Phila. Indem. Ins. Co. v. Chi. Title Ins. Co.

• Decision Date: 13 November 2014
• Docket Number: 12–2691.,Nos. 12–2525,12–2612,s. 12–2525
• Citation: 771 F.3d 391
• Parties: PHILADELPHIA INDEMNITY INSURANCE COMPANY, Plaintiff–Appellee/Cross–Appellant, v. CHICAGO TITLE INSURANCE COMPANY, Defendant–Cross–Claim Plaintiff–Appellant/Cross–Appellee, v. Western Capital Partners LLC, Defendant–Cross–Claim Defendant–Appellee/Cross–Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

771 F.3d 391

PHILADELPHIA INDEMNITY INSURANCE COMPANY, Plaintiff–Appellee/Cross–Appellant

v.CHICAGO TITLE INSURANCE COMPANY, Defendant–Cross–Claim Plaintiff–Appellant/Cross–Appellee

v.Western Capital Partners LLC, Defendant–Cross–Claim Defendant–Appellee/Cross–Appellant.

Nos. 12–2525

12–2612

12–2691.

United States Court of Appeals, Seventh Circuit.

Argued April 2, 2013.

Decided Nov. 13, 2014.

Rehearing Denied Dec. 8, 2014.

Scott L. Howie, Richard M. Waris, Attorneys, Pretzel & Stouffer, Chartered, Chicago, IL, for Plaintiff–Appellee for docket no. 12–2525.

J. Timothy Eaton, Attorney, Taft Stettinius & Hollister LLP, Chicago, IL, for Defendant–Appellant Chicago Title Insurance Company for docket nos. 12–2525, 12–2612 and 12–2691.

John C. Martin, Attorney, Chicago, IL, Brian T. Ray, Hatch Ray Olsen Sandberg LLC, Denver, CO, for Defendant–Appellee Western Capital Partners LLC for docket no. 12–2525.

Ronald A. Damashek, Attorney, Stahl Cowen Crowley & Addis, Chicago, IL, for Amicus Curiae for docket nos. 12–2525, 12–2612 and 12–2691.

Robert M. Chemers, Scott L. Howie, Attorneys, Pretzel & Stouffer, Chartered, Chicago, IL. for Plaintiff–Appellee for docket no. 12–2612.

Robert W. Hatch, II, Brian T. Ray, Attorneys, Hatch Ray Olsen Sandberg LLC, Denver, CO, for Plaintiff–Appellant for docket no. 12–2691.

Before FLAUM, ROVNER, and SYKES, Circuit Judges.

Opinion

SYKES, Circuit Judge.

This insurance dispute is governed by Illinois law and raises a question of first impression in that state: May a title insurer contractually limit its duty to defend its insured to claims or causes of action specifically covered by its policy?

The question arises in complex coverage litigation between Philadelphia Indemnity Insurance Company, a general liability carrier; Chicago Title Insurance Company, a title insurer; and Western Capital Partners LLC, a high-risk real-estate lender insured by both companies. When Western Capital attempted to foreclose on some mortgaged commercial property in Chicago, the property owners responded with a separate lawsuit alleging that Western Capital had breached its contract, committed fraud and other torts, and violated state consumer-protection statutes. Western Capital tendered the defense to Chicago Title, which accepted the tender, but only as to claims potentially covered by its title policy. Western Capital then looked to Philadelphia Indemnity, and this satellite coverage litigation ensued.

Chicago Title's policy specifically limits its duty to defend to claims that are covered by its policy—that is, claims involving defects in title or lien priority and other claims adverse to the insured's title. The district court declined to enforce this limiting language and instead applied the “complete defense” rule, holding that Chicago Title had a duty to defend the entire lawsuit. Chicago Title appealed.

We reverse. An insurer's duty to defend its insured is contractual. General liability insurance indemnifies against liability for damages arising from a broad array of acts and omissions and promises to defend any suit seeking damages arising from a covered loss or occurrence. A promise to defend a “suit” is construed as a promise to defend the entire suit even if only one or some of the claims are covered by the policy. This is known as the “complete defense” rule, and it is recognized in Illinois, as elsewhere.

Title insurance is different. Unlike the broad indemnity and defense duties contractually assumed by general liability insurers, title insurance only indemnifies against losses incurred by reason of defects in title and specifically limits the insurer's duty to defend to claims that are within the policy's coverages. The Illinois Supreme Court has never applied the complete-defense rule to title insurance; indeed, it has not applied the rule outside the context of general liability insurance. Only one state supreme court has addressed whether the complete-defense rule applies to title insurance and held that it does not. See GMAC Mortg. LLC v. First Am. Title Ins. Co., 464 Mass. 733, 985 N.E.2d 823, 828 (2013). We think the Illinois Supreme Court is likely to agree. Accordingly, we hold that the contractual limits on Chicago Title's duty to defend are enforceable and remand for further proceedings consistent with this opinion.

I. Background

In June 2006 Western Capital made a $2.77 million loan to finance the development of a mixed-use commercial building on Ridgeland Avenue on Chicago's south side. The loan was secured by three mortgages on the developers' property: a first mortgage on the Ridgeland Avenue property and second mortgages on two other properties. The development apparently faltered, and in 2007 Western Capital initiated foreclosure proceedings in Cook County Circuit Court. This spawned extensive litigation regarding the Ridgeland Avenue project. Western Capital turned to its insurers to cover the costs associated with its defense in this litigation.

The mortgages were insured under a title policy issued to Western Capital by Chicago Title. The policy was written on the standard 1992 form developed by the American Land Title Association (“ALTA”) and generally covers losses sustained by reason of defects in title and lien priority regarding the real property pledged as security for the loan. The policy also requires Chicago Title to “pay the costs, attorneys' fees and expenses incurred in defense of the title or the lien of the insured mortgage, as insured, but only to the extent provided in the Conditions and Stipulations.”

Condition 4(a) specifically limits the insurer's duty to defend to claims falling within the policy's coverages:

DEFENSE AND PROSECUTION OF ACTIONS;

...

Upon written request by the insured ..., the Company [Chicago Title], at its own cost and without unreasonable delay, shall provide for the defense of an insured in litigation in which any third party asserts a claim adverse to the title or interest as insured, but only as to those stated causes of action alleging a defect, lien or encumbrance or other matter insured against by this policy.... The Company will not pay any fees, costs or expenses incurred by the insured in the defense of those causes of action which allege matters not insured against by this policy.

(Emphases added.) Defense costs do not decrease the policy limits, which are capped at the amount of loan proceeds actually disbursed on the policy's effective date—here, about $1.54 million.

Philadelphia Indemnity is Western Capital's general liability insurer. The Philadelphia Indemnity policy covers Western Capital for losses arising from negligent acts, errors, or omissions in connection with its professional services. The coverage is excess to other valid and collectable insurance.

The 2007 foreclosure action prompted a proliferation of litigation. The substantive details and procedural history are complex; we need mention only the main events here. In response to the foreclosure action, the developers sued Western Capital and other defendants in Cook County Circuit Court, Chancery Division. The new suit, filed in February 2008, alleged nine claims for relief against Western Capital, including claims for breach of contract, fraud, negligence, violation of state consumer-fraud statutes, and a quiet-title claim, to name a few. The gist of the complaint was that Western Capital and the other defendants had schemed to defraud the plaintiffs in connection with the real-estate development. We'll refer to this suit as the “Ridgeland lawsuit.”

Western Capital tendered the defense to Chicago Title. A few months later, the Ridgeland lawsuit was consolidated with the foreclosure action. In August 2008 Chicago Title's counsel sent a lengthy letter to Western Capital explaining the title insurer's position regarding its duty to defend the Ridgeland lawsuit. Briefly, Chicago Title agreed to pay for the defense of four of the nine counts alleged against Western Capital; counsel explained that the remaining counts fell outside the title policy's coverages and thus outside the insurer's duty to defend. The letter concluded by approving Schiff Hardin LLP as Western Capital's choice of counsel.

On August 12, 2009, the circuit court dismissed all nine claims against Western Capital in the Ridgeland lawsuit. Eight claims were dismissed with prejudice and one without prejudice; as far as the record reveals, the claim dismissed without prejudice was never refiled.

On December 27, 2009, the defendants in the foreclosure action were permitted to amend their answer to include a 19–count counterclaim against Western Capital and other parties. Twelve of the new counterclaim counts were directed at Western Capital. Schiff Hardin forwarded an electronic copy of the amended answer to Chicago Title's counsel. On November 9, 2010, the circuit court dismissed all 12 counts against Western Capital with prejudice.

In December 2010, Chicago Title's counsel wrote to Western Capital regarding the defense costs associated with the counterclaim in the foreclosure action. Counsel explained that Chicago Title would pay defense costs for two of the 12 counts in the counterclaim—approximately 17% of the total—but the remaining ten counts fell outside the title policy's coverages and thus outside the insurer's duty to defend.

In August 2011 the defendants in the foreclosure action moved for leave to file an amended counterclaim, repleading 11 of the 12 counts that had been dismissed and adding two new claims against Western Capital. This move was procedural only for the purpose of preserving the issues for appeal.¹ On September 23, 2011, the court granted the motion and permitted the refiling of the counterclaim, but “solely for the purpose of preserving issues for appeal.” Chicago Title's counsel again wrote to Western Capital explaining that the 11 refiled counts did not trigger the insurer's defense duty because repleading was allowed only to preserve the issues for appeal. Counsel also explained that the two new...