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SCHWINN CYCLING & FITNESS, INC. v. HARTFORD ACCIDE

September 30, 1994

SCHWINN CYCLING & FITNESS, INC., a Delaware corporation, Plaintiff,
v.
THE HARTFORD ACCIDENT AND INDEMNITY COMPANY, a Connecticut corporation, Defendant.



The opinion of the court was delivered by: CHARLES RONALD NORGLE, SR.

 CHARLES R. NORGLE, SR., District Judge:

 Before the court are the cross-motions of plaintiff Schwinn Cycling & Fitness, Inc. ("Schwinn") and defendant The Hartford Accident and Indemnity Company ("Hartford") for summary judgment. For the following reasons, Schwinn's motion is granted and Hartford's motion is denied.

 FACTS *fn1"

 On October 18, 1986, Michael Campbell ("Campbell") sustained disabling injuries while riding a Schwinn bicycle. As a result of his injuries, Campbell filed a product liability lawsuit in the District Court of Johnson County, Kansas ("Campbell Litigation"). At the time of Campbell's accident, Schwinn possessed several layers of excess liability insurance. Each policy representing each layer of insurance coverage contained varying terms of responsibilities, obligations, and limitations. Columbia Casualty Company ("Columbia") issued the policy which provided the first layer of excess insurance ("Columbia Policy"). Under the terms of the Columbia Policy, Columbia agreed to indemnify up to $ 750,000 over and above Schwinn's self-insured retention limit of $ 250,000, subject to an aggregate limit of $ 750,000 for all occurrences during a policy year. Columbia, however, did not assume a duty to provide legal defense.

 Great American Surplus Lines Insurance Company ("Great American") provided the second layer of excess insurance ("Great American Policy") in the amount of $ 2 million over and above Columbia's coverage, subject to $ 2 million aggregate limit. Unlike the Columbia Policy, the Great American Policy assumed the duty to provide legal defense to Schwinn, under certain circumstances, in the event of a lawsuit against Schwinn. Under the terms of the Great American Policy, the duty to defend Schwinn, however, terminates when its coverage limits are exhausted.

 Hartford provided the third layer of excess insurance coverage, in the amount of $ 3 million over and above the coverage of the Great American Policy, subject to $ 3 million aggregate limit. With respect to defense costs, the policy obligates Hartford to make proportional contribution if certain contingencies precipitate.

 On July 21, 1992, the interested parties in the Campbell Litigation settled the dispute in the amount of $ 5,169,916 ("Campbell Settlement"). The affected insurance companies, Columbia, Great American, and Hartford, all approved the terms of the settlement and paid the amount each insurance company owed. Hartford paid 52.224 percent of the settlement amount, or $ 2,699,916.00.

 In connection with the Campbell Litigation, Schwinn incurred in excess of $ 1.5 million in defense costs, including fees for attorneys, court reporters, and expert witnesses. Following the settlement on July 21, 1992, Schwinn demanded that Columbia, Great American, and Hartford pay defense costs in equal proportion to each insurer's contribution to the settlement amount. Columbia and Great American agreed to the demand and paid defense costs accordingly. Hartford, on the other hand, rejected Schwinn's demands. Hartford responded that it never assumed the defense of the Campbell Litigation and has no legal obligation to reimburse Schwinn under the terms of its policy.

 In response to Hartford's refusal to pay, Schwinn filed a two-count complaint demanding the sum of $ 918,131.37 plus pre-judgment interest from the date the defense-cost contribution was due and owing. Schwinn asserts that under the terms of the Hartford Policy, Hartford agreed to pay a pro rata share of the defense costs. Hartford defends that it has no obligation to indemnify under the terms of the policy because Schwinn's defense costs were covered in their entirety by the underlying insurance, the Columbia Policy and the Great American Policy.

 DISCUSSION

 Resolving coverage disputes that arise between an insured and insurer is often like working on a jig-saw puzzle. The parties invariably agree on the pieces to be assembled, but they disagree on the picture the puzzle will represent once the pieces are fitted together. With a jig-saw puzzle, the pieces are placed by their shapes, sizes and colors. With a coverage dispute, the court is supplied with instructions, in the form of insurance policy terms, on how the pieces are to be arranged. Both Schwinn and Hartford agree on the relevant pieces the court must assemble and the policy terms the court must follow in resolving their dispute. The end result is a picture showing either an obligation to indemnify Schwinn or a proper basis for refusing to indemnify. In this case, the assemblage of the relevant pieces demonstrates that Hartford is under a contractual obligation to indemnify Schwinn for its pro rata share of the defense costs.

 Rule 56(c) of the Federal Rules of Civil Procedure provides that a summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c); Transportation Communications Int'l Union v. CSX Transp., Inc., 30 F.3d 903, 904 (7th Cir. 1994). Summary judgment is not a discretionary remedy and must be granted when it is warranted. Jones v. Johnson, 26 F.3d 727, 728 (7th Cir. 1994) (per curiam). Even though all reasonable inferences are drawn in favor of the party opposing the motion, Associated Milk Producers, Inc. v. Meadow Gold Dairies, 27 F.3d 268, 270 (7th Cir. 1994), presenting only a scintilla of evidence will not suffice to oppose a motion for summary judgment, Walker v. Shansky, 28 F.3d 666, 671 (7th Cir. 1994).

 In this case, the material facts are not in dispute and the adjudication of the coverage issue hinges on the interpretation of the policy terms governing defense costs. In adjudicating the issue before the court, the court will apply and follow the law of Illinois. The court has diversity jurisdiction over the instant action. See 28 U.S.C. ยง 1332. It is a well settled principle that a court exercising diversity jurisdiction and sitting in the State of Illinois must apply Illinois' choice-of-law rules. Boggs v. Adams, 838 F. Supp. 1293, 1295 (N.D. Ill. 1993); Colonial Penn Life Ins. Co. v. Assured Enter., Ltd., 151 F.R.D. 91, 95 (N.D. Ill. 1993). The choice-of-law rules of Illinois require the court to follow the "most significant contacts" approach in identifying the applicable state law in contract disputes. Palmer v. Beverly Enter., 823 F.2d 1105, 1109 (7th Cir. 1987); Continental Casualty Co. v. Armstrong World Indus., Inc., ...


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