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Employers Reinsurance Corp. v. E. Miller Insurance Agency

June 28, 2002


Appeal from the Circuit Court of Cook County. No. 97 CH 7211 Honorable Thomas P. Durkin, Judge Presiding.

The opinion of the court was delivered by: Justice Greiman

This declaratory judgment action was brought to determine the obligations of plaintiff-appellant Employers Reinsurance Corporation (ERC) to defend or pay defense costs and indemnification to its insureds, defendants E. Miller Insurance Agency, Inc. (Miller Agency), Edward Miller, Jr. (Miller Jr.) and Edward Miller, Sr. (Miller Sr.) (together referred to as the Miller defendants or the insureds) under a claims made, errors and omissions policy issued to the Miller Agency for the allegations directed against them in an underlying lawsuit. The trial court granted judgment in favor of defendants-appellees Northbrook Property & Casualty Insurance Company (Northbrook Property), A.J. Maggio Company (A.J. Maggio) and Power Construction Company (Power Construction) (together referred to as the Northbrook defendants). The trial court denied ERC's motion for reconsideration and, alternatively, its motion for leave to file an amended complaint. ERC appeals from the judgment on the pleadings in favor of the Northbrook defendants. For the following reasons, we reverse and grant summary judgment in favor of ERC.

This case arises from the defense and indemnification of Power Construction and A.J. Maggio in three separate lawsuits. Prior to those suits, Northbrook Property, as a bona fide subrogee for Power Construction and A.J. Maggio, along with Power Construction and A.J. Maggio themselves, asserted that the Miller Agency issued certificates of insurance to Power Construction and A.J. Maggio. Allegedly, those certificates of insurance named both Power Construction and A.J. Maggio as additional insureds under two general liability insurance policies issued by Scottsdale Insurance Company (Scottsdale) and Houston General Insurance Company (Houston General) to third party Composite Products. Composite Products was a subcontractor on two separate jobs in which Power Construction and A.J. Maggio were involved. According to Power Construction, A.J. Maggio and Northbrook Property, Scottsdale allegedly was insuring Power Construction and Houston General allegedly was insuring A.J. Maggio.

However, after Power Construction and A.J. Maggio were sued, Scottsdale and Houston General denied coverage, claiming that Power Construction and A.J. Maggio were never added as additional insureds on Composite Products' policies. Specifically, Scottsdale claimed that the Miller Agency was not an authorized agent and had no authority to bind coverage, and Houston General claimed that no policy existed for the dates alleged. Thus, there could be no additional insured coverage for either Power Construction or A.J. Maggio. As a result of those denials, Northbrook Property, as the general liability insurer of Power Construction and A.J. Maggio, carried the full cost of defending and indemnifying its insureds in those cases.

In December of 1995, Power Construction, A.J. Maggio and Northbrook Property sued the Miller Agency and Miller Jr. for consumer fraud, breach of fiduciary duties and breach of contract. Miller Sr. was later charged pursuant to an amended complaint. That complaint specifically alleged that, but for certain acts and omissions committed by all of the Miller defendants, Northbrook Property would not have incurred defense and indemnification costs for its insureds, Power Construction and A.J. Maggio, because they would have been defended and indemnified by Scottsdale and Houston General as additional insureds under Composite Products' policies.

The Miller Agency was served on January 16, 1996, Miller Jr. was served on September 16, 1996, and Miller Sr. was served on November 1, 1996. However, none of the Miller defendants forwarded a copy of the summons or the complaint to their professional liability, errors and omissions provider, ERC. In fact, on March 13, 1996, approximately two months after the Miller Agency was served, the Northbrook defendants actually supplied ERC with those copies.

Upon receiving a copy of the summons and complaint, ERC opened a claim file and began an investigation of the charges set forth against the Miller defendants. Its investigation began with a request to the Miller Agency and Miller Jr. for their version of the handling of the Composite Products account and for copies of documents regarding the account. On April 3, 1996, ERC again wrote to the Miller Agency and advised that it was investigating the charges set forth in the underlying complaint under a reservation of rights based upon the Miller defendants' failure to give prompt notice of the underlying complaint, as required by ERC's policy. ERC also requested information regarding the defensive measures the Miller defendants had taken in response to their being served with the underlying complaint.

As of May 13, 1996, nearly two months since ERC heard of the underlying complaint, ERC still had received no information from its insureds. Accordingly, on that date, ERC telephoned Miller Jr. to obtain documentation and information. Miller Jr. assured ERC that Miller Sr. would respond. Having received no response from Miller Sr. by May 23, 1996, ERC again wrote to Miller Jr. and the Miller Agency to request information. In that letter, ERC advised the Miller Agency that it had not assumed its defense and that a default judgment could be sought. ERC then stated that if it was not contacted by June 1, 1996, with information, it would deny coverage for breach of the cooperation provision in its policy. None of the Miller defendants responded.

On June 10, 1996, in accord with its previous warnings, ERC denied coverage to the Miller Agency based upon its failure to cooperate with the investigation. Again, the insureds did not respond. On November 16, 1996, nearly two months after Miller Sr. was served, the insurance agent for the Miller Agency, Swett and Crawford, sent ERC a copy of the amended complaint. On November 26, 1996, ERC wrote to Swett and Crawford to acknowledge receipt of the underlying complaint and to advise that it was denying coverage and would not be taking any further action on the matter. The insureds did not respond to the denial.

According to ERC, the next time that it heard about the underlying litigation was on March 3, 1997, when the Northbrook defendants' attorney advised ERC that default orders had been entered against the Miller defendants. On that day, the Northbrook defendants' attorney wrote to Miller Sr. to inform him that on February 4, 1997, a default order had been entered against him. In that letter, the Northbrook defendants' attorney advised that he intended to prove up money damages, have judgment personally entered against Miller Sr., and seek to satisfy that judgment from his personal assets. A copy of the order of default was attached to that letter.

On that same date, the Northbrook defendants' attorney also wrote the Miller Agency, advising that a default order had been entered against it on October 1, 1996, that he intended to prove up money damages and have a judgment entered against the Agency and would seek to satisfy that judgment with the Agency's assets. A copy of the default order was also attached to that letter. The Northbrook defendants' attorney also notified ERC that default orders were entered against the insureds and that it intended to prove up the default orders and collect against ERC through a garnishment proceeding.

On March 6 and 10, 1997, following their receipt of the default orders, the Miller defendants contacted ERC for the first time. ERC responded on March 17, 1997, by reminding them that on June 10, 1996, coverage was denied based upon breach of the late notice and cooperation provisions, and that it had restated its denial on November 26, 1996. ERC also reminded them that it acknowledged the underlying complaint under a reservation of rights because of the apparent breaches of notice and cooperation provisions. In closing, ERC again restated its denial.

On June 10, 1997, ERC filed a complaint for declaratory judgment against the Miller defendants and the Northbrook defendants for a determination of its coverage obligations to the insureds for the underlying litigation. Specifically, ERC sought a finding that it had no obligation to pay defense costs or indemnify the insureds both prior to and during the litigation because the insureds had breached the prompt notice (count I) and cooperation (count II) provisions of ERC's policy. It also claimed to be free of defense obligations based on a criminal acts exclusion (count III) and a fraudulent acts exclusion (count IV) in the policy, and that it owed no obligations prior to tender (count V). On November 25, 1997, the ERC filed its first amended complaint for declaratory judgment, essentially realleging the allegations in its first complaint. The relevant portions of ERC's contract with the Miller defendants read as follows:

"DEFENSE AND SETTLEMENTS. The Corporation, in the Insured's name and behalf, shall have the right to investigate, defend, and conduct settlement negotiations in any claim or suit ***.


DEFENSE EXPENSES AND SUPPLEMENTARY PAYMENTS. With respect to such insurance as is afforded by the policy, the Corporation shall pay, in addition to the applicable limit of liability, provided the limit of liability had not been exhausted:

(a) All expenses incurred in the defense of any claim or suit against the Insured alleging such negligent act, error or omission, and seeking damages on account thereof, even if such claim or suit is groundless, false, fraudulent, or for an amount less than the Insured's deductible ***.


NOTICE. The Insured shall give prompt notice to the Corporation of:

(a) Any claim made and of any action or suit commenced against the Insured, and

(b) Any proceeding, event, or development which in the judgment of the Insured might result in a ...

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