American Alliance v. 1212 Restaurant Group

• Court: Appellate Court of Illinois
• Citation: American Alliance v. 1212 Restaurant Group, 794 N.E.2d 892, 342 Ill. App.3d 500, 276 Ill.Dec. 642 (Ill. App. 2003)
• Decision Date: 11 July 2003
• Docket Number: No. 1-01-4236.,1-01-4236.
• Parties: AMERICAN ALLIANCE INSURANCE COMPANY, Plaintiff-Appellant and Cross-Appellee, v. 1212 RESTAURANT GROUP, L.L.C., an Illinois Limited Liability Company, Russell Scalise, Scott Schwab, Defendants-Appellees and Cross-Appellant (Demetri G. Alexander, Defendant-Appellee).

794 N.E.2d 892

342 Ill. App.3d 500

276 Ill.Dec. 642

AMERICAN ALLIANCE INSURANCE COMPANY, Plaintiff-Appellant and Cross-Appellee, v. 1212 RESTAURANT GROUP, L.L.C., an Illinois Limited Liability Company, Russell Scalise, Scott Schwab, Defendants-Appellees and Cross-Appellant (Demetri G. Alexander, Defendant-Appellee).

No. 1-01-4236.

Appellate Court of Illinois, First District, Fifth Division.

July 11, 2003.

Pretzel & Stouffer, Chartered, Chicago (Robert Marc Chemers, Amy E. Johnson, of counsel), for Appellant.

Schiff & Hulbert, Chicago (Matthew B. Schiff, Linda C. Kramer, James W. Hulbert, of counsel), for Appellees/Cross-Appellants.

Justice HARTIGAN delivered the opinion of the court:

In August 2000, Demetri G. Alexander filed an action for damages against defendants, 1212 Restaurant Group, L.L.C. (1212), Russell Scalise, and Scott Schwab, related to his employment and subsequent termination with 1212, including defamation per se against Scalise and Schwab. In September 2000, defendants tendered the Alexander action to plaintiff, American Alliance Insurance Company (American Alliance) as defendants' insurance carrier, and in November 2000, American Alliance denied coverage and refused to provide a defense. American Alliance then filed a complaint for declaratory judgment as to its duty to defend defendants in the underlying Alexander action. In November 2001, the trial court, in considering cross-motions for summary judgment, found that American Alliance had a duty to defend defendants in the Alexander action and dismissed defendants' claim under section 155 of the Illinois Insurance Code (215 ILCS 5/155 (West 2000)). American Alliance appeals, arguing that the trial court erred in finding a duty to defend the Alexander action when the alleged defamation fell under the employment-related practices (ERP) exclusion in its policy with defendants. Additionally, defendants appeal, arguing that the trial court improperly dismissed their section 155 claim against American Alliance because American Alliance's denial was vexatious and unreasonable. We affirm.

I. BACKGROUND

1212 operates a restaurant called The State Room at 1212 North State Street in Chicago. Scalise is a majority owner of 1212 and manager. Schwab works as Scalise's designee in charge of day-to-day operations of the restaurant. In May 1999, Alexander entered into an employment agreement with Scalise to work as creative director and front house manager of the restaurant. The initial period of Alexander's employment was three years.

In August 2000, Alexander filed a complaint against 1212, Scalise and Schwab alleging breach of contract, defamation per se against Scalise and Schwab individually, and intentional infliction of emotional distress against Scalise and Schwab individually. In his complaint, Alexander alleged that Scalise dropped a piece of equipment on Alexander's left foot that crushed his toe and foot. This injury required surgery and Alexander had to wear a brace and use crutches upon his return to work. Alexander alleged that Scalise and Schwab repeatedly told Alexander to "lose the shoe," meaning not to wear his brace because they did not want a "gimp" at the front door of the restaurant.

Alexander further alleged that throughout his employment at 1212, Scalise and Schwab repeatedly called Alexander names, including, "gimp," "cokehead," "faggot," "homo," etc., in front of Alexander and other 1212 employees. These remarks also included lewd and offensive comments about sexual acts Alexander was allegedly engaging in with a male graphic artist consultant of 1212. In June 2000, Alexander alleged that Scalise terminated his employment without prior notice. Alexander averred that Scalise handed him a separation agreement and threatened Alexander in front of another 1212 employee that if Alexander did not sign the agreement, Scalise would tell people that Alexander was "robbing the joint." Alexander further claimed that, on information and belief, following his termination, Scalise and Schwab told people that Alexander had his hand in the till and was robbing "the joint."

In September 2000, defendants tendered their defense in the Alexander action to American Alliance.

American Alliance issued a policy to 1212 as named insured. The policy provided commercial general liability insurance for an effective policy period from January 25, 2000, to and including January 25, 2001. Included in the policy was the following exclusion:

"B. The following exclusion is added to Paragraph 2., Exclusions of Section I—Coverage B—Personal and Advertising Injury Liability:

This insurance does not apply to:

`Personal and advertising injury':

1. A person arising out of any:

(a) refusal to employ that person;

(b) termination of that person's employment; or

(c) employment-related practices, polices, acts or omissions, such as coercion, demotion, evaluation, reassignment, decipline [sic], defamation, harassment, humiliation, discrimination directed at that person."

In November 2000, based on that exclusion, American Alliance denied coverage and refused to provide any defense for defendants. Also, in November 2000, American Alliance filed its complaint for declaratory judgment seeking a judgment that American Alliance had no duty to defend the Alexander action.

In December 2000, defendants filed an answer and affirmative defense, as well as a counterclaim alleging that American Alliance acted vexatiously and unreasonably in its refusal to defend defendants in violation of section 155 of the Illinois Insurance Code (215 ILCS 5/155 (West 2000)). Defendants also filed a motion for judgment on the pleadings and American Alliance moved to dismiss defendants' counterclaims. In March 2001, the trial court denied defendants' motion for judgment on the pleadings and granted American Alliance's motion to dismiss defendants' counterclaim, but permitted them to amend if they came up with additional facts.

The parties filed cross-motions for summary judgment that the trial court heard in November 2001. Following oral argument, the court entered judgment in favor of defendants and found that American Alliance had a duty to defend. The trial court found:

"But in looking at the matter in light of the summary judgment motion and the very liberal reading that the Court must give to the duty to defend, I—and ambiguities that I think appear in the complaint which doesn't make it clear to the Court when this defamation began, * * * whether it was a continuation of the defamation that occurred during the course of his employment or whether it was something that took place at some point in the future but post-employment and the clarification that counsel has brought pursuant to * * * what the deposition said that this took place a year * * * out, at best it makes this factor ambiguous to the Court in terms of when the defamation actually occurred.

And since it is not clear * * * by the complaint when the defamation occurred the Court cannot make a final determination that it is * * * not outside of the exclusion and that this behavior may possibly be covered and in those circumstances the Court under the duty to defend is required to rule, make the judgment in light of the insured in this matter."

The court also granted American Alliance's motion to dismiss defendants' amended counterclaim with prejudice.

This appeal follows.

II. ANALYSIS

On appeal, American Alliance argues that the trial court erred in granting summary judgment in favor of defendants because the ERP exclusion precludes coverage of the underlying action. Defendants assert on cross-appeal that the trial court improperly dismissed their counterclaim under section 155 of the Illinois Insurance Code (215 ILCS 5/155 (West 2000)) because American Alliance's denial was vexatious and unreasonable.

A. Whether the ERP Exclusion Precludes Coverage

When construing an insurance policy, the court's role is to ascertain and enforce the intention of the parties as expressed in the agreement. de los Reyes v. Travelers Insurance Cos., 135 Ill.2d 353, 358, 142 Ill.Dec. 787, 553 N.E.2d 301, 304 (1990). To ascertain the meaning of the policy's words and the intent of the parties, the court must construe the policy as a whole. Outboard Marine Corp. v. Liberty Mutual Insurance Co., 154 Ill.2d 90, 108, 180 Ill.Dec. 691, 607 N.E.2d 1204, 1212 (1992). The construction of an insurance policy and a determination of the rights and obligations thereunder are questions of law for the court which are appropriate subjects for disposition by way of summary judgment. Crum & Forster Managers Corp. v. Resolution Trust Corp., 156 Ill.2d 384, 391, 189 Ill.Dec. 756, 620 N.E.2d 1073, 1077 (1993). We review cases involving summary judgment de novo. Ragan v. Columbia Mutual Insurance Co., 183 Ill.2d 342, 349, 233 Ill.Dec. 643, 701 N.E.2d 493, 496 (1998).

Where a declaratory judgment action is brought to determine an insurer's duty to defend, the court must look only to the complaint in the underlying action to see if the allegations set forth therein show that the insured's conduct is within or potentially within coverage. Bituminous Casualty Corp. v. Fulkerson, 212 Ill. App.3d 556, 562, 156 Ill.Dec. 669, 571 N.E.2d 256, 260 (1991). If the facts alleged in the underlying complaint fall within or potentially within the policy's coverage provisions, then the insurer has a duty to defend the insured in the underlying action. Pekin Insurance Co. v. L.J. Shaw & Co., 291 Ill.App.3d 888, 891-92, 225 Ill. Dec. 862, 684 N.E.2d 853, 855 (1997). The burden is on the insurer to show that a claim falls within a provision that limits or excludes coverage. Pekin, 291 Ill.App.3d at 892, 225 Ill.Dec. 862, 684 N.E.2d at 855. Provisions that limit or exclude coverage are to be construed liberally in favor of the insured and most strongly against the insurer. National Union Fire Insurance Co. of Pittsburgh, Pennsylvania v. Glenview Park District, 158 Ill.2d 116,...