National Cas. Co. v. Forge Indus. Staffing Inc.

• Decision Date: 03 June 2009
• Docket Number: No. 08-3110.,08-3110.
• Citation: 567 F.3d 871
• Parties: NATIONAL CASUALTY COMPANY, Plaintiff-Appellee, v. FORGE INDUSTRIAL STAFFING INCORPORATED, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

567 F.3d 871

NATIONAL CASUALTY COMPANY, Plaintiff-Appellee, v. FORGE INDUSTRIAL STAFFING INCORPORATED, Defendant-Appellant.

No. 08-3110.

United States Court of Appeals, Seventh Circuit.

Argued February 10, 2009.

Decided June 3, 2009.

Shaun M. Baldwin, Tressler, Soderstrom, Maloney & Priess, LLP, Chicago, IL, Thomas H. Crouch, Meagher & Greer, Scottsdale, AZ, for Plaintiff-Appellee.

Robert B. Baker, Surdyk & Baker, Chicago, IL, for Defendant-Appellant.

Before CUDAHY, WILLIAMS, and TINDER, Circuit Judges.

WILLIAMS, Circuit Judge.

Fearful that its insurer, National Casualty Corporation ("NCC"), would surreptitiously control its defense in a way that would preclude coverage under the insurance policy, Forge declined to accept insurer-appointed counsel to defend it against claims brought before the Equal Opportunity Employment Commission ("EEOC"). The parties then filed cross-claims for declaratory judgment seeking to resolve whether an actual conflict of interest existed requiring NCC to reimburse Forge for the costs of retaining independent counsel to defend against these EEOC charges.

Because we find that the EEOC charges do not contain mutually exclusive claims (one of which would be covered under the policy and one of which would not), and we fail to detect any other evidence that NCC would provide a less than vigorous defense on behalf of Forge, we find that under Illinois law, appointment of conflict counsel was not required. Therefore, we affirm the district court's judgment.

I. BACKGROUND

This suit arises out of a dispute regarding the burden of bearing the defense costs of an insured's privately retained counsel in an action before the EEOC. NCC issued an insurance policy to Forge Industrial Staffing, Inc. Forge is a staffing company that places temporary, and occasionally permanent, employees at companies throughout the United States. Among other things, the policy insured Forge against any legal damages stemming from intentional acts, including intentionally discriminating against any of its employees. The parties do not dispute any of the following facts.

During February and April 2006, four of Forge's former employees filed anti-discrimination charges with the EEOC. The gist of their complaints was that Forge fired them: (1) due to their race and/or gender; and/or (2) in retaliation for complaining about Forge's staffing practices, which allegedly included honoring its clients' requests not to staff employees that were African-American, Hispanic, and/or female.

As a result of these charges, NCC agreed to defend Forge under the Employment Practices Liability Part of the insurance contract and assigned NCC's own counsel to do so. At the same time, NCC reserved the right to later deny coverage based on any of the exclusions in the policy. Most notably, the policy did not provide coverage for "punitive damage awards" or for any claim arising out of Forge's "willful failure ... to comply with any law ... or regulations relating to employment practices." The policy defined "willful" as "acting with intentional or reckless disregard for such employment-related laws, orders or regulations."

After receiving this reservation-of-rights letter, Forge requested that NCC provide independent counsel for Forge because a purported conflict of interest existed as a result of NCC's reservation of rights. Specifically, Forge asserted that whether the policy would indemnify Forge for its alleged conduct depended on how the EEOC charges were defended with respect to the issues of punitive damages and Forge's knowledge of the applicable anti-discrimination laws. When NCC refused to provide independent counsel, Forge hired its own counsel. Subsequently, NCC filed this declaratory judgment action to resolve the conflict of interest issue as well as a dispute regarding the appropriate deductible under the policy. Forge cross-filed, requesting that the district court order NCC to cover Forge's defense costs. The district court found that no actual conflict existed and determined that Forge had to bear the costs of retaining its own counsel. The district court also found that only the Employment Practices Liability Part of the policy applied, requiring Forge to pay a $25,000 deductible to NCC. Forge now appeals.

II. ANALYSIS

A. Conflict of Interest Determination

In Illinois, an insurer has a broad duty to defend its insured in any action where the allegations in the complaint are even potentially within the scope of the policy's coverage. Guillen v. Potomac Ins. Co. of Ill., 203 Ill.2d 141, 271 Ill.Dec. 350, 785 N.E.2d 1, 7 (2003); Am. Family Mut. Ins. Co. v. W.H. McNaughton Builders, Inc., 363 Ill.App.3d 505, 300 Ill.Dec. 234, 843 N.E.2d 492, 497 (2006). Along with an insurer's obligation to defend its insured comes its right to control and direct the defense. Am. Family, 300 Ill.Dec. 234, 843 N.E.2d at 498. Policy dictates that an insurer has this right so that it "may protect its financial interest in the litigation's outcome and minimize unwarranted liability claims." Stoneridge Dev. Co. v. Essex Ins. Co., 382 Ill.App.3d 731, 321 Ill.Dec. 114, 888 N.E.2d 633, 644 (2008); see also Clemmons v. Travelers Insurance Co., 88 Ill.2d 469, 58 Ill.Dec. 853, 430 N.E.2d 1104, 1108 (1981). Insurer-appointed counsel has an ethical obligation to both the insurer and the insured. Stoneridge, 321 Ill.Dec. 114, 888 N.E.2d at 644; Am. Family, 300 Ill.Dec. 234, 843 N.E.2d at 498. However, in reality this counsel may have a closer relationship with the insurer and a greater desire to protect the insurer's interests. Ill. Masonic Med. Ctr. v. Turegum Ins. Co., 168 Ill.App.3d 158, 118 Ill.Dec. 941, 522 N.E.2d 611, 613 (1988). This is of no import when the interests of the insurer and its insured are aligned, but when they diverge, a conflict of interest arises. Am. Family, 300 Ill.Dec. 234, 843 N.E.2d at 498.

If there is an actual conflict of interest between the insurer and insured, the insured has the right to obtain independent counsel at the insurer's expense. See id.; Md. Cas. Co. v. Peppers, 64 Ill.2d 187, 355 N.E.2d 24, 31 (1976). An actual, not merely potential, conflict is required to trigger the insured's right to conflict counsel. See, e.g., Murphy v. Urso, 88 Ill.2d 444, 58 Ill.Dec. 828, 430 N.E.2d 1079, 1083-84 (1981); Am. Country Ins. Co. v. Williams, 339 Ill.App.3d 835, 274 Ill.Dec. 857, 791 N.E.2d 1268, 1276 (2003). An actual conflict does not arise merely because the insurer has an interest in negating coverage as to every count of the underlying complaint. See, e.g., Tews Funeral Home, Inc. v. Ohio Cas. Ins. Co., 832 F.2d 1037, 1047 (7th Cir.1987); Turegum, 118 Ill.Dec. 941, 522 N.E.2d at 613-14. Conversely, it is not dispositive that insurer and insured have a shared interest in a finding of no liability; in that case, "the question becomes whether the insurer's interest would be equally protected by a finding that would not be in the interest of the insured." Am. Family, 300 Ill.Dec. 234, 843 N.E.2d at 499; Murphy, 58 Ill.Dec. 828, 430 N.E.2d at 1083-84.

In order to determine if a conflict exists, the court "must compare the allegations of the underlying complaint against the insured to the terms of the insurance policy at issue." Am. Family, 300 Ill.Dec. 234, 843 N.E.2d at 498. If, after comparing the complaint against the insured to the insurance policy, "it appears that factual issues will be resolved in the underlying suit that would allow insurer-retained counsel to `lay the groundwork' for a later denial of coverage, then there is a conflict between the interests of the insurer and those of the insured." Id. (citations omitted).

Illinois courts have held that conflict counsel must be appointed when the underlying complaint contains two mutually exclusive theories of liability, one which the policy covers and one which the policy excludes. See, e.g., Maneikis v. St. Paul Ins. Co. of Ill., 655 F.2d 818, 825 (7th Cir.1981) (collecting Illinois cases). This situation typically arises when the insurance policy covers negligent but not intentional conduct. Id. In this instance, the insurer would have the incentive to lay the groundwork during discovery to show that the insured acted intentionally, removing the possibility of coverage. See Am. Family, 300 Ill.Dec. 234, 843 N.E.2d at 498 ("[I]f, in the underlying suit, insurer-retained counsel would have the opportunity to shift facts in a way that takes the case outside the scope of policy coverage, then the insured is not required to defend the underlying suit with insurer-retained counsel."). More generally, courts have found that conflict counsel should be appointed whenever the insurer's "interests would be furthered by providing a less than vigorous defense to those allegations." Turegum, 118 Ill.Dec. 941, 522 N.E.2d at 613-14; see also Am. Country, 274 Ill.Dec. 857, 791 N.E.2d at 1276.

B. The Mere Possibility that Punitive Damages Might Be Sought in Future Litigation Does Not Create an Actual Conflict of Interest

Forge asserts, relying on Nandorf, Inc. v. CNA Insurance Cos., 134 Ill.App.3d 134, 88 Ill.Dec. 968, 479 N.E.2d 988 (1985), that the possibility that the EEOC charges could result in lawsuits in which the plaintiffs might request punitive damages that dwarf the possible compensatory damages creates an actual conflict of interest mandating the appointment of conflict counsel. In Nandorf, each underlying plaintiff requested $5,000 in compensatory damages and $100,000 in punitive damages. Id. at 990. As here, the policy in question did not cover punitive damage awards. See id. The court reasoned that an insurer may not have an incentive to provide a "vigorous defense" to its insured when the amount of punitive damages sought greatly outweighs the amount of compensatory damages sought. Id. at 992. Essentially, the court believed that the insurer (and by extension insurer-appointed counsel) might find it more economically efficient to put on a...