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

GENERAL INSURANCE COMPANY OF AMERICA v. CLARK MALL CORP. (May 4, 2011)

Discount Mega Mall in Chicago was damaged in a major fire in the fall of 2007. It filed a claim with its commercial general liability carrier, General Insurance. It also tendered to General the defense of claims brought by its tenants. General filed a declaratory judgment action against Clark Mall Corporation d/b/a Discount Mega Mall Corporation as well as its principals and tenants seeking an order that it had no duty to defend or indemnify. The defendants asserted five counterclaims for: a) an order that defense and indemnity was required, b) damages for breach of contract, c) damages for a vexatious refusal to defend, d) damages for a violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, and e) damages for fraud. The defendants moved for judgment on the pleadings with respect to the duty to defend. Magistrate Judge Cole (N.D. Ill.) ruled that General failed to produce evidence establishing the exclusion on which they based their denial of coverage and concluded that it had a duty to defend. Although the magistrate judge originally concluded that the refusal to defend was not vexatious, he later explained that he had not rejected the argument conclusively. At General's request, the magistrate judge entered his ruling as a final judgment under Rule 54(b). General appeals.

In their opinion, Chief Judge Easterbrook and Judges Rovner and Sykes dismissed for want of appellate jurisdiction. The Court made a few comments on the merits presented by the appeal but moved quickly to consider appellate jurisdiction. Rule 54(b) requires that an order be final and that there is no just reason to delay an appeal. In order for in order to be final, it must be the final disposition of a claim in the case. A court must compare the issue resolved in the claim on appeal with those that remain. That comparison here shows that the judgment was not final. The vexatious refusal to defend claim still pends. The common law fraud claim still pending includes allegations relating to General's refusal to defend. Since several of the counterclaims still pending are intertwined with the judgment on the duty to defend, the judgment was not final and the Court has no appellate jurisdiction.

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ENVISION HEALTHCARE v. PREFERREDONE INSURANCE CO. (May 12, 2010)

PreferredOne, a health insurance company, entered into a contract with Envision Healthcare, a wholesale insurance broker, for the marketing and sales of its insurance products. Envision sold one of those insurance products to Bradley Romer. Romer had two knee surgeries, with serious complications, that resulted in a hospital bill in excess of $100,000. Upon receiving the hospital bill, PreferredOne did a little investigating into Romer's application. It concluded that he omitted a pre-existing condition. It then rescinded the policy and refused to pay the balance of the hospital bill. Romer brought a breach of contract suit in state court against PreferredOne. PreferredOne filed a third-party complaint against Envision for indemnification. Envision then filed suit against PreferredOne in federal court seeking a declaration that it had no duty to indemnify. It then unsuccessfully sought to dismiss the state court third-party complaint on the grounds that it involved the same legal issue. PreferredOne moved to dismiss the federal action. Concluding that the federal and state cases involved the same parties and presented the same legal issue, the district court dismissed the case under the Wilton/Brillhart doctrine of abstention. Envision appeals.

In their opinion, Judges Bauer, Manion, and Tinder affirmed. The Court first noted that its standard of review of the district court's decision to abstain is for abuse of discretion. Applying that standard, the Court found no abuse. In fact, it noted that the case presented a "classic example" of the proper use of the Wilton/Brillhart doctrine -- only declaratory relief is sought and a parallel state court action, between the same parties and addressing the same issue, is proceeding.

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CAPITOL INDEMNITY CORP. v. ELSTON SELF SERVICE WHOLESALE GROCERS, INC. (March 12, 2009)

Elston Self-Service Wholesale Grocers, Inc. ("Elston") is a wholesale cigarette distributor. Lorillard Tobacco Co. ("Lorillard") filed a complaint against Elston, alleging that it sold counterfeit cigarettes bearing a Lorillard trademark. Elston was insured by Capitol Indemnity Corp. When Elston claimed coverage, Capitol Indemnity disclaimed any duty to indemnify or defend. Capitol Indemnity sought a declaratory judgment that it had no such duty. The district court ruled that Capitol Indemnity had an obligation to defend Elston in the Lorillard litigation. Capitol Indemnity appeals.

In their opinion, Chief Judge Easterbrook and Judges Flaum and Manion affirmed. The Court addressed the policy provisions. At issue was an exclusion to the policy's coverage of "advertising injury." The policy excluded from coverage any injury arising out of the publication of “material” whose first publication took place before the policy period. Capitol Indemnity argued that Elston's years of lawful sales of Lorillard cigarettes before the beginning of the policy term constituted a prior publication. The counterfeit packaging was nearly identical to the Lorillard packaging. The Court rejected Capitol Indemnity’s position. It interpreted the term "material" in the policy exclusion to refer to the same wrongful material alleged in the complaint. Because there was no allegation of counterfeit sales prior to the policy term, there was no prior publication. Under Illinois law, Capitol Indemnity is required to defend Elston if the underlying complaint potentially falls within the scope of coverage. Having found that the prior publication exclusion does not apply, the Court affirmed the district court’s finding of a duty to defend.

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