In Their Opinion : Seventh Circuit Court of Appeals Commentary : Lawyer & Attorney Michael E. Rigney : Kelley Drye & Warren Law Firm

WEST BEND MUTUAL INSURANCE CO. v. UNITED STATES FIDELITY AND GUARANTEE CO. (March 25, 2010)

MDK owned a gasoline station in Goshen, Indiana. In 1996, it discovered that one of its underground gasoline storage tanks was leaking. Several years later, a group of nearby residents allegedly affected by the release sued MDK for personal injury and property damage. MDK requested coverage from its insurers, including West Bend Mutual Insurance Company ("West Bend") and Federated Mutual Insurance Company "(Federated"). West Bend agreed and eventually settled the case for $4 million. Federated declined based on its policy's pollution exclusion and other limitations. West Bend sued Federated. The district court granted summary judgment to Federated, concluding that the policy’s Pollution Exclusion provided a defense to coverage and that the Products-Completed Operations Hazard coverage did not obligate Federated to provide coverage. The court did not address whether the Known Loss Exclusion affected coverage. West Bend appeals.

In their opinion, Judges Flaum, Williams, and Sykes (dissenting) affirmed. The Court identified its task as to construe the policy as a whole, giving words their ordinary meaning, and construing any ambiguities against the insurer. The principal focus of the Court's approach was the Indiana Supreme Court's decision in American States. That case also dealt with a release from a gasoline storage tank. The policy in question contained a Pollution Exclusion that excluded coverage for certain losses arising out of the release of "pollutants." The definition of "pollutants" was identical to that in the Federated policy and did not mention motor fuels or gasoline. The Indiana Supreme Court found that the policy did not unambiguously identify gasoline as a pollutant. It resolved the ambiguity against the insurer and found coverage to exist. Although the definition of "pollutant" was identical in the policies, the Court noted that the Federated policy's Pollution Exclusion did include "motor fuels," which included gasoline. Thus, the Court concluded that the Federated Pollution Exclusion unambiguously and explicitly excluded gasoline contamination from the policy's coverage. The Court proceeded to consider both the excess liability coverage and the Products-Completed Operations Hazard coverage as possible sources for coverage. It concluded that; a) the excess coverage was coextensive with the primary coverage, and thus also excluded gasoline contamination, and b) the Products-Completed Operations Hazard coverage did not cover the loss. That coverage only applies to abandoned product and knowingly completed market transactions, neither of which is present here.

Judge Sykes dissented. She concurred with the majority's treatment of the policy’s Pollution Exclusion but disagreed with its treatment of the Products-Completed Operations Hazard coverage. Specifically, she disagreed that the case relied upon by the majority created a general rule of insurance law that the coverage only applies to abandoned product or knowingly completed market transactions. Without that general rule, Judge Sykes would conclude that the plain policy language covers the loss.

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ESTATE OF LUSTER v. ALLSTATE INSURANCE CO. (March 23, 2010)

Wavie Luster lived alone in her home in Merrillville, Indiana. In late 2001, she was hospitalized after a fall. Upon her release from the hospital, she immediately moved into an extended-care facility, where she remained until her death in 2006. A fire caused extensive damage to her home a few months after her death. Her personal representative submitted a claim on the estate's behalf to Allstate Insurance Company, which had provided insurance on the home for years. Allstate denied the claim on the basis that her home had been unoccupied for over four years. Notwithstanding the denial, Allstate continued to bill Luster's representative and he continued to pay the premiums for more than two years after the fire. In late 2008, Allstate attempted to cancel the policy retroactive to November of 2001 and returned the premiums for that period. The estate brought suit against Allstate for breach of the insurance contract. The district court granted summary judgment to Allstate. The estate appeals.

In their opinion, Judges Posner, Ripple, and Wood reversed and remanded. The Court noted four relevant policy provisions: 1) the insured had an obligation to inform Allstate of any change in the use or occupancy of the premises, 2) the policy continued in effect after the death of the insured until the end of the premium period, 3) there was no coverage for a loss caused by an increase in hazard known to the insured, and 4) there was no coverage for loss caused by vandalism if the property was unoccupied for 30 consecutive days prior to the loss. With respect to notice requirement for a change in occupancy, the Court concluded that the 4+ years in which the house stood empty constituted a change in occupancy, notwithstanding the owner's desire to return. But Luster's failure to notify did not result in a automatic termination of the insurance contract. It was merely a breach, entitling Allstate to certain remedies, which may or may not have included rescission under Indiana law. In any event, Allstate took no action upon learning of the change in occupancy. It continued billing for and receiving the premiums for two years. With respect to the second provision, the Court concluded that the death clause could not revive a policy that had already lapsed -- it merely prevents a coverage lapse upon the death of the insured. It has no application here. The third provision is the provision the district court relied on in granting Allstate summary judgment. The district court ruled that leaving the house unoccupied constituted an increase in hazard as a matter of law. But the Court rejected that conclusion, stating that there is no rule that an unoccupied home for any period of time increases the hazard as a matter of law. Rather, an evidentiary hearing is required for Allstate to prevail on this ground. Finally, with respect to the fourth provision, the Court noted that there was no finding with respect to the cause of the fire. It may well have been caused by vandalism, and, if so, it certainly occurred more than 30 days before the house became unoccupied. The Court concluded that an evidentiary hearing on remand is required to resolve that issue, as well. Before it reversed and remanded, however, the Court had to deal with the estate’s argument that Allstate's waived its right to deny coverage by collecting the premiums for more than two years after learning that the house was unoccupied. The Court rejected the argument. If Allstate was entitled to deny coverage, it was entitled to do so because of the “increase in hazard” or “vandalism” exclusions, not because it had a right to cancel the coverage entirely. Collecting the premiums is not inconsistent with enforcing the exclusions in the policy.

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AUTO-OWNERS INSURANCE CO. v. WEBSOLV COMPUTING (September 1, 2009)

Websolv sent an unsolicited fax to the dental office of Guy Bibbs. The fax was an advertisement for a healthcare seminar. Bibbs sued Websolv in state court. Websolv tendered its defense to Auto-Owners Insurance Co. Auto-Owners filed an action in federal court seeking a declaratory judgment that it had no duty to defend. Although the parties stipulated to the application of Iowa law, the court applied Illinois law and granted Websolv’s motion for summary judgment. Auto-Owners appeals.

In their opinion, Chief Judge Easterbrook and Judges Cudahy and Sykes reversed and remanded. The Court first addressed the choice-of-law issue. The Court concluded that the district court should have honored the parties' stipulation that Iowa law controls. When the parties agree on which state's law should govern and that choice is reasonable, the court should apply that law. The lower court was incorrect in its belief that it was required to apply the law of the forum. The court is only required to apply the choice-of-law rules of the forum -- in order to determine which forum’s law is the correct substantive law. Here, under Illinois' choice-of-law rules, Iowa law would apply. The Court turned to the merits, applying Iowa law. The claim in the case is that Websolv violated the Telephone Consumer Protection Act (“TCPA”) by sending the unsolicited fax. Websolv claims the suit is covered either under the policy's advertising injury section or its property damage section. The Court rejected both theories. The advertising injury section requires the company to defend its insureds for suits alleging injury from the publication of material that "violates a person's right of privacy." Recognizing that a right of privacy could refer either to matters of secrecy or matters of seclusion, the Court concluded that an Iowa court would apply the policy’s coverage only in the secrecy context. The rights protected by the TCPA, on the other hand, are privacy rights arising in the seclusion context. The Court relied, in part, on the use of the word "publication" in the policy. Publication is more relevant in the secrecy context than the seclusion context. With respect to the property damage theories, the Court noted that the only alleged property damage was the use of ink and paper from the fax machine. The Court held that this damage fell within the exclusion in the policy for "expected or intended" consequences. Websolv certainly expected its fax transmission to result in the use of ink and paper on the recipient’s end.

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CASTRONOVO v. NATIONAL UNION FIRE INSURANCE COMPANY (July 6, 2009)

Sandra Castronovo died the day after her car was struck by a truck driven by Kenneth Lively. At the time of the accident, Lively was employed by and driving a truck owned by Doug Lavery, Ltd. He was hauling a trailer owned by GE Capital Corp. and leased to Greif Brothers Corp., who loaned it to Lavery. Lavery and Lively were named insureds under a $1 million policy issued by Owners Insurance. Travelers Property Casualty Company issued a $2 million policy to Greif. National Union issued a $25 million umbrella policy to Grief which covered permissive users of vehicles owned by Grief. The National Union policy provided excess coverage to the Travelers policy and provided primary coverage for covered risks that were not covered at all by any other insurance. Sandra’s husband John sued Lively, Lavery, GE and Greif. Owners provided a defense to Lively and Lavery but eventually tendered its $1 million policy limit to the court. Travelers defended GE and Greif under the Greif policy. Travelers refused to defend Lavery and made no decision with respect to Lively. In early 2005, Greif and Travelers both spoke with National Union about the case. And National Union continued to follow the developments. In September the court approved a consent judgment against Lively and Lavery in the amount of $6 million. They assigned their rights of coverage to Castronovo in return for a covenant not to execute on their personal assets. National Union learned of the consent judgment only after it was entered. In October, Travelers determined that Lively and Lavery were both insureds and paid their $2 million policy limit to Castronovo. Castronovo sued National Union to recover the approximate $3 million balance. The court granted summary judgment to National Union, holding that Lively and Lavery breached the policy by not notifying National Union of the consent judgment. Castronovo appeals.

In their opinion, Chief Judge Easterbrook and Judges Bauer and Flaum affirmed. The only issue on appeal was whether National Union breached its duty to defend under the umbrella policy. The policy required National Union to defend in two circumstances: a) when all underlying policy limits were exhausted, or b) when the National Union policy provides the only coverage. Castronovo conceded that the former did not apply because the policy limits of the other policies were not exhausted until after the consent judgment was entered. The Court rejected the argument that a duty to defend arose under the “only coverage” clause once Owners tendered its policy limit and Travelers was disputing coverage. The Court ruled that the clauses were mutually exclusive. The first always applies when there is other coverage and the second only applies when there is no other coverage. The Court concluded that National Union had no duty to defend under either clause. The Court also concluded that National Union had no duty to defend because Lively and Lavery never actually requested a defense, a requirement under Ohio law.

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WESTFIELD INSURANCE COMPANY V. SHEEHAN CONSTRUCTION COMPANY (APRIL 29, 2009)

Several home owners in the same subdivision began to notice water damage in their new homes. Litigation ensued against the general contractor, Sheehan Construction Co. Although the problem was traced to one of Sheehan's subcontractors, Sheehan settled the litigation for nearly $3 million. Sheehan is ensured by Westfield Insurance Co. under a general liability policy. Sheehan brought an action against Westfield for indemnity. The district court granted judgment to Westfield. Sheehan appeals.

In their opinion, Chief Judge Easterbrook and Judges Wood and Williams affirmed. Westfield's policy excluded damage to "your work” if it was included in the "products-completed operations hazard." "Your work" is defined in the policy to include work performed by Sheehan or on its behalf. Although the Court recognized that the standard form policy was changed in 1986 to exclude a subcontractor’s work from the "your work" exclusion, it noted that Sheehan's policy did not contain the newer language. With respect to the "products-completed operations hazard" requirement, the Court also looked to the policy definition and concluded that the term was designed so that it covered accidents that occurred during construction but did not cover poor workmanship in a completed house. The Court concluded that the "your work" exclusion directly addressed the homeowners’ harm at issue and resulted in non-coverage.

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FIRST STATE BANK OF MONTICELLO v. OHIO CASUALTY INSURANCE CO. (February 5, 2009)

James Stilwell was an entrepreneur and property owner in central Illinois. Stilwell found himself at times in need of cash, however. He devised a scheme whereby he would write a check on his account at Tuscola National Bank (“TNB”) and present it to First State Bank of Monticello (“FSB”) in return for a bank money order. Stilwell frequently had no money in his account at TNB. Even though cashing a check for a noncustomer was against FSB’s policy, it sold him almost $2 million in money orders over the course of several months. When questioned by bank representatives, Stilwell made up stories to cover his scheme. Finally, TNB froze his account, leaving FSB with $307,000 in worthless checks. Stilwell agreed to repay FSB, but died before he did. FSB filed a claim with its insurer, Ohio Casualty Insurance Company (“Ohio Casualty”). Ohio Casualty denied the claim on two grounds: that the loss was not covered under the policy and that it was an excluded loss because it was caused by a FSB employee. FSB filed suit to recover. The district court granted summary judgment to FSB. FSB requested prejudgment interest in a Rule 59(e) motion. The court declined. Both Ohio Casualty and FSB appeal.

In their opinion, Judges Wood, Sykes and Tinder affirmed. The Court first addressed Ohio Casualty’s argument that FSB did not suffer a “loss . . . resulting directly from . . . false pretenses . . . committed . . . on the premises” as required by the policy. It first rejected the argument that FSB suffered no loss because it received Stilwell’s check. A loss is a depletion of funds. The fact that the loss did not occur at the moment of the presentment is of no consequence. Next, the Court rejected the argument that the loss did not directly result from Stilwell’s conduct. The Court distinguished between tort principles of causation and contract interpretation principles in determining “direct” cause. The Court recognized that some courts refer to tort principles of causation but that Illinois applies contract principles to determine policy coverage. Here, given the plain meaning of “direct,” FSB’s loss was a direct result of Stilwell’s conduct. Finally, the Court addressed and rejected Ohio Casualty’s argument that a policy exception for loss “caused by an Employee” applied to FSB’s loss. The Court concluded that losses that an employee failed to prevent were not included in the definition of losses “caused” by an employee.

On FSB’s cross-appeal, the Court quickly dispensed of the prejudgment interest issue. FSB requested prejudgment interest for the first time in its Rule 59(e) motion. The district court was entitled to consider it untimely.

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