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Northbrook Property & Casualty Insurance Co. v. Applied Systems

May 17, 2000


The opinion of the court was delivered by: Justice Cerda

Appeal from the Circuit Court of Cook County. Honorable Thomas A. Hett, Judge Presiding.

In this declaratory judgment action, defendant, Applied Systems, Inc. (Applied), appeals the order of the circuit court entering summary judgment in favor of plaintiff, Northbrook Property & Casualty Insurance Company (Northbrook), on the ground that Northbrook had no duty under either of two commercial liability insurance policies to defend or indemnify Applied in a federal lawsuit filed against it by Harbor Software, Inc. (Harbor). The primary issue before us is whether Applied provided Northbrook with timely notification of the Harbor litigation under the policies as a matter of law. We have jurisdiction of the case pursuant to Supreme Court Rules 301 and 303 (155 Ill. 2d R. 301, 303), and for the following reasons we affirm.


Applied and Harbor are each businesses engaged in the area of developing and marketing computer software programs to the insurance industry. In the 1980s, Harbor's principal product was an automated management system developed for insurance agencies known as "Sales Center Manager" ("Sales Manager"). At the same time, Applied marketed a similar, but somewhat less advanced, product called "Agency Manager."

On November 5, 1992, Harbor filed a six-count complaint against Applied in the federal district court of New York alleging claims for copyright infringement, violations of the Latham Act, fraud, misappropriation of trade secrets, unfair competition and unjust enrichment. A copy of Harbor's complaint was served upon and received by Applied's corporate counsel, Mark Camasta, on the same date.

According to the complaint's allegations, Applied contacted Jeffrey Tollaksen, the co-founder of Harbor, in late 1988 to express Applied's interest in either acquiring or licensing the Sales Manager software. Following a meeting between Applied and Harbor associates in January 1989, at which Tollaksen demonstrated the Sales Manager program under Applied's assurances of confidentiality, the parties commenced negotiations regarding the formulation of an agreement that would grant Applied the exclusive licensing rights to Sales Manager.

During the negotiation period, Tollaksen completed, at the request of Applied, a successful integration of Sales Manager with Agency Manager, so as to allow the two programs to operate together. Once the integration of the two programs was complete, Applied abruptly ended negotiations regarding the exclusive licensing agreement and informed Harbor it was no longer interested in marketing the Sales Manager program.

Shortly thereafter, Applied offered a new version of Agency Manager which allegedly performed substantially all of the automated marketing functions of Sales Manager, as well as many other program features. Applied allegedly copied the Sales Manager software and integrated it with the old version of Agency Manager. According to the complaint, Applied "never intended to enter into an exclusive licensing agreement with *** [it], but instead sought to learn *** [its] trade secrets, to steal the source code for the [Sales Manager] Program, to fraudulently enlist Mr. Tollaksen's services in adapting the [Sales Manager] Program for Agency Manager, and to unfairly compete with" it. The complaint explains that Harbor first discovered Applied's wrongful conduct when Tollaksen saw an advertisement in an industry publication announcing the new version of Agency Manager.

At the time Harbor filed its lawsuit, Applied was insured under a commercial general liability insurance policy ("CGL Policy") and a commercial Excess/Umbrella liability insurance policy ("Excess/Umbrella Policy") (collectively referred herein at times as the "policies"), both issued by Northbrook. Each policy had an effective coverage period of April 1, 1992 to April 1, 1993.

Coverage B of the CGL Policy, entitled "Personal and Advertising Injury Liability", requires Northbrook in part to "pay those sums that *** [Applied] becomes legally obligated to pay as damages because of *** advertising injury to which this insurance applies," and further "to defend any suit seeking those damages." Coverage B specifically provides coverage for "advertising injury caused by an offense committed in the course of advertising [Applied's] goods, products or services" during the policy period.

The Excess/Umbrella Policy contains two coverage forms, Coverage A and Coverage B. Coverage A, which is entitled "Excess Liability Over Underlying Insurance," provides liability coverage over the limits provided in applicable underlying insurance as listed in the underlying insurance schedule, and is subject to all the terms and conditions of the underlying policy. *fn1

Under Coverage B, entitled "Umbrella Liability Over the Retained Limit or Insurance Not Listed in the Schedule of Underlying Insurance," umbrella coverage is provided over the amount in which Applied is self- insured or the limits of insurance not listed in the underlying insurance schedule. The record does not disclose if any other underlying insurance is applicable, but it does reveal that Applied has a retained limit of $10,000.

Per this coverage provision, Northbrook is required to pay those sums Applied "becomes legally obligated to pay as damages because of injury in excess of the retained limit *** or any insurance not specified as underlying insurance, whichever is greater, caused by an occurrence during the policy period[.]" Northbrook is further obligated to "investigate and defend any claim or suit alleging damages insured by Coverages A and/or B" provided no other insurer is obliged to undertake such an investigation or defense. The term "injury" as used in Coverage B specifically includes "advertising injury."

Both polices contain a "Conditions" section which discusses, inter alia, the insured's duties in the event of an occurrence, claim or suit. The CGL Policy provides in relevant part:

"b. If a claim is made or suit is brought against any insured, [Applied] must:


(2) Notify [Northbrook] as soon as ...

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