Memorandum of Law in support of the motion, Plaintiffs contended that
Defendant is collaterally estopped from relitigating the issue of whether
an "occurrence" was alleged by KDB under the All America and Central
Mutual policies due the this court's decision in American Fire. In
American Fire, this court concluded that the damages alleged in the
underlying KDB complaint were not the result of an "occurrence" and were
not covered under the Commercial General Liability Insurance issued by
American Fire. American Fire, 54 F. Supp.2d at 850. American Fire defined
an occurrence identically to All America and very similar to Central
Mutual, American Fire, 54 F. Supp.2d at 844.
On February 29, 2000. Defendant filed a Response to Plaintiffs' Motion
for Judgment on the Pleadings. Defendant argued that American Fire
involved different issues from the present case, thereby making
collateral estoppel inappropriate. Specifically, Defendant contends that
American Fire properly reserved its rights under the policy by reserving
the "occurrence" issue in its first letter to Defendant dated April 30,
1998. Defendant further argues that because Plaintiffs failed to cite the
"occurrence" provision in a reservation of rights letter until sixteen
months after their initial reservation of rights letter, All America and
Central Mutual should be precluded from asserting the "no occurrence"
policy defense due the doctrines of waiver, estoppel, breach of good faith
and fair dealing, and laches.
A Rule 12(c) judgment on the pleadings is "designed to provide a means
of disposing of cases when the material facts are not in dispute and a
judgment on the merits can be achieved by focusing on the content of the
pleadings and any facts of which the court will take judicial notice.'"
Continental X-Ray Corp. v. Home Indem. Co., 1997 WL 102537, at *2
(N.D.Ill. 1997) (quoting 5A Charles A. Wright & Arthur R. Miller, Federal
Practice & Procedure § 1367 (1990). A Rule 12(c) motion is subject
to the same standard as a Rule 12(b)(6) motion to dismiss and "`should
not be granted unless it appears beyond doubt that the plaintiff cannot
prove any facts that would support his claim for relief.'" GATX Leasing
Corp. v. National Union Fire Ins. Co., 64 F.3d 1112, 1114 (7th Cir. 1995)
(quoting Thomason v. Nachtrieb, 888 F.2d 1202, 1204 (7th Cir. 1989). When
the plaintiff is the moving party, the motion should not be granted
unless it appears beyond doubt that the non-moving party cannot prove
facts sufficient to support his position. See Continental X-Ray Corp.,
1997 WL 102537, at *5-6. In ruling on a Rule 12(c) motion, this court
must view the facts in a light most favorable to the non-moving party.
Flenner v. Sheahan, 107 F.3d 459, 461 (7th Cir. 1997). A judgment on the
pleadings is proper when only questions of law, and not questions of
fact, exist after the pleadings have been filed. Indiana Ins. Co. v.
Hydra Corp., 245 Ill. App.3d 926, 185 Ill.Dec. 775, 615 N.E.2d 70, 72
(1993), appeal denied, 152 Ill.2d 559, 190 Ill.Dec. 889, 622 N.E.2d 1206
A. Application of Collateral Estoppel
To determine whether judgment on the pleadings is proper, this court
must determine whether application of collateral estoppel is appropriate
in this case. Under this doctrine, "once an issue is actually and
necessarily determined by a court of competent jurisdiction, that
determination is conclusive in subsequent suits, based on a different
cause of action, involving a party to the prior litigation." Crowder v.
Lash, 687 F.2d 996, 1009 (7th Cir. 1982); see also Meyer v. Rigdon,
36 F.3d 1375, 1379 (7th Cir. 1994). Collateral estoppel is appropriate
where: "(1) the party against whom the estoppel is asserted was a party
to the prior adjudication; (2) the issues which form the basis of the
estoppel were actually litigated and decided on the merits in the prior
suit; (3) the resolution of the particular issues was necessary to the
court's judgment; and (4) those issues are identical to the issues raised
in the subsequent suit." County of Cook v. MidCon Corporation,
773 F.2d 892, 898 (7th Cir. 1985).
Two prongs of this test are undisputed in the instant case: (1)
Defendant was also the Defendant in the American Fire litigation; and (2)
the "occurrence" issue was the central and only issue on which this court
based its decision in American Fire. See American Fire, 54 F. Supp.2d at
849-50 ("Because this court has concluded that the damages alleged in the
underlying KDB complaint were not the result of an "occurrence" and are
not covered, or potentially covered, under the CGL policy issued by
Plaintiff, there is no need to rule upon Plaintiffs other policy
defenses.") Defendant argues. however, that prongs 2 and 4 enumerated
above are not satisfied because the issues raised in the instant case are
distinguishable from those involved in American Fire. Specifically, it
argues that: (1) this case raises different issues regarding Plaintiffs'
reservation of rights than were present in American Fire; and (2) the
insurance policies at issue in this case are different from the policy
issued by American Fire in that Central Mutual is an excess insurance
1. Reservation of Rights and Affirmative Defenses
Defendant first argues that the reservation of rights letter sent by
All America on June 2, 1998, was inadequate because it failed to
specifically set forth the "no occurrence" policy defense. Furthermore,
Defendant contends that because the "no occurrence" policy defense was
not raised in a reservation of rights letter until sixteen months after
All America undertook the defense in the underlying case, Plaintiffs are
now precluded from raising it according to the doctrines of waiver,
estoppel, breach of duty of good faith and fair dealing, and laches.
Thus. Defendant argues, there are different issues in the instant case
than those present in American Fire precluding the application of
collateral estoppel. In response to Defendant's affirmative defenses,
Plaintiffs moved to strike.
Rule 12(f) provides that "the court may order stricken from any
pleading any insufficient defense or any redundant, immaterial,
impertinent, or scandalous matter." F.R.Civ.P. 12(f). "A movant bears
the burden of demonstrating that the challenged allegations are so
unrelated to plaintiffs claim as to be devoid of merit, unworthy of
consideration and unduly prejudicial." Vakharia v. Little Company of Mary
Hosp. & Health Care Ctr., 2 F. Supp.2d 1028 (N.D.Ill. 1998).
Defendant first raises the affirmative defenses of waiver and
estoppel. "[W]here an insurer believes that its policy does not provide
coverage [in the underlying cause of action], the insurer must either
defend under a reservation of rights or secure a declaratory judgment"
regarding its responsibilities under the policy. Royal Ins. Co. v.
Process Design Assoc. Inc., 221 Ill. App.3d 966, 164 Ill.Dec. 290,
582 N.E.2d 1234, 1239 (1991) (quoting Northbrook Property & Casualty
Ins. Co. v. U.S. Fidelity & Guarantee Co., 150 Ill. App.3d 479, 103
Ill.Dec. 500, 501 N.E.2d 817 (1986)). Failure to promptly reserve its
rights under the policy may result in waiver because the "insurer who
wishes to reserve his or her rights under a policy must notify the
insured `without delay.'" American States Ins. Co. v. National Cycle,
Inc., 260 Ill. App.3d 299, 197 Ill.Dec. 833, 631 N.E.2d 1292, 1297 (1994)
(quoting Apex Mutual Ins. Co. v. Christner, 99 Ill. App.2d 153,
240 N.E.2d 742, 751 (1968)). Under Illinois law, however, "an insurer is
not required to assert all of its defenses to liability in a letter to
its insured to avoid waiving those defenses." Universal Fire & Casualty
Ins. Co. v. Jabin, 16 F.3d 1465, 1470 (7th Cir. 1994) (quoting Tobi Eng'g
v. Nationwide Mutual Ins., 214 Ill. App.3d 692, 158 Ill.Dec. 366,
574 N.E.2d 160, 162 (1991)). Waiver must either be "an
express or implied voluntary and intentional relinquishment of a known
right." Universal Fire, 16 F.3d at 1470. This waiver will be implied only
if the act constituting waiver is "clear, unequivocal, and decisive."
Universal Fire, 16 F.3d at 1470. Here, All America's June 2 letter to
Defendant expressly indicated that it "did not waive any of its rights
under the policy."
Defendant argues that an exception to this general rule of waiver
exists in the present case. As discussed in Universal Fire, in some
circumstances. "the insurer must make specific reference to the policy
defense which may ultimately be asserted or else waive that defense."
Universal Fire, 16 F.3d at 1471. Defendant argues that All America's
failure to specifically indicate its reservation of rights under the "no
occurrence" provision of its policy until October 27, 1999, resulted in
such waiver. However, as the court in Universal Fire explained, this
specificity is required only in instances in which "the insurer reserves
the right to raise certain specified defenses during the course of its
representation of the insured that may cause a serious conflict of
interest between insurer and insured." Universal Fire, 16 F.3d at 1471.
Defendant has failed to plead facts to demonstrate such a serious
conflict of interest. Furthermore, even if such facts were present, as
discussed below, this court finds that the specificity provided by All
America in its October 27 letter was sufficient to properly reserve its
rights under the policy.
Defendant further contends that because Plaintiffs failed to
specifically delineate the "no occurrence policy defense in its June 2
letter, they are now estopped from asserting this defense. Similar to the
waiver doctrine, estoppel can act to prevent an insurer from asserting
defenses for which it has not reserved its rights. American States, 197
Ill.Dec. 833, 631 N.E.2d at 1298. However, "unlike waiver, estoppel may
be an involuntary relinquishment of rights and requires prejudicial
reliance by the insured." American States, 197 Ill.Dec. 833, 631 N.E.2d
at 1298. Defendant here alleges that it suffered prejudice in the form of
surrendering control of its defense to and relying upon defense counsel
provided by Plaintiffs due to Plaintiffs' failure to assert the "no
occurrence" defense until October 27, 1999. When confronted with this
same argument, the court in American States found that the "insured has
the burden of establishing prejudicial reliance `by clear, concise, and
unequivocal evidence.'" American States, 197 Ill.Dec. 833, 631 N.E.2d at
1299 (quoting Old Mutual Casualty Co. v. Clark, 53 Ill. App.3d 274, 11
Ill.Dec. 151, 368 N.E.2d 702, 705 (1977)).
A similar situation regarding reservation of rights letters was
presented in Northwestern National Ins. Co. v. Corley, 503 F.2d 224 (7th
Cir. 1974). In Northwestern, the plaintiff insurance company brought a
declaratory judgment action for interpretation of potential coverage
under a comprehensive general liability policy issued to Leakakos
Construction Company. Northwestern alleged that it sent a reservation of
rights letter on December 16, 1970, which stated it was "accepting
untimely notice of the litigation `subject to full reservation of rights
under the policy.'" Northwestern, 503 F.2d at 227. Leakakos alleged that
the only reservation of rights letter it received was seven months
later. by which time Northwestern's attorneys had already begun work on
the defense. This second letter specifically delineated the policy
defenses which were the source of Northwestern's reservation of rights.
The lower court granted summary judgment in favor of Leakakos finding
that Northwestern entered into the defense without a reservation of
rights and was estopped from later asserting a reservation of rights. On
appeal by Northwestern, Leakakos argued that even if Northwestern had sent
the December letter, the letter "failed to use language adequate to
reserve Northwestern's rights under the policy." Northwestern, 503 F.2d
at 232. However, the appellate court held that the
insurance company did not need to specifically set forth all of its
defenses in an initial reservation of rights letter, stating:
We do not entertain the opinion that the insured is
not entitled to be more specifically informed of the
exact reasons for a possible denial of coverage. On
the other hand, we do not think that an insured who is
given unequivocal notice, such as was given here, can
sit quietly by and engage in a sandbagging operation
to secure coverage for which he has paid no premium.
Northwestern, 503 F.2d at 233.
Like All America, Northwestern issued a more specific reservation of
rights letter several months after an initial broad reservation of rights
and was not deemed to have waived its policy defenses, nor was it
estopped from asserting them.
This court also finds Essex Ins. Co. v. Stage 2, Inc., 14 F.3d 1178
(7th Cir. 1994) instructive. In Essex, two patrons of the Stage 2
nightclub assaulted another patron, Lucht. Lucht sued Stage 2 for breach
of its duty of care. Stage 2 sought a defense from its insurance
carrier, Essex. In response, Essex hired a law firm Sorling, to
participate in the Stage 2 defense along with Stage 2's general counsel,
Gifford. Although no reservation of rights letter was issued by Essex,
the insurer had previously sent a reservation of rights letter which
specifically delineated the relevant exclusionary provisions of the policy
in an earlier case involving a similar claim against Stage 2. Seventeen
months after Lucht filed his suit and after making several unsuccessful
attempts to settle the case, Essex sought declaratory judgment that it
had no duty to defend Stage 2. In this action, Stage 2 raised the
affirmative defenses of waiver and estoppel, both of which were
rejected. As concerned the estoppel claim, the court stated:
We are satisfied that Stage 2 knew from the inception
of Lucht's suit that its insurance contract with Essex
would not cover any liability arising from the suit. . . .
Therefore, they cannot now claim that Essex's conduct
misled them or that they reasonably relied to their
detriment on the absence of a written reservation of
rights letter. Essex, 14 F.3d at 1182.
As discussed above, Defendant received notification that All America was
reserving all of its rights under the policy on June 2, 1998.
Furthermore, Defendant cannot argue that they were unaware that the "no
occurrence" policy defense could be raised. Attached as Exhibit 3 to
Defendant's answer was the letter from American Fire which indicated that
they were raising the "no occurrence" policy defense with regard to the
same litigation for which All America denied coverage. As indicated above
the "no occurrence" policy provision in the American Fire policy was
identical to that contained in the All America policy.
Finally, Defendant argues that the defenses of laches and breach of
good faith and fair dealing preclude Plaintiffs' assertion of the "no
occurrence" policy defense. Laches applies "when a party's failure to
timely assert a right has caused prejudice to an adverse party." Van
Milligan v. Bd. Of Fire and Police Comm'rs Of the Village of Glenview,
158 Ill.2d 85, 196 Ill.Dec. 665, 630 N.E.2d 830, 833 (1994). As discussed
above, Defendant is unable to establish prejudice by the delay in
receiving the more detailed reservation of rights letter. Likewise, this
court does not find that Defendant has established a breach of the duty
of good faith and fair dealing. Such a finding requires "vexatious,
unreasonable, outrageous conduct" on the part of the "insurer. Emerson
v. Am. Bankers Ins. Co. of Florida, 223 Ill. App.3d 929, 166 Ill.Dec.
293, 585 N.E.2d 1315, 1321 (1992). Defendant has failed to state any
facts which could give rise to a finding of bad faith sufficient to meet
2. Excess Insurance Policy
Defendant further argues that collateral estoppel is inappropriate
because it holds an Excess Insurance policy with Central Mutual rather
than a Commercial General Liability Insurance policy as was present in
American Fire. However, this argument is unconvincing. This court in
America a Fire concluded that the underlying complaint made by KDB did
not allege property damage which could be considered an "occurrence" as
defined by the policy. This holding is equally applicable to Central
Mutual, even as an excess insurance carrier, because the definition of
"occurrence" provided by Central Mutual is nearly identical to the
definition provided by American Fire.
Furthermore, the affirmative defenses pled by Defendant are equally
ineffective as applied to Central Mutual. An excess insurer does not
have obligations under the policy until applicable primary insurance has
been exhausted. American States Ins. Co. v. Liberty Mut. Ins. Co.,
291 Ill. App.3d 336, 225 Ill.Dec. 342, 683 N.E.2d 510 (1997). "It is the
duty to defend which gives rise to the duty to reserve rights when
defense of a claim is undertaken, and without such a duly, an insurer
has no obligation to issue a reservation of rights letter." International
Ins. Co. v. Sargent & Lundy, 242 Ill. App.3d 614, 182 Ill.Dec. 308,
609 N.E.2d 842, 855 (1993). While Central Mutual did not join in All
America's reservation of rights letter dated June 2, 1998, it did join
in the second letter sent on October 27, 1999. Because Central Mutual's
duty to defend did not arise at the same time as All America, the
affirmative defenses raised by Defendant are no more applicable to
Central Mutual than they are to All America.
B. Application of Offensive Collateral Estoppel
Finally, additional factors must be considered because Plaintiffs seek
to use collateral estoppel offensively. Trial courts are granted "broad
discretion" to determine when offensive collateral estoppel should be
employed. Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 331, 99
S.Ct. 645, 58 L.Ed.2d 552 (1979). Among the considerations to be weighed
by this court is the prevention of what has been termed a "wait and see
plaintiff." Because "potential plaintiffs will have everything to gain and
nothing to lose by not intervening in the first action" and the interests
t)f judicial economy will not be served, the Supreme Court warned against
the use of offensive collateral estoppel in these situations. Parklane,
439 U.S. at 330, 99 S.Ct. 645. Defendant argues that Plaintiffs' failure
to join in the American Fire litigation precludes the use of collateral
estoppel. This court declines to find that Plaintiffs adopted such a wait
and see attitude toward the American Fire litigation which constituted
merely judgment on the pleadings rather than a full trial on the merits.
"Where a plaintiff has not needlessly increased the total amount of
litigation by adopting a `wait and see' attitude, the concern for
judicial economy animating the Parklane Hosiery "easy joinder" limitation
has not been implicated." Ross-Berger Companies, Inc. v. Equitable Life
Assuranace Society of the United States, 872 F.2d 1331, 1337 n. 2 (7th
Cir. 1989). Based upon the type of disposition in the American Fire
litigation and the absence of facts indicating a wait and see attitude on
the part of Plaintiffs, this court finds in its discretion that
collateral estoppel is appropriate.
IT IS THEREFORE ORDERED THAT:
(1) Plaintiffs' Motion for Judgment on the Pleadings (#6) is GRANTED.
Judgment is entered in favor of Plaintiffs and against Defendant with
respect to Counts II and V of the Complaint.
(2) Plaintiffs' Motion to Strike Affirmative Defenses (#8) is GRANTED.