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June 16, 1989


The opinion of the court was delivered by: SHADUR


 Evanston Insurance Company ("Evanston") seeks a declaration that the Insurance Companies and Affiliates Errors and Omissions Policy (the "Policy") it issued to Security Assurance Company ("Security") does not cover certain claims made against Security. Evanston has now moved for summary judgment under Fed.R.Civ.P. ("Rule") 56. For the reasons stated in this memorandum opinion and order, its motion is granted.

 Facts *fn1" and Prior History

 Levine claims that in September 1982 Security agreed to "front" the program for American Benefits (id. 8). That would involve Security's issuance of a master insurance policy to American Benefits Trust, providing coverage to all the participants in the group program (id.). *fn3"

 On September 23, 1982 Security President Frank Barrett ("Barrett") telexed Levine that Security was withdrawing from negotiations and would not agree to issue the policy covering participants in the American Benefits Trust programs (12(l) para. 13 *fn4" ). Next day Levine responded with this telex (12(l) App. J *fn5" ):

This is to advise that ABL [American Benefits] finds SACS [Security's] notice of termination of major medical coverage for the ABT [American Benefits Trust] communicated to Global Surplus and Whitcomb Surplus to be totally unacceptable.
Security has entered into a binding contract with American Benefits to provide major medical coverage to the American Benefits Trust for a period of three months effective August 1, 1982 and terminating October 31, 1982. There is ample evidence to prove the existence of this agreement, which is most recently referred to in letters from Security's President Frank J. Barrett, dated September 14, 1982 to Martin Levine, President of American Benefits and to John Faber, General Counsel for the California Department of Insurance.
This will serve as notice that: 1) all conditions precedent to this contract have been met 2) a binding contract is in effect 3) American Benefits stands ready, willing and able to perform under the contract and 4) American Benefits will hold Security directly liable for any resulting damages if the terms of the contract are not specifically performed by Security.

 Barrett acknowledges receiving that telex (12(l) para. 14). Later that same day Barrett also received this telex (12(l) App. K) from Edward Hurley ("Hurley"), President of American Diversified Life Insurance Company ("American Diversified") *fn6"

This is to advise that American Diversified Life Insurance Company will hold Security Assurance Company directly liable for any damages sustained by American Diversified Life Insurance Company as a result of Security Assurance Company's breach of contract with American Benefits Limited.

 Still on September 24 (a busy day indeed) Levine called Evanston Executive Vice President Paul Bonn ("Bonn") (12(l) para. 16). Following that conversation, Bonn prepared this file memorandum (12(l) App. L):

I received a telephone call from Martin Levine, President of the captioned company, regarding our wire yesterday terminating negotiations with his company for a book of major medical A & H in California. Mr. Levine was upset at our decision to terminate negotiations and intimated that several lawsuits involving the parties would follow. He expressed the hope to avoid those legal costs by having us reconsider our decision and accept the risk as it had been proposed earlier.
I reiterated our position to Mr. Levine that we did not have a contract in force with his company. I also stated that it was highly unlikely that we would reconsider our business decision and I was sorry he felt the need for a lawsuit but that he should do whatever he feels is necessary and we will do the same. He asked that I convey his feelings to Frank J. Barrett, which I have done and we will await further developments.

 Barrett reviewed that memorandum the same day. Barrett also advised Security Vice Chairman Robert Godfrey ("Godfrey") of Levine's telex not later than September 30 (12(l) para. 18).

 On October 12 Bonn received a call from Claude Dorais ("Dorais"), a lawyer representing several entities (agents) that had placed business with American Benefits in the belief that Security was the carrier (Dorais Dep. 16; Bonn Dep. 68-69). Dorais told Bonn that if his information was correct "Security was clearly on the risk" (Dorais Dep. 17). Bonn denied any liability and reported the conversation to Barrett (Bonn Dep. 69).

 Dorais then wrote to Bonn on October 20, outlining why he believed Security was responsible. He added (12(l) App. M):

From the information I have, it appears to me that Security Assurance and its parent, Central National, are responsible for claims incurred under the ABA program of benefits for the period of time commencing August 1, 1982, through October 31, 1982.
* * * *
Based on the information which I have, it seems that Security is on the risk and that any delay by Security in fulfilling its obligations only increases the ultimate cost to Security.
I recognize that you may disagree with my conclusion or my analysis in that there may be additional facts of which I'm not aware. That's why I called you in the first place and that's why I'm anxious to talk to your counsel. There are thousands of participants out here in California, Mr. Bond [sic], that are being pursued by hospitals, physicians, and other providers of medical services for bills which they never thought they would have to pay. All of these participants are potential plaintiffs and it seems to me that it is in our mutual best interests to proceed quickly to consider the validity of these claims and the obligations Security Assurance has.

 On October 25 Security's outside counsel Arthur Karma ("Karma") responded to Dorais' letter. Karma denied Security was in any way liable. He said no contract between Security and American Benefits existed because:

1. several express conditions precedent had not been met and
2. American Benefits had made "major material misrepresentations" during the negotiations.

 Karma concluded (12(l) App. N, at 3):

Please take notice therefore that [Security] will vigorously defend any actions which are brought against it as well as pursuing any claims for affirmative relief to which it feels it is entitled.

 On October 25 the Los Angeles Times published an article identifying several insurance companies, including Security, that might be liable to American Benefits' participants. Bonn was quoted in that article, a copy of which he received on October 25 (12(l) para. 24 and Apps. O, P).

 On October 29 Godfrey signed the application (the "Application") on Security's behalf requesting issuance of the Evanston Policy. Among the questions Godfrey answered were these (12(l) App. A):

10. If insurance had been in force similar to that proposed under this Part of the Application, no claim(s) which would have fallen within the scope of such insurance has (have) been made or is (are) now pending against any person(s) or entity(ies) proposed for this insurance except as follows: (If answer is NONE, so state.)
* * * *
12. No person(s) or entity(ies) proposed for this insurance is (are) cognizant of any act, error, or omission which he (they) has (have) reason to suppose might afford valid grounds for any future claim(s) such as would fall within the scope of the ...

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