coverage of the underlying lawsuit: (1) the fraud,
concealment, and misrepresentation endorsement; (2) the covered operations endorsement; and
(3) the waiver mandate. 7 As relevant here, the waiver mandate requires “[s]trict adherence to all
written safety procedures on file with the company” for all activities covered under the Policy.
Doc. 50-8 at 35. Funtopia argues that the complaint in the underlying lawsuit does not allege a
violation of Funtopia’s safety procedures, meaning that Atain cannot rely on this ground to deny
coverage. But as Atain points out, the safety procedures Funtopia provided to Atain with its
application require a Funtopia supervisor to attach a participant to the auto-belay system. Doc.
50-4 at 90. And the underlying complaint alleges that, among other things, Wells’ son ascended
the rope climbing wall without having the safety harness tethered to the safety cable. Doc. 50-1

agreed to be bound by the representations in the insurance application, not as a separate basis for
rescission.
The Court has already addressed Funtopia’s arguments concerning the fraud, concealment, and
misrepresentation endorsement. And Funtopia makes no argument as to the covered operations
endorsement.
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¶ 11. Wells’ allegations in the underlying lawsuit thus at least suggest that Funtopia did not
comply with its own safety procedures as represented to Atain. Thus, the second amended
complaint sufficiently alleges a violation of the waiver mandate. 8
CONCLUSION
For the foregoing reasons, the Court grants Wells’ motion to join Funtopia’s motion to
dismiss [52], denies Funtopia’s motion to dismiss the second amended complaint [51], and
denies Funtopia’s motion for clarification and reconsideration [35].

Dated: January 17, 2023

______________________
SARA L. ELLIS
United States District Judge

Because the second amended complaint sufficiently alleges defenses to coverage, the Court denies
Funtopia’s request that the Court enter a declaration that Atain must defend and indemnify Funtopia in the
underlying case.
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