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Local 705 International Brotherhood of Teamsters Health and Welfare Fund v. Five Star Managers

August 15, 2000

LOCAL 705 INTERNATIONAL BROTHERHOOD OF TEAMSTERS HEALTH & WELFARE FUND,
PLAINTIFF-APPELLANT,
V.
FIVE STAR MANAGERS, L.L.C.,
DEFENDANT-APPELLEE.



Appeal from the Circuit Court of Cook County. No. 98 CH 7109 Honorable Albert Green, Judge Presiding.

The opinion of the court was delivered by: Justice Gordon

This appeal arises from a suit for declaratory judgment brought by plaintiff Local 705 International Brotherhood of Teamsters Health & Welfare Fund (H&W) against its insurer, Connecticut Specialty Insurance Company (Connecticut Specialty), and its insurer's agent, Five Star Managers, L.L.C. (Five Star). The suit seeks declarations that H&W is entitled to coverage for losses totaling more than $20 million incurred pursuant to a settlement agreement reached in an underlying suit brought by H&W's sister fund, the Local 705 International Brotherhood of Teamsters Pension Fund (the Pension Fund), against H&W. Pursuant to Five Star's section 2-615 (735 ILCS 5/2-615 (West 1992)) motion to dismiss, the trial court dismissed Five Star from the suit, leaving Connecticut Specialty as the remaining defendant. This appeal is taken by plaintiff from the decision dismissing Five Star. For the reasons set forth below, we affirm that dismissal.

BACKGROUND

On November 4, 1997, the Pension Fund brought suit against H&W in the U.S. District Court for the Northern District of Illinois, seeking recovery of $16,511,985 which it claimed was improperly transferred from the Pension Fund to H&W between 1991 and 1995 in violation of fiduciary duties imposed by the Employee Retirement Income Security Act, 29 U.S.C.A. §1001 et seq. (West 1999) (ERISA). H&W thereupon notified its carrier, Connecticut Specialty, of the Pension Fund's complaint, demanding coverage and tendering its defense of the suit to its insurer. Connecticut Specialty denied coverage and declined to undertake the defense of the litigation or to pay H&W's attorney fees, alleging as its ground that the Funds had knowledge of this claim prior to the coverage period.

H&W filed its initial verified complaint for declaratory judgment against Connecticut Specialty and Five Star on May 29, 1998. In that complaint, H&W sought declarations that it was entitled to a defense in the underlying Pension Fund litigation and, if H&W were found liable, that it was entitled to be indemnified for its damages.

While H&W's declaratory judgment action was pending, the underlying Pension Fund litigation was resolved on December 22, 1998, when the federal district court entered an order approving a settlement agreement in the case and reducing the terms of the settlement to a judgment. Under the terms of the settlement agreement, H&W agreed to pay $20 million to the Pension Fund, plus $182,000 in attorney fees to the attorney of the Pension Fund. The $20 million total consisted of $16,511,985.48 that was previously transferred from the Pension Fund to H&W, plus $3,488,014.52 in interest. The settlement agreement between H&W and the Pension Fund was entered into pursuant to an earlier settlement agreement reached in September 1998 by H&W and the Pension Fund with the U.S. Department of Labor, which had investigated the fund transfers and alleged that they were in violation of ERISA.

About three months later, Five Star was dismissed from H&W's original declaratory judgment action pursuant to a section 2-619 motion (735 ILCS 5/2-619 (West 1992)) which Five Star had filed. The trial court concluded that H&W had failed to plead that it incurred liability in the underlying litigation sufficient to implicate coverage beyond Connecticut Specialty's $10 million layer. However, the court noted that subsequent to the filing of the original complaint, the underlying litigation had been settled, and it granted H&W leave to amend.

On May 11, 1999, H&W filed its verified amended complaint in two counts for declaratory judgment against Connecticut Specialty and Five Star, pursuant to section 2-701 of the Code of Civil Procedure (735 ILCS 5/2-701 (West 1992)). The amended complaint makes essentially the same allegations as the original, with the exception of additional allegations as to the settlement agreement reached in the underlying Pension Fund litigation. The amended complaint alleges that in January 1997, H&W and the Pension Fund sought to replace their existing fiduciary liability insurance. *fn1 On January 17, 1997, the Funds applied for such insurance with Connecticut Specialty, requesting "occurrence" *fn2 coverage in the amount of $25 million and a policy period of January 31, 1997, to January 31, 1998. On February 10, 1997, Five Star, an insurance brokerage company acting on behalf of Connecticut Specialty, issued an insurance binder to the Funds with Connecticut Specialty on those terms. However, the Connecticut Specialty policy itself (Policy No. FLO100315), which was subsequently issued to both H&W and the Pension Fund, provided coverage only to a liability limit of $10 million. H&W alleges that in reliance upon the Five Star binder, the Funds made premium payments on the Connecticut Specialty policy and canceled their other coverages.

Count I of H&W's two-count amended complaint is brought exclusively against Connecticut Specialty and not against Five Star. In that count, H&W seeks a declaration that Connecticut Specialty is obligated to provide coverage and payment of H&W's loss in the underlying litigation, and that it is obligated to pay H&W's attorney fees and costs incurred in defense of that litigation. Five Star is joined as an additional defendant in count II, which seeks declaratory relief amounting to an increase in coverage under the express terms of the Connecticut Specialty policy so that the relief provided is coextensive with the $25 million stated in Five Star's binder. Specifically, count II seeks a declaration that Connecticut Specialty is obligated to provide that coverage, or in the alternative that Five Star is obligated to provide the full $25 million of coverage, or that Five Star is obligated to provide the $15 million difference between the Connecticut Specialty policy's $10 million in coverage and the $25 million figure.

Among the exhibits attached to H&W's amended complaint are copies of the following: H&W's original insurance application to Connecticut Specialty; Five Star's $25 million insurance binder; Connecticut Specialty's fiduciary liability policy No. FLO100315 limiting liability to $10 million; the complaint in the underlying Pension Fund suit; correspondence between H&W and Connecticut Specialty and their respective counsels regarding coverage and defense of the underlying litigation; and the federal district court's order approving and reducing to judgment the terms of the settlement agreement in the underlying suit. Included in that last exhibit are copies of the settlement agreement with the Pension Fund, and the earlier settlement agreement reached by H&W and the Pension Fund with the U.S. Department of Labor.

On August 23, 1999, the trial court granted Five Star's section 2-615 (735 ILCS 5/2-615 (West 1992)) motion to dismiss H&W's amended complaint for declaratory judgment. The court concluded that only the $3,488,014.52 in interest plus the $182,000 in attorney fees implicated insurance coverage, and that the remaining $16,511,985.48 was "merely a transfer of funds and not a loss incurred by plaintiff." The court therefore concluded that it did not need to resolve whether the $3,670,014.52 in interest and attorney fees was recoverable from Five Star since that amount would be subsumed under the $10 million of coverage which the carrier had admitted to. The trial court reasoned that any opinion as to coverage beyond that level would be advisory only and therefore H&W had failed to state a claim for declaratory judgment against Five Star. The court also found, pursuant to Supreme Court Rule 304(a) (155 Ill. 2d R. 304(a)), that there was no just cause to delay enforcement or appeal of its order. This appeal followed.

DISCUSSION

H&W argues on appeal that the trial court erred when it ruled that H&W sustained no loss for coverage purposes when it returned the amount of $16,511,985 originally transferred from the Pension Fund. H&W contends that such payments are losses within the scope of the plain language of the Connecticut Specialty policy. We disagree.

As noted, the settlement agreement between H&W and the Pension Fund calling for return of those funds was reached pursuant to the complaint of the Pension Fund in the underlying litigation. According to that complaint, the $16,511,985 transferred from the Pension Fund to H&W between 1991 and 1995 was in violation of ERISA fiduciary duties. That money was drawn from employer contributions made on behalf of the Pension Fund's 7,500 participants, including 2,600 who were participants in the Pension Fund but not in H&W and thus were ineligible for H&W benefits allegedly financed with the transferred monies. The settlement agreement between the Pension Fund and H&W was in turn mandated by the settlement ...


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