First Ins. Funding Corp. v. Federal Ins. Co.

Decision Date28 March 2002
Docket NumberNo. 01-2855.,01-2855.
Citation284 F.3d 799
PartiesFIRST INSURANCE FUNDING CORPORATION, Plaintiff-Appellant, v. FEDERAL INSURANCE COMPANY, Defendant-Appellee.
CourtU.S. Court of Appeals — Seventh Circuit

Christopher C. Dickinson (argued), Jenner & Block, Chicago, IL for plaintiff-appellant.

Edward M. Kay (argued), Clausen Miller, Chicago, IL, for defendant-appellee.

Before BAUER, RIPPLE and MANION, Circuit Judges.

RIPPLE, Circuit Judge.

Defrauded of over $4.3 million, First Insurance Funding Corporation ("First Insurance") sought indemnification for these losses under the terms of a financial institution bond that its parent corporation had purchased from Federal Insurance Co. ("Federal"). When Federal denied the claim for coverage, First Insurance filed this action seeking a declaratory judgment of Federal's obligation to indemnify for these losses. In addition, First Insurance alleged that Federal's actions constituted not only a breach of contract but also an unreasonable and vexatious denial of coverage in violation of the Illinois Insurance Code. Upon Federal's motion, the district court dismissed the complaint concluding that the bond did not cover the losses for which First Insurance sought indemnification. In the district court's determination, this ruling also foreclosed First Insurance's claim against Federal under the Illinois Insurance Code. For the reasons set forth in the following opinion, we affirm the judgment of the district court.

I BACKGROUND
A. Facts

Operating from Northbrook, Illinois, First Insurance serves as an insurance premium finance company. In this role, it provides loans to businesses that seek to finance the payment of their annual insurance premiums. Typically, these businesses obtain financing from First Insurance through an independent insurance broker. More precisely, a business seeking insurance coverage hires an independent insurance broker for a dual purpose; the broker not only procures insurance coverage for the business but also obtains the necessary financing for this purchase from an insurance premium finance company such as First Insurance.

If the broker and its business client select First Insurance to finance the transaction, the parties document the loan through a standardized finance agreement. To expedite the loan application process, First Insurance provides brokers with blank premium finance agreements as well as related computer software. Using this material, the broker assists its business client in filling out the loan agreement. Once the broker and client complete and sign the finance agreement, they forward the document to First Insurance which then must review and approve the application. Once First Insurance approves the loan, it disburses the loan amount to the broker who, in turn, pays the insurance premium on behalf of its client.

Beginning in 1996, First Insurance provided funding for a significant volume of legitimate premium finance loans for clients of Colesons Insurance Group ("Colesons") — an independent insurance broker. Colesons had received authorization from First Insurance to select it from among vendors offering premium financing to Colesons' business clients. In submitting its clients' loan applications, Colesons used the blank premium finance agreements and related software provided by First Insurance. Based on these legitimate transactions, Colesons developed a reputation with First Insurance for trustworthy business dealings.

However, at some time prior to August 2000, certain individuals associated with Colesons began submitting fraudulently altered premium finance agreements to First Insurance. Specifically, these documents bore forged signatures of Colesons' clients that purportedly sought premium finance loans from First Insurance. The fraudulently altered documents shared certain similarities. Each premium finance agreement bore Colesons' warranty that the client's signature was genuine. In addition, when preparing the altered documents, the forgers used the software program that First Insurance had provided Colesons. In reliance on these forged and fraudulently altered documents, First Insurance disbursed over $4.3 million to Colesons.

Upon discovering the fraudulent transactions, First Insurance promptly sought indemnification for its losses under the terms of a financial institution bond that its parent corporation had purchased from Federal. This bond, which served as an insurance policy, provided coverage against losses resulting from certain fraudulent or dishonest conduct perpetrated against First Insurance. Citing, among other reasons, Exclusion 3.m of the bond, Federal denied the request for indemnification. Exclusion 3.m provides that:

This bond does not directly or indirectly cover ... loss caused by any agent, broker, factor, commission merchant, independent contractor, intermediary, finder or other representative of the same general character of the ASSURED.

R.12, Ex.A. Federal reasoned that Colesons served as an intermediary, finder or other representative of First Insurance. As such, in Federal's estimation, the terms of the bond did not cover the losses for which First Insurance sought indemnification.

B. District Court Proceedings
1.

On December 29, 2000, First Insurance, invoking the diversity jurisdiction of the district court,1 commenced this multi-count action against Federal. In particular, the complaint sought a declaratory judgment that the terms of the bond required Federal to indemnify First Insurance for the losses it sustained as a result of the forgery scheme. First Insurance also alleged that Federal's failure to indemnify constituted not only a breach of contract but also an unreasonable and vexatious denial of coverage in violation of Section 155 of the Illinois Insurance Code.

Federal promptly moved to dismiss the complaint. Specifically, the insurer submitted that Colesons was an intermediary, finder or similar representative of First Insurance thereby implicating Exclusion 3.m of the bond. Thus, in Federal's estimation, the bond did not cover the losses for which First Insurance sought indemnification. Moreover, absent a valid claim for coverage, Federal reasoned that First Insurance could not maintain a cause of action under the Illinois Insurance Code.

2.

After reviewing the pleadings, the district court dismissed First Insurance's complaint. Finding the terms of the contract unambiguous, the district court concluded that the bond excluded from coverage the losses for which First Insurance sought indemnification. In the district court's estimation, Colesons functioned as an intermediary or finder of First Insurance thereby implicating Exclusion 3.m of the bond. Because this provision barred from coverage losses caused by an intermediary or finder, First Insurance could not state a valid claim for coverage under the bond. According to the district court, this determination also foreclosed First Insurance's claim under Section 155 of the Illinois Insurance Code. Relying on Illinois law, the court concluded that an insured must have a legitimate claim for coverage before it may maintain an action against an insurer under this statutory provision. First Insurance's complaint was dismissed with leave to amend its allegations.

Availing itself of this opportunity, First Insurance submitted an amended complaint to the district court.2 The district court, however, concluded that First Insurance had failed to allege any new allegations and had merely recapitulated its previous pleading. Moreover, the district court expanded its previous ruling, noting that, even if Colesons had not functioned as an intermediary or finder, the insurance broker certainly served First Insurance as a representative of the same general character. Once again concluding that Exclusion 3.m defeated First Insurance's request for indemnification, the district court again dismissed the complaint with leave to amend. First Insurance, however, failed to amend the complaint.3

II DISCUSSION

We review the district court's grant of a motion to dismiss de novo. See Tobin for Governor v. Ill. State Bd. of Elections, 268 F.3d 517, 521 (7th Cir.2001). We not only accept as true all of the well-pleaded factual allegations in the plaintiff's complaint but also draw all reasonable inferences in the plaintiff's favor. See id. We, however, need not accept as true "conclusory statements of law or unsupported conclusions of fact." McLeod v. Arrow Marine Transp., Inc., 258 F.3d 608, 614 (7th Cir.2001). After reviewing the plaintiff's pleadings under these rules, if it appears beyond doubt that the plaintiff cannot prove any set of facts that would entitle it to relief, then we shall affirm the district court's dismissal of the complaint. See Tobin for Governor, 268 F.3d at 521.

A.
1.

Before turning to the provisions of the bond, we set forth the principles that will guide our inquiry. Interpretation of an unambiguous contract — including insurance policies — poses a question of law. See Zemco Mfg., Inc. v. Navistar Int'l Transp. Corp., 270 F.3d 1117, 1123 (7th Cir.2001). Under Illinois law,4 when interpreting an insurance agreement, the court's primary function is to ascertain and give effect to the true intentions of the contracting parties. See Fid. & Cas. Co. v. Merridew, 261 Ill.Dec. 1, 762 N.E.2d 570, 574 (2001). In doing so, we must consider the agreement as a whole, "with due regard to the risk undertaken, the subject matter that is insured, and the purpose of the entire contract." Maremont Corp. v. Cont'l Cas. Co., 326 Ill.App.3d 272, 260 Ill.Dec. 133, 760 N.E.2d 550, 554 (2001). Absent some contrary indication from the terms of the agreement, undefined and unambiguous terms are assigned their plain and ordinary meaning. See Benedict v. Fed. Kemper Life Assurance Co., 325 Ill.App.3d 820, 259 Ill.Dec. 543, 759 N.E.2d 23, 27 (2001). If the terms of the...

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