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Old Republic Insurance Co. v. Chuhak & Tecson

June 3, 1996

OLD REPUBLIC INSURANCE COMPANY, PLAINTIFF-APPELLEE, CROSS-APPELLANT,

v.

CHUHAK & TECSON, P.C., EDWIN JOSEPHSON, AND MICHAEL KEARNS, DEFENDANTS-APPELLANTS, CROSS-APPELLEES. OLD REPUBLIC INSURANCE COMPANY, PLAINTIFF-APPELLANT,

v.

CHUHAK & TECSON, P.C., EDWIN JOSEPHSON, AND MICHAEL KEARNS, DEFENDANTS-APPELLEES.



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 93 C 4407--Charles R. Norgle, Sr., Judge. No. 95-4093 Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 95 C 4941--Milton I. Shadur, Judge.

Before POSNER, Chief Judge, and CUMMINGS and COFFEY, Circuit Judges.

POSNER, Chief Judge.

ARGUED APRIL 17, 1996

DECIDED JUNE 3, 1996

We have consolidated for argument and decision the appeals in two cases, virtually identical, mysteriously assigned to two different judges of the same district court--who reached opposite results, the second judge disagreeing so violently with the first that he imposed sanctions on the plaintiff in the second case for relying on the first judge's opinion.

The cases are diversity suits governed by Illinois law. They involve a dispute between an insurance company, Old Republic, on the one hand, and, on the other, a lawyer named Josephson; the law firm, Chuhak & Tecson, of which he was a member; and an individual named Michael Kearns, who has sued Josephson for legal malpractice. A narrative of the events leading up to the district judges' decisions will quickly disclose the proper disposition of the appeals.

Kearns, injured in a construction accident in 1986, retained Josephson, who was then a partner in the law firm of Mass, Miller and Josephson, to prosecute a tort claim estimated by Kearns to be worth several hundred thousand dollars. In 1989 Josephson left Mass, Miller and Josephson and became a partner in Chuhak & Tecson. Old Republic had insured Chuhak & Tecson, along with any person, such as Josephson, "who is or becomes a partner, officer, director or employee" of Chuhak & Tecson, against liability claims made during the policy period that arose out of professional services rendered by such persons "in connection with [Chuhak & Tecson's] practice of law."

In 1991, Kearns brought a suit for malpractice against Josephson in an Illinois state court, claiming that Josephson had failed to file suit on Kearns's tort claim within the two-year statute of limitations for filing such a suit, which had expired in 1988. Josephson tendered the defense of the claim to Old Republic. Old Republic responded by filing a suit in federal district court against Josephson, Chuhak & Tecson, and Kearns, seeking a declaration that it was not required to defend Josephson because his alleged malpractice in failing to file a timely suit on Kearns's behalf had occurred before he joined Chuhak & Tecson and hence could not have arisen out of professional services in connection with that firm's practice of law. This, the first of the two suits that these appeals bring before us, was assigned to Judge Norgle. Defending against the suit, Chuhak & Tecson pointed out that Kearns's complaint was probably in error in alleging that the applicable statute of limitations was two years; it was four. This would mean that the claim for malpractice had not arisen until 1990 (when the time for filing Kearns's suit expired), by which time Josephson was practicing with Chuhak & Tecson. Judge Norgle nevertheless granted summary judgment for Old Republic. His ground was that there had been no showing that Kearns had ever become a client of Chuhak & Tecson; and if he had not, then Josephson's alleged malpractice was not "in connection with" the firm's practice of law and so was not covered by the policy. The defendants appealed, while Old Republic filed a conditional cross-appeal complaining of an order by Judge Norgle that had prevented it from conducting discovery aimed at uncovering the details of Josephson's employment contract with Chuhak & Tecson. These are the appeals numbered 95-1638, 95-1663, and 95-1779 in this court.

Judge Norgle rendered his decision in 1994. The following year Kearns dismissed the state court suit against Josephson that he had filed in 1991, but within a few days he filed a fresh suit, much like the old, against Josephson. The new suit acknowledged the applicability of the four-year statute of limitations, thus pushing the alleged malpractice into the period in which Josephson was a member of Chuhak & Tecson, and alleged "that after his association with the firm of Chuhak & Tecson, defendant, Edwin Josephson, committed the acts or omissions described in this complaint as an agent and/or employee of the firm of Chuhak & Tecson." Josephson tendered the defense of Kearns's new suit to Old Republic, which responded by filing its second declaratory judgment suit, relying on Judge Norgle's decision in the first suit. This second suit was randomly assigned to Judge Shadur, who turned down Old Republic's motion to transfer it to Judge Norgle on the ground that although the suits were related, the rules of the U.S. District Court for the Northern District of Illinois forbid assigning a related case to the same judge if the case before that judge is no longer "pending." N.D. Ill. R. 2.31(b)(1). But the first suit was pending, albeit in our court rather than in the district court. (We have found no case discussing the meaning of "pending" in the rule.) Having refused to relinquish the case, Judge Shadur, emphasizing the language that we have quoted from the complaint in Kearns's new suit, quickly disposed of it, holding that Old Republic is obligated to defend Josephson against the suit and sanctioning Old Republic for filing the second declaratory judgment action in bad faith. Old Republic appeals from both the judgment on the merits and the imposition of sanctions. This is the appeal numbered 95-4093.

Primarily as a result of Judge Shadur's refusal to transfer the second case to Judge Norgle, we have had to wade through 286 pages of briefs in a straightforward dispute over the obligation to defend under an insurance policy. And we have had to endure the spectacle of one judge imposing sanctions on a party for relying on the opinion of another judge of the same court in a nearly identical case. A procedure at once so redundant and so unseemly mocks the efforts of the federal judiciary to reassure skeptics that we are trying with some success to achieve expedition and economy in the judicial process. The doctrine of collateral estoppel, which requires only a judgment that is final in the court rendering it, and not a judgment that is final after exhaustion of appellate remedies, Prymer v. Ogden, 29 F.3d 1208, 1213 n. 2 (7th Cir. 1994); Williams v. Commissioner, 1 F.3d 502, 504 (7th Cir. 1993), might have abbreviated the second suit; but Old Republic has not pleaded collateral estoppel, so the issue is waived.

The appeals from Judge Norgle's decision in Old Republic's first declaratory judgment suit may appear to be moot because the suit that Josephson wanted Old Republic to defend, Kearns's 1991 suit against him, has been dismissed. There is no longer anything to defend. But Josephson argues that he incurred substantial costs of defending the suit before it was dismissed. If Old Republic had a duty to defend that suit, it has a duty to reimburse Josephson for those costs. So Old Republic's suit, while moot insofar as any further duty to defend against Kearns's 1991 suit is concerned, is not moot concerning responsibility for the costs of defense already incurred.

We think that Old Republic did have a duty to defend that suit, and hence that Judge Norgle's decision to the contrary was erroneous. The duty to defend imposed by liability insurance contracts that obligate the insurer to bear the expense of defending as well as indemnifying the insured against claims of liability has been interpreted to be broader than the duty to indemnify. Crum & Forster Managers Corp. v. Resolution Trust Corp., 620 N.E.2d 1073, 1079 (Ill. 1993); Transcontinental Ins. Co. v. National Union Fire Ins. Co., 662 N.E.2d 500, 508 (Ill. App. 1996). If the suit against the insured contains claims arguably covered by the policy, the insurance company must defend. The burden on the insured would be great if he had to pay a lawyer both to defend himself against the liability claim and litigate close questions of coverage with the insurer.

Kearns's 1991 suit named as the defendant a lawyer employed by Chuhak & Tecson and hence presumptively insured under the policy that Old Republic had issued to the firm. The suit seemed, however, to relate to an act of malpractice committed in 1988 and hence before the defendant joined Chuhak & Tecson, for by 1988 two years had elapsed from the date of Kearns's accident without Josephson's having sued on his behalf, and a claim for malpractice based on failing to sue within the statute of limitations accrues when the period allowed by the statute of limitations for suit expires.

Old Republic therefore had a solid basis for seeking a declaration that it had no duty to defend because the alleged malpractice was clearly beyond the scope of the policy. But when the insured countered with evidence that the applicable statute of limitations was four years, not two, the picture changed. Kearns could easily amend, and could be expected to amend, his complaint to change the date of the alleged malpractice from 1988 to 1990, after Josephson became an insured under the policy. In fact Kearns did this, in an amended complaint filed in the 1991 suit before he, for reasons that are unclear to us, dropped that suit and instituted a new one in 1995. All that Old Republic was left to argue was that maybe Josephson, even after joining Chuhak & Tecson, hadn't represented Kearns "in connection with" Chuhak & Tecson's business. Maybe representation of Kearns was a frolic of Josephson's own. Maybe. But a maybe doesn't cancel the duty to defend. The administration of legal malpractice insurance would be greatly encumbered if every time an employee of an insured firm, and hence an additional insured, tendered a defense to the insurer, the insurer filed a declaratory judgment suit to explore the (remote) possibility that the employee had not been acting within the scope of his employment when he committed the alleged act of malpractice. And not only malpractice insurance. If a truck driver while driving one of his employer's trucks runs down a pedestrian and the employer tenders the defense of the pedestrian's claim to its liability insurer, the latter will not be warranted in filing a declaratory judgment action to determine whether the driver might have been on a frolic or detour of his own, unless there is a good reason to suspect that. (Oddly, there is authority in Illinois that an automobile liability insurance policy ...


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