Solo Cup Co. v. Federal Ins. Co.

Decision Date16 May 1980
Docket NumberNo. 79-1528,79-1528
Parties22 Fair Empl.Prac.Cas. 883, 22 Empl. Prac. Dec. P 30,825 SOLO CUP COMPANY, Plaintiff-Appellant, v. FEDERAL INSURANCE COMPANY, Defendant-Appellee.
CourtU.S. Court of Appeals — Seventh Circuit

Shayle P. Fox, Chicago, Ill., for plaintiff-appellant.

John E. Guy, Abramson & Fox, Chicago, Ill., for defendant-appellee.

Before PELL and BAUER, Circuit Judges, and DUMBAULD, Senior District Judge. *

PELL, Circuit Judge.

This is an appeal by the plaintiff Solo Cup Company (Solo) from a judgment in favor of the defendant, Federal Insurance Company (Federal). Jurisdiction is based on diversity of citizenship. The district court concluded that the law of Illinois governed substantive questions, and the parties do not challenge this determination on appeal. The principal issue presented for review is whether the lower court erred in holding that there was a lack of coverage under an insurance policy for sums paid in settlement of an employment discrimination action brought pursuant to Title VII of the Civil Rights Act of 1964, 42 U.S.C. §§ 2000e-2000e-17 (1970 & Supp. II 1972).

I.

On January 24, 1974, Federal issued an "Umbrella Excess Liability Policy" to Solo which imposed both indemnity and defense obligations upon the insurer. The relevant indemnity provisions obligated Federal to secure Solo against any "ultimate net losses" 1 which it might suffer as a result of "occurrences" of covered "personal injuries."

An "occurrence" was defined as

an accident or happening or event or a continuous or repeated exposure to conditions which unexpectedly and unintentionally results in personal injury . . . . All such exposure to substantially the same conditions existing at or emanating from one premise or location shall be deemed one occurrence.

Policy Definition 5. (Emphasis supplied.)

The term "personal injuries" was broadly defined in Policy Definition 2 to include bodily injury, mental injury, mental anguish, shock, sickness, disease, disability, false arrest, false imprisonment, wrongful evictions, detention, malicious prosecution, discrimination, humiliation; also libel, slander or defamation of character or invasion of rights of privacy. . . .

(Emphasis supplied.)

Finally, covered "ultimate net losses" included not only sums the insured became obligated to pay through adjudication or compromise, but also

sums paid as salaries, wages, compensation, fees, charges and law costs, premiums on attachment or appeal bonds, interest, expenses for . . . lawyers . . . and for litigation, settlement, adjustment and investigation of claims and suits which are paid as a consequence of any occurrence covered hereunder. . . .

Policy Definition 6.

In addition to the inclusion of defense costs as a part of the ultimate net loss for which Solo was entitled to indemnity, however, there had been added to the policy "Endorsement No. 1 Supplementary Payments," which imposed the following separate and distinct defense obligation upon Federal:

It is agreed that, with respect to any occurrence not covered by the underlying policies . . . but covered by the terms and conditions of this policy . . . the company shall:

(A) Defend any suit against the insured alleging such injury . . . and seeking damages on account thereof, even if such suit is groundless, false or fraudulent. . . .

While the policy was in force, Anne Willard, an employee in Solo's Atlanta, Georgia, facility, filed a charge with the Equal Employment Opportunity Commission (EEOC), in which she alleged that Solo's failure to promote her was sexually discriminatory. Thereafter, on May 6, 1976, the EEOC filed against Solo in the Northern District of Georgia an action seeking broad compensatory and injunctive relief for an alleged class of female discriminatees. The complaint included allegations of intentional discrimination.

Separately, on November 16, 1976, the General Services Administration (GSA) conducted an on site review of Solo's Grandview, Missouri, facility to determine whether Solo, as a government contractor, had complied with the mandate of Executive Order 11246 and its implementing regulations to refrain from employment discrimination. This compliance review resulted in an administrative allegation that Solo had discriminated against seventy-two female employees with respect to initial job placement. While the GSA proposed that Solo pay the alleged discriminatees $266,667 in backpay and interest as a basis for conciliation, the record does not indicate that any debarment proceedings have been commenced against Solo to date to enforce its alleged liability.

In a letter dated February 17, 1977, Solo advised Federal of both the EEOC action 2 and the GSA compliance review, and asserted that both matters were within the coverage of the policy. Federal immediately disclaimed coverage as to the EEOC matter, and thereafter asserted in its answer to plaintiff's amended complaint below that the GSA review was merely investigative and that Federal therefore had no obligation to defend.

On May 4, 1977, Solo advised Federal of its intention to settle the EEOC litigation, and subsequently entered into a consent decree in the Northern District of Georgia. Pursuant to the terms of the decree, Solo paid the charging party, Anne Willard, $25,000. The decree recited, however, that its entry did not "constitute or operate as an acknowledgement or admission" that Solo had violated Title VII. Equal Employment Opportunity Commission v. Solo Cup Company, No. C 76-806 (N.D.Ga. May 31, 1977).

Solo then commenced this action seeking indemnity for legal fees, costs, and sums paid in settlement of the EEOC action, for legal fees paid in conjunction with the GSA review, and additionally a declaration of its right to indemnity for any sums paid as a result of the administrative claim of backpay liability.

The district court granted Federal's motion for summary judgment as to all issues. The court reasoned that Federal could have no indemnity or defense obligations toward Solo with respect to the EEOC action because the EEOC complaint contained allegations of intentional discrimination which were inconsistent with the policy definition of an insured "occurrence." With respect to coverage of the claims related to the GSA review, the court held that the insurer had no duty to defend against administrative procedures, and that the question of whether any claim resulting from the GSA review could constitute an insured occurrence did not present an actual controversy within the meaning of the Declaratory Judgment Act, 28 U.S.C. § 2201, or Article III of the Constitution, U.S.Const. art. III, § 2.

II.
A. The EEOC Action

The contract of insurance at issue in this litigation imposed an absolute duty upon Federal to provide a defense in any actions filed against Solo charging the occurrence of an injury within the coverage of the policy. It is well settled under the law of Illinois that

(this) duty to defend extends to cases where the complaint alleges several causes of action or theories of recovery against an insured, one of which is within the coverage of the policy while others (might) not be.

Maryland Casualty Co. v. Peppers, 64 Ill.2d 187, 355 N.E.2d 24, 28 (1976) (emphasis supplied). An insurer may not refuse the tendered defense of an action unless a comparison of the policy with the underlying complaint shows on its face that there is no potential for coverage. Weed v. Ohio Farmer's Insurance Co., 53 Ill.App.3d 826, 11 Ill.Dec. 564, 566, 368 N.E.2d 1310, 1312 (1977). In making the comparison any ambiguous or equivocal expressions in the policy will be strictly construed against the insurer. Pioneer Insurance Co. v. Alliance Insurance Co., 374 Ill. 576, 586, 30 N.E.2d 66, 71-72 (1940). See generally 7C Appleman, Insurance Law and Practice § 4683 (1979).

Solo contends, however, that even if Federal's refusal to provide a defense was proper under the above described duty of defense and was therefore not a breach of the agreement contained in Endorsement 1 of the policy, quoted supra, Federal may nevertheless be required to indemnify Solo for the $25,000 paid in settlement of the underlying action if, on remand, a trier of fact concludes that Solo's actions toward Anne Willard were not "intentional" within the meaning of the policy. Solo bases this argument on the premise that because the duties of indemnity and defense contained in the insurance contract are independent covenants, the mere fact that one covenant has not been breached does not preclude an opposite conclusion with respect to the remaining covenant.

While it is true that the obligations of indemnity and defense contained in the contract are independent of each other, we are unable to agree that Federal may, absent the existence of a duty of defense regarding the EEOC claim, have any obligation of indemnity for the sums paid in settlement of that claim. This follows from the fact that under Illinois law, a duty to defend such as is embodied in this contract of insurance, is broader than a general duty to indemnify for liabilities, fees, and costs. Colton v. Swain, 527 F.2d 296, 301-302 (7th Cir. 1975) (applying Illinois law).

The defense obligation is triggered when the insured tenders the defense of an action against it which is potentially within the policy coverage. By contrast, the indemnity obligation at issue here matures only when the insured becomes obligated to pay by reason of liability imposed by law. An insurer whose policy has an assumption of defense clause will therefore frequently have an independent duty to defend actions which will not ultimately result in an obligation to indemnify, either because the insured was not adjudged liable or because the facts were resolved in such a way as to bring the matter within a policy exclusion. 3 Conversely, litigation over the independent duty to...

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