Court Predicts Illinois Will Adopt A "Primary Focus" Test For Coverage Of Unallocated Settlement Of Covered And Uncovered Claims
SANTA'S BEST CRAFT v. ST. PAUL FIRE AND MARINE INSURANCE CO. (July 1, 2010)
JLJ, Inc. manufactures Christmas lights. So does Santa's Best Craft, LLC (“SBC”). In 2002, JLJ claimed that SBC copied its packaging and slogan and sent a cease-and-desist letter. SBC forward JLJ's letter to St. Paul Fire and Marine Insurance Company, its general liability insurer. St. Paul denied coverage. St. Paul again denied coverage after JLJ brought suit. JLJ amended the suit in 2004 to add two members of SBC and a licensee (Monogram). SBC brought suit for a declaration that St. Paul provide a defense. SBC settled the underlying litigation in late 2004 for $3.5 million. SBC reimbursed Monogram for $1.3 million in defense costs under a contractual indemnity. Although the St. Paul policy covered Monogram as an indemnitee, Monogram never tendered its defense. Judge Gettleman (N.D. Ill.) concluded that St. Paul had a duty to defend but had not breached it. It then stayed the action pending the result of state court litigation. SBC had brought suit in state court against Zürich American Insurance Company, which insured SBC prior to St. Paul. Zürich brought St. Paul into that action. The state court entered judgment in favor of the plaintiffs for their defense costs but denied prejudgment interest. The district court then concluded that St. Paul was not required to indemnify SBC for the settlement costs on the ground that some claims were not covered and the settlement amount was not allocated between covered and uncovered claims. SBC appeals.
In their opinion, Judges Cudahy, Flaum, and Evans affirmed in part and reversed and remanded in part. The Court first concluded that the St. Paul policy did create a duty to defend. That duty arises when the allegations of the complaint are potentially within the provisions of the policy. Here, both the complaint and the policy refer to the unauthorized use of a slogan. The Court also concluded that neither the intellectual property or the "material previously made known" exclusions governed. With respect to the former, coverage is not excluded simply because "trade dress" claims, which are a subset of the slogan infringement claim, are excluded. With respect to the latter, the parties' admissions established its inapplicability. Second, the Court agreed with the district court that St. Paul did not breach its duty to defend. Under Illinois law, St. Paul's action for declaratory judgment before trial satisfied its obligation. Third, the Court addressed the settlement payment. It noted that different states have adopted different approaches to settlement costs indemnification when the settlement includes covered and uncovered claims. It ultimately predicted that an Illinois court would apply a "primary focus" test under which an insured would have the burden to show that the primary focus of the settled claims was a potentially covered loss. The Court remanded for that determination. Fourth. the Court determined that St. Paul was not obligated to reimburse SBC for Monogram’s defense costs. A prerequisite to St. Paul's duty to defend an indemnitee is a determination that no conflict of interest exists. Here, the district court concluded, and the Court agreed, that such a conflict existed. Finally, the Court noted that the district court addressed prejudgment interest with respect only to the Monogram defense costs, not to the plaintiffs' defense costs. It remanded for consideration of that as well.
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The Health Care Industry Liability Insurance Program (the "Insurer") issued a commercial general liability policy to Momence Meadows Nursing Center, Inc. (“Momence”). The policy included commercial general liability coverage and professional liability coverage. After the policy was issued, two former employees brought an action against Momence for violations of the False Claims Act and the Illinois Whistleblower Reward and Protection Act ("IWRPA"). The suit alleged that Momence submitted false claims to the United States and the State of Illinois and that the employees were retaliated against for bringing the charges. The basis for the false claims charge was that Momence improperly certified that it was meeting the Medicare and Medicaid standards of care. The complaint alleged numerous instances of improper care, inadequate nutrition, and injuries to patients. The insurer brought this action for a declaration that it had no duty to defend or indemnify Momence. The court granted summary judgment to the insurer on the duty to defend and held that the issue of indemnification was not ripe. Momence appeals.