Federal Ins. Co. v. Binney & Smith, Inc.
| Decision Date | 30 June 2009 |
| Docket Number | No. 1-08-0843.,1-08-0843. |
| Citation | 913 N.E.2d 43 |
| Parties | FEDERAL INSURANCE COMPANY, Plaintiff-Appellant-Cross Appellee, v. BINNEY & SMITH, INC., a subsidiary of Hallmark Cards, Inc., Defendant-Appellee-Cross-Appellant. |
| Court | United States Appellate Court of Illinois |
Fred A. Smith, Kirk C. Jenkins, Sedgwick, Detert, Moran & Arnold LLP, of Chicago, for Plaintiff-Appellant-Cross-Appellee.
Paul L. Langer, Matthew J. Morris, Proskauer Rose LLP, of Chicago, for Defendant-Appellee-Cross-Appellant.
This insurance indemnity action is drawn by the packaging of boxes of crayons and colored by the expense of settling a lawsuit directed at the packaging.
Plaintiff Federal Insurance Co. (Federal) filed a declaratory judgment action against defendant Binney & Smith, Inc. (Binney), seeking a declaration that it did not owe a duty to defend or indemnify defendant in connection with a class action lawsuit—Schwab v. Binney & Smith, Inc.—filed against the defendant in 2000. Binney settled the Schwab action several months after it was filed, allegedly incurring expenses of around $1 million. Binney filed a counterclaim, alleging breach of contract against Federal in connection with the Schwab action and three similar putative class actions. Following a bench trial, the trial court entered a judgment in favor of Binney for $1,013,717.76.
On appeal, Federal contends: (1) the trial court erred in finding Binney settled the Schwab action in reasonable anticipation of liability for a covered loss; (2) the trial court erred by failing to allocate the amounts Binney paid to settle Schwab between the class plaintiff's claims for violation of the Consumer Fraud Act and breach of express and implied warranty; (3) the trial court erred by refusing to allocate the settlement in Schwab pro rata, according to the number of years Federal actually insured Binney for advertising injuries; and (4) the trial court erred by awarding Binney all sums paid in connection with the Schwab settlement, including amounts Binney had already recovered from a settlement with another insurer. Binney cross-appeals, contending the trial court erred by not awarding prejudgment interest. We affirm in part, reverse and remand in part.
On May 23, 2000, the Seattle Post-Intelligencer reported finding asbestos in three major brands of crayons, including the Crayola brand crayons manufactured by Binney. The asbestos was believed to be found in the talc used by crayon manufacturers as a binding agent.
In June 2000, Steven Schwab, individually and as a parent and guardian of Anne Elise Schwab, filed a national class action complaint against Binney in the Chancery Division of the Circuit Court of Cook County, Illinois—Case No. 00 CH 08354. The putative class consisted of all individuals who ever purchased Binney's Crayola brand crayons. The class plaintiffs alleged test results showed the presence of above trace-level asbestos fibers that were of the length, size, ratio, and type known to cause cancer. The class plaintiffs in the Schwab action brought three causes of action against Binney: breach of implied warranty of merchantability, violation of the Illinois' Consumer Fraud Act and Uniform Deceptive Trade Practices Act, and breach of express warranty. The damages sought had to do with the purchase price of the crayons.
The class plaintiffs alleged Binney's Crayola crayons packaging contained the seal of the Art and Creative Materials Institute, which says "CP NONTOXIC." On at least some of the packaging for Crayola brand crayons the label states the product is "Certified Non-Toxic." The class plaintiffs alleged Binney's crayon labels represented its crayons were "non-toxic and safe for children." In support of their Consumer Fraud Act and Deceptive Trade Practices Act claims, the class plaintiffs alleged Binney "misrepresented, concealed and/or omitted to advise plaintiffs and the Class that [Binney's] product had been manufactured with asbestos or ACMs and that their products contained asbestos fibers." Binney's Product Safety Manager, Joan Lilly, admitted in an affidavit that Crayola crayons have been "advertised as non-toxic on the packaging from at least 1969 through 1986."
Between 1969 and 1996, Federal issued Binney a series of comprehensive general liability insurance policies. Three of the policies provided Binney with broad defense and indemnity coverage against claims arising out of "advertising injury." The limit for advertising injury coverage under each of the policies is $500,000.
A week after the Schwab action was filed, Binney representatives met with the Chairman and several Commissioners of the U.S. Consumer Product Safety Commission (CPSC). Binney provided the CPSC with samples of its Crayola crayons for testing. A public report issued by the CPSC entitled "CPSC Staff Report on Asbestos Fibers in Children's Crayons," concluded:
"Based on the results of the testing and evaluation, the staff concludes that the risk a child would be exposed to the fibers through inhalation or ingestion of crayons containing asbestos and traditional fibers is extremely low."
The report noted that although CPSC staff determined the risk is extremely low, that, as a precaution, the "crayons should not contain these fibers" and the industry should "reformulate crayons using substitute ingredients." The CPSC report noted Binney agreed to reformulate its crayons within a year to eliminate talc. The report did not call for a mandatory recall of Crayola crayons.
Six months after the Schwab action was filed, Binney and the class plaintiffs reached a settlement. The settlement also disposed of Sqyres v. Binney & Smith, Inc., a companion case pending in Texas. On June 15, 2001, the Cook County Chancery Court approved the settlement after conducting a fairness hearing. The settlement obligations and amount of out-of-pocket costs Binney incurred totaled $1,013,717.76, excluding prejudgment interest. Under the terms of the settlement, Binney was required to: publish national advertisements in various publications containing coupons for a 75 cent credit towards the purchase of ceratin boxes of Crayola crayons; email similar 75 cent coupons to consumers registered at the crayola.com website; complete reformulation of its crayons by June 6, 2001, in order to eliminate the talc that was the alleged source of the asbestos; publish and pay all costs for the production of the notice of class settlement and certification; and pay $600,000 in class attorneys' fees and expenses.
On September 19, 2000, Federal filed a complaint for declaratory judgment, seeking a declaration that it had no duty to defend or indemnify Binney in the Schwab action. The duty to defend no longer is at issue in this case. Binney filed an answer and counterclaim, alleging breach of contract against Federal in connection with the Schwab action and three similar putative class actions. Binney also filed a third party complaint against Royal Insurance Company of America (Royal), seeking defense and indemnification for the Schwab action and two other asbestos-related lawsuits. Binney's third party complaint was dismissed after it entered into a confidential settlement with Royal. Binney sought the full amount of its Schwab-related settlement costs and prejudgment interest at the rate of 5% from Federal.
Following a bench trial, the trial court found in Binney's favor. The trial court denied Binney's request for prejudgment interest. Federal appeals. Binney cross-appeals.
Federal contends the trial court erred in determining it had a duty to indemnify Binney for the Schwab settlement. Specifically, Federal contends Binney was unable to establish it settled an otherwise covered loss in reasonable anticipation of personal liability.
We are bound by the trial court's factual findings unless they are against the manifest weight of the evidence. U.S. Gypsum Co. v. Admiral Insurance Co., 268 Ill.App.3d 598, 619, 205 Ill.Dec. 619, 643 N.E.2d 1226 (1995). However, the construction of an insurance policy's provisions, and a determination of the parties' rights and obligations under that policy, are questions of law we review de novo. Outboard Marine Corp. v. Liberty Mutual Insurance Co., 154 Ill.2d 90, 108, 180 Ill. Dec. 691, 607 N.E.2d 1204 (1992); Zimmerman v. State Farm Mutual Insurance Co., 312 Ill.App.3d 1065, 1068, 246 Ill.Dec. 70, 729 N.E.2d 70 (2000).
"If an insured settles an underlying claim prior to verdict, it must show that it settled an otherwise covered loss in `reasonable anticipation of liability.'" U.S. Gypsum Co., 268 Ill.App.3d at 625, 205 Ill.Dec. 619, 643 N.E.2d 1226, citing WestAmerica Mortgage Co. v. TriCounty Reports, Inc., 670 F.Supp. 819 (N.D.Ill.1987); Commonwealth Edison Co. v. National Union Fire Insurance Co. of Pittsburgh, PA., 323 Ill.App.3d 970, 978, 256 Ill.Dec. 675, 752 N.E.2d 555 (2001). In order to recover a settlement, the insured:
"`need not establish actual liability to the party with whom it has settled "so long as a potential liability on the facts known to the [insured is] shown to exist, culminating in an amount reasonable in view of the size of possible recovery and degree of probability of claimants success against the insured."'" U.S. Gypsum Co., 268 Ill.App.3d at 625-26, 205 Ill.Dec. 619, 643 N.E.2d 1226, quoting Luria Brothers & Co. v. Alliance Assurance Co., 780 F.2d 1082, 1091 (7th Cir. 1986).
The determination of whether Binney's anticipation of liability was reasonable would turn on the "quality and quantity of proof" which Binney would expect to be offered against it in the underlying action. See U.S. Gypsum Co., 268 Ill.App.3d at 626, 205 Ill.Dec. 619, 643 N.E.2d 1226. The burden of proving reasonableness falls on the insured both out of fairness, since the insured was the one who agreed to the settlement, and out of...
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