Transamerica Ins. Co. v. South

• Decision Date: 22 September 1997
• Docket Number: No. 95-2224,95-2224
• Parties: TRANSAMERICA INSURANCE COMPANY, Plaintiff-Appellee, v. Ronald M. SOUTH, David L. Domnick, First Financial Group of Illinois, et al., Defendants. Appeal of Phoenix Home Life Mutual Insurance Company, Intervening Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 392

125 F.3d 392

TRANSAMERICA INSURANCE COMPANY, Plaintiff-Appellee, v. Ronald M. SOUTH, David L. Domnick, First Financial Group of Illinois, et al., Defendants Appeal of Phoenix Home Life Mutual Insurance Company Intervening Defendant-Appellant.

No. 95-2224.

United States Court of Appeals Seventh Circuit.

Argued April 5, 1996.

Decided July 16, 1996.

Rehearing Granted Oct. 21, 1996.

Reargued May 23, 1997.

Decided Sept. 22, 1997.

Timothy S. Richards (argued), Ellen M. Edmonds, Neville, Richards, Defranco & Wuller, Belleville, IL, for Plaintiff-Appellee.

Ronald M. South, St. Louis, MO, pro se.

Michael J. Nester, Donovan, Rose, Nester & Szewczyk, Belleville, IL, for Defendants.

Mark G. Zellmer, Matthew D. Menghini, Arthur L. Smith (argued), Husch & Eppenberger, St. Louis, MO, for Intervening Defendant-Appellant.

Before BAUER, CUDAHY, and FLAUM, Circuit Judges.

BAUER, Circuit Judge.

We hope this is the last time we have cause to consider the issues raised in this appeal concerning the insolvency exclusion in an insurance policy issued by Transamerica Insurance Company ("Transamerica") to Phoenix Home Life Mutual Insurance Company ("Phoenix"). ¹ This panel reversed the district court's grant of summary judgment in favor of Transamerica and against Phoenix in our original opinion, which has been withdrawn from the bound volume. See 89 F.3d 475 (withdrawn), 1996 WL 394163 (7th Cir.1996). We now vacate the portion of that opinion which discussed the insolvency exclusion and which referred to "life insurance policies" instead of annuities. We do not alter our previous conclusion that Phoenix has standing to appeal, which was thoroughly and accurately assessed by Judge Cudahy in our withdrawn opinion. Accordingly, we affirm the district court's grant of summary judgment in favor of Transamerica.

Background

We assume familiarity with the facts in this case, as they have been thoroughly set forth in our previous opinion dealing with this particular insolvency exclusion, see Transamerica Ins. Co. v. South, 975 F.2d 321, 322-23 (7th Cir.1992) ("South I"), so we will only briefly reiterate the relevant facts. In 1988, Ronald South was an agent of Phoenix in Belleville, Illinois. South worked out of an agency owned by David Domnick, which was called First Financial Group of Illinois, Inc. Domnick supervised South, but South was an agent of Phoenix and not of Domnick. Domnick, too, was an agent of Phoenix. South recommended to several of his clients that they purchase "risk-free" annuities from First Columbia Insurance Company ("First Columbia"). ² First Columbia was not authorized to do business in Illinois, and so its annuities were not guaranteed by the Illinois Insurance Guarantee Fund. South had not bothered to check into the financial status of First Columbia before encouraging his clients to buy the annuities. After First Columbia went belly-up, some of South's clients who had purchased the annuities sued him for negligence and negligent misrepresentation, seeking to recover their losses.

During the relevant time period, Phoenix agents were insured under a "Life Agents Errors and Omissions Policy" issued by Transamerica. The policy covered "all Agents, General Agents or Managers" of Phoenix, and provided, in pertinent part:

[Transamerica agrees] to pay on behalf of the INSURED all sums which the INSURED shall become legally obligated to pay as DAMAGES because of:

A. Any act, error or omission of the INSURED, or any person for whose acts the INSURED is legally liable in rendering or failing to render PROFESSIONAL SERVICES for others in the conduct of the NAMED INSURED'S profession as a licensed Life Agent, Broker, General Agent or Manager.

* * *

D. Any actual or alleged failure of a General Agent or Manager covered by this Policy to supervise, manage or train any INSURED.

The coverage was made subject to various exclusions, including the one at issue here:

XII. Any claim arising out of insolvency, receivership or bankruptcy of any organization (directly or indirectly) in which the INSURED has placed or obtained coverage or in which an INSURED has placed the funds of a client or account.

(emphasis added). Both South and Domnick were agents of Phoenix covered by the policy.

We have already considered this insolvency exclusion. In South I, we held that the exclusion relieved Transamerica of its duty to indemnify South himself against damage claims. South I, 975 F.2d at 328. We said: "As was the district court, we are convinced that it is clear and free from doubt that the claims do fall within the exclusion: they arise out of the insolvency of an organization (directly or indirectly) in which the insured placed the funds of a client." Id. In this appeal, we are asked to revisit the insolvency exclusion to determine whether Transamerica has a duty to indemnify either Domnick or his agencies for his alleged negligent supervision of South in connection with the sale of the First Columbia annuities.

Transamerica filed this action as a declaratory judgment action seeking to define the scope of its coverage of negligent acts committed by Phoenix employees. Transamerica named various defendants, but not Phoenix. Phoenix moved to intervene and filed a counterclaim which mirrored Transamerica's complaint and which requested a declaratory judgment that Transamerica did have to indemnify Domnick and his agents with respect to South and the First Columbia annuities. Transamerica moved to dismiss the counterclaim, arguing that Phoenix lacked standing. Phoenix and Transamerica both moved for summary judgment on the coverage issue regarding the insolvency exclusion. The district court denied Transamerica's motion to dismiss, finding that Phoenix had standing, but granted Transamerica's motion for summary judgment, finding that Transamerica did not owe Phoenix a duty to defend or indemnify the investors' suits.

In our first go-around with this appeal, we found that Phoenix had standing in the action below and standing to appeal from the district court's judgment. However, we reversed the district court's decision that Transamerica had no duty to defend or indemnify Domnick. We came to that conclusion primarily because we believed that the first part of the insolvency exclusion was relevant, and that, as required by that part, Domnick was not "the INSURED" who "placed or obtained coverage." Rather, we found, unlike South I, that the exclusion did not apply to Domnick as it did to South.

Transamerica filed a petition for rehearing on July 30, 1996, in which it pointed out that our original opinion referred to the product South suggested to his clients as "life insurance policies" rather than "annuities." Transamerica, therefore, believed that we should have applied the second part of the insolvency exclusion, which applies to "an INSURED" who "placed the funds of a client." Because of the emphasis we had placed in our withdrawn opinion on the definite article "the" versus the indefinite articles "a," "an," and "any," Transamerica believed that, if we were to apply the second part of the exclusion, we would find that South was "an INSURED" who placed client funds and, therefore, that Transamerica was relieved from coverage. After Phoenix filed an answer to Transamerica's petition on August 14, 1996, we granted Transamerica's Petition for Rehearing and set the case for reargument. See 99 F.3d 216-17 (7th Cir. October 21, 1996). We specifically asked the parties to address (1) whether Transamerica had waived its ability to argue the applicability of the "placed or obtained coverage" language of the exclusion and (2) whether the second part of the insolvency exclusion necessarily applied once we correctly realized that the products we were dealing with were "annuity contracts" and not "insurance policies" and whether there was an ambiguity in the exclusion nonetheless. We now find that Transamerica has not, and could not have, waived its argument, and that the policy unambiguously excludes coverage for Domnick's supervision of South in conjunction with the sales of the First Columbia annuities.

Analysis

A. Standing of Phoenix to Appeal ³

The district court both granted Phoenix's petition to intervene as a defendant in Transamerica's original action and found that Phoenix had standing to bring its counterclaim. The standing determination was based on the district court's finding that "Phoenix has paid Domnick's costs of defense and settlement in several lawsuits, and has properly alleged that it is subrogated to Domnick's rights by operation of law and by contract." Dist. Ct. Op. at 3. On appeal, Transamerica does not directly attack those decisions, but challenges Phoenix's standing to appeal the judgment entered below. Transamerica alleges that Phoenix's interest in this litigation is "conjectural and hypothetical," since Phoenix has not shown that it had a duty to indemnify Domnick. Thus, Transamerica argues, Phoenix fails to meet the Article III injury-in-fact requirement of an actual or threatened injury which is "concrete and particularized." See Matter of FedPak Systems, Inc., 80 F.3d 207, 212 (7th Cir.1996), citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61, 112 S.Ct. 2130, 2136-37, 119 L.Ed.2d 351 (1992). Phoenix responds that, because Transamerica did not object to Phoenix's original intervention in the case, it has waived its right to object to Phoenix's standing to appeal the judgment below. Alternatively, Phoenix argues that, because it was properly allowed to intervene in the action below and will be bound by the judgment rendered, it fulfills the requirements for standing to appeal.

To begin the analysis, we distinguish three distinct but related concepts: intervention pursuant to Federal Rule of Civil Procedure 24; Article III standing to pursue the original controversy; and Article III standing to appeal the judgment below. Phoenix is correct that the issue of intervention has been...