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03/11/87 the Fidelity & Casualty v. Nalco Chemical Company Et

March 11, 1987

THE FIDELITY & CASUALTY COMPANY OF NEW YORK, PLAINTIFF-APPELLANT

v.

NALCO CHEMICAL COMPANY ET AL., DEFENDANTS AND THIRD-PARTY, PLAINTIFFS-APPELLEES (CORROON & BLACK ET AL., THIRD-PARTY DEFENDANTS)



APPELLATE COURT OF ILLINOIS, FIRST DISTRICT, THIRD DIVISION

509 N.E.2d 446, 155 Ill. App. 3d 730, 108 Ill. Dec. 750 1987.IL.277

Appeal from the Circuit Court of Cook County; the Hon. Arthur L. Dunne, Judge, presiding.

APPELLATE Judges:

JUSTICE WHITE delivered the opinion of the court. McNAMARA, P.J., and RIZZI, J., concur.

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE WHITE

Plaintiff, Fidelity & Casualty Company of New York , sued for a judgment declaring that it had no duty to defend or indemnify defendants Nalco Chemical Company (Nalco) and Industrial Bio-Test Company in 11 suits filed against Nalco and IBT. Defendants counterclaimed for amounts expended in defense and settlement of the 11 suits. Defendants and F&C moved for summary judgment on the issue of the duty to defend, and the trial court denied both motions. Following a bench trial limited to the issue of F&C's duty to defend, the court entered a judgment for defendants. Pursuant to Supreme Court Rule 304 (103 Ill. 2d R. 304(a)), the trial court found no just reason to delay appeal of the order. F&C appeals. IBT was a chemical testing laboratory which performed toxicological

In August 1976, Anthony Desimone, who had purchased stock in Syntex Corporation after September 1975, brought a class action suit against Syntex, IBT, and several officers and employees of IBT and Syntex, alleging that IBT conducted tests for a drug which Syntex produced. Desimone alleged that IBT conducted those tests improperly, and IBT's reports on those tests were false and misleading. Syntex submitted IBT's reports to the Food and Drug Administration , and, on the basis of those reports, the FDA approved the marketing for the drug. The FDA subsequently discovered irregularities in IBT's reports and testing procedures. On August 5, 1976, the FDA gave notice of possible withdrawal of marketing approval for the drug. Trading in Syntex stock was halted, and its price dropped sharply. Desimone alleged that IBT's fraudulent statements to Syntex and the FDA caused the price of Syntex stock to be artificially inflated after September 1975 and therefore it caused Desimone's loss.

In September 1976, Harry Lewis, who purchased shares of Syntex stock between March 1973 and October 1975, brought a similar class action suit against Syntex, its officers, and IBT. In December 1977, Henry Lloyd brought another class action suit against Syntex, its officers, and IBT, alleging that he purchased options in Syntex stock. Lloyd, Lewis, and Desimone all alleged that IBT's failure to report its improper testing procedures constituted a violation of section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. sec. 78j(b) (1982)) and that the violation caused them to incur substantial economic losses. IBT forwarded summonses and complaints to F&C in the Desimone, Lewis, and Lloyd suits. F&C refused the tender of defense, and it notified IBT that the allegations of the complaints were not covered by the insurance policy.

Syntex sued IBT for profits lost due to IBT's breach of its contractual obligation to perform tests properly. It alleged that IBT failed to perform some tests and submitted fictitious data for those tests, and it also alleged that "IBT made a number of clerical and recording errors . . . attributable to animal misidentification." F&C did not accept IBT's tender of defense of the suit. IBT settled all of the claims related to Syntex in February 1979.

Between 1977 and 1981, Xttrium Laboratories, Inc., Wesley-Jessen, Inc., Sandoz, Inc., Mobay Chemical Corporation, Ciba-Geigy Corporation, Olin Corporation, and Chevron Chemical Company filed suits against IBT and Nalco. Each plaintiff corporation stated a cause of action for breach of contract based on allegations that IBT performed tests improperly and IBT submitted incomplete and inaccurate test results. The plaintiffs

of the tenders of defense. IBT settled all of the lawsuits by early 1983. In a criminal action stemming from charges related to the 11 lawsuits, the president and three other employees of IBT were convicted of scheming to defraud IBT's clients and several government agencies. Three of those convictions have been affirmed on appeal. United States v. Keplinger (7th Cir. 1985), 776 F.2d 678, 683, cert. denied (1986), 476 U.S. 1183, 91 L. Ed. 2d 548, 106 S. Ct. 2919.

At a hearing on F&C's and IBT's motions for summary judgment, defendants conceded that the comprehensive general liability policy did not cover any of the 11 lawsuits, but they maintained that the laboratory endorsement provided coverage. The laboratory endorsement, which is captioned "MEDICAL OR X-RAY LABORATORIES -- PROFESSIONAL LIABILITY," states:

"This endorsement modifies such insurance as is afforded by the provisions of the policy ...


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