Western Cas. & Sur. Co. v. Western World Ins. Co., Inc.

• Decision Date: 27 August 1985
• Docket Number: No. 84-2975,84-2975
• Citation: 769 F.2d 381
• Parties: WESTERN CASUALTY & SURETY COMPANY, Plaintiff-Appellant, v. WESTERN WORLD INSURANCE COMPANY, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 381

769 F.2d 381

WESTERN CASUALTY & SURETY COMPANY, Plaintiff-Appellant, v. WESTERN WORLD INSURANCE COMPANY, INC., Defendant-Appellee.

No. 84-2975.

United States Court of Appeals Seventh Circuit.

Argued May 31, 1985.

Decided July 31, 1985.

Rehearing and Rehearing En Banc Denied Aug. 27, 1985.

William Kurnik, Kurnik & Cipolla, Arlington Heights, Ill., for plaintiff-appellant.

Robert Marc Chemers, Pretzel & Stouffer, Chtd., Chicago, Ill., for defendant-appellee.

Before CUMMINGS, Chief Judge, EASTERBROOK, Circuit Judge, and PELL, Senior Circuit Judge.

EASTERBROOK, Circuit Judge.

Both Western Casualty & Surety Co. and Western World Insurance Co. issued policies to the City of Crystal Lake, Illinois. Western Casualty's policy covered, among other things, "discrimination excluding intentional acts." Western World's covered "wrongful acts," which it defined to mean "any actual or alleged error ... or act or omission or neglect or breach of duty including misfeasance, malfeasance and nonfeasance by an Insured." The policy then excluded "loss in connection with any claim ... based upon or arising out of ... (7) the willful violation of statute or ordinance committed by or with the knowledge or consent of the Insured."

Crystal Lake refused to permit the construction of some subsidized, low-income housing. The owner of the land and the sponsors of the project brought suit, contending that the City's refusal violated the Equal Protection Clause of the Fourteenth Amendment and several federal statutes, including 42 U.S.C. Secs. 2000d and 3601. The complaint alleged that the City intentionally discriminated against low-income prospective tenants; it also alleged that because black and Hispanic people are more likely to have low incomes, the City's decision had a disparate effect on these groups that violated both Constitution and statutes.

The City notified both insurers. Western World denied all liability and refused to defend; Western Casualty, while reserving its position on liability, undertook the defense. Ultimately the City settled the suit. It consented to injunctive and declaratory relief, and Western Casualty paid the plaintiffs' legal expenses of $86,867.87. Western Casualty also paid counsel $23,645.50 for defending the City. In this diversity action Western Casualty seeks compensation from Western World for the costs of litigating and settling the suit against the City.

This case is governed, the parties agree, by the common law of Illinois. Illinois permits a suit by one insurance company against another even though the insured has suffered no loss. E.g., Royal Globe Insurance Co. v. Aetna Insurance Co., 82 Ill.App.3d 1003, 38 Ill.Dec. 449, 403 N.E.2d 680 (1st Dist.1980). Although the Illinois cases involve suits by excess carriers against defaulting primary carriers, their rationale applies as well to suits among primary carriers. The state seeks to encourage all carriers to participate in the initial proceedings, and as the state courts have found, it is a bad idea to inform insurance carriers that whichever is least faithful to its obligation to the insured will escape all liability as long as a responsible carrier covers the loss. See Aetna Casualty & Surety Co. v. Coronet Insurance Co., 44 Ill.App.3d 744, 3 Ill.Dec. 371, 358 N.E.2d 914 (5th Dist.1976).

Western World's principal defense was based on general condition (i) of its policy, which provides that if the City "has other insurance insuring against a loss covered by this policy, the insurance provided by this policy shall apply in excess of such other insurance." Condition 6 in Western Casualty's policy states that "[t]he insurance afforded by this policy is primary insurance.... When ... the insured has other insurance which is stated to be applicable to the loss on an excess or contingent basis, the amount of The Western's liability under this policy shall not be reduced by the existence of such other insurance." Western Casualty settled the suit against the City within the limits of its policy. Western World therefore contends that it is not liable; it is an excess insurer, and there is no excess.

The district court rejected this argument because Western Casualty's policy covers "discrimination excluding intentional acts." (The parties and the district court treat this as meaning "discrimination except intentional discrimination." This converts "intentional acts" into a term of legal art, "intentional discrimination." We have no reason to reject this assumption of all concerned.) To the extent the loss stemmed from intentional discrimination, the court held, Western World could be liable under its coverage of "malfeasance" as a primary carrier. In a second opinion, however, the district court held that the exclusion of "willful violation[s] of statute" from Western World's coverage applied to the claims in the suit against the City. Western World therefore prevailed, and Western Casualty appeals.

Western Casualty argues that the district court's interpretation drains Western World's coverage of "malfeasance" of any content. Recent cases holding that wilful violations of law are a subset of intentional violations support this position. A person may intend the acts and desire the consequences, making the conduct intentional, see Personnel Administrator of Massachusetts v. Feeney, 442 U.S. 256, 279, 99 S.Ct. 2282, 2296, 60 L.Ed.2d 870 (1979), without knowing that this violates the law or being reckless on this score, a requirement of wilfulness, see Trans World Airlines, Inc. v. Thurston, --- U.S. ----, 105 S.Ct. 613, 625-26, 83 L.Ed.2d 523 (1985). The construction of "wilful" in Thurston, if applied to Western World's policy, would permit it to cover at least some discrimination of the sort not covered by Western Casualty's policy.

We need not decide whether Western World's policy covered a category of intentional but not wilful discrimination, however, unless the district court's conclusion that the two policies both create primary insurance is correct. We are convinced that it is not. Western World's policy is excess if there is other insurance "against a loss covered" by the policy. The district court assumed that the excess clause operates on each theory of liability, rather than each "loss." According to the district court, Western Casualty's policy covers unintentional discrimination ("disparate impact"), which made Western World's policy excess on that theory, but only Western World's policy covers intentional discrimination, which made it a primary insurer on that theory of liability. A "loss" is not the same as a theory of liability, however.

The difficulty in this case arises from the different designations used by the excess insurance clause and the exclusions in Western World's policy. The excess insurance clause depends on whether a "loss" is "covered" by some other policy. The exclusions depend on the theories of liability that underlie a claim. When a claim is founded on (or a loss caused by) two or more acts, one included and others excluded, what happens?

If the case goes to trial, and the plaintiff wins on one theory while losing on another, then it is easy to tell which policy governs. But most cases are settled, as this was. The settlement did not apportion damages among theories of liability. The plaintiffs received an injunction, not damages. They suffered a single injury (the denial of the right to build the low-income housing) and obtained a single remedy. They did not care on what ground they won, so long as they won. The award of attorneys' fees was justified by the fact that the plaintiffs prevailed, not by any...