Old Guard Insurance Company v. Saoirse Homes LLC et al

Filing 64

MEMORANDUM Opinion and Order: Old Guard Insurance Company's motion to dismiss 48 is denied. See attached order for details. Signed by the Honorable Iain D. Johnston on 11/14/2023: (yxp, )

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
WESTERN DIVISION
Old Guard Insurance Company,
Plaintiff,

Case No. 3:22-cv-50413

v.
Saoirse Homes, LLC, Selene Homes, LLC,
Jennifer Jeffery, and Jon B. Havrilesko,

Honorable Iain D. Johnston

Defendants.

MEMORANDUM OPINION AND ORDER
Plaintiff Old Guard Insurance Company brings this diversity action against
two LLCs and a member of both companies (the LLC defendants) 1 seeking a
declaratory judgment that it has no duty to indemnify or defend them under an
insurance contract. Before the Court is Old Guard’s motion to dismiss a
counterclaim brought by the LLC defendants under section 155 of the Illinois
Insurance Code. For the following reasons, the motion is denied.
I. BACKGROUND
On July 29, 2022, Jon Havrilesko brought an action against the LLC
defendants, alleging that they had violated federal copyright law as to home designs
whose copyright he owned. 2 Dkt. 1, Ex. A. After this suit was instituted, the LLC

In particular, Old Guard names Saoirse Homes, LLC, Selene Homes, LLC, and Jennifer
Jeffery as defendants. Havrilesko, the plaintiff in the underlying suit, is also named as a
defendant in this suit, but is not involved with this counterclaim.
2 It is currently docketed with this Court as Jon B. Havrilesko, v. Petry Home Builders,
LLC, No. 22-cv-50265.
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defendants made a tender of defense to their insurer, Old Guard, which refused to
defend the action. Defs.’ Countercl. (DC) ¶ 25. Old Guard then filed an action of its
own against the LLC defendants, seeking a declaratory judgment that it was not
required to defend or indemnify the LLC defendants in the underlying suit. Defs.’
Answer ¶¶ 35-53. The LLC defendants counterclaimed, including under section 155
of the Illinois Insurance Code, DC ¶¶ 34-45, which counterclaim is subject to Old
Guard’s pending motion to dismiss. 3 Dkt. 48.
II. LEGAL STANDARD
A motion to dismiss a counterclaim is governed by the ordinary standard for
motions to dismiss. See Cozzi Iron & Metal, Inc. v. U.S. Off. Equip., Inc., 250 F.3d
570, 574 (7th Cir. 2001). A motion to dismiss under Federal Rule of Civil Procedure
12(b)(6) challenges the sufficiency of the plaintiff’s complaint. Carlson v. CSX
Transp., Inc., 758 F.3d 819, 826 (7th Cir. 2014). Under Rule 8, a plaintiff must
allege facts sufficient to “state a claim to relief that is plausible on its face.” Bell Atl.
Corp. v. Twombly, 550 U.S. 544, 570 (2007). For a complaint to be plausible, the
plaintiff's factual allegations—as opposed to any legal conclusions—must allow “the
court to draw the reasonable inference that the defendant is liable for the
misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The Court accepts
as true all of the plaintiff's well-pleaded factual allegations and views them—and all
reasonable inferences—in the light most favorable to the plaintiff. Landmark Am.
Ins. Co. v. Deerfield Constr., Inc., 933 F.3d 806, 809 (7th Cir. 2019). The moving

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This counterclaim is designated as Count III.
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party bears the burden of establishing the insufficiency of the plaintiff’s allegations.
Marcure v. Lynn, 992 F.3d 625, 631 (7th Cir. 2021).
III. ANALYSIS
A. Section 155
Illinois law provides that “[i]n any action by . . . a company” concerning that
company’s liability under an insurance contract, the court may award fees and
damages to the other party when the insurance company’s actions are “vexatious
and unreasonable.” 215 ILCS 5/155. To qualify, an insurer’s behavior must be
“willful and without reasonable cause.” Citizens First Nat’l Bank v. Cincinnati Ins.
Co., 200 F.3d 1102, 1110 (7th Cir. 2000). This determination is based on the totality
of the circumstances. Golden Rule Ins. Co. v. Schwartz, 203 Ill. 2d 456, 469 (2003);
see also Med. Protective Co. v. Kim, 507 F.3d 1076, 1086 (7th Cir. 2007).
If the pleadings demonstrate a bona fide dispute regarding coverage—one
that is “real, actual, genuine, and not feigned”—then there can be no section 155
liability. See Am. States Ins. Co. v. CFM Const. Co., 923 N.E.2d 299, 308 (Ill. App.
Ct. 2010) (cleaned up) (quoting Black’s Law Dictionary 177 (6th ed. 1990)).
“Whether an insurer had a bona fide coverage dispute with an insured shows
whether the insurer acted unreasonably or vexatiously; this showing goes to the
merits of the claim and is not a separate affirmative defense.” P & M/Mercury
Mech. Corp. v. W. Bend Mut. Ins. Co., 483 F. Supp. 2d 601, 604 (N.D. Ill. 2006). But
arguments against coverage that “lack support in fact or law belie any possible good
faith dispute and thus fall under section 155.” TKK USA, Inc. v. Safety Nat. Cas.

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Corp., 727 F.3d 782, 793 (7th Cir. 2013) (quoting Bedoya v. Ill. Founders Ins. Co.,
688 N.E.2d 757, 764-65 (1997)).
B. LLC defendants’ counterclaim
The counterclaim at issue relies on the following facts:
(1) the underlying suit alleges that the LLC defendants have
“published infringing copies of [that suit’s plaintiff’s] Copyright
Works . . . for the purposes of advertising, marketing, and/or
promotion” on the internet, including on the LLC defendants’ own
website, and in print, DC ¶ 9;
(2) the insurance contract with Old Guard obligates it to defend the
LLC defendants against “any suit” 4 seeking damages for “personal and
advertising injury,” id. ¶ 12, which is defined to include any “injury . . .
arising out of” infringement “upon another’s copyright” in an
“advertisement,” 5 id. ¶ 14;
(3) exclusions reduce the scope of coverage for “personal and
advertising injur[ies]” but do not affect coverage for any “infringement,
in [an] ‘advertisement,’ of copyright,” id. ¶ 13;
(4) nevertheless, Old Guard has “unequivocally refused to defend” the
LLC defendants in the underlying suit and has instead filed this

Suit is defined as a “civil proceeding in which damages because of . . . ‘personal and
advertising injury’ to which this insurance applies are alleged.” Id. ¶ 16.
5 Advertisement is defined as “a notice that is broadcast or published to the general public
or specific market segments about your goods, products or services for the purpose of
attracting customers or supporters,” including “material placed on the Internet” and parts
of a web site that are “about your goods, products, or services.” Id. ¶ 15
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declaratory judgment action, and has disclosed no reasonable basis for
doing so. Id. ¶¶ 27, 35
An insurer’s obligation to defend its insured is decided under the “eightcorners rule”; that is, with reference only to the “four corners of the insurance policy
and the four corners of the complaint for which defense is sought.” United Fire &
Cas. Co. v. Prate Roofing & Installations, LLC, 7 F.4th 573, 580 (7th Cir. 2021).
Under Illinois law, 6 “[a]n insurer's duty to defend its insured is much broader than
its duty to indemnify.” Outboard Marine Corp. v. Liberty Mut. Ins. Co., 154 Ill. 2d
90, 125 (1992). “[I]f any portion of [a] suit potentially falls within the scope of
coverage, the insurer is obligated to defend.” Health Care Indus. Liab. Ins. Program
v. Momence Meadows Nursing Ctr., Inc., 566 F.3d 689, 694 (7th Cir. 2009) (second
emphasis added); see also 3 Jeffrey E. Thomas, New Appleman on Insurance Law
Library Edition § 17.01 (2021) (“It is difficult to overstate the breadth of an
insurer's duty to defend.”).
Further, “the filing of a declaratory judgment action” can itself be “a
vexatious and unreasonable action supporting an award under 215 ILCS 5/155(1)”
under the totality of the circumstances. Sun Life Assurance Co. of Canada v. Wells
Fargo Bank, N.A., No. 17 C 06588, 2018 U.S. Dist. LEXIS 76437, at *12 (N.D. Ill.

The parties seem to agree that Illinois law governs the interpretation of the contract, an
assumption under which the Court will proceed. See Wood v. Mid-Valley, Inc., 942 F.2d 425,
426-27 (7th Cir. 1991) (“Courts do not worry about conflict of laws unless the parties
disagree on which state's law applies. We are busy enough without creating issues that are
unlikely to affect the outcome of the case (if they were likely to affect the outcome the
parties would be likely to contest them). We shall continue in this course.”).
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May 7, 2018). 7 And a section 155 claim founded solely on an insurer’s unreasonable
interpretation of an insurance contract can survive a motion to dismiss. See Midway
Wholesalers, Inc. v. Motorists Com. Mut. Ins. Co., No. 21 CV 05441, 2022 U.S. Dist.
LEXIS 171474, at *10-16 (N.D. Ill. Sept. 22, 2022) (finding that a section 155 claim
premised merely on the theory that an insurer’s coverage position was “patently
contrary” to the language of the insurance contract could proceed).
All the cases that Old Guard cites to show that a section 155 claim based on
an unreasonable legal interpretation is insufficient to survive a 12(b)(6) motion are
inapposite. They either involved dismissal on summary judgment, with the benefit
of a full record, or dealt with the duty to indemnify, which will generally require
more factual enhancement to proceed compared with claims involving the moreeasily triggered duty to defend. In the lone case that dealt with a duty to defend,
although the section 155 claim was dismissed, the court implicitly held open the
possibility that it could have proceeded if the insurer’s position was “unreasonable
or lacked merit in light of the policies’ language,” Scottsdale Ins. Co. v. City of
Waukegan, No. 07 C 64, 2007 U.S. Dist. LEXIS 67710, at *6-7 (N.D. Ill. Sept. 10,
2007), which is precisely what the LLC defendants have pleaded.

Old Guard asserts that an identical argument was received dismissively by the Seventh
Circuit: “Presenting a dispute to a court for resolution is hardly a reason to award punitive
damages!” Am. States Ins. Co. v. Cap. Assocs. of Jackson Cnty., Inc., 392 F.3d 939, 940 (7th
Cir. 2004). But in that case, the insurer had undertaken the defense of its insured under a
reservation of rights, and only thereafter filed a declaratory judgment action; it was
evidently this situation that led the insured’s section 155 counterclaim to be derided as
“absurd.” Id.

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Old Guard’s motion to dismiss thus hinges on “whether [it] had a genuine
basis for disputing the policy coverage” regarding its duty to defend, which, again, is
an extremely expansive duty. Nine Group II, LLC v. Liberty Int’l Underwriters, Inc.,
168 N.E.3d 956, 967 (Ill. App. Ct. 2020). If it didn’t and knew it has no reasonable
argument for denying coverage, it can be liable under section 155, even if the sum of
its misconduct was filing a declaratory judgment action.
Old Guard spends much of its memorandum emphasizing that under Illinois
law, insurance companies who do not believe they are obligated to defend their
insured may, in lieu of defending the suit under a reservation of rights, file a
declaratory judgment action, whereupon the duty to defend is suspended during the
pendency of the suit; it decries what it characterizes as the LLC defendants’
attempt to punish it for exercising its right to seek a declaratory judgment. Old
Guard Mem., Dkt. 49, at 10-12. But this argument assumes what is at issue: that
Old Guard has a reasonable basis for disputing coverage. Section 155 does not
exempt from liability an insurer who “file[s] an action disputing its obligation to
defend its insured on the most frivolous of grounds, thus leaving its insured to shift
for itself until the declaratory judgment action was dispatched”—the “simple act of
filing that action” does not “preclude the insured party from recovering the
attorneys’ fees that it was forced to expend in the interim in consequence of the
insurer’s bootless (and substantively groundless) lawsuit.” Old Republic Ins. Co. v.
Chuhak & Tecson, P.C., 906 F. Supp. 1177, 1179 (N.D. Ill. 1995), rev’d on other
grounds, 84 F.3d 998 (7th Cir. 1996). The LLC defendants’ claim is not that Old

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Guard should be punished for exercising its rights under conditions of legal
uncertainty; the thrust of the claim is that there is no uncertainty as to its duties
under the law, and thus acts in bad faith.
The LLC defendants have pleaded sufficient factual matter, paired with
reasonable inferences drawn from those facts, to proceed. They have laid out facts—
within the eight corners—relevant to assessing a duty to defend. The allegations in
the underlying suit seem, at first blush, to fall clearly within the coverage for
advertising injury stemming from copyright infringement, and to fall clearly outside
the putatively relevant exclusion, which explicitly carves out copyright infringement
in advertising. The LLC defendants also plead that Old Guard has “unequivocally”
refused to defend them in the underlying suit and filed a declaratory judgment
action while disclosing no reasonable basis for having done so. A reasonable
inference from these facts is that Old Guard does not have any such basis.
Old Guard points to a few arguments. Old Guard Reply, Dkt. 55, at 3. But
these arguments are devoid of any factual enhancement or legal elaboration and are
thus not enough to show any bona fide dispute, especially when the language of the
insurance contract appears, facially, to deal with the issue so squarely.
Thus, without prejudging the merits, no bona fide dispute is apparent from
the face of the complaint. Accepting the facts pleaded as true, the LLC defendants
plausibly suggest that Old Guard refuses to defend them in bad faith and is thus
liable under section 155. It may well be that Old Guard will win on the merits—
after all, it is not obligated to plead any legal theories at this stage. Rabe v. United

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Airlines, Inc., 636 F.3d 866, 872 (7th Cir. 2011). On the record before the Court,
however, the LLC defendants have made out a plausible claim for relief.
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Old Guard’s motion to dismiss is denied.

Date: November 14, 2023
___________________________
Honorable Iain D. Johnston
United States District Judge

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