Northwestern Nat. Ins. Co. v. Corley

• Decision Date: 13 September 1974
• Docket Number: No. 73-1376,73-1376
• Citation: 503 F.2d 224
• Parties: NORTHWESTERN NATIONAL INSURANCE COMPANY, Plaintiff-Appellant, v. Eugene R. CORLEY d/b/a Eugene R. Corley Builders, and Leakakos Construction Co., Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 224

503 F.2d 224

NORTHWESTERN NATIONAL INSURANCE COMPANY, Plaintiff-Appellant, v. Eugene R. CORLEY d/b/a Eugene R. Corley Builders, and Leakakos Construction Co., Inc., Defendants-Appellees.

No. 73-1376.

United States Court of Appeals, Seventh Circuit.

Argued Feb. 19, 1974.

Decided Sept. 13, 1974.

Edward V. Scoby, Chicago, Ill., for plaintiff-appellant.

James A. Regas, albert J. Horrell, Stephen J. Schostok, Chicago, Ill., for defendants-appellees.

Before PELL, Circuit Judge, and CAMPBELL and GRANT, Senior District Judges. ^*

PELL, Circuit Judge.

Plaintiff-appellant Northwestern National Insurance Company (Northwestern) brought a declaratory judgment action ¹ in federal district court seeking interpretation of its coverage under a comprehensive general liability policy issued to Leakakos Construction Company, Inc. (Leakakos). It named as defendants its insured, Leakakos, and Eugene R. Corley, d/b/a Eugene R. Corley Builders (Corley), plaintiff in a state court suit against Leakakos for alleged defects in masonry work done under a contract for a Corley-developed apartment building. Northwestern contends that exclusionary language in the insurance policy issued to Leakakos relieves it from the duty to 'defend and pay any claim or judgment that might be rendered' against Leakakos and in favor of Corley. Northwestern's complaint for declaratory judgment further alleges that the state court suit, filed October 1970, is still pending in the Circuit Court of Cook County, Illinois. It has not been brought to our attention that there has been any change in this status.

Without reaching the merits of the policy coverage controversy, as to which we also express no opinion, the federal district court granted Leakakos's motion for summary judgment. In its memorandum decision, the court concluded that a 1970 decision of the Supreme Court of Illinois, Gibraltar Ins. Co. v. Varkalis, 46 Ill.2d 481, 263 N.Ed.2d 823, was dispositive. Varkalis, as interpreted by the district court, provides that an insurance company which attempts to reserve its rights under a policy subsequent to appearing and defending the action in behalf of its insured will be deemed to have waived those policy rights.

Northwestern raises two questions for review: (1) whether the district court properly interpreted the applicable state law; and (2) whether certain documents submitted by the parties raise a factual issue as to the existence of a December 16, 1970, reservation-of-rights letter.

I

The pertinent history underlying this appeal is as follows. In November 1967, Northwestern issued a comprehensive general liability insurance policy (#CLA 61 09 12) to Leakakos covering the period November 11, 1967, to November 11, 1968. The policy provided in part that the insurer would pay on behalf of Leakakos all sums which it would become legally obligated to pay because of 'property damage to which this insurance applies, caused by an occurrence . . ..' ² In summer of 1967, Leakakos entered into a contract with Corley, whereunder Leakakos was to provide masonry work for the construction of an apartment building in Chicago. Leakakos began performance under the contract in September 1967 and completed the work eight or nine months later. In October 1970, Corley brought a $150,000 suit against Leakakos in state court alleging defects in construction and workmanship, which defects supposedly constituted departures from and violations of the terms and specifications of the Leakakos-Corley contract.

In December 1970, Leakakos's personal attorney, James Regas, inquired whether Northwestern would undertake the defense of the Corley suit. On December 16, 1970, according to an allegation in Northwestern's second amended complaint, Northwestern upon receipt of the inquiry mailed to Leakakos a letter in which it, inter alia, stated it was accepting untimely notice of the litigation 'subject to full reservation of all our rights under the policy.' Leakakos denied receiving any such letter. On March 16, 1971, pursuant to stipulation granted by Corley, a law firm retained by Northwestern filed an appearance, answer, and jury demand on the insured's behalf. However, two months prior to that submission, attorney Regas had filed an answer for Leakakos. Thus, there are two answers on behalf of Leakakos on file in the state court suit. On July 6, 1971, Corley's attorneys took the deposition of one of the officers of the Leakakos corporation. Both James Regas and the firm retained by Northwestern attended.

About a week later, July 15, 1971, Northwestern wrote Leakakos that the insurer 'shall proceed with the investigation and afford a defense of (the) litigation with the express understanding that in so doing this company does not waive any of its rights under the policy that was issued to you . . ..' The letter also stated that, in the absence of objection within ten days. Northwestern would assume that Leakakos consented to the handling of the defense subject to a reservation of right. ³ On July 21, attorney Regas relayed an offer on the part of Corley to settle within the limits of the Northwestern policy ($100,000) and demanded that the insurer do so. The record discloses no response from Northwestern.

On December 16, 1971, Northwestern filed the present declaratory judgment action. Leakakos, joined by Corley, then sought summary judgment. In an amendment to the original motion, Leakakos asserted that the only letter it had received which purported to reserve Northwestern's rights was that dated July 15, 1971, by which time the insurer's attorneys had already begun to participate in the defense of Leakakos in the state court. Leakakos maintained that subsequent to the entry of appearance by the counsel retained by the insurance company Leakakos, as it had a right to do, had relied upon the insurance company to 'bear the burden of and do all things necessary for the defense of the State Court proceedings.' It argued that the insurer was therefore estopped from relying on the July 15th letter. The district court granted the motion for summary judgment.

II

The district court, in its memorandum opinion, stated that 'the complaint in the state court action should have placed the insurance company on notice that a policy exclusion might be applicable. Since it entered into its defense without reservation, it is estopped from asserting a reservation at a later time.' ⁴ The court found no need to determine whether Northwestern's actions in state court had prejudiced Leakakos; thus, the court apparently interpreted Gibraltar Ins. Co. v. Varkalis, 46 Ill.2d 481, 263 N.E.2d 823 (1970), the case it considered dispositive, as sub silentio overruling what the district court acknowledged to be 'a substantial line of Illinois Appellate Court cases . . . suggesting that there is no waiver upon the entrance of the insurance company into the case unless its actions prejudice the insured.' Northwestern strongly disagrees with the court's reading of Varkalis.

In Varkalis, the insured in 1961 had caused the death of a woman by repeatedly driving his car over her body. He subsequently pleaded guilty to a murder charge and entered the penitentiary. In March 1962, Varkalis filed an action against the insured seeking damages for the wrongful death of the woman killed. Gibraltar Insurance Company stated that it first became aware of this claim in February 1964; the next month, counsel for the company entered an appearance and filed an answer on behalf of the insured. In April 1964, its counsel moved to dismiss Varkalis' complaint, which motion was denied. It was not until more than a year later, in July 1965, that Gibraltar notified its insured that it would provide a defense but that it would not extend coverage under the policy because of the manner in which the 'accident' had occurred.

In October 1966, Gibraltar filed a declaratory judgment action. The trial and appellate courts held that the action was barred by the statute of limitations. The appellate court further held that Gibraltar, by virtue of its conduct, was estopped from asserting its policy defense. The Supreme Court of Illinois devoted the first part of its opinion to the statute of limitations question in which it disagreed with the lower courts. It then discussed the waiver issue:

'Notwithstanding this continued representation of Robinson (the incarcerated insured) in the wrongful death action . . ., not until July 13, 1965, did (Gibraltar) advise him that it was defending the action on his behalf under a reservation of its rights arising under the insurance policy. Under such circumstances we believe it clear that plaintiff has waived its right to assert its policy defense . . .. If plaintiff had doubts about its liability under the policy . . . it could have easily given Robinson prompt notice that it would defend the wrongful death action under a reservation of rights, or it could have refused to defend and instituted a declaratory judgment action . . ..' 263 N.E.2d at 827.

In its final remarks on the subject, the court repeated what it obviously thought to be the crucial point:

'Plaintiff did not notify the insured of its intention to assert a policy defense until July 13, 1965. During the interim it acted on behalf of Robinson as though no questions of policy coverage were involved, thus clearly causing him to wholly rely for his defense on the efforts of plaintiff.' Id.

Although, as the court below noted, the Illinois Supreme Court did not directly discuss prejudice, we think that the quoted passages show that the court implicitly assumed the existence of prejudice. We find support for this interpretation of the court's language in its citation of two appellate decisions that refer to the factor of prejudice, Apex Mut. Ins. Co. v. Christner, 99 Ill.App.2d 153, 240 N.E.2d 742 (1968), and Gallaway v. Schied, 73 Ill.App.2d 116, 219 N.E.2d 718 (1966). ⁵ Cf. Ford Motor Co. v. Commissary, Inc., 286...