U.S. Specialty Ins. Co. v. Vill. of Melrose Park

• Decision Date: 21 April 2020
• Docket Number: No. 19 C 5232,19 C 5232
• Parties: U.S. SPECIALTY INSURANCE COMPANY, Plaintiff, v. VILLAGE OF MELROSE PARK, Ronald Serpico, Sam Pitassi, Michael Castellan, Steven Rogowski, and John Scatchell, Defendants.
• Court: U.S. District Court — Northern District of Illinois

455 F.Supp.3d 681

U.S. SPECIALTY INSURANCE COMPANY, Plaintiff,

v.VILLAGE OF MELROSE PARK, Ronald Serpico, Sam Pitassi, Michael Castellan, Steven Rogowski, and John Scatchell, Defendants.

No. 19 C 5232

United States District Court, N.D. Illinois, Eastern Division.

Signed April 21, 2020

Sarah Marie Kitlinski, Bates Carey LLP, David Frederick Cutter, BatesCarey LLP, Chicago, IL, for Plaintiff.

Dominick L. Lanzito, Jennifer Lynn Turiello, Kevin Mark Casey, Paul A. O'Grady, Peterson, Johnson & Murray Chicago LLC, Chicago, IL, for Defendants.

OPINION AND ORDER

SARA L. ELLIS, United States District Judge

In this coverage action, Plaintiff U.S. Specialty Insurance Company ("USSIC") seeks a declaration that it has no duty to defend or indemnify its insureds, the Village of Melrose Park, Ronald Serpico, Sam Pitassi, Michael Castellan, and Steven Rogowski (the "Village Defendants"), in the underlying lawsuit captioned Scatchell v. Village of Melrose Park , No. 18 C 3989 (N.D. Ill.).¹ USSIC relies on an exclusion in the applicable insurance policy that bars coverage if the underlying lawsuit derives from facts or circumstances known to the Village Defendants prior to the policy's effective date or that formed the subject of a prior administrative or regulatory proceeding. The Village Defendants filed a counterclaim, asking the Court to find the exclusion unenforceable. The parties have filed cross-motions for judgment on the pleadings. Because the exclusion is enforceable and applies to the facts presented by this case, the Court concludes that USSIC does not have a duty to defend or indemnify the Village Defendants in the underlying lawsuit.

BACKGROUND²

I. The USSIC Policies

As relevant here, USSIC has issued two insurance policies to the Village that potentially provide coverage to the Village Defendants for the underlying lawsuit: (1) Policy No. PKG80210705, effective from December 22, 2016 to December 22, 2017 (the "2016-2017 Policy"); and (2) Policy No. PKG80310705, effective from December 22, 2017 to December 22, 2018 (the "2017-2018 Policy"). The 2016-2017 Policy and the 2017-2018 Policy are materially identical. Among other things, the 2016-2017 and 2017-2018 Policies provide Employment Practices Liability Coverage ("EPL Coverage") on a claims made and reported basis.

Section I.A of the EPL Coverage provides, in relevant part:

1. We will pay those sums that the insured becomes legally obligated to pay as "damages" because of an "employment practices wrongful act" to which this insurance applies. We will have the right and duty to defend the insured against any "suit" seeking those "damages", even if the allegations of such "suit" are groundless, false or fraudulent. However, we will have no duty to defend the insured against any "suit" seeking "damages" to which this insurance does not apply. We may, at our discretion, investigate any "employment practices wrongful act" and settle any "claim" or "suit" that may result.

....

2. This insurance applies to "damages" only if: ...

b. The "employment practices wrongful act" is first committed after the retroactive date and before the end of the Policy Period listed in the Declarations;

c. The "claim" for "damages" is first made against the insured during the Policy Period listed in the Declarations, or if applicable, any Extended Reporting Period provided as described in SECTION V – EXTENDED REPORTING PERIODS; and

d. The "claim" is timely reported pursuant to SECTION VI – EMPLOYMENT PRACTICES LIABILITY CONDITIONS, Paragraph B.

Doc. 1-1 at 98.

In addition, Section I.C provides:

Regulatory Investigations

We have, at our option, the right but not the obligation to investigate and defend regulatory investigations or actions, including but not limited to Equal Employment Opportunity Commission actions (or the state equivalent) against the insured prior to any "suit" being filed....

The insured, however, must promptly notify us in accordance with the requirements of SECTION VI. – EMPLOYMENT PRACTICES LIABILITY CONDITIONS, Paragraph B. and describe the circumstances surrounding each regulatory investigation or action submitted for consideration under this provision.

Id. at 99. With respect to notification of regulatory investigations or actions, Clause 4 of Paragraph B of Section VI provides:

If, during the Policy Period any insured becomes aware of an "employment practices wrongful act" which may reasonably result in a future "claim" and notice is provided in writing to us of such "employment practices wrongful act" prior to the end of the Policy Period, then any "claim" subsequently arising from such "employment practices wrongful act" shall be deemed to have been made on the date notice of such "employment practices wrongful act" was given to us. Such notice must describe the "employment practices wrongful act" in reasonable detail, provide the name of the potential claimant, the date, time and location of the "employment practices wrongful act", contain the circumstances by which the insured first became aware of the "employment practices wrongful act" and particulars as to why the insured can reasonably expect a "claim" as a result of such "employment practices wrongful act". Notice of such "claim" shall be given to us in writing as soon as practicable upon your receipt of the "claim".

Id. at 106.

The EPL Coverage includes a number of exclusions to coverage, including Exclusion L:

This insurance does not apply to "damages", "claims" or "suits" alleging, based upon, arising out of, attributable to, directly or indirectly resulting from, in consequence of, or in any way involving:

....

L. Prior Employment Practices Wrongful Act, Prior Insurance, Prior or Pending Litigation

....

3. Any "claim" deriving in whole or in part, from any fact, series of facts or circumstances, or matters asserted or alleged:

a. Which were known to any insured; or

b. Were the subject of any prior or pending, legal action or litigation, administrative or regulatory proceeding, "claim", "suit", demand, arbitration, decree or judgment against any insured prior to the beginning of the Policy Period listed in the Declarations.

Id. at 99, 101.

The EPL Coverage defines a "claim" as "a ‘suit’ or written demand seeking ‘damages’ because of an alleged ‘employment practices wrongful act’." Id. at 107. "Suit" is defined as:

a civil proceeding (other than a regulatory investigation or action, including but not limited to Equal Employment Opportunity Commission (EEOC) actions or the state equivalent) in which "damages" because of an "employment practices wrongful act" to which this coverage applies are alleged. "Suit" includes:

1. An arbitration proceeding in which such "damages" are claimed and to which the insured must submit or does submit with our consent; or

2. Any other alternative dispute resolution proceeding in which such "damages" are claimed and to which the insured submits with our consent.

Id. at 110. With some exclusions not relevant here, "damages" means "judgments and settlements which the insured is legally obligated to pay as a result of an ‘employment practices wrongful act’ covered by" the policy. Id. at 108. The EPL Coverage defines "employment practices wrongful act" to include "employment-related offenses" such as discrimination, harassment, and retaliation. Id. at 108–09.

II. The Underlying Litigation

On September 15, 2017, Scatchell filed a discrimination charge with the Equal Employment Opportunity Commission (the "EEOC"), alleging that the Village retaliated against him for opposing unlawful or discriminatory practices while he worked for the Village as a lieutenant in the police department. Specifically, Scatchell complained that he engaged in protected activity by taking a stand against the Village's mistreatment of another police officer. Scatchell alleged that the Village, in retaliation, did not promote him to deputy chief, did not investigate an incident in which three-quarter sticks of dynamite were thrown at his house, changed his assignment, decreased his responsibilities, and excluded him from meetings.³ Scatchell contended that, because of the retaliation, he "ha[d] endured and will suffer substantial financial loss, suffering, humiliation, emotional distress, and other damages in the past and the future." Doc. 1-3 at 6. Scatchell filed an amended charge with the EEOC on September 25, 2017. In the amended charge, Scatchell alleged that, after he filed the initial EEOC charge, he experienced continued retaliation and an intensified hostile work environment, which included the posting of accusations of rule violations against him on a community bulletin board. The Village responded to Scatchell's charges on November 21, 2017, denying Scatchell's allegations of retaliation. Among other things, the Village contended that Scatchell did not engage in protected activity and did not pursue his claim through the proper administrative channels. On March 9, 2018, the EEOC issued a Dismissal and Notice of Rights, indicating the EEOC could not determine whether a statutory violation occurred.

Scatchell filed the underlying lawsuit on June 7, 2018. In the underlying lawsuit, Scatchell alleges that the Village Defendants engaged in First Amendment retaliation and retaliated against Scatchell in violation of 42 U.S.C. § 1981 based on the same protected activity raised in his EEOC charge. He also claims that the Village maintains an unconstitutional policy or practice of retaliation and that the individual defendants engaged in a conspiracy to commit retaliation. The complaint includes many of the same alleged instances of retaliation as those Scatchell raised in his EEOC charges but also includes the Village Defendants’ alleged attempts to pin a false case on Scatchell, retaliation against Scatchell's son, and Scatchell's daughter's termination as the Village FOP's attorney.

On July 2, 2018, USSIC received notice that the Village Defendants seek coverage under the 2017-2018 Policy for the underlying lawsuit. On July 6,...