Madison Mut. Ins. Co. v. Diamond State Ins. Co., 15-3292

• Decision Date: 21 March 2017
• Docket Number: No. 15-3292,15-3292
• Citation: 851 F.3d 749
• Parties: MADISON MUTUAL INSURANCE COMPANY, Plaintiff–Appellant, v. DIAMOND STATE INSURANCE COMPANY, Defendant–Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

851 F.3d 749

MADISON MUTUAL INSURANCE COMPANY, Plaintiff–Appellant,

v.DIAMOND STATE INSURANCE COMPANY, Defendant–Appellee.

No. 15-3292

United States Court of Appeals, Seventh Circuit.

Argued January 10, 2017

Decided March 21, 2017

Kevin P. Clark, Attorney, Boggs, Avellino, Lach & Boggs, LLC, St. Louis, MO, Dale T. Miller, Attorney, Lindemann Miller LLP, Chicago, IL, for Plaintiff–Appellant.

Paula M. Carstensen, Robert Sheppard Marshall, Amy P. Klie, Robin Ann Nowicki, Attorneys, Nicolaides Fink Thorpe Michaelides Sullivan LLP, Chicago, IL, for Defendant–Appellee.

Before Wood, Chief Judge, and Rovner and Hamilton, Circuit Judges.

Rovner, Circuit Judge.

Madison Mutual Insurance Company ("Madison Mutual") brought suit seeking a declaratory judgment obliging Diamond State Insurance Company ("Diamond State") to defend Geraldine Davidson in a state-court action filed by her former neighbors, Dr. William and Wendy Dribben. Diamond State previously provided professional liability errors and omissions coverage to Davidson in her capacity as a real estate broker and supplied a defense to Davidson in a previous suit alleging certain wrongdoing by Davidson as a broker. Because the new suit repeats certain allegations from the prior suit, Madison Mutual asserts that it both relates back to the earlier action and may potentially involve claims within the coverage provided by Diamond State. The district court rejected these assertions and entered summary judgment in favor of Diamond State. We affirm.

I.

In 1999, the Dribbens purchased a home from Todd and Sherry Favre on 42 acres in an exclusive four-parcel development known as Heartland Oaks, in Southern Illinois not far from Saint Louis, Missouri. Davidson represented the Favres in that purchase. Davidson had also conceived of and was one of the developers of Heartland Oaks, and she and her husband owned one of the four parcels in the development. At the center of the development is a 30–acre artificial lake (sometimes referred to in the pleadings as the "Large Lake," as a smaller lake was added later), and the dam creating that lake is located on the parcel that the Dribbens purchased. In a 2006 lawsuit filed by the Dribbens against Davidson and the other original owners in the development, the Dribbens alleged that Davidson had failed to disclose that the original owners/developers had never obtained a permit from the Illinois Department of Natural Resources ("IDNR") authorizing the dam. The 2006 suit alleged, inter alia , that Davidson's non-disclosure amounted to fraudulent concealment and consumer fraud. Davidson tendered the suit to Diamond State, which had issued a professional liability errors and omissions policy to her effective from October 2005 through October 2006 and extended by endorsement to November 22, 2007. The Diamond State policy applied to claims made and reported during the policy period and provided coverage for "wrongful acts arising out of the performance of professional services for others." R. 26–1 at 6. The policy defines a "wrongful act" as "any actual or alleged negligent act, error or omission, or ‘personal injury’ " arising out of the services Davidson provided as a real estate broker. R. 26–1 at 14. Under a reservation of rights, Diamond State agreed to provide Davidson with a defense to the 2006 suit. The two counts asserting claims against Davidson as a real estate broker were eventually severed from the remainder of the 2006 suit and arbitrated in favor of Davidson. R. 26–9, 26–10.

In 2011, the Dribbens filed a second suit, this one against both Davidson and her husband, alleging a pattern of harassment, intimidation, and interference with the Dribbens' property rights by the Davidsons. The wrongful acts attributed to the Davidsons in the prolix first and second amended complaints range from commercially farming their own property and the Dribbens' property (without their consent), in violation of restrictive covenants; polluting the Large Lake with crop runoff; filing lawsuits with the aim of interfering with the Dribbens' easement rights; spreading rumors that Dr. Dribben was a serial killer; posting offensive signs; and stalking and intimidating the Dribben family and their attorneys. The first amended complaint asserted claims for enforcement of covenants, trespass, malicious prosecution, interference with the Dribbens' right to sell their property, intentional and negligent infliction of emotional distress, unjust enrichment, a declaration that there had been no adverse possession of the Dribbens' property, and for an order of protection. The second amended complaint, dated May 2014, added two more claims of trespass (including criminal trespass), three counts seeking to remove clouds upon and quiet title to the Dribbens' property, two counts of nuisance, one count of negligence, and one count seeking to enjoin other neighbors in the development vis-à -vis the disputed easements, for a total of 18 counts.

Davidson tendered the 2011 lawsuit to Madison Mutual, which had provided homeowner's insurance coverage to Davidson and her husband (including personal liability coverage up to $500,000 per occurrence) from July 2004 to July 2011. Madison Mutual had also issued umbrella liability coverage to the Davidsons (with a limit of $1 million per occurrence) from December 2005 to December 2011. Madison Mutual agreed to provide the Davidsons with a defense pursuant to their homeowner's coverage.

Davidson also tendered the first and later the second amended complaints to Diamond State, but on both occasions Diamond State refused to supply her with a defense in the 2011 litigation. Diamond State did not view either complaint as seeking relief for acts arising out of any professional services Mrs. Davidson had provided to others as a real estate broker.

In 2014, Madison Mutual filed this suit in the district court seeking a declaratory judgment to the effect that Diamond State has breached its duty to defend Davidson in the 2011 suit and bears a duty to reimburse Madison Mutual for the costs it has incurred in supplying a defense to her in that litigation. (Davidson herself is not a party to the suit.) Madison Mutual posits that the factual allegations made in the 2011 suit support a potential claim against Davidson in her capacity as a real estate broker for her failure to disclose to the Dribbens that the dam lacked a permit; Madison Mutual views that potential claim as relating back to the 2006 suit against Dribben, which Diamond State was obligated to (and did) defend.

The district court entered summary judgment in favor of Diamond State, concluding that it has no duty to defend Davidson. In relevant part, the court reasoned the allegations made against the Davidsons in the 2011 suit (which the district court referred to as the "Underlying Litigation") did not support a potential claim against Mrs. Davidson as a broker that in turn might relate back to the 2006 suit (referred to as the "Original Litigation") and trigger a duty to defend on the part of Diamond State.

Although there are factual statements relating to the dam and the IDNR in the Underlying Litigation, those statements pertain to the allegations of [the] Davidsons' harassment of the Dribbens and not the failure to disclose the requirement for a dam permit which was the issue in the Original Litigation.

The question becomes whether any of the allegations contained in the Underlying Litigation could be deemed as "rising out of the wrongful act" contained in the Original Litigation. There was a single wrongful act alleged in the Original Litigation—that of Geraldine's failure to disclose that the lake did not have an IDNR permit for the dam.

The fact that Geraldine Davidson was the real estate agent that represented the Favres in the sale of their home to the Dribbens and that she [was] one of the developers of Heartland Oaks—are facts—but the allegations in the Underlying Litigation must arise from the previous wrongful act . It could be argued that all of the allegations—both in the Original and Underlying Litigations—arise from Ms. Davidson's actions as a real estate agent in the sale of the property from the Favres to the Dribbens (for if she had not sold them the home, none of these allegations could have occurred), but the sale of the home was not the "wrongful act" alleged in the Original [L]itigation. The "wrongful act" was the failure to disclose the lack of the dam permit.

The failure of Geraldine Davidson to disclose the lack of the dam permit does not extend to the inclusion [of] all problems, omissions, harassment, trespassing, and numerous other allegations contained in the Underlying Litigation. Those allegations stand apart from the initial "wrongful act" and as such, Diamond has no duty to defend.

R. 41 at 11 (emphasis in original).

II.

As the district court disposed of this case on summary judgment, we review its decision de novo. E.g. , Panfil v. Nautilus Ins. Co. , 799 F.3d 716, 718–19 (7th Cir. 2015). This is a diversity action, and the parties agree that we should look to the law of Illinois, the forum state, for the relevant substantive legal principles. See , e.g. , Am. Alternative Ins. Corp. v. Metro Paramedic Servs., Inc. , 829 F.3d 509, 513 (7th Cir. 2016).¹

An insurer's duty to defend its insured in litigation depends on both the terms of the insurance policy at issue and the nature of the underlying action. The duty to defend is logically broader than the duty to indemnify. See Cincinnati Ins. Co. v. H.D. Smith, LLC , 829 F.3d 771, 774 (7th Cir. 2016). Whereas the latter duty requires a claim that actually falls within the scope of coverage, the former duty is triggered by allegations in the underlying litigation that plausibly may fall within the scope of coverage. See Health Care Indus. Liab. Ins. Program v. Momence Meadows Nursing Ctr., Inc. , 566 F.3d 689, 693 (7th Cir. 2009) (discussing Crum & Forster v. Resolution Trust Corp. , 156 Ill.2d 384, 189 Ill.Dec. 756, ...