Appeal from the United States District Court for the Northern District of Illinois, Eastern Division, No. 82 C 5418, James F. Holderman, Judge.
Before CUDAHY, FLAUM and RIPPLE, Circuit Judges.
CUDAHY, Circuit Judge. American Home Assurance Company ("American Home") brought this action for a declaratory judgment, 28 U.S.C.A. §§ 2201 et seq. (West Supp. 1986), to determine: (1) the extent to which Dykema, Gossett, Spencer, Goodnow & Trigg ("Dykema"), a law firm, is entitled to insurance coverage by American Home for certain claims made against it; and (2) the extent to which any payments in settlement of these claims, as well as other expenses associated with the litigation, should be apportioned between American Home and Northbrook Excess and Surplus Insurance Company ("Northbrook"), a subsequent insurer of Dykema. Dykema and Northbrook counterclaimed, seeking, inter alia, a declaration that American Home was obligated to satisfy all of the claims. On cross-motions for summary judgment, the district court ruled that American Home was obligated to pay the full amount necessary to satisfy the claims against Dykema as well as the attorneys' fees incurred by Dykema in connection with the claims. It also ruled that American Home was liable for prejudgment interest on the money it owed. We reverse the judgment of the district court as to coverage, affirm in part as to prejudgment interest and remand for further proceedings.
The undisputed facts relied upon by the district court in its opinion, American Home Assurance Co. v. Dykema, Gossett, Spencer, Goodnow & Trigg, 625 F. Supp. 1052 (N.D. Ill. 1985) ("District Court Opinion") are as follows:
1. The Barker Litigation. Michigan Baptist Foundation, Inc. (the "Foundation") was incorporated by the Michigan Baptist Convention (the "Convention") for the purpose of building and operating a retirement village in Florida. In order to finance the project, the Foundation began in January 1974 to issue first mortgage bonds secured by its interest in the land and ongoing construction. In October 1976, Lee County Bank, the trustee for the bonds, refused to participate in further issues. The Foundation then sold unsecured note certificates until March 1978 when it was placed in receivership. See generally Barker v. Lee County Bank, 1985-1986 Fed. Sec. L. Rep. (CCH) P92,404 (N.D. Ill. 1985).
In March 1977, about four months after the Foundation had started selling the note certificates, Dykema was retained by the Convention to advise it about the Foundation's activities. A little over two years later, in May 1979, the Convention as well as other defendants were sued in the United States District Court for the Northern District of Illinois by a class of purchasers of the bonds and notes. In November 1979, Dykema was named a defendant in that lawsuit. The third (and last) amended complaint in that suit, filed in April 1980 and captioned Barker v. Lee County Bank, No. 79-C-2047 ("Barker"), charged all defendants with knowing participation in conduct resulting in the unlawful public sale of more than $7 million in mortgage bonds and notes issued by the Foundation between 1974 and 1978. Dykema's participation in the challenged offerings was described in paragraphs 66 through 82 of the complaint. Specifically, the complaint alleged:
Shortly after being retained by the Michigan Convention, Dykema Gossett was made aware of the grave financial and legal situation of the Foundation, of the Foundation's unlawful sale of its Note Certificates, First Mortgage Bonds and life care contracts, and of the fact that the legally required disclosures had not been made by the Foundation in connection with such sales.
Third Amended Complaint P67, Appellees' Supplemental Appendix at 98. Subsequent paragraphs alleged actions in connection with the Foundation's activities undertaken in April through August of 1977 by Ronald Rose, a partner in Dykema.*fn1 Finally, it was alleged that "as late as the spring of 1978, when the Foundation's future was hopeless, attorney Ronald Rose urged and advised that the sale of the Note Certificates be continued." Id. at P82.
Dykema was charged with aiding and abetting violations of section 10(b) of the Securities Exchange Act and rule 10b-5 (Count I) and with violating the Florida securities law (Count VI). Further charges alleged common law fraud and deceit (Count II); reckless or negligent misrepresentation (Count III); and professional recklessness or negligence (Count IV).
2. The Insurance. American Home issued to Dykema a professional liability insurance policy on August 19, 1976. The initial policy limit was $1 million; an endorsement dated January 12, 1977 raised the limit to $2 million. The policy read in pertinent part:
[American Home agrees] to pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of any act or omission of the insured, or of any other person for whose acts or omissions the insured is legally responsible, and arising out of the performance of professional services for others in the insured's capacity as a lawyer provided one or more claims arising out of the same professional service are made . . . .against the partnership . . . .
This policy applies to acts or omissions . . . during the policy period . . . .
American Home Policy PI (Coverage B), PV (Policy Period, Territory), Appellees' Supplemental Appendix at 16. American Home also undertook to "defend any suit against the insured alleging such act or omission and seeking damages which are payable under the terms of this policy . . . . " Id. PII (Defense, Settlement, Supplementary Payments). This policy expired on August 19, 1977.
On August 19, 1979, two years after the expiration of the American Home policy, Northbrook issued Dykema a professional liability insurance policy that obligated Northbrook to pay on behalf of the Insured all sums in excess of the deductible amount stated in the Declarations which the Insured shall become legally obligated to pay as damages as a result of CLAIMS FIRST MADE AGAINST THE INSURED DURING THE POLICY PERIOD:
(a) by reason of any act, error or omission in professional services rendered or that should have been rendered by the Insured or by any person for whose acts, errors or omissions the Insured is legally responsible, and arising out of the conduct of the Insured's profession as a lawyer . . . . .
PROVIDED ALWAYS THAT such act, error or omission or such personal injury happens:
(a) during the policy period, or
(b) prior to the policy period provided that prior to the effective date of this policy:
(3) there is no prior policy or policies which provide insurance for such liability or claim. If coverage is otherwise afforded under this policy and if the available limits of liability of such prior policy or policies are insufficient to pay any liability or claim, this policy will be excess over any such prior coverage.
Northbrook Policy PI (Coverage), Appellees' Supplemental Appendix at 26. This policy was in force from August 19, 1979 to August 19, 1980.
When Dykema was served with the first amended complaint in Barker in November 1979, it immediately notified both American Home and Northbrook. American Home acknowledged this notice by letter dated December 6, 1979 and informed Dykema that the law firm of Hinshaw, Culbertson, Moelmann, Hoban & Fuller ...