AYH Holdings, Inc. v. Avreco, Inc., No. 1-03-3712

• Decision Date: 31 March 2005
• Docket Number: No. 1-03-3712, No. 1-03-3763.
• Citation: 357 Ill. App.3d 17,826 N.E.2d 1111,292 Ill.Dec. 675
• Parties: AYH HOLDINGS, INC., Plaintiff-Appellant, v. AVRECO, INC., Defendant-Appellee (Gremesco, Inc., Defendant). Ayh Holdings, Inc., Plaintiff, v. Gremesco, Inc., Defendant-Appellant (Avreco, Inc., Defendant-Appellee).
• Court: United States Appellate Court of Illinois

826 N.E.2d 1111

357 Ill. App.3d 17

292 Ill.Dec. 675

AYH HOLDINGS, INC., Plaintiff-Appellant, v. AVRECO, INC., Defendant-Appellee (Gremesco, Inc., Defendant).

Ayh Holdings, Inc., Plaintiff, v. Gremesco, Inc., Defendant-Appellant (Avreco, Inc., Defendant-Appellee).

Nos. 1-03-3712, 1-03-3763.

Appellate Court of Illinois, First District, Second Division.

March 31, 2005.

Piper Rudnick, LLP (Kenneth L. Schmetterer, of counsel), Chicago, for Appellant AYH.

Pretzel & Stouffer, Chartered (Robert Marc Chemers, Donald J. O'Meara, Jr., Scott L. Howie, of counsel), Chicago, for Appellant Gremesco.

Seidler & McErlean (Marc P. Seidler, Julie G. Davis, of counsel), Chicago, for Appellee Avreco.

Presiding Justice BURKE delivered the opinion of the court:

Plaintiff AYH Holdings, Inc. appeals from an order of the circuit court granting summary judgment in favor of defendant Avreco, Inc. on AYH's claims for breach of fiduciary duty and professional negligence against Avreco. Defendant Gremesco, Inc. also appeals from an order of the circuit court granting summary judgment in favor of Avreco on Gremesco's cross-claim based on contribution and indemnification against Avreco. On appeal, AYH contends that the trial court erred in finding that Avreco owed no duty to it and in granting summary judgment in favor of Avreco. Gremesco, too, contends that the trial court erred in finding that Avreco owed no duty to AYH and in granting summary judgment in favor of Avreco. For the reasons set forth below, we reverse and remand.

STATEMENT OF FACTS

This appeal arose out of the procurement of insurance intended to provide excess property and business-interruption coverage to American Yacht Harbor Associates L.P. (AYH).¹ AYH owned and operated commercial property, including a marina, on the United States Virgin Island of St. Thomas. The property sustained severe damage when Hurricane Marilyn struck on September 15, 1995. The insurance carrier, Geneva Assurance Syndicated, Inc. (Geneva), from which a policy of excess insurance was procured, subsequently became insolvent and failed to cover AYH's losses.

Geneva was an insurance syndicate that conducted business through the Illinois Insurance Exchange (Exchange). The Exchange was a surplus lines market, structured similar to Lloyds of London, and the board of trustees, which governed the Exchange, was made up of public individuals and syndicate representatives. Only an Exchange broker could procure and process insurance through an Exchange syndicate. As a result of being unable to collect for its losses, AYH filed this lawsuit against Avreco and Gremesco, insurance brokers involved in placing the policy with Geneva. Gremesco filed a cross-claim against Avreco based on contribution and indemnification. Prior to 1989, AYH insured its property through Lloyds. However, following Hurricane Hugo in 1989, Lloyds withdrew from the Caribbean. Thereafter, AYH placed its insurance with Geneva. According to AYH's complaint, between 1992 and 1995, AYH, by John Jelilian, used VI Insco, a Virgin Island's insurance brokerage firm, through Richard Child, and Gremesco, a surplus lines wholesale broker, through Chris Larson, to secure insurance from Geneva, through underwriter John Brotsos. When AYH first began using Geneva, AYH and its creditor, Barclays, were advised by Stan Dawson, of VI Insco, that Geneva did not have a Best rating. However, Dawson expressed to AYH his understanding that the lack of a Best rating did not matter because policies procured through the Exchange were covered by the Exchange's guaranty fund. Prior to October 1994, insurance was placed by Gremesco through an exchange broker subsidiary of Geneva. When the subsidiary ceased operations, Brotsos, of Geneva, advised Larson, of Gremesco, to go through Frank Prestipino, a broker with Avreco, to place the renewal coverage. There is no dispute that at all relevant times there was no contact between anyone at AYH and anyone at Avreco.

With respect to the 1995 renewal at issue here, the third or fourth renewal with Geneva, although VI Insco was AYH's agent since AYH was required to have an agent on the island, it played a very minimal role in placing the coverage because Jelilian worked directly with Larson. On March 11, Gremesco prepared a "Commercial Insurance Application" for the renewal, which was forwarded to Avreco as well as a competitor broker, Theodore Tunick. According to Larson, Avreco was to take this information and work with Geneva to procure coverage. On March 13, Larson wrote to Prestipino, including AYH's renewal information and advising him that AYH was seeking quotes from at least one other broker. Larson wrote, "Thus, we are not working in a vacuum. As such, I may need you to impress upon our pal [Brotsos] the need to be flexible as respects pricing and possibly the structure of the renewal." Additionally, Larson wrote: "The Controller [of AYH] has advised that he is striking an overall package number of $180,000 this year. This means I'd have to come in around $235,000 for the liability and $245,000 for the property at full limits. Realistically, I'd need J.B. [Brotsos] to come in around $100,000 or so for his portion to layer the thing to ultimately achieve a[$]410,000,000 or thereabouts." According to Prestipino, he agreed only to act as a "conduit" and "a funnel" for the paperwork between Larson and Brotsos.

On April 8, Larson wrote to Brotsos, advising him that Tunick was quoting against Geneva and had pointed out that Geneva was not rated. Larson advised Brotsos that he would give AYH both quotes, but would recommend the most economical. Additionally, Larson wrote, "Tunick poses a serious threat so your best efforts * * * will be greatly appreciated." On April 19, Tunick submitted its quote to Jelilian, noting it obtained quotes from only A rated companies. Tunick detailed its policy in comparison with Geneva's, including the difference in premiums; his being shown as ultimately less. Nonetheless, on April 26, Larson wrote to Prestipino, instructing him to bind the excess coverage quote provided by Geneva. The next day, Avreco forwarded an "evidence of insurance" to Larson. The policy was not ultimately issued until October 19. The "Declaration" page identified Avreco as the Exchange broker for the policy. As noted above, on September 15, AYH sustained extensive damage and submitted its claims to Geneva, which did not pay. On May 18, 1998, AYH filed the instant lawsuit against Avreco and Gremesco, alleging that they breached their professional and fiduciary duties owed to AYH because they failed to monitor and discover the unsound financial condition of Geneva and failed to maintain a reasonably adequate market security monitoring system. AYH alleged that had the brokers not breached their duties, coverage would have been placed with a financially stable company and AYH would have been paid its losses. Count I set forth a breach of fiduciary claim against Avreco and Gremesco, count II set forth a professional negligence claim against each, and count III set forth a breach of contract claim against each. Thereafter, Avreco and Gremesco filed motions to dismiss, arguing that AYH's complaint failed to state a cause of action.² These motions were subsequently denied and Avreco and Gremesco answered AYH's complaint and set forth affirmative defenses.

On August 19, 2002, Avreco filed its motion for summary judgment and brief in support of same, arguing that AYH's claims were barred by the statute of limitations, another Illinois statute, the duties alleged were nonexistent, and there was no agency relationship between AYH and Avreco. Thereafter, Gremesco filed a motion for summary judgment on the same grounds. AYH responded in opposition and Avreco and Gremesco replied.

Extensive evidence, both through depositions and documentation, was presented in connection with the motions for summary judgment. On May 12, 1995, the Exchange issued a press release in connection with Geneva's financial condition, particularly that its "capital structure could be inadequate to support its underwriting activity." The press release stated that Geneva and the Exchange had reached an agreement under which Geneva voluntarily agreed to cease writing business pending a complete financial analysis, to file its 1994 audits by June 1, and to submit a 90-day business plan as to how it would restructure its assets. The Exchange further stated that it was "confident the analysis of Geneva's financial structure and any subsequent restructuring will result in providing policyholders a stronger syndicate within the group." According to numerous witnesses, this press release was disseminated to all syndicate owners and Exchange brokers, including Avreco.

Sometime shortly after this, Gremesco was advised of the situation. According to Jelilian, he sent a fax to Larson, in approximately the third week of May, regarding information he had received from Tunick that Geneva was no longer writing insurance. Jelilian inquired of Larson as to the significance of Geneva's cessation of writing insurance. Within a couple of days, Larson responded to Jelilian and advised him of what he had learned from Brotsos and Prestipino. Jelilian was led to believe that the cessation was temporary and there were no immediate concerns or problems. Jelilian further testified it was his understanding that Carl Freyer, an owner of AYH, spoke with Dick Cross from Barclays about the situation and was also told there was no problem.

Larson testified that he first became aware of the May 12 press release and Geneva's financial difficulties when he learned same from Jelilian. According to Larson, he was surprised and embarrassed to learn this information from Jelilian because he would have expected to have heard it from Avreco or Geneva. Larson told Jelilian he would check into the matter and, thereafter, spoke with Prestipino and Brotsos. A couple of days later, when...