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07/18/97 KEVIN GRAEME SMITH AND CERTAIN OTHER

July 18, 1997

KEVIN GRAEME SMITH AND CERTAIN OTHER UNDERWRITERS AT LLOYD'S LONDON, PLAINTIFFS AND COUNTER-DEFENDANTS-APPELLEES,
v.
CARL A. NEUMANN, DEFENDANT AND COUNTER-PLAINTIFF-APPELLANT (ARNSTEIN AND LEHR, DEFENDANTS).



Appeal from the Circuit Court of Du Page County. 96--MR--0082. Honorable John W. Darrah, Judge, Presiding.

Released for Publication August 20, 1997.

The Honorable Justice Hutchinson delivered the opinion of the court. Bowman and Thomas, JJ., concur.

The opinion of the court was delivered by: Hutchinson

The Honorable Justice HUTCHINSON delivered the opinion of the court:

Defendant, Carl A. Neumann, appeals from the order of the circuit court of Du Page County granting summary judgment to plaintiffs, Kevin Graeme Smith and other underwriters at Lloyd's London. On appeal, defendant contends that the trial court erred in finding that the provisions within clause (bb) of plaintiffs' insurance policy precluded defendant from receiving insurance coverage. We affirm.

The record on appeal reveals the following facts. In 1985, defendant was a partner at the law firm of Arnstein & Lehr. One of defendant's clients was Indeck Energy Services, Inc. (Indeck). Defendant provided legal services for Indeck beginning in 1985. While at Arnstein & Lehr, defendant drafted an employment agreement and a shareholders' agreement for Indeck. Shortly thereafter, Indeck hired Michael Polsky to be its chief executive officer. Indeck and Polsky entered into the employment agreement and shareholders' agreement that had been drafted by defendant. The agreement allowed Polsky to acquire stock shares in Indeck.

On November 30, 1987, defendant resigned from Arnstein & Lehr, and on December 1, 1987, defendant became a partner at Keck, Mahin & Cate (Keck). At Keck, defendant continued to perform legal services for Indeck.

In August 1990 Indeck gave Polsky notice of its intent to terminate Polsky's employment, effective in September 1990. In 1991 this employment dispute was submitted to the commercial arbitration tribunal. The arbitration also addressed Polsky's rights under the related shareholders' agreement. Indeck was represented at the arbitration by defendant and another Keck attorney, Steven Adelman.

On November 27, 1991, the arbitrator found that Indeck's termination of Polsky violated the terms of the employment agreement. The arbitrator awarded Polsky approximately $21.6 million in compensatory damages and for redemption of Polsky's Indeck stock pursuant to the shareholders' agreement.

Following the results of the arbitration, in or about April 1992, Indeck terminated the services of Keck, defendant, and Adelman. Indeck also refused to pay outstanding invoices for work performed by defendant and Keck in the Polsky arbitration.

On April 8, 1992, defendant and representatives of Indeck and Keck met at Indeck's offices to discuss Keck's unpaid billing invoices. At that meeting, Indeck claimed that Keck and defendant had committed professional malpractice. Indeck presented Keck and defendant with a written list identifying alleged instances of malpractice. With regard to purported malpractice in professional services performed by defendant while he was employed by Arnstein & Lehr, Indeck alleged with respect to the Polsky matter:

"6. Substance of Shareholders Agreement. Failure to have minority shareholder discount provision or even to discuss it with the client."

On April 28, 1992, written notice of a potential claim by Indeck for professional malpractice was given to Keck and defendant's professional liability insurer, Attorney's Liability Assurance Society, Inc. (ALAS). Attached to the notice was the list of alleged errors that defendant received at the April 8, 1992, meeting. ALAS acknowledged the Indeck claim in May 1992 and has provided insurance coverage to Keck and defendant for the entire claim, without any reservation of rights.

In November 1993 Indeck tendered to Keck, defendant, and Adelman a proposed agreement to toll the statute of limitations. The proposed tolling agreement was also forwarded to ALAS on or before November 12, 1993. Defendant signed the tolling agreement on November 18, 1993. Defendant was specifically named a party to this agreement, "individually and as present or former partner of the law firm [Keck]." The agreement purports to toll "any and all statute of limitations and statute of repose which would otherwise expire *** between Indeck and Keck."

On October 14, 1994, Indeck filed suit in the Lake County circuit court against Keck, Adelman, and defendant. In its second amended complaint, Indeck alleged acts of professional malpractice committed by Keck, Adelman, and defendant from 1985 to 1992.

On October 28, 1994, Lawrence Wojcik, a partner at Keck, transmitted a photocopy of the original Indeck complaint to Arnstein & Lehr. On October 31, 1994, Arnstein & Lehr forwarded a copy of the complaint to its insurance broker, Rollins Hudig Hall of Illinois, Inc. On August 28, 1995, defendant sent a letter to Arnstein & Lehr's insurance broker, requesting that plaintiffs coordinate their defense and indemnity obligations with defendant's and Keck's defense counsel.

Defendant is insured for the Indeck claim under an ALAS policy issued to Keck effective from April 1, 1992, to April 1, 1993. In addition to insuring defendant for claims arising out of professional services he performed while at Keck, the ALAS policy contains a "prior acts endorsement," providing coverage for defendant while he is a partner at Keck, for claims made against him "by reason of any ACT" committed "in his *** professional capacity as an Attorney, Counselor of Law or Notary prior to such assured becoming a partner or employee of the FIRM." Thus, the ALAS policy covers defendant for claims made while defendant is a partner at Keck, by reason of his acts at Arnstein & Lehr or any other firm where he may have been employed before he became a partner at Keck.

Defendant admitted in both the present case and the underlying Indeck action that ALAS covered him for all acts, errors, or omissions in the underlying Indeck suit without a reservation of rights.

On January 25, 1996, plaintiffs denied coverage to defendant for the claims made against him in the Indeck action. On February 1, 1996, plaintiffs filed a complaint against defendant and Arnstein & Lehr, seeking the trial court's declaration that they have no obligation to defend or indemnify defendant in the Indeck action.

On June 4, 1996, plaintiffs moved for summary judgment; defendant moved for summary judgment the following day. Defendant submitted his own affidavit in response to plaintiff's motion for summary judgment.

In the present case, in his counterclaim, defendant seeks coverage under plaintiffs' policies for his acts, errors, or omissions at Arnstein & Lehr under one primary and two excess policies of insurance effective from May 4, 1994, to May 4, 1995. The two excess policies are "subject to the same warranties, terms and conditions" that are contained in the primary policy. The "Declarations Page" of plaintiffs' primary policy identifies the "Named Insured" and "the Insured" as follows:

"1. The Insured: The unqualified word, 'Insured,' whenever used in this policy means:

a. the Named Insured firm or predecessor firm set forth in ...


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