American Home Assur. Co. v. Stone

• Decision Date: 24 August 1995
• Docket Number: No. 94-3388,94-3388
• Citation: 61 F.3d 1321
• Parties: AMERICAN HOME ASSURANCE COMPANY, Plaintiff-Appellee, v. Steven STONE, Sheila Hall, Peter Hall, Brandon Hall, and Devin Hall, Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1321

61 F.3d 1321

64 USLW 2164

AMERICAN HOME ASSURANCE COMPANY, Plaintiff-Appellee, v. Steven STONE, Sheila Hall, Peter Hall, Brandon Hall, and Devin Hall, Defendants-Appellants.

No. 94-3388.

United States Court of Appeals Seventh Circuit.

Argued Feb. 14, 1995.

Decided Aug. 4, 1995.

As Modified August 24, 1995.

John T. Wardrope, Robert A. Chaney (argued), Purcell & Wardrope, Chicago, IL, for plaintiff-appellee.

Henry Burt, Tracy D. Kasson, Rathje, Woodward, Dyer & Burt, Wheaton, IL, George P. Lindner (argued), John R. Felton, William A. Delaney, II, Lindner, Speers & Reuland, Aurora, IL, for defendants-appellants.

Before WOOD, Jr., COFFEY, and KANNE, Circuit Judges.

COFFEY, Circuit Judge.

In 1990, Sheila and Peter Hall received marriage and family counselling from Steven H. Stone, a psychotherapist, for a period of four months. Sheila and Peter Hall and their children later brought three separate malpractice lawsuits in Illinois state court against Stone, alleging that Stone engaged in a sexual relationship with Sheila while she was receiving professional treatment and therapy. Stone's insurer, American Home Assurance Company (American Home), brought this diversity action seeking a declaration of policy limit. The insurance company argues that a special provision in the professional insurance policy limiting American Home's obligation to indemnify Stone to $25,000 for malpractice lawsuits involving allegations of sexual misconduct is applicable to the lawsuits filed by the Halls against Stone. The district court agreed, and granted summary judgment in favor of American Home. The Halls appeal. We affirm.

I. Background

Stone was a social worker licensed by the State of Illinois. He was employed as a psychotherapist ¹ and insured by American Home under its Mental Health Counselor's Professional Liability Policy. In June 1990, Sheila and Peter Hall began seeing Stone for marriage counseling. Their children, Devin and Brandon Hall, also participated in several family counseling sessions with Stone. After several weekly joint sessions, Stone commenced individual therapy sessions with Sheila Hall, the wife and mother, in July 1990. The Halls separated in October 1990, and the wife continued individual therapy sessions. In October 1990, Stone began having sexual contact and later sexual intercourse with Sheila, and their relationship continued until December of 1991. At the time Sheila Hall terminated her relationship with Stone, she also reported Stone to the Illinois Department of Professional Regulation (IDPR). IDPR conducted an investigation and discovered allegations of Stone's other patients having had sexual intercourse with him. Stone voluntarily relinquished his social worker's license in June 1992.

The husband and wife filed separate lawsuits against Stone on March 18 and June 9, 1992, respectively, in the Circuit Court of DuPage County, alleging malpractice and intentional or negligent infliction of emotional harm. Specifically, Sheila Hall alleged that:

In the course of treatment and therapy, Stone so aroused Plaintiff's emotions by the manipulation of the transference phenomenon that she fell in love with him. Stone brought about this result by wrongfully and negligently manipulating the psychotherapeutic situation to the point where plaintiff's feelings were no longer transferred feeling for him as a psychotherapist, but direct feelings of love for him as a person, beyond the phenomenon of transference. As a result of this manipulation of the transference phenomenon, Plaintiff began a sexual relationship with Stone....

As a result of the control Stone exercised over the Plaintiff, he failed to employ counseling techniques commonly used which would have improved marital relationship between Plaintiff and her husband....

That as a direct and proximate cause of Stone's sexual contact with the Plaintiff ... Plaintiff has experienced extreme pain and suffering, as well as emotional distress of a continuing and permanent nature, including an attempted suicide ...

Also focusing on the sexual relationship between Sheila Hall and Stone, Peter Hall alleged in his separately filed complaint:

That during the aforedescribed counseling of this plaintiff, and the counseling of Plaintiff's wife, this defendant, contrary to his fiduciary obligations to this plaintiff, engaged in a course of sexual conduct with Plaintiff's wife when Defendant Stone knew, or reasonably should have known, that said conduct would make it impossible to dissolve [sic] the aforereferenced marital discord ... and would cause severe emotional distress to Plaintiff, Peter Hall....

Additionally, the Halls' children, Devin and Brandon Hall, alleged in a separate action that Stone negligently caused them emotional harm and distress by engaging in a sexual relationship with their mother and causing their parents' marriage to be irretrievably damaged. The negligent acts or omissions allegedly committed by Stone include failing to "employ counseling techniques ... that would have improved the marital relationship between Peter Hall and Sheila Hall and the Hall family relationship," mishandling "the transference phenomenon and allow[ing] sexual intercourse to occur between Stone and Sheila Hall during the course of the marital and family counseling."

During the period of his counseling sessions with the Halls, Stone was insured under American Home's Mental Health Counselor's Professional Liability policy. The limits of liability under the policy are $1 million for "each wrongful act or series of continuous, repeated or interrelated wrongful acts or occurrence," and $3 million in the aggregate. However, a lower limit of liability applies when the lawsuits filed against the insured contain allegations of sexual misconduct. The "Sexual Misconduct" provision limits American Home's total liability to $25,000 for "all claims against any Insured(s) involving any actual or alleged erotic physical contact, or attempt thereat [sic] or proposal thereof" by the insured with his or her former or current patient. The provision further provides that the $25,000 aggregate limit applies to cover "any and all causes of action alleged and arising out of the same related courses of professional treatment and/or relationships" if sexual misconduct is "alleged at any time either in a complaint, during discovery, at trial or otherwise." It is undisputed that the costs incurred in defending sexual misconduct suits are not subject to the $25,000 limit, but are subject to the $1 million limit reduced by $25,000. That is, American Home's total obligation in defending the three lawsuits filed by the Halls is not to exceed $975,000.

American Home filed this action in the district court seeking a declaration that the $25,000 limit was applicable to its potential obligation to indemnify Stone in the three lawsuits filed by the Halls. In its motion for summary judgment, American Home argued that the special provision was triggered because the underlying malpractice suits charged sexual misconduct on the part of the insured. In response, the Halls filed cross-motions for summary judgment claiming, among other things, that the "Sexual Misconduct" provision in American Home's insurance policy violated Illinois public policy. The court found in favor of American Home and ruled that the "Sexual Misconduct" provision was applicable to limit American Home's liability with respect to the Halls' three lawsuits.

II. Analysis

We review a grant of summary judgment de novo, Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986), viewing the record and the inferences drawn from it in the light most favorable to the non-moving party. United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 994, 8 L.Ed.2d 176 (1962).

We will affirm if there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986). Because the parties did not raise a conflict of law issue in this diversity suit and argued only Illinois law in their submissions to the trial court, we see no reason to discuss the issue of choice of law and thus, will apply Illinois law. See Employers Ins. of Wausau v. Bodi-Wachs Aviation Ins. Agency, Inc., 39 F.3d 138, 142 n. 2 (7th Cir.1994); In re Stoecker, 5 F.3d 1022, 1028-29 (7th Cir.1993); see also Peerman v. Georgia-Pacific Corp., 35 F.3d 284, 286 (7th Cir.1994).

The issue before us is whether the enforcement of the "Sexual Misconduct" provision, which limits American Home's total liability to $25,000 for all claims raised in the Halls' three underlying malpractice lawsuits, will violate the Illinois public policy of protecting mental health patients from sexual exploitation by psychotherapists. The relevant portions of American Home's insurance policy provide:

SPECIAL PROVISIONS

1. Sexual Misconduct--The total limit of the Company's liability here-under shall not exceed $25,000 in the aggregate for all damages with respect to the total of all claims against any Insured(s) involving any actual or alleged erotic physical contact, or attempt thereat [sic] or proposal thereof:

a) by any Insured ...

b) with or to any former or current patient or client of any Insured, or with or to any relative of or members of the same household as any said patient or client ...

In the event any of the foregoing are alleged at any time, either in a complaint, during discovery, at trial or otherwise, any and all causes of action alleged and arising out of the same or related courses of professional treatment and/or relationships shall be subject to the aforesaid $25,000 aggregate limit of liability and to all other provisions of this clause....

The Halls argue that the "Sexual Misconduct" provision is void as against Illinois public policy because victims of sexual exploitation by psychotherapists...