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Philips Electronics v. New Hampshire Insurance Co.

March 20, 1998

PHILIPS ELECTRONICS, N.V., AND PHILIPS ELECTRONICS NORTH AMERICA CORPORATION, D/B/A ADVANCE TRANSFORMER COMPANY, PLAINTIFFS-APPELLEES/CROSS-APPELLANTS,
v.
NEW HAMPSHIRE INSURANCE COMPANY, RELIANCE NATIONAL INSURANCE COMPANY (U.K.) LTD., COMMERCIAL UNION ASSURANCE PLC, ROYAL INSURANCE PLC, SOREMA (U.K.) LTD., ASSICURAZIONI GENERALI S.P.A., RIVER THAMES INSURANCE COMPANY LTD., CHIYODA FIRE & MARINE INSURANCE COMPANY (EUROPE) LTD., CONTINENTAL CASUALTY COMPANY, ARIG INSURANCE COMPANY LTD., THE AETNA CASUALTY & SURETY COMPANY, CHUBB INSURANCE COMPANY OF EUROPE S.A. AND A. SHARP (ON HIS OWN BEHALF AND ON BEHALF OF EACH MEMBER OF SYNDICATE 839), DEFENDANTS-APPELLANTS/CROSS-APPELLEES, AND NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., DEFENDANT.



Appeal from the Circuit Court of Cook County Honorable John Gustafson, judge Presiding.

The opinion of the court was delivered by: Justice Hartman

Defendants, collectively referred to as Insurers, brought an action in the Commercial Court of the High Court of Justice, Queen's Bench Division, in London, England (Commercial Court), seeking a declaration that they owe no coverage under their fidelity insurance policies for losses claimed by their insured, plaintiff Philips Electronics North America Corporation (PENAC). PENAC unsuccessfully challenged the Commercial Court's jurisdiction over the declaratory judgment proceedings.

While a preliminary appeal in the Commercial Court action was pending in the English Court of Appeal, PENAC and its parent corporation, Philips Electronics, N.V. (Philips) (sometimes collectively plaintiffs) brought this suit in the circuit court. Insurers moved to dismiss or stay pursuant to section 2-619(a)(3) of the Code of Civil Procedure (735 ILCS 5/2-619(a)(3) (West 1994)) (section 2-619(a)(3)), pending the outcome of the Commercial Court case.

Philips is a Netherlands corporation with its principal place of business in Eindhoven, Netherlands. PENAC, a wholly-owned subsidiary of Philips, is a Delaware corporation with its principal place of business in New York. PENAC is authorized to do business in Illinois, where it operates under the name of Advance Transformer Company (Advance), an unincorporated division of PENAC. Advance manufactures electronic equipment, including magnetic and electronic ballasts.

Philips contracted with Insurers to purchase a Comprehensive Crime Policy consisting of primary, excess, and deductible policies (fidelity policies), which would provide plaintiffs with coverage for the period between December 31, 1993 and December 31, 1994. An English broker negotiated the contract on behalf of Philips and PENAC. Two Insurers entered into the contract in the United States, where they are domiciled; the eleven remaining Insurers entered into the contract in London.

Most of the 13 Insurers have limited ties to Illinois. Only one, Continental Casualty Company, is incorporated in Illinois and has its principal place of business in Chicago. Seven others are incorporated in England; the remainder are incorporated elsewhere in the United States, or in Italy or Belgium. The principal place of business for five Insurers is in England; the others keep their principal place of business in Connecticut, New York, Pennsylvania, Belgium, Italy, Netherlands, and Pakistan. Defendant A. Sharp is an underwriter for Lloyd's of London, who participated in the policies on behalf of the members of Lloyd's Syndicate No. 839. Eleven of the 13 Insurers operate in the London insurance market. A large portion of the fidelity policies were written by Insurers who were based in the United States, or were English subsidiaries of American insurers, who also provided most of the coverage for the fidelity policies.

The fidelity policies indemnified plaintiffs for losses resulting from fraudulent or dishonest acts committed by an employee. To qualify for coverage, the employee must have possessed, "the manifest intent:

(a) to cause the Insured to sustain such loss; and

(b) to obtain financial benefit for the Employee, or for any other person or organisation intended by the Employee to receive such benefit, other than salaries, commissions, fees, bonuses, promotions, awards, profit sharing, pensions or other employee benefits earned in the normal course of employment."

A choice of law provision stated that the "construction, interpretation and the meaning of the terms, exclusions, limitations and conditions of this Policy shall be determined in accordance with" English *fn1 law.

In November and December of 1994, plaintiffs notified Insurers of two potential losses, for which it planned to seek coverage, stemming from activities occurring at Advance. In their proof of loss, plaintiffs stated that Theodore A. Filson joined Advance in 1986 as Vice President of Operations, and became president in 1989. Plaintiffs claimed that in February 1992 Filson, his wife, and other Advance employees and their wives formed a fraudulent travel agency, through which they embezzled funds from Advance. By April 1992, Filson knew that the design of the electronic ballasts Advance manufactured contained an inherent flaw, and all of the ballasts were defective, yet he continued to ship the ballasts. Plaintiffs believe Filson wanted to preserve or increase the division's performance, so that he could retain his position and earn his bonus, and continue to embezzle money without PENAC or Philips investigating Advance's operations.

Plaintiffs asked Filson to resign in November 1993, and in May 1994 they hired outside investigators to determine the losses suffered at Advance. After notifying the London office of one Insurer of its losses, Philips arranged a meeting in London with a claims manager to discuss its claims for coverage. On March 21, 1995, PENAC sued several former Advance employees and their wives in federal court in the Northern District of Illinois, stating claims for fraud and deceit, constructive fraud, conversion, theft and embezzlement, civil conspiracy, breach of fiduciary duty and aiding and abetting.

The fidelity policies required the insured to submit a claim for coverage (proof of loss) within six months after discovering the loss unless the parties agreed to extend the period. An insured may not sue on the policies until 90 days after filing a proof of loss, but must file suit within two years of discovering the loss. Insurers granted plaintiffs several extensions in filing the proof of loss, which initially was due in May 1995.

Philips submitted its proof of loss on behalf of PENAC to the London offices of Insurers on August 31, 1995, claiming losses for at least $28 million as of December 31, 1994, resulting from the embezzlement, replacement of the defective ballasts, bonuses paid to Filson, and investigation fees. Philips also claimed a total potential loss of more than $100 million, which included the projected future costs of replacing all the defective ballasts shipped by Filson. The proof of loss consisted of more than 200 exhibits, a lengthy narrative prepared by Philips explaining the results of its investigation, and a preprinted loss form stating that the loss was a direct result of employee dishonesty. Philips agreed to make other documents available to Insurers, but did not include it with the Proof of Loss because the size of the documentation was "too voluminous" to attach.

Philips reserved the right to amend or supplement the proof of loss as it continued to investigate and as its losses continued to mount. Philips further stated that "The information contained herein is confidential and is not to be used *** for any other purpose. The release of this Information to others without our express consent will be considered a ...


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