Mkt. St. Bancshares, Inc. v. Fed. Ins. Co.

• Decision Date: 19 June 2020
• Docket Number: No. 18-3395,18-3395
• Citation: 962 F.3d 947
• Parties: MARKET STREET BANCSHARES, INC., parent organization of Peoples National Bank, N.A., a/k/a Peoples National Bank of McLeansboro, Plaintiff/Counterclaim Defendant-Appellant, v. FEDERAL INSURANCE CO., d/b/a Chubb Group of Insurance Companies, Defendant/Counterclaim Plaintiff-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

962 F.3d 947

MARKET STREET BANCSHARES, INC., parent organization of Peoples National Bank, N.A., a/k/a Peoples National Bank of McLeansboro, Plaintiff/Counterclaim Defendant-Appellant,

v.FEDERAL INSURANCE CO., d/b/a Chubb Group of Insurance Companies, Defendant/Counterclaim Plaintiff-Appellee.

No. 18-3395

United States Court of Appeals, Seventh Circuit.

Argued December 10, 2019

Decided June 19, 2020

Rehearing Denied July 10, 2020

John T. Hundley, Attorney, Sharp-Hundley, P.C., Mount Vernon, IL, for Plaintiff-Appellant

Edward P. Gibbons, Attorney, Christopher A. Wadley, Attorney, Walker Wilcox Matousek LLP, Chicago, IL, for Defendant-Appellee

Before Kanne, Sykes, and Barrett, Circuit Judges.

Kanne, Circuit Judge.

This is an insurance-coverage dispute between a bank and its insurer. In 2014, the two entered an agreement: in exchange for an insurance premium, the insurer, Federal Insurance Company, would defend and indemnify the bank, Peoples National Bank, against "claims" made by third parties during the policy period, which ran from April 15, 2014, to April 15, 2017. When they entered this agreement, the bank had been embroiled in an ongoing lawsuit for about a decade. During the damages phase of that lawsuit, in 2016, the plaintiffs in the case argued that the bank owed certain damages, and the bank called upon Federal Insurance to defend against the argument and to cover the bank's corresponding losses. Federal Insurance refused, explaining in part that the damages argument was not a "claim" under the policy.

The bank then sued Federal Insurance in Illinois state court, seeking to recover losses (including defense costs) from the underlying damages argument. Federal Insurance removed the action to federal court and filed a counterclaim for declaratory relief. Both parties moved for summary judgment on the counterclaim, and the district court granted judgment in the insurer's favor.

We affirm because the damages argument in the underlying lawsuit is not a "claim" under the parties’ insurance policy.

I. BACKGROUND

Peoples National Bank¹ became entrenched in litigation after a business deal collapsed, triggering obligations that the bank failed to fulfill. The business deal had to do with a corporation that Terry and Robert Newman formed in 1996 to operate various Taco John's restaurant franchises. The Newmans obtained financing for their operations through Peoples, and in 1998 the Newmans entered a lease agreement for a property in Anna, Illinois, where they would operate one of the restaurants.

In 2001, the Newmans agreed to sell their corporation to Amigos Food Service, LLC. The sale involved various agreements by the Newmans, Amigos, and Peoples. One agreement provided that Amigos would secure a $150,000 letter of credit naming the Newmans and Peoples as beneficiaries. Another agreement—between the Newmans and Peoples—provided that $81,000 of the letter-of-credit proceeds would be retained to assure rent payments on the property in Anna, Illinois.

Ultimately, Amigos defaulted on its obligations. Rent on the Anna property went unpaid. And the landlords demanded the unpaid rent from the Newmans, who turned to Peoples for the $81,000 letter-of-credit proceeds set aside for this purpose. But the money wasn't available. Peoples had allocated it to satisfy other debts Amigos had accumulated. As a result, the Newmans failed to pay the overdue rent, the landlords sued the Newmans for it in Illinois state court, and the Newmans filed a third-party complaint against Peoples in 2003. The Newmans alleged that Peoples had breached its contract with them by failing to reserve $81,000 of the letter-of-credit proceeds to satisfy the Newmans’ lease obligations. The following year, the Newmans added counts for conversion and breach of fiduciary duty.

About nine years passed before the Illinois trial court entered judgment on the Newmans’ contract claim; the court determined that Peoples was liable for breaching its agreement concerning the letter-of-credit proceeds. About two years after that, in 2015, the court granted summary judgment to the Newmans on their other two counts.

Between those judgments, in 2014, Peoples entered an agreement with Federal Insurance for professional liability insurance. The agreement was for a claims-made policy under which Federal Insurance would defend and indemnify Peoples against "Loss on account of any Claim first made against [Peoples] during the Policy Period." The policy period spanned three years, April 15, 2014, to April 15, 2017.

In 2016, the Newmans’ case went to a bench trial on damages for the conversion and breach-of-fiduciary-duty counts. The Newmans argued for and presented evidence of damages based on the so-called "Pledge Agreement"—one of the agreements entered in connection with the Newmans’ sale of the corporation. Basically, the Newmans argued that the bank was required, under the Pledge Agreement, to timely notify the Newmans of Amigos's default and that the bank's failure to do so caused certain damages. This was problematic because the Newmans hadn't addressed the Pledge Agreement in their complaint, or otherwise, during the liability phase of litigation. Nevertheless, the trial court permitted the damages evidence over the bank's objection. The Newmans later submitted a written closing argument for the Pledge Agreement damages, and the trial court awarded those damages along-side others.

While that damages issue was pending, Peoples gave Federal Insurance information about the Newmans’ lawsuit and contended that the Newmans’ damages argument based on the Pledge Agreement was a "claim" made during the policy period, triggering Federal Insurance's duty to defend and indemnify Peoples against it.

Federal Insurance disagreed. It explained that the damages argument was not a "claim" under the policy; and even if it were, it fell outside the covered period, because it would have been considered "first made" when the Newmans commenced the lawsuit in 2003, well outside the policy period.

Seeking to recover its loss from the damages argument, Peoples sued Federal Insurance in Illinois state court. Federal Insurance removed the action to the federal district court, filed a counterclaim for declaratory relief, and moved for summary judgment, which the district court granted.

Before Peoples appealed that decision to us, the Appellate Court of Illinois vacated the underlying damages award in the Newmans’ case. Stevens v. Newman , 2019 IL App (5th) 170134-U, 2019 WL 764797. The state appellate court concluded that the award stemming from the Pledge Agreement could not stand on the facts alleged and proved during the lawsuit's liability phase. So, the court remanded for a new damages trial.

At that point, turning back to the federal indemnity lawsuit, Peoples appealed the summary-judgment decision in Federal Insurance's favor. The bank maintains that the Newmans’ damages assertion based on the Pledge Agreement is a "claim," under the insurance policy, that gave rise to Federal Insurance's duty to defend and indemnify. Because the Appellate Court of Illinois vacated the underlying damages award, Peoples no longer seeks to recover loss from the initially awarded damages, themselves; Peoples seeks only to recover loss from defending against the Newmans’ argument.

II. ANALYSIS

With the relevant facts undisputed, the parties’ disagreement boils down to whether Federal Insurance had a duty, under the insurance policy, to defend and indemnify Peoples against the Newmans’ damages argument based on the Pledge Agreement. This is a question of law, which we review de novo . See Private Bank & Trust Co. v. Progressive Cas. Ins. Co. , 409 F.3d 814, 816 (7th Cir. 2005). The parties agree that Illinois law governs.²

The insurance policy provides that Federal Insurance has a "duty to defend any Claim covered by" the policy and must pay Peoples for "loss," including "defense costs," on account of a covered "claim." Illinois law recognizes that the insurer's duty to defend arises when "the facts alleged in the underlying complaint fall within, or potentially within, the policy's coverage provisions." Crum & Forster Managers Corp. v. Resolution Trust Corp. , 156 Ill.2d 384, 189 Ill.Dec. 756, 620 N.E.2d 1073, 1079 (1993). Stated differently, when "the insurer has no potential obligation to indemnify it has no duty to defend." Zurich Ins. Co. v. Raymark Indus., Inc. , 118 Ill.2d 23, 112 Ill.Dec. 684, 514 N.E.2d 150, 163 (1987).

So, the critical question is: On its face, did the Newmans’ damages assertion—advanced about thirteen years into the lawsuit—potentially bring it within the policy's coverage? This inquiry takes us to the policy's terms, which we compare to the Newmans’ damages argument. Cf. Outboard Marine Corp. v. Liberty Mut. Ins. Co. , 154 Ill.2d 90, 180 Ill.Dec. 691, 607 N.E.2d 1204, 1220 (1992).

Under Illinois law, we give the terms of an unambiguous insurance policy their plain and ordinary meaning, reading the policy as a whole and considering "the type of insurance purchased, the nature of the risks involved, and the overall purpose of the contract." State Farm Mut. Auto. Ins. Co. v. Villicana , 181 Ill.2d 436, 230 Ill.Dec. 30, 692 N.E.2d 1196, 1199 (1998) ; see U.S. Fire Ins. Co. v. Schnackenberg , 88 Ill.2d 1, 57 Ill.Dec. 840, 429 N.E.2d 1203, 1205 (1981). If a provision is susceptible to only one reasonable reading, no ambiguity exists, and it must be applied as written. Bruder v. Country Mut. Ins. Co. , 156 Ill.2d 179, 189 Ill.Dec. 387, 620 N.E.2d 355, 362–63 (1993).

The type of insurance purchased here is a claims-made, professional-liability policy. It provides that Federal Insurance "shall pay, on behalf of [Peoples], Loss on account of any Claim first made against [Peoples] during the Policy Period or, if exercised, during the Extended Reporting Period, for a Wrongful Act while performing Professional Services, including failure to perform Professional Services." In a claims-made policy like...