Am. Safety Cas. Ins. Co. v. Counter

Decision Date18 April 2012
Docket NumberNos. 11–2775,11–2789,11–2961.,s. 11–2775
Citation678 F.3d 475
PartiesAMERICAN SAFETY CASUALTY INSURANCE CO., Plaintiff, Counterdefendant, Appellant, and Scottsdale Insurance Co., Plaintiff, Counterdefendant, Appellee, v. CITY OF WAUKEGAN, ILLINOIS, Defendant–Appellee, Counterplaintiff–Appellant, v. Interstate Indemnity Co., Counterdefendant–Appellant.
CourtU.S. Court of Appeals — Seventh Circuit

OPINION TEXT STARTS HERE

Jeffrey J. Asperger (argued), Attorney, Asperger Associates, LLC, Chicago, IL, for American Safety Casualty Insurance Company.

Gabor Balassa, Mark R. Filip (argued), Attorneys, Kirkland & Ellis LLP, Chicago, IL, for Interstate Indemnity Company.

Paulette A. Petretti (argued), Attorney, Scariano, Himes & Petrarca, Chicago, IL, for City of Waukegan.

Thomas H. Crouch (argued), Attorney, Meagher & Greer, Scottsdale, AZ, Louis A. Varchetto, Attorney, Mulherin, Rehfeldt & Varchetto, Wheaton, IL, for Scottsdale Insurance Company.

Before EASTERBROOK, Chief Judge, BAUER, Circuit Judge, and SHADID, District Judge.*

EASTERBROOK, Chief Judge.

In 1989 S. Alejandro Dominguez was arrested for home invasion and sexual assault. In 1990 he was convicted of these offenses. In 1993 he was released on parole. In 2002 he was exonerated by DNA evidence, and in 2005 he received a pardon from the Governor of Illinois. As a matter of Illinois law, his claim for malicious prosecution accrued in 2002 with his exoneration. Cult Awareness Network v. Church of Scientology International, 177 Ill.2d 267, 226 Ill.Dec. 604, 685 N.E.2d 1347 (1997) (“favorable termination” of the proceeding is an element of the tort). As a matter of federal law, his constitutional claims under 42 U.S.C. § 1983 accrued in 1989 and 2002. Claims related to wrongful arrest accrue on the date of the arrest, see Wallace v. Kato, 549 U.S. 384, 127 S.Ct. 1091, 166 L.Ed.2d 973 (2007), but claims related to wrongful conviction do not accrue until the conviction has been invalidated, see Heck v. Humphrey, 512 U.S. 477, 114 S.Ct. 2364, 129 L.Ed.2d 383 (1994).

Dominguez sued in 2004 under both state and federal law. His claims based on wrongful arrest were dismissed as untimely. His claims based on malicious prosecution (state law) and concealment of exculpatory evidence (federal law) were tried. A jury returned a verdict in his favor and awarded approximately $9 million against Paul Hendley of the Waukegan police; the City of Waukegan was dismissed as a party but is liable as an indemnitor. We affirmed that judgment. Dominguez v. Hendley, 545 F.3d 585 (7th Cir.2008).

Waukegan has insurance covering misconduct by its law-enforcement personnel. Scottsdale Insurance underwrote the primary policies for 1989 and 1990; American Safety Casualty Insurance underwrote the primary policy for 2002. (The City had excess policies too; we disregard most of them to simplify the exposition.) Other insurers issued policies for the years in between. Waukegan notified its carriers of Dominguez's suit—and all refused to defend or indemnify. Each carrier asserted that the policy for some other year applied. Instead of doing the sensible thing—providing the City with a defense while deciding among themselves, perhaps through arbitration, which was responsible—all of the carriers left Waukegan to its own devices. None lifted a finger to assist the City, and none bothered to seek a declaratory judgment of non-coverage until after the jury had returned a verdict for Dominguez.

American Safety began this proceeding in 2007 under the diversity jurisdiction—against its customer, the City, rather than against the other carriers to work out which policy or policies applied. Waukegan brought some other carriers into the suit and filed a counterclaim, seeking attorneys' fees and penalties under 215 ILCS 5/155 on the ground that American Safety and some other insurers had acted vexatiously and unreasonably by failing to defend or seek declaratory relief before the trial began. The district court issued a series of opinions concluding that American Safety's policy applies, that it must indemnify Waukegan for the verdict against Hendley (plus interest), and that it must reimburse the City for the legal expenses it incurred in defending Dominguez's suit and the declaratory-judgment action. The two principal opinions appear at 776 F.Supp.2d 670 (N.D.Ill.2011), and 776 F.Supp.2d at 717 (N.D.Ill.2011). We mention a third opinion later.

The district court concluded that National Casualty Co. v. McFatridge, 604 F.3d 335 (7th Cir.2010), determines which policy applies. McFatridge holds that, under Illinois law, the issuer of the policy in force on the date a convict is exonerated must defend and indemnify an insured whose law-enforcement personnel violate the Constitution (or state law) in the process of securing a criminal conviction. American Safety, joined by an excess carrier (Interstate Indemnity Co.) and the American Insurance Association as amicus curiae, asks us to overrule McFatridge or certify the issue to the Supreme Court of Illinois.

McFatridge relied on a rule of both state law (Cult Awareness Network) and federal law (Heck): to prevail for malicious prosecution or constitutional wrongs that led to a conviction, the plaintiff must be exonerated. Because the victim has no claim until then, the relevant “occurrence” for the purpose of determining insurance coverage is exoneration, the final element of the legal claim. We supported this conclusion by observing that Security Mutual Casualty Co. v. Harbor Insurance Co., 65 Ill.App.3d 198, 21 Ill.Dec. 707, 382 N.E.2d 1 (1978), had held exactly this as a matter of Illinois law. Although the Supreme Court of Illinois reversed the appellate court's decision, see 77 Ill.2d 446, 34 Ill.Dec. 167, 397 N.E.2d 839 (1979), it did so on the basis of an arbitration clause rather than any disagreement with the court's resolution of the merits. When we decided McFatridge in 2010, Security Mutual had been unquestioned substantively in Illinois for 32 years, and we saw no reason to think that it misstated Illinois law. It has now stood unquestioned for 34 years—no court in Illinois has so much as hinted at doubts about its conclusion, or that of McFatridge—and we therefore have no greater reason today than we did in 2010 to believe that the Supreme Court of Illinois will take a different view.

American Safety and Interstate Indemnity contend that McFatridge erred in looking to the state (and federal) elements of the claim rather than to the language of the insurance policy. The policy that American Safety issued applies to “occurrences” during the policy year (it is not a claims-made policy) and, through a chain of references, defines “occurrence” for law-enforcement coverage this way:

injury, other than “Bodily Injury”, arising out of one or more of the following offenses: (a) False arrest, detention or imprisonment; (b) Malicious prosecution; ... (g) Violations of the Federal Civil Rights Act of 1871 or 42 U.S.C. 1983 and similar laws.

Dominguez was arrested in 1989 and prosecuted in 1990; those must be the years of the “occurrences” under this definition, American Safety and Interstate Indemnity insist. But how could “malicious prosecution have occurred in 1990 when, as a matter of state law, exoneration is an element of the tort? Hendley's misconduct occurred in 1989 and 1990, but the policy does not define the “occurrence” as misconduct by a law-enforcement officer. It defines the “occurrence” as the tort under state or federal law—and, in both bodies of law, the tort occurs when its last element comes into being. For misconduct that causes imprisonment, that final element is exoneration, which happened in 2002. Until then, Dominguez could not establish either “malicious prosecution or a “violation” of § 1983. (American Safety does not contend that exoneration is just a precondition to suit, rather than an element of the tort.)

American Safety, Interstate Indemnity, and the American Insurance Association observe that only one other state, Louisiana, has held that exoneration marks the “occurrence” for insurance coverage of malicious-prosecution claims. Sauviac v. Dobbins, 949 So.2d 513, 519 (La.App.2006). Courts in six states and the District of Columbia have held that the “occurrence” occurs when the wrongful prosecution is filed or ends in conviction. See Zurich Insurance Co. v. Peterson, 188 Cal.App.3d 438, 232 Cal.Rptr. 807, 813 (1986); Billings v. Commerce Insurance Co., 458 Mass. 194, 197–200, 936 N.E.2d 408 (2010); American Family Mutual Insurance Co. v. McMullin, 869 S.W.2d 862, 864 (Mo.App.1994); Paterson Tallow Co. v. Royal Globe Insurance Cos., 89 N.J. 24, 36–37, 444 A.2d 579 (1982); Newfane v. General Star National Insurance Co., 14 A.D.3d 72, 76–77, 784 N.Y.S.2d 787 (N.Y.A.D.2004); Consulting Engineers, Inc. v. Insurance Co. of North America, 710 A.2d 82, 86–88 (Pa.Super.1998), affirmed without opinion, 560 Pa. 247, 743 A.2d 911 (2000); S. Freedman & Sons v. Hartford Fire Insurance Co., 396 A.2d 195, 199 (D.C.App.1978). (A dozen or so federal district courts and courts of appeals have predicted that states would reach one or another result on this subject; we disregard them because decisions by state tribunals are the benchmark in diversity litigation.) McFatridge thus represents a minority view, which the insurers (and the Association) urge us to abandon.

A minority it may be, but McFatridge does follow the lead of the only Illinois appellate decision on the issue. Contrary decisions pay little attention to the language of the policies. American Safety's policy defines “occurrence” (perhaps the policies in other cases did not), and as we have stressed the definition identifies the tort rather than the misconduct as the “occurrence.” The most fully reasoned of the contrary decisions is Billings, which did not discuss the policy's language but did rely on a norm in ...

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