The opinion of the court was delivered by: Aspen, District Judge:
MEMORANDUM OPINION AND ORDER
Presently pending before the Court is National Union's motion for
partial summary judgment on the issue of its alleged vexatious and
unreasonable denial of coverage.*fn2 In the alternative, National Union
moves for a separate trial on that issue. AWOI opposes the motion for
summary judgment on the grounds that the undisputed facts indicate that
National Union's denial of coverage was vexatious and unreasonable, and
that in any event, the motion is premature since AWOI has not yet
completed its discovery on the issue and because the appropriate time to
consider the question is after a trial on the merits of the question as
to the validity of the policy. AWOI further argues that the issue of the
validity of the policy and National Union's alleged unreasonable denial
of coverage are inextricably intertwined so that separate trial of the
issues is unwarranted.
The material facts of this case, to the extent they are undisputed, are
relatively straightforward. In April, 1975, AWOI submitted to National
Union its application for directors and officers liability and corporate
reimbursement insurance listing the name of the applicant organization as
"Automotive Wholesalers of Illinois and Affiliates." While AWOI is a
not-for-profit trade association engaged in promoting and developing a
cooperative relationship between various members of the automotive
service industry,*fn3 it has two for-profit wholly-owned subsidiaries.
AWOI Service Corporation is in the business of advertising, business
counselling, and credit investigation for members of AWOL and Automotive
Acceptance Corporation purchases and accepts assignments of accounts
receivable and performs other collection services for AWOI members. The
officers and directors of AWOI also serve the two for-profit subsidiaries
in the same capacity and on a voluntary basis. Although AWOI disclosed
the existence of its two subsidiaries in answer to question 10 of the
application which requested a "list of all subsidiary corporations,
associations, and fraternities," the remainder
of the application was completed solely with respect to AWOI.*fn4
In response to question 1(c), AWOI stated that "Automotive Wholesalers
of Illinois and Affiliates," the applicant organization, was chartered or
incorporated as a "not-for-profit corp." In response to question 6 of the
application requesting the applicant to "attach copies of latest annual
report and balance sheet," AWOI submitted a one-page balance sheet for
"Automotive Wholesalers of Illinois" showing total assets of $246,586.
When Gail Hulford, an underwriter for National Union, requested a copy of
AWOI's latest certified annual report, AWOI sent the same one-page
balance sheet back again, this time with the handwritten notation at the
bottom of the page: "5-20-75 The Above Figures Are True And Correct. H.
L. Bellmer Executive Vice President." Upon receipt of the one-page
balance sheet in response to her request for the latest annual report,
Ms. Hulford assumed that AWOI, like other not-for-profit corporations
with assets of about $250,000 with which she had dealt, did not have a
certified annual report. (Affidavit of Gail Hulford attached to National
Union's memorandum in support of partial summary judgment).*fn5
Finally, the application stated that no director or officer of the
applicant had "knowledge or information of any act, error or omission
which might give rise to a claim under the proposed policy." (Answer to
question 15 of the application). The application was signed by Arthur
Koratsky, AWOI staff attorney, under a boldface clause reading, "The
undersigned authorized officer of the organization declares that to the
best of his knowledge the statements set forth herein are true."
National Union issued a policy to AWOI on July 8, 1975. In October,
1975, AWOI gave notice of a potential claim under the policy. It seems
that unknown to National Union, AWOI's executive vice-president and
director Harry Bellmer had invested AWOI funds, and persuaded others to
invest, in a corporation controlled by himself and members of his
family. The corporation became insolvent in early 1975. The potential
claimants under the National Union policy were investors in Bellmer's
corporation asserting that AWOI's directors and officers were liable
under federal and state securities laws for their losses. At the time it
received the notice of potential claim, National Union also received from
AWOI's attorneys a copy of AWOI's 1974 certified annual report which AWOI
had earlier refused or failed to submit*fn6 to Ms. Hulford in connection
with the application for insurance. The 1974 certified annual report
revealed that the combined assets of AWOI and its two-for-profit
subsidiaries were $3,073,371 and that AWOI's assets alone may have been
as large as $726,006 rather than the reported $246,586.*fn7 The annual
report also described the for-profit activities of the two subsidiaries
and indicated that AWOI operated a health and welfare fund for the
benefit of its members. In
December, 1975, National Union declared the policy void ab initio on the
ground that the material submitted at the time the policy was written was
totally misleading as to both the objects and scope of the proposed
insured, AWOI and affiliates, in light of the new information submitted
to National Union. The insurer returned AWOI's premium and upon AWOI's
refusal to accept the returned premium, has kept it in an escrow account
for AWOI's benefit.
In 1978, AWOI and twelve of its directors and officers were sued by the
investors in Bellmer's corporations. Upon receipt of the complaint from
AWOI's attorneys, who requested that National Union undertake AWOI's
defense pursuant to the directors and officers liability policy, National
Union discovered that during 1972 and 1973 AWOI had engaged in some
investment advising and counselling activities by promoting to its
members investments in Bellmer's corporations. National Union then
informed AWOL that this constituted further support for its decision
declaring the policy void at its inception. Finally, in the course of
discovery in the action now pending before this Court, National Union
maintains that it has substantiated the allegations made in its
counterclaim that AWOI falsely stated in its application for insurance
that none of its officers or directors knew of claims or potential claims
against themselves because Arthur Koratsky, who signed the application as
an "authorized officer" of AWOI and its affiliates, allegedly knew of the
investment of AWOI funds in the Bellmer corporations and other activities
that could give rise to potential liability. National Union also
maintains that the minutes of AWOL board of directors meetings in June,
1975, which were obtained through discovery in the instant case, indicate
that other AWOI officers and directors knew of potential liability as a
result of Bellmer's business dealings before the policy was issued in
July, 1975.
AWOI's version of the facts does not differ substantially from National
Union's except that AWOI maintains that its answers to the questions in
the application were technically correct and that National Union is now
attempting to thrust upon AWOI the consequences of its own deficient
application form and its negligent review of the information provided with
the application. AWOI argues that the application was designed to elicit
information about only one entity and thus AWOI only submitted
information on itself and not its for-profit subsidiaries.
According to AWOI, if National Union needed information about the
subsidiaries, it should have requested it when AWOI disclosed the
existence of the subsidiaries on the face of the application.
Furthermore, AWOI asserts that National Union waived*fn8 its request for
a certified annual report when it accepted a copy of AWOI's balance sheet
bearing H.L. Bellmer's indorsement that the figures stated therein were
true and correct. AWOI also notes that since the balance sheet discloses
AWOI's holdings of 55,000 common shares of the two subsidiaries listed in
the application, and since Illinois not-for-profit corporations are
prohibited from issuing common stock by Ill.Rev.Stat. ch. 32, §
163a25, National Union was put on notice that the subsidiaries were
for-profit entities with potentially greater assets than AWOI itself.
Finally, AWOI disputes National Union's contention that it has
substantiated its allegations that AWOI officers and directors knew of
potential claims at the time the application was filed and did not
disclose their knowledge in response to a direct question on the
application. First, AWOI points out that staff attorney Arthur Koratsky
who is alleged to have had such knowledge is not technically an officer
or director of AWOI. However, National Union argues that he should be
considered an officer of AWOI for these purposes since he signed the
application on the line designated for an "authorized officer" of the
applicant organization. Secondly, AWOI argues that neither Koratsky nor
anyone else could have reasonably inferred from knowledge that AWOI
loaned funds to Bellmer's companies
that officers or directors of AWOI might be subject to liability down the
proverbial road.
The foregoing discussion notwithstanding, it is clear that AWOI
submitted an application for directors and officers liability insurance
on behalf of its not-for-profit self and its for-profit affiliates
without clearly delineating the difference between the entities. Avoiding
for the moment the question of whose fault it is that such information
did not come to light before the application was approved,*fn9 the fact
remains that National Union was unaware of the true, state of affairs
when it issued the policy.*fn10 Furthermore, whether or not AWOI's
directors or officers did in fact know of potential claims arising from
Bellmer's self-dealing (of which they were aware at least as of the
June, 1975, board meeting when the board discussed Bellmer's
activities), National Union may have been justifiably suspicious when it
was notified of a potential claim arising' out of such self-dealing
approximately three months after the issuance of the policy. Although
disputed material facts exist as to whether the policy was correctly
declared void ab initio or whether it is still valid according to its
terms, the question for decision today is the narrower one of whether
there is a dispute as to a genuine issue of fact material to a judgment
that as a matter of law National Union's denial of coverage was not
vexatious or unreasonable. If we find that there is no such dispute as to
material facts and that no such dispute would arise no matter what AWOI
might find in further discovery directed at National Union, National
Union would be entitled to judgment as a matter of law.
The question of whether an insurer has acted vexatiously or
unreasonably in processing a claim is for the court to decide in the
exercise of its discretion. Howard Foundry Co. v. Hartford Fire Insurance
Co., 222 F.2d 767, 770 (7th Cir. 1955). Illinois courts have said that no
single factor is determinative as to whether attorneys' fees should be
assessed against an insurer pursuant to section 767 of the Illinois
Insurance Code, Ill.Rev.Stat. ch. 73, § 767. "Rather, the totality of
the circumstances, taken in broad focus, will determine the matter."
Deverman v. Country Mutual Insurance Co., 56 Ill. App.3d 122, 14
Ill.Dec. 94, 96, 371 N.E.2d 1147, 1149 (4th Dist, 1977); Crest v. State
Farm Mutual Automobile Insurance Co., 20 Ill. App.3d 382, 313 N.E, 2d
679, 684 (2d Dist. 1974). Attorneys' fees are not to be awarded simply
because an insurer is unsuccessful in supporting its position in
subsequent litigation. Zak v. Fidelity-Phenix Insurance Co., 34 Ill.2d 488,
216 N.E.2d 113.
116 (1966), and a court should look very critically at a request for
attorneys' fees in a case where a substantial question as to coverage is
raised. In Crest v. State Farm Mutual Automobile Insurance Co., supra,
for example, the court noted that "[t]he plaintiff's own act in allowing
a misrepresentation to be made in his application, even if not with
intent to defraud, raised a question as to coverage and the defendant
should not be penalized for seeking a judicial determination of the
question." 313 N.E.2d at 684.*fn11
The United States Court of Appeals for the Seventh Circuit as well as
the lower federal courts in this district have routinely denied the award
of attorneys' fees under the Illinois statute where there is a factual
dispute as to the fact or amount of coverage or the amount of loss. See
e. g., Weiner v. 222 East Chestnut Street Corp., 303 F.2d 630, 636 (7th
Cir. 1962); Bremen State Bank v. Hartford Accident & Indemnity Co.,
427 F.2d 425, 428 n.2 (7th Cir. 1970); Illinois Produce International,
Inc. v. Reliance Insurance Co., 388 F. Supp. 29, 36 (N.D.Ill. 1975);
Stern, Walter & Simmons, Inc. v. Seaboard Surety Co., 308 F. Supp. 252,
254-55 (N.D.Ill. 1970). The insurer is not required to prevail in
subsequent litigation in order to escape payment of the insured's
attorneys' fees and it is neither vexatious nor unreasonable to deny a
claim upon grounds that are later held to be erroneous or unacceptable.
Thus, in Bremen State Bank, supra, the court said that "[t]o hold against
coverage in this case would fly in the face of the intention of the
parties," 427 F.2d at 425, but the court still denied the successful
plaintiff its attorneys' fees. Moreover, in Stern, Walter & Simmons,
Inc., supra, the court rejected the defendant insurer's construction of
the policy in issue in that case on the ground that if the insurer's
construction were defended it "would never be required to defend or
indemnify the plaintiff for liability arising out of the hazards
enumerated in the policy." 308 F. Supp. at 254. The court refused to find
that the insurer had acted in bad faith, however, and thus denied the
request for attorneys' fees, With these principles in mind, we now turn
to the question of summary judgment in the case at bar on the issue of
whether, as a matter of law, National Union can be said to have not acted
vexatiously or unreasonably in denying coverage of AWOL's claim.*fn12
In support of a motion for summary judgment, the moving party has the
burden of showing that there is no dispute as to any genuine issue of
fact material to a judgment in his favor as a matter of law. Cedillo v.
International Association of Bridge & Structural Iron Workers, Local
Union No. 1, 603 F.2d 7, 10 (7th Cir. 1979); Fitzsimmons v. Best,
528 F.2d 692, 694 (7th Cir. 1976). The non-moving party is entitled to
all reasonable inferences that can be made in its favor from the evidence
in the record, United States v. Diebold, Inc., 369 U.S. 654, 655, 82
S.Ct. 993, 994, 8 L.Ed.2d 176 (1962); Moutoux v. Gulling Auto Electric,
295 F.2d 573, 576 (7th Cir. 1961), and as a general rule, questions of
motive and intent have been held to be particularly inappropriate
for disposition on a motion for summary judgment. Conrad v. Delta Air
Lines, Inc., 494 F.2d 914, 918 (7th Cir. 1974); Moutoux v. Gulling Auto
Electric, supra. While the non-moving party is entitled to all reasonable
inferences in its favor, it may not merely rely on the allegations in its
pleadings but rather must affirmatively set forth specific facts in
affidavits or otherwise showing that there are issues that must be
decided at trial in response to the moving party's assertions that no
genuine material issues of fact exist. First National Bank of Arizona v.
Cities Service Co., 391 U.S. 253, 289-90, 88 S.Ct. 1575, 1592-93, 20
L.Ed.2d 569 (1968); Kirk v. Home Indemnity Co., 431 F.2d 554, 560 (7th
Cir. 1970). The non-moving party, however, cannot create an issue of
material fact through conjecture or speculation as to what evidence might
be adduced at trial or what might be turned up by further discovery.
Abiodun v. Martin Oil Service, Inc., 475 F.2d 142, 144 (7th Cir.), cert.
denied, 414 U.S. 866, 94 S.Ct. 57, 38 L.Ed.2d 86 (1973); Kirk v. Home
Indemnity Co., supra; O'Brien v. McDonald's Corp., 48 F.R.D. 370, 373-74
(N.D.Ill. 1970); 6 Moore's Federal Practice ¶ 56.17 (2d ed. 1966).
AWOI's strongest argument in opposition to National Union's motion for
summary judgment is that the motion is premature because AWOI has not yet
completed its discovery on the issue. AWOL maintains that the proper time
to consider the propriety of awarding attorneys' fees is "in light of the
totality of the circumstances of the case, including the evidence, or
lack thereof, at trial." Plaintiff's Brief at 7. However, the facts of
this case as they now stand in the light most favorable to AWOI as the
non-moving party show, at the very least, a genuine issue as to the fact
of coverage and validity of the policy. Even if this Court were to find,
on the merits of the underlying suit and counterclaim for declaratory
relief, that the AWOI officers and directors had no knowledge of
potential claims or acts giving rise to such claims against them when the
application was filed and that AWOI did not submit misrepresentative or
misleading information in connection with its application, it still could
not be said that National Union took a vexatious and unreasonable
position in the instant case. Moreover, AWOL has not alluded to any
information it expects to uncover in further discovery on this issue that
would change the clear import of the facts known to date, short of an
admission by National Union that it acted in bad faith. AWOI has not
filed any affidavits in response to National Union's affidavits nor has
it materially disputed what National Union says were its impressions at
the time it declared the policy void ab initio. Given the totality of the
facts and circumstances in this case, AWOI's bare hope or suspicion that
it will uncover something to show that National Union acted vexatiously
or unreasonably is insufficient to defeat a motion for summary judgment.
As the court said in Mintz v. Mather's Fund, Inc., 463 F.2d 495, 498 (7th
Cir. 1972), "courts should not look the other way to ignore the existence
of the genuine issues of material fact but neither should they strain to
find ...