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Philips Electronics v. New Hampshire Insurance Co.

March 31, 2000


The opinion of the court was delivered by: Justice Hartman

Appeal from the Circuit Court of Cook County. Honorable Sheldon Gardner, Judge Presiding.

Plaintiffs Philips Electronics N.V. and Philips Electronics North America Corporation, doing business as Advance Transformer Company, (collectively Philips) brought suit against the defendant insurers from whom it had purchased fidelity insurance policies (collectively Fidelity Insurers). Philips alleged that the Fidelity Insurers breached the insurance contracts for failure to indemnify Philips for its claimed losses and for damages allegedly caused by the Fidelity Insurers' misconduct and fraud during its claims-handling process. The circuit court dismissed the counts alleging claims-handling misconduct on forum non conveniens grounds; dismissed the count alleging the Fidelity Insurers' violation of Illinois' Consumer Fraud and Deceptive Business Practices Act (Consumer Fraud Act) (815 ILCS 505/1 et seq. (West 1996)) also on the grounds of forum non conveniens; and dismissed the counts alleging breach of insurance contract and fraud as barred by the doctrine of res judicata. Philips appeals *fn1 , raising as issues whether (1) the court erred in dismissing the breach of contract and fraud counts as barred by res judicata; and (2) the court abused its discretion in dismissing its claims-handling fraud and misconduct, and Consumer Fraud Act counts on forum non conveniens grounds.

Philips Electronics N.V. is a corporation organized and existing under the laws of the Netherlands with its principal place of business in Eindhoven, Netherlands. Its subsidiary, Philips Electronics North America Corporation (PENAC), is a corporation organized and existing under the laws of Delaware with its principal place of business in New York; PENAC does business in Illinois under the name Advance Transformer Company (Advance). Advance is based in Rosemont, Illinois, and manufactures electronic ballasts, triggering devices used for starting and regulating flourescent lamp fixtures.

Between December 31, 1993 and December 31, 1994, Philips was insured by the Fidelity Insurers, a group of major foreign insurance companies, under "comprehensive crime" policies. *fn2 Those comprehensive crime policies indemnified Philips for losses resulting from fraudulent or dishonest acts committed by employees. *fn3 Philips was covered under a total of three policies: a primary, an excess and a deductible policy. The primary policy (and the excess policy, by incorporation) provided expressly for "United Kingdom," or English, law to govern the construction, meaning and interpretation of the policy terms; the deductible policy also provided for the application of "English" law.

All but two of the Fidelity Insurers operated in the London insurance market. Two insurers entered into the contract with Philips in the United States; the remaining 11 insurers entered into the contract in London, England. Most of the 13 insurers have limited ties to Illinois: only one is incorporated in Illinois; seven are incorporated in England; and the remainder are incorporated elsewhere in the United States, Italy or Belgium. The policies were negotiated in London between a Lloyd's of London broker, on behalf of Philips, and eleven of the Fidelity Insurers; the policies were entered into in London and were structured to give Philips a deductible of $2,780,000.

In late 1994, Philips notified the Fidelity Insurers (at their London office) of a planned claim for potential losses. On August 31, 1995, Philips submitted an 88-page "Proof of Loss" prepared "on behalf of [PENAC]" pursuant to policy requirements. Philips' Proof of Loss consisted of more than 200 exhibits and a lengthy narrative, detailing the nature of its claims. Those claims centered upon the alleged dishonest and illegal conduct of its employee Theodore Filson, president of Advance.

According to Philips' Proof of Loss, Filson, his wife and two other Advance employees and their wives formed a fraudulent travel agency, using it to defraud Philips by dishonest overcharging. The Proof of Loss also described how Filson knew that the electronic ballasts' design contained an inherent flaw, yet he continued to sell and ship the defective ballasts in order to preserve or increase the appearance of Advance's performance. Filson's remuneration while president of Advance consisted of a salary, bonuses and an incentive plan; the amount of the bonus and incentive depended upon performance of Advance with regard to sales, income and inventory. In essence, the more ballasts that were sold, the more Filson would receive. As long as the ballast flaws remained undetected, Filson would retain his position, earn his bonuses and continue to embezzle money through the fraudulent travel agency scheme. The Proof of Loss therefore alleged that the shipment of defective ballasts was done, at least, with the dual purpose of maintaining the travel business fraud and of earning bonuses which Filson otherwise would not have earned. Philips terminated Filson and the other employees, but not before Filson had allowed shipment of the defective ballasts to Philips' customers.

As a result of Filson's dishonest conduct, Philips claimed losses of "at least $28,063,982." Specifically, Philips claimed $910,721.58 "embezzled by Filson *** through the fraudulent travel business" (the travel fraud); a $24,935,260.75 loss "resulting from the replacement of [the] defective product Filson fraudulently and dishonestly *** shipped into the market" (the defective ballast fraud); $218,000 in unearned bonuses paid to Filson (the bonus fraud); and "at least $2,000,000 in investigation fees." Additionally, Philips estimated its potential losses resulting from the replacement of defective parts to be "in excess of $100,000,000." Philips also reserved the right to amend or supplement the Proof of Loss as it continued to investigate its mounting losses.

Concerned that the allegation of Filson's deliberate placement of defective products into circulation on the market should not be made public, Philips further notified the Fidelity Insurers that "[t]he 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 breach of your fiduciary and contractual obligations under the policy." (Emphasis in original). Accordingly, Philips urged upon the Fidelity Insurers the importance of keeping the Proof of Loss confidential and made it plain that it desired to resolve any dispute with the Fidelity Insurers by arbitration or some other form of alternative dispute resolution.

Negotiations between Philips and the Fidelity Insurers regarding coverage of claims began shortly after notice was given. To that end, in late 1994 and 1995, Philips' attorney, Patrick Ardis, met with the Fidelity Insurers' independent claims adjuster, Edward Davies, in London and Illinois. As part of his investigation, Davies interviewed former and current employees of Advance and requested additional documentation from Philips. Philips provided substantial amounts of documents and information to assist Davies' investigation.

In September 1995, after learning that Davies intended to interview Filson and other former Advance employees, Ardis wrote to Davies, reminding him of the confidentiality of information contained in the Proof of Loss and requesting that Davies not provide copies of that document to the ex-employees or their counsel. Davies responded by informing Philips that he did "not consider it public dissemination to release the documents to the attorneys of the persons about whom allegations are made in the [Proof of Loss] for the purpose of giving these persons the opportunity to answer the allegations and then to judge the answers in the light of facts." *fn4 Accordingly, Davies confronted the former employees about Philips' allegations and showed the Proof of Loss to those former employees and their attorneys during his investigation.

On November 29, 1995, while Davies' investigation was on-going, the Fidelity Insurers initiated declaratory judgment proceedings against Philips, naming PENAC, in the Commercial Court of the High Court of Justice, Queen's Bench Division, in London, England (Commercial Court), seeking a declaration that they owed no duty to indemnify Philips under the policies for losses resulting from the bonus fraud, the defective ballast fraud, and investigation fees. Philips moved to dismiss the action on jurisdictional grounds, but its motion was denied.

In refusing dismiss the Fidelity Insurers' claim, the Commercial Court found that the issues before it involved threshold issues of construction. Recognizing that the facts underlying Philips' claims of loss (the former employees' allegedly fraudulent and dishonest conduct) were largely centered in Illinois, the Commercial Court nonetheless determined that England was an appropriate forum in large part because the question before the court was one entirely of policy construction and was not fact-sensitive. In particular, the Commercial Court recognized that Philips, or PENAC, had submitted a detailed Proof of Loss, specifying the basis for its claim, which was presumed to be true for purposes of determining coverage. The Commercial Court further emphasized that it had provided Philips' attorney with the opportunity to "take [the Commercial Court] through the Proof of Loss to show [it] that by reason of perhaps inconsistent or alternative allegations of fact any attempt to resolve the matters of construction which [the Fidelity Insurers] put in issue would be doomed to failure or would likely prove difficult, but [Philips' attorney] declined the invitation." Thereafter, Philips sought interlocutory leave to appeal the Commercial Court's decision, which the English Court of Appeal granted on June 19, 1996.

On May 17, 1996, after the Commercial Court issued its opinion but before leave to appeal was allowed, Philips filed its original complaint in the circuit court of Cook County. Initially, Philips asserted that the Fidelity Insurers breached the insurance contract and breached their duty of good faith and fair dealing by providing former Advance employees with copies of its Proof of Loss, despite repeated requests to keep the information confidential, and by filing a peremptory claim against Philips in England. Philips further asserted a violation of the Illinois Insurance Code (215 ILCS 5/155 (West 1994)), alleging that Fidelity Insurers unreasonably refused to indemnify Philips for its losses. *fn5

Contemporaneous with the circuit court case, the English action proceeded. On May 17, 1997, the English Court of Appeal affirmed the Commercial Court's refusal to dismiss. Recognizing Philips' Illinois complaint, the English Court of Appeal nonetheless found that England was the appropriate forum to determine issues of construction. *fn6

Following the determination of the English Court of Appeal, the Fidelity Insurers' English declaratory judgment action again proceeded in the Commercial Court. There, the Fidelity Insurers accepted liability as to the claim involving $910,721.58 embezzled by Filson through the fraudulent travel business. Philips conceded that its claim for $2,000,000 in investigation fees was not recoverable under the policies. Remaining, therefore, were claims regarding the defective ballast fraud and the bonus fraud, resulting in two main issues of construction in dispute: whether the claim for bonuses fraudulently obtained is excluded by the words "other than *** bonuses *** earned in the normal course of employment" contained in the policies and (2) whether ...

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