Robert R. McCormick Found. v. Arthur J. Gallagher Risk Mgmt. Servs., Inc.

• Citation: 441 Ill.Dec. 814,158 N.E.3d 219,2019 IL 123936
• Decision Date: 21 November 2019
• Docket Number: Docket No. 123936
• Parties: ROBERT R. MCCORMICK FOUNDATION et al., Appellants, v. ARTHUR J. GALLAGHER RISK MANAGEMENT SERVICES, INC., Appellee.
• Court: Supreme Court of Illinois

2019 IL 123936

158 N.E.3d 219

441 Ill.Dec. 814

ROBERT R. MCCORMICK FOUNDATION et al., Appellants,

v.ARTHUR J. GALLAGHER RISK MANAGEMENT SERVICES, INC., Appellee.

Docket No. 123936

Supreme Court of Illinois.

Opinion filed November 21, 2019.

John R. McCambridge, David E. Schoenfeld, Matthew C. Wolfe, and Riley C. Mendoza, of Shook, Hardy & Bacon L.L.P., of Chicago, for appellants.

Richard J. Prendergast and Michael T. Layden, of Richard J. Prendergast, Ltd., and John C. Ellis, of Ellis Legal P.C., both of Chicago, for appellee.

JUSTICE THOMAS delivered the judgment of the court, with opinion.

¶ 1 The issue presented is whether the common-interest exception to the attorney-client privilege as set forth in Waste Management, Inc. v. International Surplus Lines Insurance Co. , 144 Ill. 2d 178, 190, 161 Ill.Dec. 774, 579 N.E.2d 322 (1991), extends to the circumstances of this case, where there is no insured-insurer relationship between the parties and the party claiming the privilege is bringing suit based on the defendant's negligence in failing to procure appropriate insurance as a broker. We find that the common-interest exception does not extend to the facts of this case.

¶ 2 BACKGROUND

¶ 3 Plaintiffs, the Robert R. McCormick Foundation and the Cantigny Foundation (Foundations), brought the instant suit against their former insurance broker, Arthur J. Gallagher Risk Management Services, Inc. (Gallagher), in Du Page County circuit court. The Foundations' complaint included four counts: breach of contract to procure insurance, contractual indemnity, professional negligence, and negligent misrepresentation.

¶ 4 The complaint alleged the following facts. The Foundations are among the largest charitable organizations in the United States and engage in numerous philanthropic activities. As large charitable enterprises whose livelihoods flow from extensive securities holdings, the Foundations have need of robust insurance coverage, including directors and officers (D & O) coverage. Gallagher is a for-profit insurance brokerage firm. In 2008, the Foundations hired Gallagher as their insurance broker, and thereafter, the parties entered into a series of annual compensation agreements. An agreement signed by the parties in 2009 was in effect when the key events underlying the Foundations' claims against Gallagher took place.

¶ 5 In February 2010, the parties began discussions as to whether the Foundations should renew their primary D & O insurance coverage (the Chubb policy) through (what was essentially) a single policy with Federal Insurance Company, a member of the Chubb group of insurance companies, which gave the Foundations a total of $25 million in D & O coverage for 2008-10. The Foundations repeatedly advised Gallagher during the course of these discussions that their goal was to obtain the same breadth of coverage provided by the Chubb policy, while also seeking a reduced premium if possible.

¶ 6 In June 2010, Gallagher offered the Foundations two choices—either renew the existing Chubb policy, or purchase a two-year $25 million policy from Chartis Insurance Company (the Chartis policy). Gallagher assured the Foundations that the Chartis policy provided the same coverage as the Chubb policy and that the coverage would be "apples to apples." The proposed Chartis policy, however, had the added benefit that it carried a premium that was $3400 less than the Chubb policy. Given the difference in premiums, Gallagher recommended that the Foundations bind coverage with Chartis.

¶ 7 Unbeknownst to the Foundations, the Chartis policy actually contained a broad exclusion of claims that in any way related to the purchase or sale of securities. By contrast, the expiring Chubb policy contained a narrower securities exclusion that barred coverage only with respect to claims involving alleged violations of securities laws.

¶ 8 In 2007, the Foundations were the second largest shareholder group in the Tribune Company (the Tribune), a large multimedia corporation. At that time, the Foundations sold their preferred stock in the Tribune for some $2 billion during a leveraged buyout (LBO) of the company. About a year after that transaction, the Tribune filed for bankruptcy protection.

¶ 9 After the Tribune exited bankruptcy in 2011, aggrieved shareholders filed a number of federal suits across the country against more than 5000 defendants; the suits were eventually consolidated in the Southern District of New York. See In re Tribune Co. Fraudulent Conveyance Litigation , 831 F. Supp. 2d 1371 (J.P.M.L. 2011). The Foundations were named as defendants in three of the suits. These suits generally allege that the Foundations—through their directors and officers and acting in concert with other controlling shareholders—orchestrated the LBO through actual and constructive fraud. Accordingly, the suits seek to unwind the LBO and to claw back creditors' funds.

¶ 10 The Foundations tendered the suits (the LBO Litigation) to their new insurer Chartis under their D & O policy, but Chartis denied coverage under the policy exclusion for claims "in any way relating to any purchase of securities." The Foundations allege that this exclusion was not found in their prior policy with Chubb. As a result, the Foundations have been forced to fund the extremely costly defense of the sprawling and complex LBO Litigation. That defense has been largely successful to date, but it has been expensive, and the litigation will likely continue for years.

¶ 11 The Foundations assert that Chubb would have defended and indemnified them under their former policy. On that basis, the Foundations sued Gallagher for breach of contract and professional negligence resulting in loss of coverage.

¶ 12 On Gallagher's motion for summary judgment, the circuit court determined that an exclusion in the Chubb policy, too, would have barred coverage for the LBO Litigation. On appeal (the first of two appeals in this case), the appellate court disagreed with the circuit court's ruling, holding instead that the Chubb exclusion in question did not necessarily bar coverage. See 2016 IL App (2d) 150303, ¶¶ 14-16, 402 Ill.Dec. 728, 52 N.E.3d 649. The appellate court therefore reversed the circuit court's grant of summary judgment for Gallagher. Id. ¶ 17.

¶ 13 On remand, Gallagher raised several affirmative defenses, and the parties proceeded to discovery. Gallagher's affirmative defenses asserted that the Foundations' conduct in the LBO transaction was fraudulent and therefore uninsurable. Moreover, Gallagher alleged, the Foundations knew of "an ongoing, progressive loss" before they changed insurers in June 2010 and therefore would never have been entitled to coverage under an insurance policy purchased in June 2010 regardless of its terms. Gallagher stated to the circuit court that, in order to prove its defenses, it hoped to garner facts relating to the following: (1) the extent to which the Foundations advocated for the LBO, (2) the Foundations' knowledge that the sustainable debt burden that the LBO structure placed on the Tribune would result in bankruptcy, and/or (3) the Foundations' knowledge that they would be sued as a result of their involvement with the LBO. These contentions echo key allegations made in the LBO Litigation against the Foundations.

¶ 14 During discovery, Gallagher subpoenaed the Foundations and their legal counsel, seeking any and all communications between the Foundations and their attorneys related to the Tribune bankruptcy and the LBO Litigation. Gallagher argued that it needed these documents to prove its affirmative defenses. The Foundations refused to tender the documents, citing attorney-client privilege. The Foundations asked the circuit court to quash the subpoenas or, in the alternative, to stay the case until the completion of the LBO Litigation. When the Foundations maintained that the documents Gallagher sought included attorney-client privileged communications and attorney work product, Gallagher argued that it was entitled to the documents under the common-interest exception announced in Waste Management , 144 Ill. 2d 178, 161 Ill.Dec. 774, 579 N.E.2d 322.

¶ 15 The circuit court agreed with Gallagher, finding that Gallagher had a "common interest" with the Foundations because it was "standing in the insurer's shoes for the purposes of this malpractice issue and may bear the ultimate burden of payment of the underlying claims and defense costs, so [Gallagher's] interests have become aligned with [the Foundations' interests] in defeating or settling the underlying litigation." The circuit court also denied the Foundations' request for a stay. To preserve its appeal rights, the Foundations refused to turn over the privileged documents, and the circuit court then issued a "friendly" contempt order to allow appeal of the issue.

¶ 16 On appeal, the appellate court found Waste Management controlling as to allowing discovery of the documents and therefore affirmed the circuit court's discovery order in all material respects, although it vacated the contempt order. See 2018 IL App (2d) 170939, ¶¶ 15, 23, 425 Ill.Dec. 23, 110 N.E.3d 1081. It also affirmed the denial of a stay but remanded with directions for the circuit court to proceed with discovery while monitoring the necessity for a stay in the future. Id. ¶ 23.

¶ 17 We allowed the Foundations' petition for leave to appeal, which asks this court to determine whether the holding of Waste Management applies to render the attorney-client privilege in this professional negligence case inapplicable with respect to the attorney communications mentioned in Gallagher's subpoena. Ill. S. Ct. R. 315 (eff. July 1, 2018).

¶ 18 ANALYSIS

¶ 19 Where legal advice of any kind is sought from a lawyer in his or her capacity as a lawyer, the communication relating to that purpose, made in confidence by the client, is protected from disclosure by the client or lawyer, unless the protection is waived. Fischel & Kahn, Ltd. v. van Straaten...