STATE BAR ASS'N MUT. INS. v. COREGIS INS.

• Decision Date: 16 December 2004
• Docket Number: No. 1-03-2283.,1-03-2283.
• Citation: 355 Ill. App.3d 156,290 Ill.Dec. 394,821 N.E.2d 706
• Parties: The ILLINOIS STATE BAR ASSOCIATION MUTUAL INSURANCE COMPANY and Munday and Nathan, Plaintiffs-Appellants, v. COREGIS INSURANCE COMPANY, Defendant-Appellee.
• Court: United States Appellate Court of Illinois

821 N.E.2d 706

355 Ill. App.3d 156

290 Ill.Dec. 394

The ILLINOIS STATE BAR ASSOCIATION MUTUAL INSURANCE COMPANY and Munday and Nathan, Plaintiffs-Appellants, v.COREGIS INSURANCE COMPANY, Defendant-Appellee.

No. 1-03-2283.

Appellate Court of Illinois, First District, Fourth Division.

December 16, 2004.

Pretzel & Stouffer, Chartered, Chicago (Robert Marc Chemers and Andrew G. Witik, of counsel), for Appellant.

Bollinger, Ruberry & Garvey, Chicago (Edward F. Ruberry, Jeffrey A. Goldwater and Anthony G. Barone, of counsel), for Appellee.

Justice QUINNdelivered the opinion of the court:

Plaintiffs Munday & Nathan, an Illinois law firm, and their professional malpractice insurer, Illinois Bar Association Mutual Insurance Company(ISBA Insurance), appeal from the judgment of the circuit court, which granted summary judgment for defendantCoregis Insurance Company(Coregis).On appeal, plaintiffs argue that the circuit court erred in finding that an insurance policy issued by Coregis was void ab initio due to a material misrepresentation made by its insured in applying for the policy.For the following reasons, we find that, while the policy was not void ab initio, but, instead, merely voidable, Coregis did not waive its right to void the policy based upon the insured's material misrepresentation.Therefore, we affirm the judgment of the circuit court.

BACKGROUND

In 1994, attorneys Brian Hubka and Thomas Nathan, a named partner in the law firm of Munday & Nathan (Munday), entered into an agreement to jointly represent Cherry Maxwell in a personal injury lawsuit that arose out of an automobile accident in 1991.In April 1994, Hubka and Nathan reached a settlement agreement on behalf of Ms. Maxwell in the amount of $225,000.Instead of disbursing the settlement proceeds to Ms. Maxwell, Hubka converted them for his own use.On February 22, 1995, the Illinois Attorney Registration and Disciplinary Commission(ARDC) filed a complaint against Hubka alleging, inter alia, that he converted client funds.On May 4, 1995, Hubka admitted, in his answer to the ARDC complaint, that he never disbursed the settlement funds to Ms. Maxwell.

Five months after answering the ARDC complaint, Hubka submitted an application to renew his lawyers professional liability insurance policy with Coregis Insurance Company(Coregis), with whom he had been insured since 1993.In his application, despite answering the pending ARDC charges against him by admitting his failure to disburse the settlement funds to Ms. Maxwell, Hubka stated that he was not aware of any "circumstance, act, error, omission or personal injury which may result in a claim" against him.After receiving his application, Coregis renewed the policy for the period of November 7, 1995, to November 7, 1996.

On January 20, 1996, Maxwell filed suit against Hubka, Nathan, and Munday for conversion, legal malpractice, breach of fiduciary duty, and breach of contract.Nathan and Munday tendered their defense to ISBA Insurance, their professional liability insurer.

On August 8, 1996, the Illinois Supreme Court entered an order suspending Hubka from the practice of law.¹On September 4, 1996, after learning of his suspension, Coregis informed Hubka that it would not renew the policy, which was to expire on November 7, 1996.

On September 30, 1996, Hubka tendered his defense against Ms. Maxwell's lawsuit to Coregis.Three days later, Coregis sent a letter to Hubka stating that it had received notice of his tender and informing him that it had assigned Michael Bruck(Bruck) of Quinlan & Crisham to defend him.In the letter, Coregis also highlighted certain exclusions contained in the policy that it felt were or may become relevant to the issue of whether it would provide a defense for Hubka, and reserved its right to refuse to defend or indemnify him if it determined that any of those exclusions were applicable.Specifically, the letter stated, in pertinent part:

"Also, please refer to the EXCLUSIONS section of the Policy, which states, in pertinent part:

This policy does not apply to:

* * *

J. any CLAIM arising out of conversion, misappropriation or improper commingling of client funds.

* * *

Count I of Ms. Maxwell's Complaint alleges conversion of approximately $200,000 of settlement proceeds.Count II of the Complaint sets forth a cause of action based in legal malpractice.Count III alleges breach of fiduciary duty.Finally, count IV alleges breach of contract.All four counts of Ms. Maxwell's Complaint revolve around the same allegations of conversion.While we do not place any credence in Ms. Maxwell's allegations, we must reserve our rights with respect to same.Therefore, based on the aforementioned exclusions, if it is determined that any of your acts gave rise to conversion of settlement funds, please be advised that we will neither defend nor indemnify you for those acts, errors, or omissions.

In addition, I call your attention to the EXCLUSIONS section of the Policy which states that the following is also excluded:

A. any CLAIM that results in a final adjudication against any INSURED that an INSURED has committed any criminal, dishonest, fraudulent or malicious acts, errors, omissions or PERSONAL INJURIES.

This exclusion does not apply to any INSURED who is not so adjudged;

Once again, all four counts of Ms. Maxwell's Complaint are based upon the same set of allegations that you converted her settlement funds.We do not believe that there is any credibility to Ms. Maxwell's assertions, but we must reserve our rights with respect to the assertions.Therefore, if it is adjudged that you committed any criminal, dishonest, fraudulent or malicious acts, errors or omissions, including, but not limited to conversion, be advised that we will not indemnify you with respect to same.

Finally, I again call your attention to the EXCLUSIONS section of the Policy which states that the following is excluded from coverage:

B. any CLAIM arising out of any act, error, omission or PERSONAL INJURY occurring prior to the effective date of this policy if any INSURED knew or could have reasonably foreseen that such act, error, omission or PERSONAL INJURY might be expected to be the basis of a CLAIM or suit;

Ms. Maxwell's Complaint alleges that Ms. Maxwell's personal injury case was settled in April, 1994, for the amount of $225,000.The effective date of the Policy is November 7, 1995.Therefore, if it is determined that on or prior to November 7, 1995, you either knew or could have reasonably foreseen that Ms. Maxwell would bring a claim based upon your own acts, errors, or omissions concerning her personal injury case, please be advised that we will not defend or indemnify you with respect to same.

In order to protect your interests, we shall defend this claim on your behalf, pursuant to this Reservation of Rights.If it should develop that you are not covered by the Policy, you understand that by agreeing to defend you under this Reservation of Rights, the Company does not waive any right or defenses it may have available, nor does it waive its right to deny coverage at a later date.We also reserve the right to withdraw from the defense of this matter should our investigation determine that there is no coverage."(Emphasis in original.)

Though it had previously informed Hubka that it would not renew the policy, on November 4, 1996, Coregis offered Hubka the option to purchase an "Extended Reporting Endorsement," which extended for one year the time period in which Hubka could report a claim to Coregis based upon any act, error, or omission that occurred before the policy expired.

On February 10, 1997, Bruck drafted a letter to Hubka explaining that there was a potential conflict between Hubka's and Coregis's interests in the resolution of Ms. Maxwell's lawsuit against Hubka.After explaining this potential conflict, the letter detailed Hubka's right to independent counsel and suggested that he"consult with an attorney of [his] own choosing in connection with the matters" in the letter.The letter also gave Hubka the option of waiving any potential conflict and fully consenting to Bruck's continued representation.Though there is no signed letter in the record, Bruck stated in an affidavit that he"specifically discussed" with Hubka "a potential conflict of interest due to the fact that we had been retained by Coregis Insurance Company and advised Mr. Hubka that he may have the right to obtain independent counsel to represent him in the Maxwell matter."Bruck also averred that "before and after the letter was sent, Brian Hubka indicated that he understood the issues, waived any potential conflict and consented to" his representation.Hubka stated in his own affidavit that he never received this letter, discussed any potential conflict with Bruck, or waived any potential conflict.

On April 16, 1997, Ms. Maxwell moved for summary judgment against Hubka on count II (legal malpractice) of her amended complaint.On August 14, 1997, Coregis filed a complaint for declaratory judgment against Hubka and Ms. Maxwell.In its complaint, Coregis sought a declaration that it owed no duty to defend or indemnify Hubka in Ms. Maxwell's lawsuit based upon two policy exclusions: (1) exclusion J, which excluded coverage for "any claim arising out of conversion, misappropriation or improper commingling of client funds" and (2) exclusion B, which denied coverage for claims arising out of acts, errors, or omissions that occurred prior to the policy's inception date which the insured knew or could reasonably have foreseen would become the basis of a claim or lawsuit.Neither Nathan nor Munday was named as a defendant in Coregis's declaratory judgment complaint.

On August 15, 1997, the day after Coregis filed its declaratory judgment complaint, the trial court granted Ms. Maxwell's motion for summary judgment and entered judgment against Hubka in the amount of $213,414.75.On January 2, 1998, Ms. Maxwell...