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American Insurance Corp. v. Sederes

decided: December 23, 1986.


Appeal from the United States District Court for the Southern District of Illinois, East St. Louis Division, No. 83 C 3262, Gerald B. Cohn, Magistrate.

Author: Fairchild

Before POSNER and FLAUM, Circuit Judges, and FAIRCHILD, Senior Circuit Judge.

FAIRCHILD, Senior Circuit Judge. Dorothy Sederes appeals from a judgment entered by a magistrate*fn1 which declared that plaintiff did not issue an insurance policy under which it owed a duty to provide worker's compensation coverage arising from the death of Chester Sederes.*fn2 Mrs. Sederes contends that the policy did, in fact, cover her husband, who was killed while piloting a charter flight on November 18, 1981. Jurisdiction is founded in diversity, and all parties agree that Illinois law governs.

Chester Sederes began working as a charter pilot for Synergistic Flight Systems (Flight) on November 5, 1981. Flight had been incorporated in September, 1981 by Franc Richardson. In 1980 and 1981, Richardson had operated a financial consultation service as Franc Richardson d/b/a Richardson Service Corporation (RSC) and had also conducted business as Franc Richardson d/b/a/ Synergistic Financial Systems (Financial). RSC was incorporated on November 2, 1981 and an assumed name certificate was filed on November 5 by RSC d/b/a Financial. Financial leased planes to other businesses and apparently hired several pilots to shuttle Financial's clients around the country. Richardson later decided to go into the air charter business and formed Flight to meet FAA regulations and run the charter business.

Richardson had previously obtained personal insurance from Earl E. Zimmerman and Company, Inc. (Zimmerman). Richardson was familiar with several of the people working at Zimmerman, and also obtained business insurance from them. On July 14, 1981, Richardson obtained worker's compensation insurance from Fireman's Fund for the clerical employees of Financial. All of the work to obtain this policy was done by Zimmerman and the policy was issued to Franc Richardson d/b/a Synergistic Financial Services, Ltd. Fireman's Fund contends that the named insured was a sole proprietorship or individual d/b/a Financial.

On August 14, 1981, an endorsement was issued adding corporate pilots to Financial's worker's compensation policy. The endorsement's code classification was "7421," indicating the operation of a flight service to transport corporate personnel and clients. One or more pilots, however, actually worked for Flight's air charter business. Richardson asserts that he informed Guffy and Scheibel, employees of Zimmerman, that a new corporation was beginning a charter service and he needed worker's compensation coverage for the charter pilots. Guffy and Scheibel were apparently aware an air charter service was involved, but neither determined that "7422" was the correct code classification for such a service. Scheibel denied being told that a separate corporation was involved.

Fireman's approved the "7421" endorsement based upon information received from Zimmerman that pilots were to be added to Financial's payroll. Fireman's does not insure charter pilots ("7422") because charter flight insurance is considered a specialized area in which Fireman's lacks the necessary expertise to do business. Following Mr. Sederes' death, Fireman's audited Richardson, determined that Financial, the corporation, employed most of the people working for Franc Richardson; found that there were no employees of Financial, the sole proprietorship, and thus, no one was covered under the policy; returned the premium; and cancelled the policy.

Mrs. Sederes argues that Flight and Financial were really one entity, and that a policy covering the corporate pilots of Financial must also be held to cover Flight's charter pilots. She then argues that Zimmerman was the agent of Fireman's, and any knowledge obtained by Zimmerman from Richardson was imputed to Fireman's. Mrs. Sederes asserts that, by reason of imputed knowledge, Fireman's knew that Financial and Flight were the same entity and were operating an air charter service. Thus, Fireman's should be estopped from contending that "7421" was the wrong code for the air charter service, and should be required to provide worker's compensation coverage for her husband's death. Fireman's argues that Flight and Financial were separate entities and that the policy it issued covered only employees of Financial. Fireman's further contends that even if Flight and Financial were the same entity, no knowledge can be imputed to Fireman's that the charter service was involved, since Zimmerman was an agent of Richardson, not an agent of Fireman's. It argues that since it did not know an air charter service was involved, and this information materially affected the risk, the policy is void as to any charter pilots even if their employer was an insured.

The magistrate determine, in extensive findings of fact, that the corporate veil between Financial and Flight should be pierced; that Zimmerman was an agent of Richardson; that Zimmerman mischaracterized the type of coverage needed; and that Richardson was liable to Mrs. Sederes for the coverage. Flight and Financial moved for a new trial, reconsideration, or amended judgment, contending that the magistrate erred in finding that Richardson was liable when he was not named as a party, and that Zimmerman was the agent of Richardson. Mrs. Sederes made a similar motion, contending that the magistrate erred in finding that Zimmerman was Richardson's agent, and Fireman's was therefore not estopped from denying coverage. The magistrate denied Mrs. Sederes' motion and granted Flight's and Financial's motion to exclude Richardson and to refrain from piercing the corporate veil. Interestingly, the magistrate's amended order retained identical findings of fact regarding the piercing of the corporate veil between Flight and Financial, and held that "there was in reality only one business," but his conclusion and the amended judgment state that Flight and Financial were separate business entities. This apparent disparity between the findings of fact and the amended judgment is, however, unimportant on this appeal.

We need not decide whether Flight and Financial should be deemed one entity, and therefore the insured in the policy, because of our conclusion, below, that the activity of charter flight operation was not covered in any event. But because of the confusion on the issue, arising from the disparity between the order on reconsideration and the judgment, and because further litigation between some of the parties is at least possible, and the alter ego issue might then be significant, we vacate that part of the judgment which declares that Flight and Financial are separate entities, and the findings relevant to that declaration.

In Illinois, an insurance agent can be the agent of the insurer, the agent of the insured, or, in some circumstances, the agent of both. Ill. Rev. Stat. ch. 73 P1065.37 (Supp. 1986); Ross v. Thomas, 45 Ill. App. 3d 705, 708, 360 N.E.2d 126, 128, 4 Ill. Dec. 379 (1977); Galiher v. Spates, 129 Ill. App. 2d 204, 207, 262 N.E.2d 626, 628 (1970). Whether an insurance intermediary is an agent of the insured or an agent of the insurer is generally a question of fact. Lazzara v. Esser, 802 F.2d 260, 264 (7th Cir. 1986); Davidson v. Comet Casualty Co., 89 Ill. App. 3d 720, 723, 412 N.E.2d 19, 22, 44 Ill. Dec. 943 (1980); Ross, 45 Ill. App. 3d at 708, 360 N.E.2d at 128; Galiher, 129 Ill. App. 2d at 207, 262 N.E.2d at 628. An insurance broker, or agent of the insured, is defined by Illinois courts as:

One who procures insurance and acts as middleman between the insured and the insurer, and solicits insurance business from the public under no employment from any special company, but, having secured an order, places the insurance with the company selected by the insured, or, in the absence of any selection by him, with the company selected by such broker.

Galiher, 129 Ill. App. 2d at 206-07, 262 N.E.2d at 628; see, e.g., City of Chicago v. Barnett, 404 Ill. 136, 141-42, 88 N.E.2d 477, 481 (1949); Davidson, 89 Ill. App. 3d at 722-23, 412 N.E.2d at 22; Browder v. Hanley Dawson Cadillac Co., 62 Ill. App. 3d 623, 628-29, 379 N.E.2d 1206, 1210, 20 Ill. Dec. 138 (1978). An insurance agent, on the other hand, has a fixed and permanent relationship to an insurance company that the agent represents, and has certain duties and allegiances to that company. Lazzara, 802 F.2d at 264; see Roby v. Decatur Steel Erectors, Inc., 59 Ill. App. 3d 720, 725, 375 N.E.2d 1355, 1359, 17 Ill. Dec. 71 (1978); Galiher, 129 Ill. App. 2d at 207, 262 N.E.2d at 628. Whether a person is an agent or a broker is determined by his or her acts. Lazzara, 802 F.2d at 263; see Barnett, 404 Ill. at 141-42, 88 N.E.2d at 481; Browder, 62 Ill. App. 3d at 629, 379 N.E.2d at 1210; Galiher, 129 Ill. App. 2d at 207, 262 N.E.2d at 628.

Zimmerman and Fireman's had entered into an "agency agreement" that detailed Zimmerman's authority. This agreement refers to Zimmerman as "our agent" to exercise authority within Illinois. The agreement does not include a promise by Zimmerman to sell only for Fireman's and its subsidiaries, and does not expressly indicate whether Zimmerman is permitted to sell for other companies. It does, however, detail the procedures and restrictions that Zimmerman must abide by or risk ending the agreement. On the face of the agreement it may well appear that Zimmerman is Fireman's agent, at least for those purposes listed in the agreement. However, Lazzara must be based on a proposition of Illinois law that the existence of a similar agency agreement does not control, but is just one of many facts bearing on the question whether the general principles of agency apply ...

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