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TransAmerica Insurance Co. v. South


July 16, 1996








Appeal from the United States District Court for the Southern District of Illinois.

No. 94 C 74--William D. Stiehl, Judge.

Before BAUER, CUDAHY, and FLAUM, Circuit Judges.

CUDAHY, Circuit Judge.



This case brings before this court for the second time issues relating to the coverage of an insurance policy issued by Transamerica Insurance Company to Phoenix Home Life Mutual Insurance Company (formerly Home Life Insurance). *fn1 Transamerica's policy insured Phoenix's agents against liability for various acts or omissions committed in the course of their professional activities on behalf of Phoenix. The problems leading to this declaratory judgment action began when one of Phoenix's agents, Ronald South, sold life insurance policies issued by First Columbia Life Insurance Company to various Illinois residents. South had his office in an agency owned by David Domnick, who supervised South's work. South, however, was directly employed by Phoenix. In 1988, First Columbia became insolvent and it was then discovered that, because First Columbia had not been authorized to do business in Illinois, the policies sold by South were not backed by the Illinois Guaranty Fund.

Various lawsuits resulted, including this declaratory judgment action by Transamerica seeking to define the scope of its coverage of negligent acts committed by Phoenix employees. In an earlier opinion in this case, we held that an exclusion in the policy relieved Transamerica of any duty to indemnify South himself against damage claims. Transamerica Ins. Co. v. South, 975 F.2d 321 (7th Cir. 1992) (South I). The relief requested here is a declaratory judgment that Transamerica has no duty to indemnify Domnick or his agencies in any actions involving his supervision of South in the sale of the Columbia Life policies. Transamerica named various defendants, but did not name Phoenix in the suit. Phoenix successfully moved to intervene and filed a counterclaim. The counterclaim precisely mirrored Transamerica's complaint and requested a declaratory judgment that Transamerica does owe a duty to indemnify Domnick and his agencies in the Columbia Life matters.

Transamerica moved to dismiss the counterclaim, alleging that Phoenix lacked standing. Both Phoenix and Transamerica moved for summary judgment, the only issue being whether the policy issued by Transamerica excluded coverage for claims based on Domnick's allegedly negligent supervision of South. The district court denied the motion to dismiss, but granted Transamerica's motion for summary judgment and denied Phoenix's motion on the merits.

We affirm the determination that Phoenix has standing to pursue the claim, but reverse the district court's grant of summary judgment for Transamerica and its denial of summary judgment for Phoenix.

I. Factual Background

For a period from May 1, 1986, to May 1, 1989, Phoenix agents were covered by a "Life Agents Errors and Omissions Policy" issued by Transamerica. The policy covered "all Agents, General Agents or Managers" of Phoenix for, among other things:

sums which the INSURED shall become legally obligated to pay as DAMAGES because of: A. Any act, error or omission of the INSURED, or any person for whose acts the INSURED is legally liable in rendering or failing to render PROFESSIONAL SERVICES for others. . . .

. . .

D. Any actual or alleged failure of a General Agent or Manager covered by this Policy to supervise, manage or train any INSURED. Phoenix App., Part 3 at 1-2.

The coverage was made subject to various exclusions, including the one at issue here:

XII. Any claim arising out of insolvency, receivership or bankruptcy of any organization (directly or indirectly) in which the INSURED has placed or obtained coverage or in which an INSURED has placed the funds of a client or account. Id. at 9.

Both South and Domnick were agents of Phoenix covered by the policy. Domnick owned his own agency, known as First Financial Group of Springfield, Inc. (FFG), which sold Phoenix insurance. South, though employed directly by Phoenix rather than by Domnick's agency, worked out of Domnick's offices and was supervised by Domnick. As already noted, South sold Columbia Life policies to a number of customers. These sales were not authorized by Phoenix, nor was Domnick aware of them. When Columbia Life became insolvent and the purchasers discovered that their policies were not backed by the Illinois Guaranty Fund, a number of lawsuits were filed in state court. Some of these lawsuits named FFG as a defendant and alleged that FFG negligently supervised South.

In an earlier declaratory judgment action, we affirmed the district court's determination that Transamerica had no duty to indemnify South in these suits. South I. Our decision in that earlier appeal was based on the insolvency exclusion. We held that because the claims "ar[ose] out of insolvency . . . of [an] organization . . . in which [South] ha[d] placed or obtained coverage," the insolvency exclusion barred any attempt by South to obtain indemnification from Transamerica under the policy. That earlier case turned on the interpretation of the phrase "arising out of insolvency." There we concluded that South's negligence was not an independent cause of his customers' losses, so that the insolvency exclusion applied to claims against him.

II. Standing of Phoenix to Appeal

The district court both granted Phoenix's petition to intervene as a defendant in Transamerica's original action and found that Phoenix had standing to bring its counterclaim. The standing determination was based on the district court's finding that "Phoenix has paid Domnick's costs of defense and settlement in several lawsuits, and has properly alleged that it is subrogated to Domnick's rights by operation of law and by contract." Dist. Ct. Op. at 3. On appeal, Transamerica does not directly attack those decisions, but challenges Phoenix's standing to appeal the judgment entered below. Transamerica alleges that Phoenix's interest in this litigation is "conjectural and hypothetical," since Phoenix has not shown that it had a duty to indemnify Domnick. Thus, Transamerica argues, Phoenix fails to meet the Article III injury-in-fact requirement of an actual or threatened injury which is "concrete and particularized." See Matter of FedPak Systems, Inc., 80 F.3d 207, 212 (7th Cir. 1996), citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992). Phoenix responds that, because Transamerica did not object to Phoenix's original intervention in the case, it has waived its right to object to Phoenix's standing to appeal the judgment below. Alternatively, Phoenix argues that, because it was properly allowed to intervene in the action below and will be bound by the judgment rendered, it fulfills the requirements for standing to appeal.

To begin the analysis, we distinguish three distinct but related concepts: intervention pursuant to Federal Rule of Civil Procedure 24; Article III standing to pursue the original controversy; and Article III standing to appeal the judgment below. Phoenix is correct that the issue of intervention has been waived. However, since standing is a jurisdictional matter, this court must determine whether Phoenix had standing to bring its counterclaim and whether Phoenix has standing to pursue this appeal, regardless of Transamerica's waiver.

It is well-established that permission to intervene in a district court action does not automatically confer standing to appeal. Diamond v. Charles, 476 U.S. 54 (1986). The analysis of standing to appeal focuses on "injury caused by the judgment rather than injury caused by the underlying facts. . . . [S]tanding to appeal is recognized if the appellant can show an adverse effect of the judgment." Wright, Miller & Cooper, Federal Practice and Procedure: Jurisdiction 2d sec. 3902. Thus even a party who has properly intervened in a case may not appeal a judgment from which he or she suffers no adverse effects.

The relationship between the Rule 24 requirements for intervention and the constitutional test for standing to pursue the original action is more murky. The issue "[w]hether one who lacks standing in her own right may intervene in litigation that is a 'case' or 'controversy' by virtue of concrete disputes among other persons," Moy v. Cowen, 958 F.2d 168, 170 (7th Cir. 1992), is unsettled in this circuit and has been expressly held open by the Supreme Court, Diamond, 476 U.S. at 68-69, as well. See also Bethune Plaza, Inc. v. Lumpkin, 863 F.2d 525, 531 (7th Cir. 1988). *fn2

It is thus perhaps conceivable that a person lacking standing to bring suit below, yet properly permitted to intervene, might have standing to appeal a judgment which adversely affected him or her.

As it turns out, we may once again postpone resolving these interesting questions to another day. The district court properly found that Phoenix had standing to bring its counterclaim. Since the counterclaim raises exactly the same issues as Transamerica's claim (as to which Phoenix is defendant-intervenor), Phoenix perforce satisfies the Article III standing requirements respecting that claim as well. Because Phoenix is expressly bound by the adverse judgment rendered on both claims, Phoenix has standing to bring this appeal.

The district judge found that Phoenix has "paid Domnick's costs of defense and settlement in several [state court] lawsuits, and has properly alleged that it is subrogated to Domnick's rights by operation of law and by contract." Dist. Ct. Op. at 3. Transamerica does not contest these findings, nor has it ever contested the allegations supporting them, which are contained in Phoenix's Counterclaim, paras. 23-27, R. 21. Instead, Transamerica focuses on the allegedly "hypothetical" and "conjectural" nature of Phoenix's duty to indemnify Domnick.

Because this case comes to us pursuant to our diversity jurisdiction, we rely on Illinois law in evaluating Phoenix's assertion that it is subrogated to Domnick. If Phoenix is subrogated to Domnick for liabilities properly the obligation of Transamerica, then Phoenix had Article III standing in the lower court and has standing to pursue its appeal in this court. Under Illinois law, "the doctrine of subrogation is broad enough to include every instance in which one person, not a mere volunteer, pays a debt for which another is primarily liable and which in equity and good conscience should have been discharged by the latter." American Nat'l Bank and Trust Co. of Chicago v. Weyerhaeuser Co., 692 F.2d 455, 460 (7th Cir. 1982), citing Bost v. Paulson's Enterprise, Inc., 343 N.E.2d 168 (Ill. App. 2 Dist. 1976); King v. King, 373 N.E.2d 1313 (Ill. App. 2 Dist. 1976); Dworak v. Tempel, 161 N.E.2d 258 (Ill. 1959). The record contains the undisputed affidavit of James J. Gadrowski, counsel for Phoenix, that "Domnick has made a demand on Phoenix that it indemnify him for all losses, costs and expenses incurred in his defense of the State Court Actions." para. 12 Gadrowski Aff., R. 13. Further, Phoenix alleges in its counterclaim that it has already paid the costs and expenses of some of those actions. para. 24, R. 21. Even apart from Phoenix's assertion that it is subrogated to Domnick by contract, the fact that Phoenix has purportedly already paid some of the charges that it argues should have been paid by Transamerica is a sufficient allegation of common law subrogation, unless Phoenix acted as a "mere volunteer" in doing so.

The general rule is that "anyone who is under no legal obligation or liability to pay the debt, is . . . a mere volunteer." Weyerhaeuser, 692 F.2d at 463. Consistent with Illinois policy favoring subrogation, Illinois courts interpret the requirement of "legal obligation or liability" generously, including potential liability within its scope. "[T]he potential for legal liability to the subrogor, as well as the disruption of normal relations and the frustration of reasonable expectations can, in many cases, supply sufficient compulsion to support subrogation." Id. Here, Phoenix had been subjected to a formal demand that it indemnify Domnick against liability in the state court actions stemming from the Columbia Life mishap and has paid out funds in response to that potential liability. Thus, Phoenix was not a mere volunteer in making payments on Domnick's behalf.

Transamerica cites three cases in support of its argument that, because Phoenix holds only an "indirectly pecuniary" interest in the case, Phoenix did not suffer injury from the judgment sufficient to confer standing to appeal. None of these cases was in a procedural posture comparable to that presented here. Two of the cited cases involved parties seeking to appeal judgments rendered against others. Evanston Insurance Co. v. Fred A. Tucker & Co., Inc., 872 F.2d 278, 280 (9th Cir. 1989) (the underlying declaratory judgment order "did not resolve claims by or against [the parties seeking to appeal]; the judgment did not mention them"); Libby, McNeill, and Libby v. City National Bank, 592 F.2d 504 (9th Cir. 1979) (similarly involving an attempt by a party to appeal a judgment which had been entered against someone else). The third case involved an attempt by an insurer to intervene, not in an action to determine the scope of insurance coverage, but in the underlying liability determination. Travelers Indemnity Co. v. Dingwell, 884 F.2d 629 (1st Cir. 1989). Travelers Indemnity did not present an issue of standing, but was decided under Rule 24. Further, the court specifically suggested that "the proper place to raise [the coverage issues] is during an action to determine whether the claim is covered by the policy." Id. at 639-40.

The present declaratory judgment action is, of course, intended to determine the scope of coverage of the policy, rather than to resolve any underlying liability questions. Additionally, the declaratory judgment order explicitly rendered judgment against Phoenix. The judgment resolved not only the claims in which Phoenix was an intervenor-defendant, but also Phoenix's counterclaim against Transamerica and would certainly have preclusive effect in any attempt by Phoenix to recover from Transamerica at a later date for its payment of Domnick's liabilities and litigation expenses.

Thus, because Phoenix alleged an interest in the matter sufficient for Article III standing in the district court and because it has been aggrieved by the judgment entered against it, Phoenix has standing to bring this appeal.

III. The Exclusion Clause

Our prior decision in this matter dealt extensively with the interpretation of the insolvency exclusion clause. That opinion focused on the phrase "arising out of insolvency," relying on tort principles of proximate cause to analyze whether the losses to the purchasers of Columbia Life policies were independently caused by South's negligence in failing to investigate properly whether the policies were adequately guaranteed. At the time of that earlier opinion, Illinois case law on the interpretation of insurance exclusions was confusing, with disparate results reached in similar cases. Since that time, Illinois law has been clarified immensely by two recent Illinois appellate court decisions. Oakley Transport, Inc. v. Zurich Insurance Co., 648 N.E.2d 1099 (Ill. App. 1 Dist. 1995); Allstate Insurance Co. v. Smiley, 659 N.E.2d 1345 (Ill. App. 2 Dist. 1995). We believe the approach of these courts is likely to be followed by the Illinois Supreme Court. These two cases conclude that the importation of tort principles of proximate cause into the construction of insurance policies is inappropriate. Rather, they suggest, policies should be interpreted in accordance with contract principles, so as to give effect to the intent of the parties. Therefore, policies should be construed according to the plain meaning of the terms used.

These more recent cases reinforce our view that the losses in this case "arise out of the insolvency" of Columbia Life. These losses would not have occurred had Columbia Life not become insolvent. In common parlance, they arise out of that insolvency whether the legal claim under consideration is based on South's negligence or Domnick's negligent supervision. Relying on a similar analysis of the "arising out of" language, the district court granted summary judgment to Transamerica and declared that Transamerica has no duty to indemnify Domnick or his agencies.

However, the determination that claims against Domnick also arise out of the insolvency of Columbia Life does not end the matter. The exclusion applies only to "claim[s], arising out of insolvency . . . of any organization (directly or indirectly) in which the INSURED has placed or obtained coverage." When we considered this exclusionary clause in our earlier opinion we did not need to tarry over the question whether Columbia Life is an organization "in which the INSURED has placed or obtained coverage." The claims in that case were against South who, clearly, had "placed or obtained coverage" in Columbia Life for his customers. Domnick, in contrast, has never "placed or obtained coverage" in Columbia Life for anyone. The question thus arises whether this exclusion applies to Domnick, as it does to South.

The general principle of Illinois law underlying the interpretation of exclusionary clauses in insurance policies is that such clauses are to be construed against the insurer if there is any ambiguity in their language. As we said in our earlier opinion: "(1) the insured's intent in purchasing an insurance policy is to obtain coverage, therefore any ambiguity jeopardizing such coverage should be construed consistent with the insured's intent, and (2) the insurer is the drafter of the policy and could have drafted the ambiguous provision to be clear and specific." South I, 975 F.2d at 327.

At best, the insolvency exclusion here is ambiguous as to whether coverage must have been placed in the insolvent organization by the particular insured against whom legal claims have been brought. This alone would be sufficient grounds to apply the general rule and construe the provision in Domnick's (and, hence, Phoenix's) favor. However, we need not rely solely on this general principle. Two cases have already applied Illinois law to the very linguistic issue presented here. These cases established the distinction between an exclusion which employs an indefinite modifier such as "an" or "any" to modify "insured" and one which uses the definite article in the phrase "the insured." Thoele v. Aetna Casualty & Surety, 39 F.3d 724, 727 (7th Cir. 1994) ("choice of the word 'any' broadened the exclusion to include injuries triggered by one insured in connection with the business pursuit of another"); Smiley, 659 N.E.2d at 1352-53 ("use of the term 'the insured' in an exclusionary clause is meant to refer to a definite, specific insured"). Here Transamerica referred to claims arising out of the insolvency of an organization in which "the INSURED placed or obtained coverage." In the present context, "the INSURED" is Domnick, who never placed or obtained coverage in Columbia Life.

Transamerica's arguments to the contrary are not persuasive. First, Transamerica urges us to interpret the phrase "obtained coverage" to cover Domnick's allegedly negligent supervision of South. The proposed interpretation strains the language past the breaking point. The very gravamen of the claims against Domnick is the allegation that Domnick failed to keep close enough track of South's activities and, in fact, did not even know that South was selling Columbia Life policies. To say that Domnick "obtained coverage" in Columbia Life by not knowing that South was obtaining such coverage would certainly be a non sequitur. Such a construction of the exclusion clause is particularly untenable given the general Illinois policy of narrowly interpreting such clauses. Second, Transamerica argues that "[t]he fact that Ronald South constitutes 'the INSURED' within the meaning of the insolvency exclusion is sufficient to bar coverage for 'negligent supervision' claims against Domnick and any other entity alleged to have supervised South's activities." Transamerica Br. at 21. This argument is simply a roundabout way of asking this court to ignore the plain distinction in meaning between the definite article, "the," and the indefinite article, "a," "an" or their variant, "any." We decline this invitation. Third, Transamerica argues that interpreting the exclusion in this way is "irreconcilable with the holdings and rationale of Transamerica, Oakley and [Allstate Insurance Co. v.] Pruitt[, 532 N.E.2d 401 (Ill. App. 1 Dist. 1988)]" because "these decisions recognized that the 'negligent supervision' of an excluded activity is likewise excluded." This argument misses the point, entirely. We agree with Transamerica that claims of negligent supervision against Domnick "arise out of" the insolvency of Columbia Life and that negligent supervision claims are in principle covered by the exclusion (the question which is analogous to those addressed in the cited cases). However, by its plain language the exclusion applies to such claims only when the insured individual against whom the claims are brought placed the coverage in the insolvent company. Transamerica, which drafted the insurance policy, might, of course, have drafted the exclusionary provision more broadly. It didn't, however, and, given the preference to find coverage when an exclusion contains ambiguous language, we will not correct the apparent errors of the drafters.

Therefore, we affirm the determination that Phoenix has standing to bring this appeal, and reverse the summary judgment granted to Transamerica and the denial of summary judgment to Phoenix.

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