Western American Ins. Co. v. Moonlight Design

• Decision Date: 31 January 2000
• Docket Number: No. 98 C 5206.,98 C 5206.
• Citation: 95 F.Supp.2d 838
• Parties: WESTERN AMERICAN INSURANCE COMPANY, Plaintiff, v. MOONLIGHT DESIGN, INC., Defendant.
• Court: U.S. District Court — Northern District of Illinois

95 F.Supp.2d 838

WESTERN AMERICAN INSURANCE COMPANY, Plaintiff, v. MOONLIGHT DESIGN, INC., Defendant.

No. 98 C 5206.

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

January 31, 2000.

Robert Marc Chemers, Amy E. Johnson, Pretzel & Stouffer, Chtd., Chicago, IL, for plaintiff.

Patrick Joseph O'Connor, Law Office of Patrick J. O'Connor, Chicago, IL, George F. Carpinello, Philip J. Iovieno, Barrett, Gravante, Carpinello & Stern, LLP, Albany, NY, for defendant.

MEMORANDUM AND ORDER

MORAN, Senior District Judge.

Plaintiff West American Insurance Company (West American) seeks to resolve whether it had a duty to defend defendant Moonlight Design, Inc. (Moonlight), its insured, in a copyright infringement lawsuit filed in New York. Both plaintiff and defendant have moved for a judgment on the pleadings. We hold that a duty to defend existed under the insurance policy and therefore deny plaintiff's motion and grant defendant's cross-motion.

BACKGROUND

Since 1986, Moonlight has been in the business of distributing bridal dresses. It has the dresses manufactured in Taiwan and then markets and distributes them in the United States. In March 1998, Moonlight was sued in federal court in New York by one of its competitors, Eve of Milady and Milady Bridals, Inc. (Milady). Milady is a New York corporation that, like Moonlight, distributed bridal dresses out of offices and showrooms located in New York City. In its lawsuit against Moonlight (the "Milady lawsuit"), Milady alleged that Moonlight infringed Milady's copyrights of bridal dress designs and falsely represented and designated the origin of those designs.¹

Upon receiving the complaint in the Milady lawsuit, Moonlight contacted its insurer, West American. Moonlight's insurance agreement with West American (the agreement) provides coverage for certain business liabilities. In relevant part, the agreement states that West American

will pay those sums that [Moonlight] becomes legally obligated to pay as damages because of "bodily injury," "property damage," "personal injury" or "advertising injury" to which this insurance applies. [West American] will have the right and duty to defend any "suit" seeking those damages. [West American] may at [its] discretion investigate any "occurrence" and settle any claim or "suit" that may result.

The agreement provides that it applies to any "`[a]dvertising injury' caused by an offense committed in the course of advertising your goods, products or services," and further defines the term "advertising injury" as an injury arising out of one or more of the following offenses:

a. Oral or written publication of material that slanders or libels a person or organization or disparages a person's or organizations goods, products or services;

b. Oral or written publication of material that violates a person's right of privacy;

c. Misappropriation of advertising ideas or style of doing business; or

d. Infringement of copyright, title or slogan.

As provided by the agreement, Moonlight tendered the defense of the Milady lawsuit to West American. Moonlight notified West American that the Milady lawsuit alleged an "advertising injury" against Moonlight and therefore was covered by the agreement. Upon reviewing the complaint West American decided that it was not obligated to defend Moonlight. West American claimed that the Milady lawsuit did not allege an advertising injury "caused by an offense committed in the course of advertising" and therefore did not fall within the auspices of the agreement. West American agreed to pay defense costs, however, subject to a reservation of rights.

West American thereafter filed this action, seeking a judgment declaring that it was not obligated to defend Moonlight in the Milady lawsuit.² In order to resolve the issue, West American moved for a judgment on the pleadings and Moonlight answered with a similar cross-motion. After briefing on the motions was completed, the Milady lawsuit settled. According to West American's amended complaint, West American and Milady arrived at an agreement whereby West American, on behalf of Moonlight, paid Milady a sum of $100,000 to settle the lawsuit. Based on this development, West American has added two counts to its original complaint against Moonlight. In addition to the original claim regarding its duty to defend (Count I of the amended complaint), West American seeks reimbursement of its defense expenditures in the Milady lawsuit and indemnification of the settlement amount (Counts II and III of the amended complaint).

For the purposes of resolving the motions presently pending before this court,, we do not address the issue whether West American is obligated to pay defense or settlement costs related to the Milady lawsuit, and therefore set aside Counts II and III of the amended complaint. The legal analysis governing those claims may differ from the standard governing whether West American had a duty to defend in the first place. A resolution of whether a duty to defend existed under the agreement, however, will dispose of at least one count of the amended complaint and simplify this lawsuit.³ Therefore, turning to Count I of the amended complaint we find that West American had a duty to defend Moonlight in the Milady lawsuit, and accordingly deny West American's motion for judgment on the pleadings and grant Moonlight's similar cross-motion.

DISCUSSION

I. Choice of Law

As a preliminary matter, we must resolve a conflict of laws. While West American argues that New York law governs the substantive issues presented in this action, Moonlight ripostes that Illinois law applies. This conflict requires us to engage in a choice-of-law analysis. When exercising diversity jurisdiction we must look to the choice-of-law rules of the forum state, Illinois, to determine which state's substantive law should apply. See Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 497, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941); West Suburban Bank of Darien v. Badger Mut. Ins. Co., 141 F.3d 720, 724 (7th Cir.1998). Illinois law defers to contractual choice-of-law provisions; however, since the insurance agreement at issue here does not contain such a provision, we revert to the choice-of-law rules provided by Illinois common law. See Diamond State Ins. Co. v. Chester-Jensen Co., Inc., 243 Ill.App.3d 471, 183 Ill.Dec. 435, 611 N.E.2d 1083, 1093 (1993). In insurance coverage cases, as in contract cases in general, Illinois applies the "most significant contacts test" to determine what state's substantive law applies. See id. The factors to be considered under this approach include

the location of the subject matter, the place of delivery of the contract, the domicile of the insured or of the insurer, the place of the last act to give rise to a valid contract, the place of performance, or other place bearing a rational relationship to the general contract.

Lapham-Hickey Steel Corp. v. Protection Mut. Ins. Co., 166 Ill.2d 520, 211 Ill.Dec. 459, 655 N.E.2d 842, 845 (1995); Hofeld v. Nationwide Life Ins. Co., 59 Ill.2d 522, 322 N.E.2d 454, 457-58 (1975). Courts in Illinois weigh all of these factors when deciding what law governs whether a duty to defend exists under an insurance agreement, but give particular emphasis to the location of the insured risk. See Society of Mt. Carmel v. National Ben Franklin Ins. Co. of Illinois, 268 Ill.App.3d 655, 205 Ill. Dec. 673, 643 N.E.2d 1280, 1287 (1994); Diamond, 183 Ill.Dec. 435, 611 N.E.2d at 1095.

Evaluating the facts presented in this case,⁴ in light of these factors, we hold that the substantive law of New York should govern here. The insured risk at issue in this case was located in New York. Where the insured company conducts business nationwide, Illinois case law provides that the location of the insured risk is the place where the insured's liability actually arises. See Evangelical Lutheran Church in America v. Atlantic Mut. Ins. Co., 973 F.Supp. 820, 824 (N.D.Ill.1997); American Builders & Contractors Supply Co. v. Home Ins. Co., 1997 WL 43017, at *2 & n. 5 (N.D.Ill. Jan. 28, 1997) (citing Society of Mt. Carmel, 205 Ill.Dec. 673, 643 N.E.2d at 1287). Here, Moonlight's alleged liability arises in New York. The Milady lawsuit, brought by a New York corporation operating out of New York, alleged injuries suffered by Milady in New York. New York was where the underlying injury occurred and where Moonlight's alleged liability arises. This factor weights heavily in favor of applying New York law.

Other factors also direct us to New York: the underlying lawsuit was filed in New York, the plaintiff in that lawsuit is domiciled in New York, and the events at issue in that lawsuit took place primarily in New York. Courts conducting a most significant contacts test have found such facts persuasive. See U.S. Gypsum Co. v. Admiral Ins. Co., 268 Ill.App.3d 598, 205 Ill.Dec. 619, 643 N.E.2d 1226, 1250 (1994); Society of Mt. Carmel, 205 Ill.Dec. 673, 643 N.E.2d at 1287-88; see also GATX Leasing Corp. v. National Union Fire Ins. Co., 64 F.3d 1112, 1115 (7th Cir.1995); Evangelical Lutheran Church, 973 F.Supp. at 824. We note that Moonlight is an Illinois corporation and that the insurance agreement at issue was executed in Illinois. These relatively sparse Illinois contacts, however, traditionally have not been enough to carry the day in a choice-of-law analysis. See Diamond, 183 Ill.Dec. 435, 611 N.E.2d at 1093-95; American Builders, 1997 WL 43017, at *2. The New York connections to this case dominate, and New York substantive law should govern the issue whether West American was obligated to defend Moonlight in the Milady lawsuit.⁵

II. Duty to Defend

Under New York law, an insurer's duty to defend is "exceedingly broad" and more expansive than its duty to indemnify. First Investors Corp. v. Liberty Mut. Ins. Co., 152 F.3d 162, 165 (2d Cir. 1998); Seaboard Surety Co. v. Gillette Co., 64 N.Y.2d 304, 486 N.Y.S.2d 873, 476 N.E.2d...