Illinois Emcasco v. Nationwide Mut. Ins.

• Decision Date: 06 August 2009
• Docket Number: No. 1-08-1625.,1-08-1625.
• Parties: ILLINOIS EMCASCO INSURANCE COMPANY, Plaintiff-Appellant, v. NATIONWIDE MUTUAL INSURANCE COMPANY, Defendant-Appellee.
• Court: United States Appellate Court of Illinois

913 N.E.2d 1102

393 Ill. App. 3d 782

ILLINOIS EMCASCO INSURANCE COMPANY, Plaintiff-Appellant, v. NATIONWIDE MUTUAL INSURANCE COMPANY, Defendant-Appellee.

No. 1-08-1625.

Appellate Court of Illinois, First District, Fourth Division.

August 6, 2009.

Cremer, Spina, Shaughnessy, Jansen & Siegert, LLC (Francis A. Spina and Kristina M. Beck of Counsel), Chicago, IL, for Appellant.

Clausen Miller, P.C. (Edward M. Kay, Steven N. Novosad, and Don R. Sampen of Counsel), Chicago, IL, for Appellee.

Justice STEELE delivered the opinion of the court:

Plaintiff, Illinois Emcasco Insurance Company (Emcasco), appeals orders of the circuit court of Cook County compelling production of certain documents and imposing a monetary sanction after finding Emcasco in contempt of court. The circuit court entered these orders after Emcasco refused to produce documents containing communications between Emcasco and its coverage counsel in a declaratory judgment action against defendant Nationwide Mutual Insurance Company (Nationwide), on the ground that the documents were protected from discovery by the attorney-client privilege. For the following reasons, we vacate the circuit court's orders and remand the case for further proceedings.

BACKGROUND

The record on appeal discloses the following facts. Triumph Development Corporation (Triumph) was the general contractor for the construction of a commercial building in Elk Grove, Illinois. Triumph was an insured on two policies issued by Nationwide: a commercial general liability policy with a liability limit of $2 million per occurrence, and a commercial umbrella policy with a liability limit of $10 million per occurrence and in the aggregate. Triumph was an insured on two policies issued by Emcasco: a commercial general liability policy with a liability limit of $1 million per occurrence, and a commercial umbrella policy with a liability limit of $5 million per occurrence. Triumph was an insured on the Emcasco policies pursuant to the contracts Triumph required of Midwestern Steel Sales, Inc. (Midwestern), a subcontractor for the construction project in Elk Grove.

In March 1998, Harold Orange, an ironworker employed by a subcontractor to Midwestern, was injured on the construction project. Orange later filed suit against Triumph and Midwestern in the circuit court of Cook County (Orange litigation). Triumph tendered the suit to Nationwide, which in turn tendered the case to Emcasco. On June 3, 1998, Emcasco accepted the defense of Triumph under a reservation of rights. However, after Triumph asserted that the reservation created a conflict of interest and sought to appoint independent counsel, Emcasco withdrew its reservation in August 1998. Emcasco appointed the firm of O'Connor, Schiff & Myers to represent Triumph, and the firm of Garretson & Santora to represent Midwestern.

In November 2001, the Orange litigation went to trial. On November 9, 2001, the jury returned a verdict in favor of Orange, awarding $7,173,500 in damages, of which 95% was apportioned to Triumph. Emcasco paid the 5% apportioned to Midwestern from its primary policy coverage. The judgment against Triumph was compromised in a negotiated settlement, the terms of which are not of record.

On December 6, 2001, Emcasco filed this declaratory judgment action against Nationwide, seeking to apply the Nationwide policies to partially pay the judgment entered against Triumph. On January 16, 2002, Triumph assigned its rights to pursue claims against Emcasco to Nationwide. On July 8, 2002, Nationwide filed a counter-claim for a declaratory judgment, alleging that Emcasco was required to exhaust its coverage before Nationwide was required to pay on the judgment entered against Triumph in the Orange litigation. Nationwide also claimed that Emcasco had acted in bad faith in its conduct of the Orange litigation, allegedly steering liability away from Midwestern and toward Triumph.

On June 1, 2007, Nationwide filed a motion to compel Emcasco to produce documents requested in pretrial discovery, including (but not limited to):

"All correspondence, documents and records issued by or on behalf of EMCASCO to any person or entity, which bears in any way upon the underlying case or insurance coverage touching upon or in any way related to tenders of defense and/or coverage afforded to [Triumph and]

Any communications, documents and records received by or on behalf of EMCASCO from any person or entity, which bears in any way upon the underlying case or insurance coverage or defense of [Triumph]."

Emcasco refused to produce communications between Emcasco and its coverage counsel at the firm of Cremer, Kopon, Shaughnessy & Spina, asserting the attorney-client privilege, and contested the motion to compel.

Following a hearing on the matter, the trial court entered an order on January 29, 2008, granting the motion to compel, relying on the Illinois Appellate Court's decision in Western States Insurance Co. v. O'Hara, 357 Ill.App.3d 509, 293 Ill.Dec. 532, 828 N.E.2d 842 (2005). Emcasco filed a motion for reconsideration. On April 18, 2008, the trial court denied the motion for reconsideration in an order stating that the court agreed with the dissent in Western States, but was bound to follow the majority opinion. Emcasco refused to comply with the order. Nationwide filed a motion for sanctions, which the trial court granted on June 12, 2008. The trial court fined Emcasco $100 for contempt to facilitate an appeal pursuant to Supreme Court Rule 304(b)(5) (155 Ill.2d R. 304(b)(5)). On June 18, 2008, Emcasco filed a timely notice of appeal to this court.

DISCUSSION

This is an interlocutory appeal, filed pursuant to Supreme Court Rule 304(b)(5), after Emcasco refused to comply with the trial court's discovery orders, was held in contempt, and was sanctioned. "[I]t is well settled that the correctness of a discovery order may be tested through contempt proceedings." Norskog v. Pfiel, 197 Ill.2d 60, 69, 257 Ill.Dec. 899, 755 N.E.2d 1, 8 (2001). In such cases, our review of the contempt finding necessarily encompasses a review of the propriety of the underlying order upon which the contempt finding is based. Norskog, 197 Ill.2d at 69, 257 Ill.Dec. 899, 755 N.E.2d at 8.

Generally, the standard of review for contempt orders is abuse of discretion. Western States, 357 Ill.App.3d at 515, 293 Ill.Dec. 532, 828 N.E.2d at 846. However, a trial court lacks the discretion to compel the disclosure of privileged information. In re Marriage of Daniels, 240 Ill.App.3d 314, 324, 180 Ill.Dec. 742, 607 N.E.2d 1255, 1261 (1992). This court applies a de novo standard of review in deciding the applicability of the attorney-client privilege. Hayes v. Burlington Northern & Santa Fe Ry. Co., 323 Ill.App.3d 474, 477, 256 Ill. Dec. 590, 752 N.E.2d 470, 473 (2001); Midwesco-Paschen Joint Venture for the Viking Projects v. IMO Industries, Inc., 265 Ill.App.3d 654, 660, 202 Ill.Dec. 676, 638 N.E.2d 322, 326 (1994).

Under the attorney-client privilege, when "legal advice of any kind is sought from a professional legal advisor in his capacity as such, the communications relating to that purpose, made in confidence by the client, are protected from disclosure." Fischel & Kahn, Ltd. v. van Straaten Gallery, Inc., 189 Ill.2d 579, 584, 244 Ill.Dec. 941, 727 N.E.2d 240, 243 (2000). The privilege encourages "full and frank consultation between a client and [counsel] by removing the fear of compelled disclosure of information." Consolidation Coal Co. v. Bucyrus-Erie Co., 89 Ill.2d 103, 117-18, 59 Ill.Dec. 666, 432 N.E.2d 250, 256 (1982). However, the privilege can be waived. See, e.g., Fischel & Kahn, 189 Ill.2d at 584, 244 Ill.Dec. 941, 727 N.E.2d at 243-44. In reviewing a claim of privilege, we keep in mind "the privilege, not the duty to disclose, * * * is the exception." Waste Management, Inc. v. International Surplus Lines Insurance Co., 144 Ill.2d 178, 190, 161 Ill.Dec. 774, 579 N.E.2d 322, 327 (1991). Illinois has "a strong policy of encouraging disclosure." Waste Management, 144 Ill.2d at 190, 161 Ill.Dec. 774, 579 N.E.2d at 327. Thus, we construe the privilege "within its narrowest possible limits." Waste Management, 144 Ill.2d at 190, 161 Ill.Dec. 774, 579 N.E.2d at 327.

In this case, the parties do not dispute that the Fourth District's decision in Western States is on point, but disagree on whether that case was correctly decided. The trial court disagreed with the decision in Western States, but followed it. A decision of the appellate court is binding on the circuit courts throughout the state, but not binding on other appellate districts. State Farm Fire & Casualty Co. v. Yapejian, 152 Ill.2d 533, 539, 178 Ill.Dec. 745, 605 N.E.2d 539, 542 (1992). Accordingly, we turn to consider whether we agree with the analysis and reasoning of the Western States decision.

In Western States, the Fourth District relied primarily on the Illinois Supreme Court's decision in Waste Management, which involved another insurance dispute. Under the policy in Waste Management, the insurers agreed to indemnify the insureds for certain costs arising from third-party claims. Waste Management, 144 Ill.2d at 185, 161 Ill.Dec. 774, 579 N.E.2d at 324-25. Two lawsuits were relevant to the decision: the Miller lawsuit and the Nunn lawsuit. The insureds hired counsel, settled the Miller lawsuit, then sought indemnification from the insurers. Waste Management, 144 Ill.2d at 186, 161 Ill.Dec. 774, 579 N.E.2d at 325.

In a declaratory judgment action, the insurers sought the production of the defense counsel's files from both the Miller and Nunn lawsuits. The insureds produced some documents, but withheld others, claiming they were protected by the attorney-client privilege and the work-product doctrine. Waste Management, 144 Ill.2d at 187, 161 Ill.Dec. 774, 579 N.E.2d at 325. On appeal, our supreme court concluded the documents were not protected. In reaching its conclusion, the court...