McCalla Corporation v. ARCH Intermediaries Limited et al
Filing
28
MEMORANDUM AND ORDER granting 20 Motion for Summary Judgment; denying 22 Motion for Summary Judgment. Signed by U.S. District Senior Judge Sam A. Crow on 5/1/14. (mb)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
McCALLA CORPORATION and
McCALLA CORPORATION, as a
Member of EMPLOYMENT PRACTICES
RISK MANAGEMENT ASSOCIATION,
Plaintiff,
v.
No. 13-1317-SAC
CERTAIN UNDERWRITERS
AT LLOYD’S, LONDON,
Subscribing to Policy No. KAH100513,
Defendant.
MEMORANDUM AND ORDER
This declaratory judgment case comes before the court on crossmotions for summary judgment. The primary issue is whether insurance
issued by the Defendant obligates Defendant to defend and to pay certain
amounts arising from Plaintiff’s criminal charges.
I. Summary Judgment Standard
A court grants a motion for summary judgment under Rule 56 of the
Federal Rules of Civil Procedure if a genuine issue of material fact does not
exist and if the movant is entitled to judgment as a matter of law. The court
is to determine “whether there is the need for a trial-whether, in other
words, there are any genuine factual issues that properly can be resolved
only by a finder of fact because they may reasonably be resolved in favor of
either party.” Anderson v.. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986).
“Only disputes over facts that might affect the outcome of the suit under the
governing law will ... preclude summary judgment.” Id. There are no
genuine issues for trial if the record taken as a whole would not persuade a
rational trier of fact to find for the nonmoving party. Matsushita Elec. Indust.
Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).
“Cross-motions for summary judgment are to be treated separately;
the denial of one does not require the grant of another.” Buell Cabinet Co. v.
Sudduth, 608 F.2d 431, 433 (10th Cir. 1979). To the extent the crossmotions overlap, however, the court addresses the legal arguments
together. Where the parties file cross motions for summary judgment, the
court is “entitled to assume that no evidence needs to be considered other
than that filed by the parties, but summary judgment is nevertheless
inappropriate if disputes remain as to material facts.” James Barlow Family
Ltd. Partnership v. David M. Munson, Inc., 132 F.3d 1316, 1319 (10th Cir.
1997), cert. denied, 523 U.S. 1048 (1998).
II. Uncontested Facts
Plaintiff, McCalla Corporation, is organized under the laws of Kansas.
Defendant, Certain Underwriters at Lloyd’s London Subscribing to Policy
Number KAH100513, issued policies of insurance to Plaintiff. Plaintiff is a
defined “Insured” under the Policy as a member of Plaintiff Employment
2
Practices Risk Management Association (EPRMA), an Illinois unincorporated
association.
In August of 2012, Plaintiff received notice that it was a target of a
U.S. Immigration and Customs Enforcement investigation. The next month,
a search warrant was executed on Plaintiff’s premises. Plaintiff retained
counsel to defend the criminal investigation and agreed to pay expenses as
they were incurred. During the policy period, the federal government filed a
one-count information charging Plaintiff with violating 18 U.S.C. §
1546(b)(2) - knowingly aiding and abetting the use of an identification
document, having reason to know the document was false, for the purpose
of satisfying a requirement of the Employee Eligibility Verification Act
program.
On November 1, 2012, pursuant to the notice requirements of the
insurance policy, Plaintiff demanded that Defendant assume its duty of
defense and pay defense costs for Plaintiff, as provided in the Policy. On
December 3, 2012, Plaintiff entered a plea to the criminal charge, admitting
the following facts:
In about March 2011, McCalla Corporation's director of operations
(supervisor) met with the manager of one of the McDonald's
restaurants it operates in Wichita, Kansas, and told the store manager
that the supervisor needed to update the store manager's 1-9 form
using current identity documents as required by the Department of
Homeland Security Employment Eligibility Verification program, as the
documents the store manager had previously used on her 1-9 form
were expired or not otherwise valid. Two days later, as proof of
employment eligibility, the store manager presented to the supervisor
a "resident alien" card that the supervisor knew did not appear to be
3
genuine, but the supervisor updated the manager's 1-9 form and
McCalla Corporation took no further action concerning the manager's
employment as a McCalla McDonald's restaurant store manager, a
position which she held from May 2009 to September 2012. The
supervisor also was aware that it took weeks, not two days, for a
foreign national to obtain a "resident alien" card, giving him further
reason to know that the resident alien card presented to him by the
store manager was not genuine. As a result of the defendant's
conduct, it derived or had proceeds traceable to, indirectly or directly,
the amount of $100,000.
The Judgment against Defendant ordered a $300,000 fine and a
$100,000.00 forfeiture to the United States pursuant to 18 U.S.C. §
982(a)(6)(A). Dk. 23, Exh. 6.
The day after Plaintiff entered its plea, Plaintiff was informed that
Defendant declined to provide coverage or a defense. After Defendant
waived any mediation requirement delineated in the policy, Plaintiff filed this
suit. Plaintiff seeks the following: a declaration that Defendant owed it a
duty to defend Plaintiff in the above-referenced criminal proceeding; a
finding that Defendant acted in bad faith in not doing so; recovery of its
costs of defense ($104,302.58); and reimbursement for or payment of the
$100,000 forfeiture ordered by the court in the criminal case.
III. Governing Law
Plaintiffs assert that the “parties agreed in the pre-trial order that
Kansas law applies.” Dk. 23, p. 10. But the pretrial order is not so
unconditional, stating in relevant part: “[s]ubject to the court’s
determination of the law that applies to the case, the parties believe and
agree that the substantive issues in this case are governed by the following
4
law: The State of Kansas.” Dk. 19, p. 2. The insurance contract at issue
contains a choice of law clause stating that “any dispute concerning the
interpretation of this Policy shall be governed by the laws of Illinois, U.S.A.”
Dk. 7, Exh. A, p. 28. Yet neither party acknowledges this language or raises
the issue of choice of law, and the Court need not raise it sua sponte. See
Flying J Inc. v. Comdata Network, Inc., 405 F.3d 821, 831 n. 4 (10th Cir.
2005).
But the court’s standard approach in diversity cases is to
apply the substantive law, including choice of law rules, of the forum state.
See BancOklahoma Mortgage Corp. v. Capital Title Co., 194 F.3d 1089, 1103
(10th Cir. 1999). Where, as here, the parties to a contract have entered an
agreement that incorporates a choice of law provision, Kansas courts
generally effectuate the law chosen by the parties to control the agreement.
Brenner v. Oppenheimer & Co. Inc., 273 Kan. 525, 539-540 (2002). Kansas
courts will not, however, enforce a choice of law provision shown to be
contrary to the public policy of the forum state. Id, at 540-41. But that
narrow exception applies only when enforcing the foreign law would
contravene a prominent public policy— an inconsistency between the chosen
law and the forum state's law is not enough. Alexander v. Beech Aircraft
Corp., 952 F.2d 1215, 1223 (10th Cir. 1991) (citing Restatement (Second)
of Conflict of Laws § 90 [1969]). See Enterprise Bank & Trust v. Barney
5
Ashner Homes, Inc., 2013 WL 1876293, 9 (Kan.App. 2013). No such
showing has been made here.
A second exception may also exist. “The Brenner court suggested that
a choice-of-law provision might be constitutionally suspect if it called for
using substantive legal principles from a jurisdiction having no connection to
the underlying transaction or the extant dispute. Brenner, 273 Kan. at 534–
35, 44 P.3d 364.” Enterprise Bank & Trust, 2013 WL 1876293 at 9. But
Plaintiff is a member of an Illinois association through which it is insured,
and Defendant is an insurance company whose address for purposes of
service of process is in Chicago, Illinois. Dk. 7, pp. 1-2 and Exh. A, pp. 1, 3.
The pleadings thus indicate that the State of Illinois has sufficient connection
to the underlying transaction to satisfy due process. Accordingly, the Court
shall apply the substantive law of the State of Illinois to this dispute, in
accordance with the parties’ choice of law in the insurance contract.
IV.
Insurance Contracts, generally
The construction, interpretation, or legal effect of a contract is a
matter to be determined by the court as a question of law. Avery v. State
Farm Mutual Automobile Insurance Co., 216 Ill.2d 100, 129 (2005). The
general rules in Illinois for construing the language of an insurance policy
are well-established.
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. Hobbs v. Hartford
Insurance Co. of the Midwest, 214 Ill.2d 11, 17, 291 Ill.Dec. 269, 823
6
N.E.2d 561 (2005). Because the court must assume that every
provision was intended to serve a purpose, an insurance policy is to be
construed as a whole, giving effect to every provision (Central Illinois
Light Co., 213 Ill.2d at 153, 290 Ill.Dec. 155, 821 N.E.2d 206), and
taking into account the type of insurance provided, the nature of the
risks involved, and the overall purpose of the contract (American
States Insurance Co. v. Koloms, 177 Ill.2d 473, 479, 227 Ill.Dec. 149,
687 N.E.2d 72 (1997)). If the words used in the policy are clear and
unambiguous, they must be given their plain, ordinary, and popular
meaning, and the policy will be applied as written, unless it
contravenes public policy. Hobbs, 214 Ill.2d at 17, 291 Ill.Dec. 269,
823 N.E.2d 561. “Although policy terms that limit an insurer's liability
will be liberally construed in favor of coverage, this rule of construction
only comes into play when the policy is ambiguous.” Id.
Knezovich v. Hallmark Ins. Co., 975 N.E.2d 1165, 1171, 363 Ill.Dec. 856,
862 (Ill.App. 1 Dist. 2012).
The entire document is to be examined to determine the parties'
intentions with consideration given to the contract's subject matter and
purpose as well as the policy's language. Hannigan v. Country Mutual
Insurance Co., 264 Ill.App.3d 336, 339, 201 Ill.Dec. 465, 636 N.E.2d 897
(1994). If an insurance policy's language is capable of more than one
reasonable interpretation, then the interpretation that favors coverage
prevails. Outboard Marine Corp. v. Liberty Mutual Ins. Co, 154 Ill.2d 90 at
119, 180 Ill.Dec. 691, 607 N.E.2d 1204 (1992). All doubts and uncertainties
in an insurance policy's language must be construed strictly against the
drafter and in favor of coverage. Id, 154 Ill.2d at 121.
7
Plaintiff asserts that Defendant’s duties in this case arise under two
policy provisions: the Employment Practices Liability (EPL) section, and the
Directors’ and Officers’ (D & O) section.
V. Employment Practices Liability Coverage
The EPL section generally provides that Defendant will pay all “loss
that an Insured becomes legally obligated to pay as a result of Claims first
made against such Insured during the Policy Period … for a Wrongful
Employment Practice.” Dk., 7, Exh. A, p. 17. The policy defines “Claim” to
include “the filing of a criminal lawsuit … provided, however that the
discretion to consider such lawsuit … a Claim shall be in the sole discretion of
Underwriters and must be agreed to by the Insured Company.” Id. It defines
“loss” to include judgments and defense costs. Id. And it defines “Wrongful
Employment Practices” to include “wrongful failure or refusal to adopt or
enforce adequate workplace or employment practices, policies or
procedures.” Plaintiff contends that the filing of the criminal information was
a “claim,” that its criminal act was a “wrongful employment practice,” and
that the forfeiture amount and defense costs are “losses.”
A. Wrongful Employment Practices
But Plaintiff ignores other definitional language which squarely defeats
its contentions. An additional proviso applies to all defined “Wrongful
Employment Practices,” stating they are covered “ … but only if
employment-related and claimed by or on behalf of an Employee, Former
8
Employee, or applicant for employment …” Dk. 7, Exh. A, p. 18 (emphasis
added). The criminal lawsuit brought against the Plaintiff was not “claimed
by or on behalf of” any enumerated person, having been brought instead by
the United States Attorney on behalf of the United States of America.
Plaintiff has shown no arguably reasonable interpretation of this section of
the policy which would justify reading this plain language out of the contract,
as is necessary to trigger Defendant’s duty to defend. And doing so would
defeat the purpose of EPL coverage, which is necessarily limited to
enumerated acts claimed by employees, former employees and prospective
employees.
B. Loss
Similarly, Plaintiff ignores the definition of “loss” for purposes of this
section, which states that “Loss does not include: (1) fines, penalties, or
taxes … [or] (10) any relief, whether pecuniary or injunctive, imposed or
agreed to in connection with criminal lawsuits or proceedings.” Dk. 7, Exh.
A, p. 16. The forfeiture is excluded as a fine or penalty, see discussion below
at VI B 1, 2, and defense costs are excluded because they constitute relief
imposed in connection with a criminal lawsuit, see Illinois Union Ins. Co. v.
Cliff Berry Inc., 2006 WL 3667230, 5 -6 (S.D.Fla. 2006) (“Because it
excludes any payments in connection to a criminal act as determined by a
final judgment, Illinois Union would be owed repayment of those legal fees
and expenses that it expended in defense of the Insureds.”).
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Accordingly, the court finds as a matter of law that Defendant did not
breach any duty under the EPL section of the policy. The court finds it
unnecessary to address Plaintiff’s contention that the sole discretion clause
in the policy’s definition of “Claim” violated public policy so is void. Similarly,
the Court finds it unnecessary to reach Defendant’s alternative argument
that various exclusions, such as the criminal adjudication exclusions, apply.
VI. Directors’ and Officers’ Liability Coverage
Plaintiff next contends that Defendant breached its duties under the
policy’s D & O section, which generally obligates Defendant to “pay all Loss
resulting from Claims first made against the Insured Company during the
Policy Period … for Wrongful Acts.”
A. Claim
Plaintiff contends that the criminal information is a claim because
“Claim” is defined to include “a civil, criminal, administrative or regulatory
proceeding commenced against any Insureds in which they may be
subjected to binding adjudication of liability for damages or other relief …”
Dk. 7, Exh. A, p. 20. Plaintiff contends that a criminal proceeding was
commenced against it “which subjected it to a binding adjudication of
liability when the information was filed.” Dk. 23, p. 15. But Plaintiff does not
attempt to show how the filing of an information subjected it to an
adjudication of liability “for damages or other relief …” as the policy requires.
10
“A criminal complaint does not seek damages. It is penal in nature.”
Spiegel v. State Farm Fire and Casualty Co., 277 Ill.App.3d 340, 341 (1995)
(quoting Shelter Mutual Insurance Co. v. Bailey, 160 Ill.App.3d 146, 156
(1987)). And cases examining identical policy language, noted below, do not
support the construction that a criminal case could be “other relief” within
the meaning of this phrase.
In Foster v. Summit Medical Systems, Inc., 610 N.W.2d 350
(Minn.Ct.App. 2000), the policy defined “claim” to include an administrative
proceeding relating to the sale of securities “in which [the insureds] may be
subjected to a binding adjudication of liability for damages or other relief”).
Id. at 354. The Court narrowly construed “relief” to require a binding
adjudication of liability for other relief.
In a legal context, the term “relief” refers to redress or benefit,
especially equitable redress such as an injunction or specific
performance. See Black's Law Dictionary 1293 (7th ed.1999). Issuing
a subpoena does not fit within either meaning of the term “relief.” See
City of Thief River Falls v. United Fire & Cas. Co., 336 N.W.2d 274, 276
(Minn. 1983) (holding that petition for mandamus to compel city to
initiate condemnation proceedings was not a “suit * * * seeking
damages” within the plain meaning of the insurance policy because its
essence was to secure performance of a legally required act rather
than provide damages).
Foster, 610 N.W.2d at 354. Foster held that an SEC investigation was not a
proceeding in which respondents “may be subjected to a binding
adjudication for * * * relief.” Accordingly, the insurance coverage claim was
barred.
11
The Northern District of Illinois subsequently found Foster’s narrow
view of “relief” appropriate, given the policy language.
The Foster decision focused on the use of “relief” in defining
claim, but considered it as part of a phrase that included “binding
adjudication.” See Foster, 610 N.W.2d at 354 (“The parties agree that
the SEC investigation is an administrative proceeding but dispute
whether it is a proceeding in which respondents ‘may be subjected to a
binding adjudication for * * * relief.” ’). The Foster court took a narrow
view of “relief,” construing it in the context of an adjudication, which
was appropriate given the language of the policy there under
consideration.
Minuteman Intern., Inc. v. Great American Ins. Co., 2004 WL 603482, 5
(N.D.Ill. 2004) (finding a subpoena was a demand for relief, under policy
language different from the policy here).
Similarly, in Center for Blood Research, Inc. v. Coregis Insurance Co.,
305 F.3d 38 (1st Cir. 2002), the definition of “claim” in the policy included
“any judicial or administrative proceeding in which any INSURED(S) may be
subjected to a binding adjudication of liability for damages or other relief.”
The Circuit held this language required the potential relief to be the product
of a binding adjudication in a proceeding. Id, at 43. There, the U.S. Attorney
had served an investigative subpoena on the insured, who was not a target
of the investigation and was not charged civilly or criminally. See id. at 4041. In holding that there was no claim, the First Circuit focused on the lack
of an adjudication for liability, see id. at 42-43. The Court noted “[w]e do
not imply that our result would be different … if the investigation led to the
12
government bringing civil or criminal proceedings against it.” 305 F.3d 38,
42 n. 5.
In Illinois Union Ins. Co. v. Cliff Berry Inc., 2006 WL 3667230, 4
(S.D.Fla. 2006), the court examined an identical definition of “claim.” It
found the criminal information was a “claim” only because the information
sought restitution, which it considered to be “other relief” under the terms of
the policy. In contrast, the information in this case sought no restitution, and
none was ordered.
Plaintiff contends that cases examining “similar[ly] worded policies”
have found that the issuance of a search warrant constitutes a claim, citing
Protection Strategies, Inc. v. Starr Indemnity and Liability Co., 2013 CV
00763 (E.D. Va. Sept. 10, 2013). Dk. 23, p. 14. But that policy’s definition
of “claim” defined “claim” to include any “judicial administrative, or
regulatory proceeding, whether civil or criminal, for monetary, non-monetary
or injunctive relief commenced against an Insured … by … return of an
indictment, information, or similar document (in the case of a criminal
proceeding).” Dk. 29, Att. 1, p. 3. Because that broader definition does not
require a binding adjudication of liability for damages or other relief, it is
significantly different than the relevant definition in this case.
The only other case cited by Plaintiff, Syracuse Univ. v. Nat’l Union Fire
Ins. Co., 2013 N.Y. Slip Op. 51041(U), 2013 WL 3357812 (N.Y. Sup. Ct.
Mar. 7, 2013), is also dissimilar to the present policy in its definition of
13
“claim.” These and other cases are inapposite because they involve
insurance policies that do not define “claim,” or define “claim” differently
than the insurance policy at issue here.
Plaintiff has shown no reasonable construction of the definition of
“claim” in the D & O policy which would permit the Court to find that the
search warrant process or the filing of the information in this case, which did
not seek restitution, could subject the Plaintiff to an adjudication of liability
for damages or to an adjudication of liability for other relief, as the policy
requires. No language in the information, in the superseding information, or
used in connection with issuing or executing the search warrant thus gives
rise to the possibility of coverage for the Plaintiff under the D & O policy.
B. Loss
Defendant additionally contends that the $100,000 forfeiture is not a
“loss” because “loss” is defined to exclude “taxes, fines or penalties imposed
by law,” and to exclude “matters uninsurable under the law pursuant to
which this Policy is construed.” Dk. 7, Exh. 1, p. 21.
1. Tax, Fine, or Penalty
Plaintiff contends the forfeiture is not a “tax, fine or penalty” imposed
by law, but concedes the $300,000 fine it was required to pay as a result of
its criminal conviction is excluded by this language.
14
The criminal forfeiture ordered in Plaintiff’s criminal case was not
imposed pursuant to a civil proceeding in rem, but was part of the
punishment for Plaintiff’s criminal offense. See Dk. 23, Judgment, p. 3.
An in personam criminal forfeiture is a form of punishment that does not
differ from a fine. See Alexander v. United States (1993), 509 U.S. 544,
558-559, 113 S.Ct. 2766, 2775-2776, 125 L.Ed.2d 441, 455-456; United
States v. Wild, 47 F.3d 669, 674 (4th Cir. 1995). In personam forfeitures
involve “assessments, whether monetary or in kind, to punish the property
owner's criminal conduct.” Austin v. United States, 509 U.S. 602, 624, 113
S.Ct. 2801, 2813, 125 L.Ed.2d 488, 507 (1993) (Scalia, J., concurring). See
Black's Law Dictionary 722 (9th ed. 2009) (defining “forfeiture” as “3.
Something lost or confiscated by this process; a penalty.”).
Criminal forfeiture is mandatory in all cases where it applies, United
States v. Monsanto, 491 U.S. 600, 607, 109 S.Ct. 2657, 105 L.Ed.2d 512
(1989), and operates in personam against a defendant to divest him of his
title to proceeds of crime or property involved in his crime or that facilitated
his unlawful conduct, United States v. Vampire Nation, 451 F.3d 189, 202
(3d Cir. 2006). “Forfeitures flow from the notion that property is somehow
irreparably tainted-whether malum in se or malum prohibitum-so that no
private ownership can be claimed and the property reverts to the sovereign.”
St. Paul Fire & Marine Ins. Co. v. Genova, 172 F.Supp.2d 1001,
1005 (N.D.Ill. 2001).
15
In the Plaintiff’s underlying criminal case, the court ordered Plaintiff to
forfeit to the United States $100,000.00 pursuant to Title 18, U.S.C §
982(a)(6)(A), as is mandated by statute for all defendants convicted of such
offenses. See 18 U.S.C § 1546(b)(2).
The court, in imposing sentence on a person convicted of a
violation of [various statutes] shall order that the person forfeit to the
United States, regardless of any provision of State law-(ii) any property real or personal-(I) that constitutes, or is derived from or is traceable to the proceeds
obtained directly or indirectly from the commission of the offense of
which the person is convicted.
18 U.S.C. § 982(a)(6)(A). Thus Congress has determined that the criminal
activity in which the Plaintiff admittedly engaged strips the lawbreaker of his
ownership interest as a punishment, vesting ownership of the forfeitable
property in the government. See United States v. Ginsburg, 773 F.2d 798,
800–03 (7th Cir. 1985). Accordingly, this court does not hesitate to find that
the forfeiture ordered in this case was a “fine or penalty” as those terms are
used in this policy and thus is excluded from the policy’s definition of “loss.”
Cf, Mortenson v. National Union Fire Ins. Co. of Pittsburgh, Pa., 249 F.3d
667, 668-669 (7th Cir. 2001) (applying Illinois law in finding a statutory
penalty imposed for willful nonpayment of payroll taxes excluded as a “fine
or penalty” in the D & O policy).
16
2. Matters Uninsurable Under Illinois Law
Defendant also contends that the forfeiture is not “loss” because loss is
defined to exclude “matters uninsurable under the law pursuant to which
this Policy is construed.” Dk. 7, Exh. 1, p. 21. The Court agrees.
Illinois has held that there is no insurable interest in a civil forfeiture.
Indiana Ins. Co. v. Brown Packing Co., Inc., 2013 WL 1944469, 5 6 (Ill.App. 1 Dist. 2013). There, the Illinois court found a $2 million civil
forfeiture represented the amount of funds gained through illegal activity so
was not “damages” within the meaning of the insurance policy. The Court
further found that forfeiture was not insurable as a matter of Illinois law and
public policy, since the underlying complaint was a criminal prosecution. Id,
at 5-6.
Similarly, under Illinois law, there is no insurable interest in the
proceeds of fraud. Ryerson, Inc., v. Federal Insurance Co., 676 F.3d 610,
613 (7th Cir. 2012) (applying Ill. law). The rationale for that holding - that
one cannot sustain a loss of something he doesn’t or shouldn’t have –
applies equally in this case:
If disgorging such proceeds is included within the policy's definition of
“loss,” thieves could buy insurance against having to return money
they stole. No one writes such insurance. See Scottsdale Indemnity
Co. v. Village of Crestwood, 673 F.3d 715, 717–18, 719–20 (7th Cir.
2012) (Illinois law); Federal Ins. Co. v. Arthur Andersen LLP, 522 F.3d
740, 743–44 (7th Cir. 2008) (ditto); Mortenson v. National Union Fire
Ins. Co., 249 F.3d 667, 671–72 (7th Cir. 2001) (ditto), and no state
would enforce such an insurance policy if it were written. Id. at 672;
Level 3 Communications, Inc. v. Federal Ins. Co., 272 F.3d 908, 910
(7th Cir. 2001). You can't, at least for insurance purposes, sustain a
17
“loss” of something you don't (or shouldn't) have. Id.; In re
TransTexas Gas Corp., 597 F.3d 298, 308–11 (5th Cir. 2010); Safeway
Stores, Inc. v. National Union Fire Ins. Co., 64 F.3d 1282, 1286 (9th
Cir. 1995). And so there is no insurable interest in the proceeds of a
fraud. Cf. Grigsby v. Russell, 222 U.S. 149, 154–55, 32 S.Ct. 58, 56
L.Ed. 133 (1911) (Holmes, J.); 3 Couch on Insurance §§ 41:3, 42:57,
pp. 41–12, 42–96 (3d ed.2011).
Ryerson, 676 F.3d at 612-13.
The rationale underlying these policy decisions was clarified in Beaver
v. Country Mutual Insurance Co., 420 N.E.2d 1058, 1061 (Ill.App.Ct. 1981),
where the Court held that “public policy prohibits insurance against liability
for punitive damages that arise out of one's own misconduct.” Id, at 1061.
In reaching its decision, the court explained that the purpose of punitive
damages is to punish and deter - a purpose that would not be served if the
wrongdoer were allowed to shift the burden of the sanction to an insurance
company. Id. at 1060. Cf, Chicago Bd. of Options Exchange, Inc. v. Harbor
Ins. Co., 738 F.Supp. 1184, 1187 (N.D.Ill. 1990) (finding no public policy in
Illinois against a corporation's insuring for vicarious liabilities stemming from
the intentional torts of its officers and directors, such as retaliatory
discharge). The Beaver court further reasoned: “It is not disputed that
insurance against criminal fines or penalties would be void as violative of
public policy. The same public policy should invalidate any contract of
insurance against the civil punishment that punitive damages represent.” Id.
(citation and internal quotation marks omitted). See Local 705 Intern. Broth.
of Teamsters Health & Welfare Fund v. Five Star Managers, L.L.C., 316
18
Ill.App.3d 391, 395, 735 N.E.2d 679, 683, 249 Ill.Dec. 75, 79 (Ill.App. 1
Dist. 2000) (finding settlement was paid with money to which the payor was
not legally entitled and that such a payment is not a “loss” but was a
“matter uninsurable under the law” of Illinois). See generally State Farm Life
Ins. Co. v. Smith, 66 Ill.2d 591, 595, 363 N.E.2d 785, 786, 6 Ill.Dec. 838,
839 (Ill. 1977) (stating “the long-established policy that one may not profit
by his intentionally-committed wrongful act.”)
The same rationale applies here. The Plaintiff, and not its officers or
directors, admittedly committed the crime. The purpose of criminal forfeiture
is to punish the criminal by depriving him of proceeds of his crime. That
purpose would not be served if the wrongdoer were permitted to shift the
burden of forfeiture to an insurance company. Accordingly, the policy
excludes the possibility that Defendant is obligated to pay the $100,000
forfeiture ordered against the Plaintiff in the underlying criminal case.
This result is consistent with Illinois public policy which excludes from
coverage intentional torts such as claims for “bodily injury, assault, battery,
invasion of privacy, mental anguish, emotional distress, sickness, disease or
death of any person, false arrest, false imprisonment, defamation, libel,
slander or damage to or destruction of any tangible property, including loss
of use thereof.” Id, pp. 21-22. See Davis v. Commonwealth Edison Co., 61
Ill.2d 494, 500–01, 336 N.E.2d 881, 885 (1975) (stating general rule that
one may not insure himself for his own intentional torts under Illinois law).
19
Additionally, it would be unreasonable to read this policy, which excludes
intentional torts, as covering forfeiture resulting from criminal acts. See
generally Fox v. Commercial Coin Laundry Systems, 325 Ill.App.3d 473,
476, 258 Ill.Dec. 840, 757 N.E.2d 529 (2001). Accordingly, no possibility of
coverage for the amount of forfeiture existed under the D & O section.
In determining lack of coverage, the Court finds it unnecessary to
reach the parties’ other arguments, including Defendant’s reliance on the
criminal adjudication exclusions and its assertion that insuring losses from
criminal cases would shock the Geiko gecko and its cohort insurance
mascots. Dk. 27, p. 5.
VII. Duty to Defend
An insurer's duty to defend its insured is determined by comparing the
allegations of the underlying complaint with the relevant provisions of the
insurance policy. Dixon Distributing Co. v. Hanover Insurance Co., 161 Ill.2d
433, 438, 204 Ill.Dec. 171, 641 N.E.2d 395 (1994). An insurer may refuse to
defend only when the allegations of the lawsuit “cannot possibly cover the
liability arising from the facts alleged.” Illinois Emcasco Insurance Co. v.
Northwestern National Casualty Co., 337 Ill.App.3d 356, 360, 271 Ill.Dec.
711, 785 N.E.2d 905 (2003). If the underlying complaint alleges facts within
or potentially within coverage, the insurer is obligated to defend its insured
even if the allegations are groundless, false, or fraudulent. United States
Fidelity & Guaranty Co. v. Wilkin Insulation Co., 144 Ill.2d 64, 73, 161
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Ill.Dec. 280, 578 N.E.2d 926 (1991). Any doubt about whether allegations in
a complaint state a potentially covered cause of action is ordinarily resolved
in favor of the insured. Pekin Ins. Co. v. United Parcel Service, Inc., 381
Ill.App.3d 98, 885 N.E.2d 386 (2008).
The Court has reviewed the copy of the criminal information attached
to Plaintiff’s brief, Dk. 23, Exh. C, and takes judicial notice of the
superseding information, see St. Louis Baptist Temple, Inc. v. Fed. Deposit
Ins. Corp., 605 F.2d 1169, 1172 (10th Cir. 1979) (court may take judicial
notice of filings in related cases). Yet it finds no allegations of facts within or
potentially within either the D & O section or the EPL section of the policy.
The facts asserted in these criminal documents are not arguably included
within the EPL section’s definitions of “Wrongful Employment Practices” or
“Loss,” or within the D & O section’s definition of “Claim.” Nor has Plaintiff
shown that anything connected with the search warrant process which
preceded the filing of the criminal information possibly triggered coverage
under either section of the policy. Accordingly, Defendant had no duty to
defend.
But even had the Court found a duty to defend, Plaintiff has shown no
damages from any breach of that duty. The parties agree that Plaintiff’s plea
and sentencing constitute a final adjudication of a criminal act. Plaintiff’s
criminal acts therefore currently fall within the “final adjudication” exclusions
in both the EPL and D & O sections. Accordingly, had Defendant paid the
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costs of Plaintiff’s defense of the criminal case and investigation, Plaintiff
would need to repay those amounts now. See American Family Mut. Ins. Co.
v. Enright, 334 Ill.App.3d 1026, 1038 (Ill.App. 2 Dist. 2002) (finding the trial
court erred in finding a duty to defend in the underlying criminal lawsuit
because the duty only arises if the allegation is proved to be false).
Under dishonest acts exclusions, which the court finds to be similar to
this exclusion, the insurer is bound to cover defense costs in cases in which
an insured is found not guilty. See e.g., In re Enron Corp. Securities,
Derivative & “ERISA” Litigation, 391 F.Supp.2d 541, 570-571 (S.D.Tex.
2005) (finding a policy exclusion which barred coverage for the ultimate net
loss arising from any claim against an insured for “any fines or penalties
imposed in a criminal suit, action, or proceeding,” excluded costs incurred in
the defense of criminal prosecutions against the insured that resulted in a
conviction but that the exclusion did not apply where the insured was found
not guilty); Polychron v. Crum & Forster Ins. Companies,916 F.2d 461, 463–
64 (8th Cir. 1990) (finding the exclusion for “fines or penalties imposed by
law,” “does not exclude attorney's fees incurred in defense of a criminal
matter, at least where the insured is acquitted”). But Plaintiff cites no case in
which a breach of a duty to defend or to pay defense costs was found where
the insured was found guilty of the criminal offense and the policy contained
a criminal adjudication exclusion, as here. Accordingly, Plaintiff has shown
no damages.
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VIII. Bad Faith
Plaintiff further contends that Defendant acted in bad faith in denying
coverage. Plaintiff alleges Defendant unreasonably delayed its denial of
coverage until after Plaintiff’s plea, then explained its denial by construing its
policy in a duplicitous manner.
Bad faith is “the semantic equivalent of ‘vexatious and unreasonable’
conduct.” Emerson v. American Bankers Insurance Co. of Florida, 223
Ill.App.3d 929, 936, 166 Ill.Dec. 293, 585 N.E.2d 1315 (1992). Given the
Court’s finding above that Defendant had no duty to defend and properly
denied coverage, no bad faith has been shown. See First Ins. Funding Corp.
v. Fed. Ins. Co., 284 F.3d 799, 807 (7th Cir. 2002) (“Illinois courts allow a
cause of action to proceed under Section 155 only if the insurer owed the
insured benefits under the terms of the policy.”); Central Mut. Ins. Co. v.
Useong Intern., Ltd., 394 F.Supp.2d 1043 (N.D.Ill. 2005) (finding “[b]ecause
this Court has held that Central has no duty to defend or indemnify UI, UI I
not entitled to any relief under Section 155.”); Hermitage Ins. Co. v. Action
Marine, Inc., 816 F.Supp. 1280 (N.D.Ill. 1993) (finding an insured cannot
recover on a bad faith denial of coverage claim under the Insurance Code
where the insurer rightfully denies coverage); McDaniel v. Glens Falls
Indem. Co., 333 Ill.App. 596, 602 78 N.E.2d 111 (1948) (rejecting bad faith
claim of vexatious delay where insured was not covered under the policy).
See also Sec. 155 of the Ill. Ins. Code, 215 ILCS 5/155 (2005) (“In any
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action by or against a company wherein there is in issue the liability of a
company on a policy or policies of insurance or the amount of the loss
payable thereunder, or for an unreasonable delay in settling a claim, and it
appears to the court that such action or delay is vexatious and
unreasonable, the court may allow as part of the taxable costs in the action
reasonable attorney fees, other costs, plus [certain penalties] ...).
IT IS THEREFORE ORDERED that Plaintiff’s motion for summary
judgment (Dk. 22) is denied and that Defendant’s motion for summary
judgment (Dk. 20) is granted.
Dated this 1st day of May, 2014, at Topeka, Kansas.
s/Sam A. Crow____________________
Sam A. Crow, U.S. District Senior Judge
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