ROBERT M. DOW, JR., District Judge.
Before the Court is Defendant The Burlington Insurance Company's motion for judgment on the pleadings under Federal Rule of Civil Procedure 12(c). [10] For the reasons set forth below, the Court grants Defendant's motion [10].
Plaintiff Archer Daniels Midland Company ("ADM") entered into a contract with
On April 10, 2003, IBM Co. employee Miguel Gonzalez was cleaning windows for ADM when the ladder on which he was working slipped, causing him to injure his knee. Mr. Gonzalez filed a lawsuit against ADM on March 3, 2005, asserting negligence and premises liability counts ("the Gonzalez litigation" or "the underlying litigation"). Three months later, ADM tendered the defense of the Gonzalez litigation to TBIC. On June 23, 2005, TBIC accepted ADM's tender of defense. However, on July 11, 2005, TBIC rescinded its acceptance and disclaimed any duty to provide a defense. ADM settled its lawsuit with Mr. Gonzalez for $150,000 in October 2008, and alleges that it spent $197,648 in attorney's fees over the course of the litigation.
ADM filed a complaint against TBIC in the Circuit Court of Cook County on January 6, 2010. ADM's complaint seeks (1) a declaratory judgment that TBIC is liable to indemnify ADM for the Gonzalez settlement, (2) damages in the amount of $347,648, and (3) statutory penalties under 215 ILCS 5/155. TBIC removed the case to this Court on March 9, 2010.
On March 16, 2010, TBIC filed a counterclaim against ADM seeking a declaratory judgment that TBIC had no duty to defend ADM in the Gonzalez litigation because (1) the policy's "cross liability exclusion" barred coverage for bodily injury to an "employee of any insured" and (2) the "employer's liability exclusion" barred coverage for bodily injury to an "employee of the insured."
ADM asserted four affirmative defenses to TBIC's counterclaim. First, ADM contends that the exclusionary provisions do not apply under the circumstances of this case because of a "separation of insureds" clause in the policy. Second, ADM contends that the TBIC policy is ambiguous and thus should be construed in favor of ADM. Third, ADM contends that TBIC's counterclaim is barred by the doctrine of estoppel. Finally, ADM contends that if the exclusionary clause does bar coverage for ADM, then TBIC's policy is illusory and therefore unenforceable.
A motion for judgment on the pleadings under Federal Rule of Civil Procedure 12(c) "is designed to provide a means of disposing of cases when the material facts are not in dispute and a judgment on the merits can be achieved by focusing on the content of the pleadings and any facts of which the court will take judicial notice." Cincinnati Ins. Co. v. Contemporary Distrib. Inc., 2010 WL 338943, at *2 (N.D.Ill. Jan. 26, 2010) (internal quotation marks and citation omitted). A defendant
The parties agree that there is no dispute concerning the material facts. The Court is called upon only to determine the scope of coverage of the insurance policy, which is a question of law. See Nicor, Inc. v. Associated Elec. and Gas Ins. Services Ltd., 223 Ill.2d 407, 307 Ill.Dec. 626, 860 N.E.2d 280, 285 (2006) (holding that "[t]he construction of the provisions of an insurance policy is a question of law"). Specifically, the Court must determine whether the exclusions in TBIC's CGL policy bar coverage for ADM in the underlying litigation and accordingly, whether TBIC was absolved of its duty to defend ADM in that litigation.
As an initial matter, the Court notes that this case comes before it pursuant to its diversity jurisdiction, 28 U.S.C. § 1332(a), and that Illinois law governs. Under Illinois law, an insurance policy is a contract, and the same rules of construction that apply to other types of contracts apply to insurance policies. See Nicor, Inc., 307 Ill.Dec. 626, 860 N.E.2d at 285. Thus, a court must "construe the policy as a whole, taking into account the type of insurance purchased, the nature of the risks involved, and the overall purpose of the contract." Id. The "primary objective is to ascertain and give effect to the intention of the parties as expressed in the agreement." Id., 307 Ill.Dec. 626, 860 N.E.2d at 286. A court must accord the insurance policy's terms their plain and ordinary meaning. Id., 307 Ill.Dec. 626, 860 N.E.2d at 285. When the policy is clear and unambiguous, a court must apply it as written unless doing so would contravene public policy. Id. However, if a policy term is ambiguous, a court must construe the policy "strictly against the insurer, who drafted the policy, and liberally in favor of coverage for the insured." Id. (internal citations omitted). Whether an ambiguity exists turns on whether the language in the policy is susceptible of more than one reasonable interpretation. Id. The test of ambiguity is not what the insurer intended its words to mean, but what a reasonable person in the position of the insured would understand them to mean. See Ins. Co. of Illinois v. Markogiannakis, 188 Ill.App.3d 643, 136 Ill.Dec. 307, 544 N.E.2d 1082, 1089 (Ill.App.Ct. 1st Dist.1989).
A court deciding whether an insurer has a duty to defend its insured must compare the factual allegations in the underlying complaint to the pertinent provisions of the policy. See Valley Forge Ins. Co. v. Swiderski Electronics, Inc., 223 Ill.2d 352, 307 Ill.Dec. 653, 860 N.E.2d 307, 314 (2006). A court should construe the underlying complaint "liberally * * * in favor of the insured, and doubts and ambiguities are to be construed in favor of the insured." Lyons v. State Farm Fire & Cas. Co., 349 Ill.App.3d 404, 285 Ill.Dec. 231, 811 N.E.2d 718, 721-22 (2004). If the complaint's allegations fall within or even
When an insurer relies upon an exclusionary provision to deny coverage to an insured, the applicability of the provision must be free and clear from doubt. See Santa's Best Craft, LLC v. St. Paul Fire and Marine Ins. Co., 611 F.3d 339, 347 (7th Cir.2010) (citing Markogiannakis, 136 Ill.Dec. 307, 544 N.E.2d at 1094). If the exclusionary provision is at all ambiguous, a court should construe the provision most liberally in favor of the insured. See Lyons, 285 Ill.Dec. 231, 811 N.E.2d at 721-22; see also Markogiannakis, 136 Ill.Dec. 307, 544 N.E.2d at 1089 (holding that "[a]mbiguous provisions or equivocal expressions whereby an insurer seeks to limit its liability will be construed most strongly against the insurer and liberally in favor of the insured"). The insurer bears the burden of proving that an exclusionary provision applies. See Santa's Best Craft, 611 F.3d at 347.
TBIC issued CGL policy number HGL0001965 to IBM Co., the named insured, for the policy period commencing on October 1, 2002, and ending on October 1, 2003. Reduced to its simplest terms, a CGL policy is a policy that is "usually obtained by a business, that covers damages that the insured becomes legally obligated to pay to a third party because of bodily injury or property damage." BLACK'S LAW DICTIONARY 809 (7th ed. 1999). A CGL policy generally covers liability for damages that are not covered by more specific types of liability insurance policies (e.g., business, automobile, and employer's liability). See Bituminous Cas. Corp. v. Maxey, 110 S.W.3d 203, 207 (Tex.App. 1st Dist.2003). Here, the section of the policy entitled "commercial general liability coverage form" establishes that the policy covers liability for "bodily injury" caused by an "occurrence" in the "coverage territory" that first occurred during the policy period. [See 6-2, at 27.]
The TBIC policy is modified by an additional insured endorsement, which provides that the section of the policy defining "an insured" "is amended to include as an insured any person or organization with whom you [the named insured] agreed, because of a written contract, written agreement or permit, to provide insurance such as is afforded under this Coverage Part, but only with respect to your operations, `your work' or facilities owned or used by you." [6-2, at 15]. The parties agree that IBM Co., the primary insured under the TBIC policy, added ADM as an additional insured pursuant to this provision in an endorsement to the policy. [See 6-3, at 31.]
The coverage form of the policy is also modified by several exclusions, only two of which are at issue here. First, the coverage form states that the policy excludes coverage for:
[6-2, at 28 (emphasis added).]
Second, the policy includes a "cross liability exclusion" endorsement, which provides that:
[6-3, at 17 (emphasis added).] The endorsement is prefaced with the admonition that: "This endorsement changes the policy. Please read it carefully." Id. The endorsement also states that "[a]ll other terms and conditions of this policy remain unchanged." Id.
In addition to the provisions quoted above, the TBIC policy includes a "separation of insureds clause" (more commonly known as a "severability clause" (see Thoele v. Aetna Cas. & Sur., 39 F.3d 724, 727 n. 1 (7th Cir.1994))). The severability clause provides that:
[6-3, at 4].
As discussed below, ADM argues in its complaint that the TBIC policy's severability clause modified the exclusion provisions of the policy such that ADM is not barred from receiving coverage under the policy for the Gonzalez litigation. Specifically, ADM argues that because Gonzalez was an employee not of ADM but rather of IBM Co., TBIC had a duty to defend ADM in the underlying litigation. ADM argues that TBIC breached its duty to defend, and so should be estopped from relying on the exclusion provisions as defenses in this litigation. Alternatively, ADM argues that the terms of the TBIC policy are at best ambiguous, and thus should be construed as providing coverage and triggering a duty to defend the underlying case. Finally, ADM argues that if the policy is indeed construed as excluding coverage for bodily injury by an employee, then the policy is illusory and unenforceable.
In its motion for judgment on the pleadings [10], TBIC contends that the severability clause has no impact on the cross liability exclusion because the language of the exclusion states that the policy does not cover bodily injury to an employee of "any insured." TBIC submits that because ADM is excluded from coverage for the Gonzalez litigation, TBIC had no duty to defend and therefore should not be estopped from asserting coverage defenses. TBIC further contends that application of the cross liability exclusion to ADM under the circumstances of this case does not render the policy illusory. The Court addresses in turn the parties' arguments as to application of the exclusion provisions, estoppel, and whether the policy is illusory.
In general, severability clauses are intended "to treat each entity covered
In Globe, the Illinois Supreme Court considered the interplay of a severability clause and an employee exclusionary clause that barred coverage for bodily injury to employees of "the insured." 327 N.E.2d at 321-22. The court held that:
Id. at 323. The court noted that if the insurer sought also to exclude coverage for an insured who was not the employer of the injured employee, that exclusion "could have been clearly stated." Id. at 323. The court thus implied — but did not decide — that drafting an exclusion that applied more broadly might be effective in barring coverage for employee's suits against non-employer-insureds despite the existence of a severability clause. Id.
In addition to the plain language of the policy, the purpose of the employee exclusion — namely, to prevent an employee who is covered by a worker's compensation program from recovering in a private suit against his employer — supports the rule in Globe. Id. at 322. As explained by a district court in the Southern District of New York, an employer's liability exclusion "recognizes that general liability coverage is unnecessary for an employer whose employee is injured in the course of his employment since the workman's compensation system (and the required workman's compensation's insurance coverage) covers such an injury." Shelby Realty LLC v. Nat'l Surety Corp., 2007 WL 1180651, at *4 (S.D.N.Y. Apr. 11, 2007). Read together, an employer's liability exclusion "precludes over-coverage (where an employer has both workman's compensation insurance and commercial liability insurance for an employee's injury) by excluding
Here, as in Globe, the TBIC CGL policy includes an employer's liability exclusion that bars coverage for bodily injury to "an `employee' of the insured." [6-2, at 28 (emphasis added).] The parties do not dispute that, according to the underlying complaint, Mr. Gonzalez was an employee of IBM Co., not ADM. Nor do the parties dispute that Mr. Gonzalez filed a lawsuit against ADM, not IBM Co. Given these undisputed facts, as a matter of law, both the plain language and the underlying purpose of the exclusion militate against a conclusion that the exclusion applies to ADM for purposes of the Gonzalez litigation. Rather, as in Globe, the severability clause modifies the exclusion such that coverage is barred only where the injured person seeks coverage from the employer-insured. Accordingly, the employer's liability exclusion does not bar coverage to ADM for the Gonzalez litigation.
ADM urges the Court to apply the holding of Globe to the cross liability exclusion endorsement in the TBIC policy as well as the employer's liability exclusion. ADM argues that even though the cross liability exclusion bars coverage to injury of an employee of "any insured" and not just "the insured," the severability clause operates to limit the application of the exclusion to IBM Co. only and not to ADM. By contrast, TBIC argues that the severability clause has no effect on the cross liability exclusion in view of that exclusion's use of the term "any insured." In other words, TBIC states that the plain language of the cross liability exclusion means that there is not even the potential for coverage for ADM in the underlying Gonzalez litigation, and thus that TBIC had no duty to defend. See Gould & Ratner v. Vigilant Ins. Co., 336 Ill.App.3d 401, 270 Ill.Dec. 190, 782 N.E.2d 749, 758 (Ill.App.Ct. 1st Dist.2002) (holding that an insurer need not file a declaratory judgment action to preserve its rights "every time [it is] informed of a claim from an insured * * * where there clearly is no potential for coverage").
No Seventh Circuit or Illinois Supreme Court case directly addresses the question of how, in a CGL policy, a severability clause affects a cross liability exclusionary endorsement that bars coverage for a suit brought by an employee of "any insured."
In Atchison, the court considered the impact of a severability clause on an employer's liability exclusion that barred coverage for bodily injury to employees of "a protected person." 263 Ill.Dec. 101, 767 N.E.2d at 828. ITS had a CGL policy with the defendant insurance company that covered Atchison under the "additional protected persons" endorsement. Id. The policy contained a severability clause. Id. The policy also contained an employer's liability exclusion that barred coverage for "bodily injury to an employee arising out of and in the course of his or her employment by a protected person." Id. (emphasis added). Several ITS employees were injured while performing work in Atchison's railway yards, and brought suit against Atchison. Id., 263 Ill.Dec. 101, 767 N.E.2d at 829. The circuit court held that the severability clause did not affect application of the exclusion, and that Atchison therefore was not covered by the policy in the underlying suits. Id., 263 Ill.Dec. 101, 767 N.E.2d at 830-31. The appellate court reversed, noting that in Globe the Illinois Supreme Court considered "the purpose of both the severability clause, to afford coverage separately to each insured, and the employer liability exclusion, to preclude an employee from suing his employer for injuries suffered as a result of the employer's negligence. In considering the intent of these provisions, we find any distinction between the use of the term `the insured' and `a protected person' to be insignificant." Id., 263 Ill.Dec. 101, 767 N.E.2d at 831 (emphasis added).
Similarly, in Cook, the appellate court held that a severability clause modified an employer's liability exclusion that barred coverage for "bodily injuries sustained by an employee of an insured in the course of employment for that insured." Cook, 81 Ill.Dec. 1, 466 N.E.2d at 588. Citing Globe, the court held that "[t]he language shows that the insurer recognizes an obligation to additional insureds distinct from its obligations to the named insured." Id. The court further held that the defendant's effort to read Globe narrowly so as to apply only to employer's liability exclusions that referenced "the insured" and not to exclusions that referenced "an insured" was tenuous and unpersuasive. Id.
In addition to these Illinois appellate court cases, another judge in this district has considered the interplay of a severability clause and a professional services exclusion as applied to an additional insured. In United States Fidelity and Guaranty
Id. at 1014-15. The court's rationale rested in part on the fact that the policy in question was a CGL policy and "was not intended to provide coverage to architects and engineers such as Eckland for liability arising specifically out of their performance of professional services." Id. at 1010.
For two reasons, the Court respectfully declines to follow Atchison, Cook, and Shorenstein (none of which is binding on this Court or directly on point) in holding that the severability clause at issue in the TBIC policy limits application of the cross liability exclusion to IBM Co. First, a court must give effect to the plain language of an insurance policy's exclusion provision. See First Nat'l Bank of Chicago v. Fid. & Cas. Co. of New York, 428 F.2d 499, 501 (7th Cir.1970) (holding that an insurer may limit coverage, and when it has done so the plain language of the limitation must be effectuated); see also 2 COUCH ON INS. § 22:31 (providing that "the rule that exceptions to and limitations upon the coverage otherwise provided by an insurance contract will be strictly construed against the insurer will not overcome plain contract language"). The majority rule is that the distinction between the terms "the insured" and "any insured" in an exclusion is crucial in determining the import of a severability clause. See Nautilus Ins. Co. v. K. Smith Builders, Ltd., 725 F.Supp.2d 1219, 1227-30 (D.Haw. 2010) (reviewing cases examining impact of severability clause on exclusions pertaining to "any insured" and applying majority rule that severability clause has no impact on such exclusions); Am. Family Mutual Ins. Co. v. Eastman, 698 N.W.2d 337, 337 (Iowa App.2005) (same); see also Michael
In this case, the distinction between the terms "the insured" and "any insured" is all the more significant given that the terms are used in different exclusion provisions of the policy; as discussed above, the employer's liability exclusion refers to "the insured," whereas the cross liability exclusion refers to "any insured." According to fundamental principles of contract construction, the difference cannot be meaningless; the Court must accord significance to use of the different articles in the different exclusions. See 2 COUCH ON INS. § 22:43 (stating that "[s]ince it must be assumed that each word contained in an insurance policy is intended to serve a purpose, every term will be given effect if that can be done by any reasonable construction, and every clause will be enforced where that can be done without doing violence to the rights of either party"). And, notably, "[a]n insurance policy may exclude coverage for particular injuries or damages in certain specified circumstances while providing coverage in other circumstances, and thus, an insurer is not absolutely prohibited from drafting and enforcing policy provisions that provide or leave intact coverage for some, but not all, manifestations of a particular peril." Id. at § 22:30 (citing Julian v. Hartford Underwriters Ins. Co., 35 Cal.4th 747, 27 Cal.Rptr.3d 648, 110 P.3d 903, 910 (2005)).
Use of the term "any insured" in the cross liability exclusion "unambiguously expresses a contractual intent to create joint obligations and preclude coverage to innocent co-insureds." Michael Carbone, 937 F.Supp. at 421. Thus, although the severability clause of the TBIC policy modifies application of the employer's liability exclusion reference to "the insured" such that it does not bar coverage to ADM in the circumstances of this case, the severability clause has no such effect on the cross liability exclusion's application to "any insured." In other words, even though the policy applies separately to ADM and to IBM Co., both insureds are barred from coverage for bodily injury to an employee of either ADM or IBM Co. under the plain, "any insured" language of the cross liability exclusion.
Second, Atchison, Cook, and Shorenstein are distinguishable in that they concern exclusions whose purposes are distinct from the cross liability exclusion at issue here. A court construing an exclusionary provision of an insurance policy "must examine the purpose of the exclusion, the public policy considerations involved, and the transaction as a whole." 2 COUCH ON INS. § 22:30. Atchison and Cook, like Globe, concerned employer's liability exclusions. See Atchison, 263 Ill.Dec. 101, 767 N.E.2d at 828; Cook, 81 Ill.Dec. 1, 466 N.E.2d at 588; Globe 327 N.E.2d at 322. As discussed above, an employer's liability exclusion is intended to prevent unnecessary coverage when an employee already is covered by the worker's compensation system. See Globe 327 N.E.2d at 322; Shelby Realty LLC, 2007 WL 1180651, at *4. It follows that a severability clause operates to limit the employer's liability exclusion so that the exclusion does not apply to an insured who is not the employer of the injured person, because that injured person will not be eligible for worker's compensation. Shorenstein, meanwhile, concerned a professional services exclusion. See Shorenstein, 700 F.Supp.2d at 1007. As the name suggests (and as the court in Shorenstein discussed explicitly in support of its holding), a professional services exclusion bars professional
A cross liability exclusion, by contrast, bars coverage for claims brought by one insured against another insured. See Underwriters at Lloyds London v. STD Enter., Inc., 395 F.Supp.2d 1142, 1144 (M.D.Fla.2005). The rationale that supports reading the severability clause to modify an employer's liability exclusion or professional services exclusion simply does not apply to the cross liability exclusion context. Indeed, the Court can conceive of no logical reason why the severability clause would operate to limit application of an exclusion whose very purpose is to prevent one insured (or its employee) from suing another insured (or its employee).
In sum, in view of the unambiguous language of the exclusion, the policy contract as a whole, the purpose of the exclusions, and the extant case law, the Court concludes that the severability clause limits application of the employer's liability exclusion provision such that the exclusion does not bar coverage for ADM in the Gonzalez litigation because ADM was not Mr. Gonzalez's employer. However, the severability clause has no impact on the cross liability exclusion endorsement because the endorsement refers to "any insured" and is intended to prevent coverage in precisely the type of scenario presented by the underlying litigation.
ADM asserts as an affirmative defense to TBIC's counterclaim for declaratory judgment that if the TBIC policy's exclusions apply to the circumstances of this case such that TBIC has no duty to defend ADM in the Gonzalez litigation, then the policy is illusory and unenforceable. TBIC counters that despite the exclusions, the policy provides coverage for (1) bodily injury claims brought by an individual who was not an employee of either IBM Co. or ADM, and (2) for certain property damage claims, and thus is not illusory.
Under Illinois law, an insurance policy is illusory if "there is no possibility under any set of facts for coverage." Employers' Fire Ins. Co. v. Berg, 2007 WL 273559, at *4 (N.D.Ill. Jan. 25, 2007) (citing WE Erickson Const., Inc. v. Chicago Title Ins. Co., 266 Ill.App.3d 905, 204 Ill.Dec. 431, 641 N.E.2d 861, 864 (Ill.App.Ct. 1st Dist.1994)). An illusory promise contravenes public policy and is unenforceable. See Nat'l Union Fire Ins. Co. of Pittsburgh, Penn. v. Glenview Park Dist., 158 Ill.2d 116, 198 Ill.Dec. 428, 632 N.E.2d 1039, 1046 (1994) (holding that an exclusion violates public policy and so renders the policy unenforceable where the "exclusion deceptively affects the general liability risks that the endorsement purports to assume"). However, a court should not deem a contract unenforceable "unless it is expressly contrary to the law or public policy." Am. Country Ins. Co. v. Cline, 309 Ill.App.3d 501, 242 Ill.Dec. 971, 722 N.E.2d 755, 760 (Ill.App.Ct. 1st Dist.1999). In general, "the construction of a contract that renders the agreement enforceable rather than void is preferred." Id. (citing Braye v. Archer-Daniels-Midland Co., 175 Ill.2d 201, 222 Ill.Dec. 91, 676 N.E.2d 1295, 1303-04 (1997)).
Here, although the cross liability exclusion bars coverage for ADM in the event of bodily injury to an IBM Co. employee (as in the underlying Gonzalez litigation), the exclusion does not preclude any possibility of coverage under other facts. Moreover, the "any insured" language of
ADM also asserts as an affirmative defense that TBIC should be estopped from arguing that the CGL policy does not provide coverage in the underlying litigation. If, comparing the allegations of the underlying complaint with the insurance policy, any potential for coverage for the lawsuit exists, then an insurer must either (1) seek a declaratory judgment regarding its obligations and rights under the policy or (2) defend the insured under a reservation of rights. See Pietras v. Sentry Ins. Co., 2007 WL 715759, at *4 (N.D.Ill. Mar. 6, 2007) (citing Fidelity & Cas. Co. v. Envirodyne Eng'rs, Inc., 122 Ill.App.3d 301, 77 Ill.Dec. 848, 461 N.E.2d 471, 473 (Ill.App.Ct. 1st Dist.1983)). If the insurer takes neither course and a court later determines that the insurer owed a duty to defend in the underlying claim, then "the insurer is estopped from raising policy exclusions or noncoverage as a defense in a coverage action." Id. (citing Central Mut. Ins. Co. v. Kammerling, 212 Ill.App.3d 744, 156 Ill.Dec. 826, 571 N.E.2d 806, 809 (Ill.App.Ct. 1st Dist.1991)).
Here, as set forth above, the cross liability exclusion unambiguously bars coverage for ADM in the underlying lawsuit. Accordingly, under the plain language of the policy, there was no potential for coverage under the TBIC policy. TBIC thus had no duty to defend ADM in the underlying litigation, and TBIC is not estopped from raising the cross liability exclusion as a defense.
Finally, ADM asserts a claim for statutory penalties pursuant to 215 ILCS 5/155. TBIC asks the Court to conclude on the basis of the pleadings that, as a matter of law, TBIC is not liable for statutory penalties.
Section 5/155 provides in relevant part that:
215 ILCS 5/155.
Here, the Court can discern no allegation in the pleadings that TBIC acted in a vexatious or unreasonable manner in denying coverage to ADM for the Gonzalez litigation. According to the complaint, TBIC rescinded its initial acceptance of the defense of the Gonzalez litigation within a few weeks. And under the analysis set forth above, TBIC properly declined to
For the reasons above, the Court grants TBIC's motion [10] for judgment on the pleadings.
