Truck Ins. Exchange v. Ashland Oil, Inc.

• Decision Date: 06 January 1992
• Docket Number: No. 90-2469,90-2469
• Parties: RICO Bus.Disp.Guide 7903 TRUCK INSURANCE EXCHANGE, Plaintiff-Appellee, v. ASHLAND OIL, INCORPORATED, et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 787

951 F.2d 787

RICO Bus.Disp.Guide 7903

TRUCK INSURANCE EXCHANGE, Plaintiff-Appellee, v. ASHLAND OIL, INCORPORATED, et al., Defendants-Appellants.

No. 90-2469.

United States Court of Appeals Seventh Circuit.

Argued Sept. 16, 1991.

Decided Jan. 6, 1992.

Michael E. Brown, John T. Lorenz, Jeffrey A. Doty (argued), Kightlinger & Gray, Indianapolis, Ind., for plaintiff-appellee.

Melbourne A. Noel, Jr., Katten, Muchin & Zavis, Stephen Schostok (argued), Michael L. Tinaglia, Brad A. Levin, Laser, Schostok, Kolman & Frank, Chicago, Ill., Catherine C. Kennedy, Dale & Eke, Indianapolis, Ind., for defendants-appellants.

Before BAUER, Chief Judge, and POSNER and EASTERBROOK, Circuit Judges.

POSNER, Circuit Judge.

This is an intricate insurance case. Ashland Oil (and some other companies--but we'll ignore them to simplify our opinion) brought a fraud suit against Toy Rex Arnett, accountant Donald Richards, and others. The suit was under RICO, with pendent law claims under Indiana law. It resulted in a substantial judgment (of which $175,000 was against Richards), which we affirmed in Ashland Oil, Inc. v. Arnett, 875 F.2d 1271 (7th Cir.1989). Meanwhile, Truck Insurance Exchange--which had issued a liability insurance policy to Richards, Isenberg & Co., a corporation of which Donald Richards was a one-half owner--had filed a declaratory judgment action against the corporation (also in federal district court under the diversity jurisdiction), Richards himself, and Ashland, seeking a declaration that the policy did not cover the judgment against Richards. That is the case before us. The district judge entered judgment for the insurance company on its motion for summary judgment. Ashland (and the other fraud plaintiffs--but we're ignoring them, remember) have appealed. Mr. Richards has not appealed. Indiana law governs the substantive issues.

The basis of federal jurisdiction over the declaratory judgment suit is diversity of citizenship, and there is no question that the plaintiff, Truck Insurance Exchange, is a citizen of a different state from any of the defendants. But we must consider whether the parties are properly aligned--that is, whether the plaintiff and the defendants are the real adversaries. City of Indianapolis v. Chase National Bank, 314 U.S. 63, 62 S.Ct. 15, 86 L.Ed. 47 (1941); Fidelity & Deposit Co. v. City of Sheboygan Falls, 713 F.2d 1261, 1264-68 (7th Cir.1983). Ordinarily the victim of an insured is on one side of the lawsuit and the insured and his insurance carrier are on the other; and if we realigned the parties accordingly, the requirement of complete diversity would no longer be satisfied. But such a realignment would be improper in this suit, as opposed to the first one, the fraud suit against Richards. The insurance company brought the present suit in order to disclaim any liability it might have either to Richards, the insured (or rather the half owner of the insured), or to Richards' victims; therefore the plaintiff in this suit really is the adversary of all the defendants. Bonell v. General Accident Fire & Life Assurance Corp., 167 F.Supp. 384, 385 (N.D.Cal.1958). So there is diversity jurisdiction, but, as we are about to see, there is another jurisdictional issue.

The insurance policy, issued in 1985, covered "claims arising out of professional services rendered prior to the inception of this coverage if claim is made or suit is brought during the policy period provided no insured had any knowledge of any circumstances which might have resulted in a claim at the effective date of the policy." (Emphasis added.) The policy period began on June 19, 1985, and ended the same day the following year. Richards' fraud had been committed years earlier, in 1981 and 1982, when he was conducting his accounting practice through a sole proprietorship called Richards & Co., rather than through the corporation (Richards, Isenberg & Co.) that Truck Insurance Exchange had insured. The district judge held that coverage was excluded by the proviso that we have quoted and, independently by the fact that the corporation was not liable for Richards' torts.

Ashland argues that the proviso is against public policy because it makes the insurance policy illusory. Unless Richards committed fraud in his sleep, he would have to have known, if not that he was committing fraud (for one purpose of liability insurance is to insure against false claims), of some circumstance that might result in a claim whether against him or the corporation through which he was operating when he bought the policy. So the only insured events would be claims that both arose and were presented in the brief policy period, a period shorter than any of the statutes of limitations likely to apply to suits against accountants.

The initial curiosity is that this argument should be made by Ashland rather than by Richards or his corporation. Ashland was not the insured. It was the insured's victim. Ordinarily a victim cannot complain about the coverage of his injurer's liability insurance policy. We shall see that he may have a practical interest and some limited legal rights in the insurance contract, but he is not a third-party beneficiary of it. Bennett v. Slater, 154 Ind.App. 67, 289 N.E.2d 144 (1972); Winchell v. Aetna Life & Casualty Ins. Co., 182 Ind.App. 261, 264, 394 N.E.2d 1114, 1117 (1979); Baker v. American States Ins. Co., 428 N.E.2d 1342, 1347 (Ind.App.1981); Eichler v. Scott Pools, Inc., 513 N.E.2d 665, 667 (Ind.App.1987). This point is obscured by the procedural setting. Ashland did not sue the insurer directly, for a declaration that the latter was liable on the policy. It was the insurer that, having decided to deny coverage, brought this declaratory judgment action and out of an abundance of caution named Ashland as an additional defendant. Naturally Ashland thought it must have some potential interest in the insurance policy to be made a defendant in a suit to determine the policy's meaning; and the insurer--which revealed that it thought the same thing by naming Ashland as a defendant in the first place--has tacitly conceded Ashland's standing by not contesting the appeal on the ground of lack of standing.

We are not bound by such a concession, but we think it correct. The policy is indirectly an asset of Donald Richards' (indirect because the insured is his corporation, not himself)--or at least it may be, depending on how the questions of coverage are resolved. And Richards is a judgment debtor of Ashland. If Richards were forced into bankruptcy, the trustee in bankruptcy would succeed to Richards' assets and would attempt to realize on them for the benefit of Richards' unsecured creditors, including the victims of his fraud--including therefore Ashland. Richards is not in bankruptcy; nor has Ashland obtained, through postjudgment proceedings or otherwise, an assignment of the insurance policy. But it may have been in anticipation of Ashland's obtaining such an assignment that the insurance company added Ashland as a defendant in this lawsuit.

In these circumstances, Ashland's interest is not so remote, improbable, or impalpable that it lacks standing to litigate the coverage of the policy--especially when we consider that Ashland named Richards, Isenberg & Co., the actual owner of the insurance policy, as an additional defendant in its fraud suit against Donald Richards. Although an insured's tort victim cannot (except in direct-action states) sue the insurance company directly, he has a legal right to protect his potential interest in the policy, for example by paying the insurance premiums to make sure the policy doesn't lapse. That right is conferred in recognition that a tort victim has a practical, albeit only a potential, financial interest in the tortfeasor's insurance policy, and the impairment of such an interest is an injury that will support standing under Article III. Maryland Casualty Co. v. Pacific Coal & Oil Co., 312 U.S. 270, 61 S.Ct. 510, 85 L.Ed. 826 (1941); Hawkeye-Security Ins. Co. v. Schulte, 302 F.2d 174, 176-77 (7th Cir.1962); Federal Kemper Ins. Co. v. Rauscher, 807 F.2d 345, 353-54 (3d Cir.1986).

That brings us to the merits. We have some difficulty even understanding Ashland's argument that the insurance policy is against public policy because the coverage it provides is illusory. Contracts are against public policy when they create incentives to commit acts that society has made illegal or, at least, disapproves of. Sayres v. Decker Automobile Co., 239 N.Y. 73, 145 N.E. 744 (1924); United States v. King, 840 F.2d 1276, 1283 (6th Cir.1988); Graham v. James F. Jackson Associates, Inc., 84 N.C.App. 427, 352 S.E.2d 878 (N.C.App.1987); E. Allan Farnsworth, Contracts § 5.2, at pp. 352-53 (2d ed. 1990). That is one of the reasons you can't insure yourself against the consequences of your deliberate wrongdoing, Zuckerman-Vernon Corp. v. Rosen, 361 So.2d 804, 806 (Fla.App.1978), and why you can't insure a person's life unless you have an insurable interest in it. Lakin v. Postal Life & Casualty Ins. Co., 316 S.W.2d 542, 549 (Mo.1958). In either case the contract would create an incentive to commit bad acts. We might not care if the victims of such acts always had completely adequate legal remedies against the actor, but they don't.

Contracts that are "illusory" in the sense of hopelessly or deceptively one-sided fail, if at all, on different grounds, such as fraud, unconscionability, or undue influence. The basic difference is that between a contract in which the parties combine to harm others (including the diffuse others evoked by such terms as "the public interest" and "public policy") and a contract in which one party exploits the other. The former is the domain of the public policy defense, the latter of fraud, incapacity, and related defenses. Like most attempts at generalization in law, this one is only partially successful; for it is on grounds of public policy that courts...