County of McHenry v. Insurance Co. of the West

• Decision Date: 24 February 2006
• Docket Number: No. 04-4223.,04-4223.
• Court: U.S. Court of Appeals — Seventh Circuit
• Parties: COUNTY OF McHENRY, Plaintiff-Appellant, v. INSURANCE COMPANY OF THE WEST, Defendant-Appellee.

438 F.3d 813

COUNTY OF McHENRY, Plaintiff-Appellant, v. INSURANCE COMPANY OF THE WEST, Defendant-Appellee.

No. 04-4223.

United States Court of Appeals, Seventh Circuit.

Argued December 9, 2005.

Decided February 24, 2006.

COPYRIGHT MATERIAL OMITTED

Craig M. White (argued), Richard J. Pearl, Wildman, Harrold, Allen & Dixon, Chicago, IL, E. Regan Daniels Shepley, Zukowski, Rogers, Flood & McArdle, Crystal Lake, IL, for Plaintiff-Appellant.

James K. Horstman (argued), Iwan, Cray, Huber, Horstman & Vanausdal, Chicago, ZIL, for Defendant-Appellee.

Before FLAUM, Chief Judge, and RIPPLE and WILLIAMS, Circuit Judges.

FLAUM, Chief Judge.

The County of McHenry, Illinois ("County") purchased an insurance policy from the Insurance Company of the West ("ICW"). ICW settled a $5 million claim on behalf of the County under the policy, but reserved the right to seek reimbursement from the County if it was determined that the policy did not cover the claim. ICW then sought to invoke the policy's arbitration clause and resolve the issues of coverage and reimbursement before an arbitrator. In response, the County filed suit, seeking a declaration that ICW cannot require the County to arbitrate. The district court granted ICW's motion to dismiss the suit for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). The County appeals. For the following reasons, we affirm the order of the district court.

I. Background

ICW issued an insurance policy to the County, which includes an excess public entity coverage ("the policy"). The policy pays on claims made against the County, after the County's self-insurance has been exhausted. The policy contains an arbitration provision, which states in relevant part:

N. ARBITRATION

In the event that a dispute arises between the Insured and the Company under this agreement or concerning when a claim or suit should be settled or the amount of such settlement, such dispute shall be subject to arbitration and both parties shall be bound by the findings and decision of the arbitrator or arbitrators.

The Company shall have the right, but not the duty, to determine when a claim or suit should be settled and may proceed to settle the claim or suit within its Limit of Liability. The insured and/or the company are entitled to require the other party to submit the dispute to arbitration.

(Emphasis added.)

In August 1999, Indeck Pleasant-Valley, Inc. ("Indeck") sued the County for denying a special use permit to construct and operate an electrical generation facility ("the Indeck claim"). Indeck sought declaratory and injunctive relief and $25 million in damages. The County instructed its broker, Marsh & McLennon, to place ICW on notice and ask ICW to protect the County's rights in the Indeck suit. ICW took the position that, due to an exclusion in the policy, it did not have a duty to defend or indemnify the County for the Indeck claim.

Between March and October 2002, ICW filed two suits in district court, each seeking a declaration that ICW had no duty to defend or indemnify. At the time ICW filed these suits, it had not made any payment for the Indeck claim. Although not relevant to this appeal, the County was successful in having both suits dismissed for lack of subject matter jurisdiction, under Federal Rule of Civil Procedure 12(b)(1). On November 21, 2002, ICW paid its $5 million indemnity limit on the Indeck claim and obtained a release of all damages claims asserted by Indeck against the County.

In August 2003, ICW formally demanded arbitration of the coverage issues and appointed an arbitrator. The County rejected ICW's arbitration demands, but selected and appointed John Brechin as an arbitrator, in the event the County was forced to arbitrate. ICW maintains that the County never provided contact information for Brechin, even after ICW requested the information multiple times. ICW then appointed a second member (not Brechin) to the three-member arbitration panel and directed the two existing members to appoint a third member.

ICW, over the County's objections, directed the arbitration to begin, leading to the present suit. The County sued for declaratory judgment in March 2004, arguing that the arbitration agreement in the policy does not apply to the Indeck claim or, alternatively, that ICW had waived its right to demand arbitration by previously filing suits related to coverage of the Indeck claim ("waiver argument"). ICW moved to stay pursuant to 9 U.S.C. § 3 and to dismiss pursuant to Rule 12(b)(6). ICW argued that the arbitrators—not the district court—are to determine whether the parties' disputes are subject to the policy's arbitration clause and that all disputes between the parties are subject to arbitration. The County responded to the Rule 12(b)(6) motion by arguing: 1) that the issues ICW sought to arbitrate were not covered by the arbitration agreement; and 2) that Illinois law does not allow an insurer to seek reimbursement from an insured. The County did not include its waiver argument in its response to ICW's motion to dismiss.

On October 25, 2004, the district court granted ICW's Rule 12(b)(6) motion and dismissed the suit. According to the district court, the central issues were whether the question of arbitrability should be made by an arbitrator, and alternately, whether the parties' disputes are within the policy's arbitration provision. The district court found that the court, not an arbitrator, should determine the issue of arbitrability. Next, the district court explained that "in the context of the arbitration provision, it is clear that the use of the term `under this agreement' was meant to cover disputes arising under any part of the insurance policy," including disputes over coverage and reimbursement. Finally, the district court refused to consider whether the policy or Illinois law allow ICW to seek reimbursement, finding that to be a merits issue that must be resolved by the arbitrators.

The County filed a motion under Federal Rule of Civil Procedure 59(e) to amend or alter the judgment. The County argued—as it did in its complaint but not in response to ICW's motion to dismiss—that ICW had waived the issue of arbitrability by bringing two suits on the Indeck claim. The district court denied the County's motion. The district court found that although the County raised the waiver issue in its initial complaint, it should have made the waiver argument in response to ICW's motion to dismiss, and it was too late to raise the issue in a Rule 59(e) motion. The County appeals.

II. Discussion

"When a district court grants a motion to dismiss under Rule 12(b)(6), our review is de novo." Stachowski v. Town of Cicero, 425 F.3d 1075, 1078 (7th Cir.2005).

We construe the complaint "in the light most favorable to the plaintiff, taking as true all well-pleaded factual allegations and making all possible inferences from those allegations in his or her favor." We shall affirm the dismissal only if it "`appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'"

Barnes v. Briley, 420 F.3d 673, 677 (7th Cir.2005) (internal citations omitted).

The County raises two main issues on appeal. First, the County argues that the district court erred by dismissing its complaint without considering its waiver argument, which was included in the County's complaint but not its response to ICW's motion to dismiss. Second, the County asserts that even if ICW did not waive its right to compel arbitration, the policy's arbitration clause does not cover the parties' dispute over the Indeck claim.

A. Waiver

According to the County, dismissal at the pleadings stage was improper because the district court failed to consider its alternative grounds for declaratory relief, i.e., its waiver argument. The County maintains that ICW waived its right to demand arbitration related to the Indeck claim by filing two coverage suits that addressed the same coverage issues ICW seeks to arbitrate-the application of the condemnation exclusion and ICW's duties under the policy regarding the Indeck claim. The County included the waiver argument in its complaint, but not in its response to ICW's motion to dismiss.

ICW's sole argument is that the County forfeited its waiver argument by failing to include the argument in its response to ICW's motion to dismiss.

The County disagrees. According to the County, the district court erred by failing to consider whether the complaint stated a claim under any possible theory, including the waiver theory, even if that theory was not presented in response to a motion to dismiss. Additionally, the County implies, in a footnote of its brief, that the district court also erred by denying the County's Rule 59(e) motion to alter or amend the judgment and refusing to consider the merits of the County's waiver argument. The County therefore urges this Court to consider the waiver argument, even if we conclude it was not properly raised below. As a last resort, the County asks the Court to exercise its discretion to consider new arguments and find that ICW has waived its right to demand arbitration of the Indeck claim.

Although this case presents a close question, we agree with ICW that the County has forfeited its waiver argument, and we decline to exercise our discretion to consider that argument now. The County raised two claims in its complaint: 1) that it was entitled to a declaration that ICW does not have a right to arbitrate coverage or reimbursement issues; and 2) that it was entitled to a permanent injunction prohibiting ICW from prosecuting any arbitration proceeding against the County. The declaratory judgment request was based on the County's arguments that the arbitration clause did not cover the parties' dispute and that the County had waived its right to arbitrate. The County discussed the waiver argument in several paragraphs of its complaint.¹ However, the...