United States District Court, N.D. Illinois
January 20, 2004.
BERNARD A. SCHLOSSER, ATTORNEY AT LAW, P.C., on behalf of itself and all others similarly situated, and as assignee of EHOME CREDIT CORP., Plaintiffs,
ST. PAUL FIRE AND MARINE INSURANCE COMPANY, Defendant
The opinion of the court was delivered by: MATHEW KENNELLY, District Judge
MEMORANDUM OPINION AND ORDER
In May 2002, plaintiff Bernard A. Schlosser, Attorney at Law, P.C.
filed suit on behalf of a putative class against eHome Credit Corp. in
state court in DuPage County, Illinois. Schlosser alleged that in April
2002, eHome, a mortgage broker, had sent an unsolicited advertisement to
his facsimile machine, in violation of the federal Telephone Consumer
Protection Act of 1991, 47 U.S.C. § 227, the Illinois Consumer Fraud
Act, 815 ILCS 505/2, and the Illinois common law of conversion. eHome had
allegedly contracted with another entity to sent 100,000 advertising
faxes. Schlosser sued on behalf of all of those who had been sent
advertising faxes without their consent or a prior business relationship
In 2001, eHome purchased a commercial general liability policy from
defendant St. Paul Fire and Marine Insurance Company, covering the period
from June 21, 2001 through June 21, 2002, along
with an umbrella excess liability policy for the same period. The
policies provided a total of $7 million in coverage. eHome was served
with summons in the Schlosser case on or about June 21, 2002. On
September 18, 2002, eHome gave St. Paul notice of the suit. On October
10, 2002, St. Paul sent eHome a letter denying coverage. In the letter,
St. Paul stated that the TCPA claim did not constitute a "personal
injury" or "advertising injury" claim within the scope of the CGL
policy's general liability coverage; there was no claim in the Schlosser
suit for bodily injury or property damage covered under the policy's
general liability coverage; and the ICFA claim, which sought injunctive
relief, restitution, penalties and attorney's fees, was not a claim for
"damages" within the meaning of the policy and did not fall within the
policy's terms in any event.
St. Paul did not elect to defend eHome under a reservation of rights,
nor did it institute a declaratory judgment action seeking a declaration
of non-coverage. eHome filed a declaratory judgment action in New York
state court against St. Paul and Schlosser sometime prior to November 27,
2002. St. Paul was served with summons on November 27, 2002; Schlosser,
as best as we can determine, was never served.
The TCPA provides for statutory damages of $500 per fax if the
violation is not willful, and $1,500 if it is. Thus eHome's potential
exposure in the Schlosser suit, if a class was certified, was somewhere
between $50,000,000 and $150,000,000. eHome, represented by the law firm
of Varga, Berger, Ledsky, Hayes & Casey (which is experienced in the
defense of consumer lawsuits), negotiated a settlement with Schlosser.
The settlement agreement, made in or about September 2003, provided for
an assignment to the putative class of eHome's rights under any
applicable insurance policies and payment by eHome of $20,000. The
agreement provided that Schlosser would pursue, as
assignee, a claim against St. Paul for the amounts provided by the
insurance policies, and that if Schlosser recovered, eHome would
stipulate in the DuPage County case to certification of a settlement
class consisting of all Illinois residents who received an advertising
fax from eHome without express consent. If Schlosser did not recover from
St. Paul, eHome would be given a release of all claims. In either event,
judgment would not be entered until after the determination of the
insurance coverage suit. A state court judge approved the settlement on
October 9, 2003.
On October 13, 2003, Schlosser's counsel advised eHome's counsel that
it was prepared to file suit against St. Paul in Illinois as the assignee
of eHome's rights under the insurance policies, and it directed eHome to
dismiss the New York action. Two days later, on October 15, 2003,
Schlosser filed this action in state court in DuPage County seeking a
declaration of coverage.
On some unknown date following the Illinois settlement and assignment,
St. Paul filed a separate suit against eHome in New York state court,
seeking a declaratory judgment of non-coverage. St. Paul advised eHome's
New York counsel that it would not pursue its newly-filed case so long as
eHome did not dismiss its own New York declaratory judgment action.
Evidently eHome did not take the steps necessary to dismiss its
earlier-filed case. On December 15, 2003, St. Paul filed a motion for
summary judgment in eHome's New York case seeking a declaration of
non-coverage. The motion is noticed for hearing on January 21, 2004, at
which time a briefing schedule is likely to be set. As indicated earlier,
Schlosser, though named as a defendant in the case, evidently has not
been served with process.
On November 26, 2003, St. Paul removed the present action to this Court
based on diversity of citizenship. On December 24, 2003, Schlosser filed
a motion for summary judgment on Count 1 of
its complaint, in which it alleges that St. Paul breached the
insurance policies by refusing to defend or indemnify eHome. On the same
date, Schlosser also filed in present case a motion entitled "motion to
enjoin St. Paul from interfering with res before the court," in
which it sought to bar St. Paul from seeking a declaration of
non-coverage from the New York state court. Both of Schlosser's motions
are now fully briefed and ready for ruling.
1. Schlosser's motion for summary judgment
The first question, and the one the Court finds to be dispositive of
Schlosser's summary judgment motion, is that of choice of law. Schlosser
cited both Illinois and New York law in its opening memorandum without
discussion of which should apply. St. Paul cited New York law throughout
its responsive memorandum but made no argument regarding why that state's
law should apply. Schlosser's reply contains the only argument in the
parties' papers on the choice of law issue, and that argument is confined
to a footnote which largely relies on a single unpublished District Court
decision. Though the question is not an easy one, the Court finds that
New York law governs this action.
A federal court sitting in diversity applies the conflict of laws rules
of the forum state, in this case Illinois. Klaxon Co. v. Stentor
Elec. Mfg. Co., 313 U.S. 487, 496 (1941). When, as in this case, an
insurance policy lacks a choice of law provision, Illinois courts employ
a "most significant contacts" test to determine the rights and
responsibilities of parties to an insurance contract. Lapham-Hickey
Steel Corp. v. Protection Mut. Ins. Co., 166 Ill.2d 520, 527,
655 N.E.2d 842, 845 (1995). "Absent an express choice of law, insurance
policy provisions are generally governed by the location of the subject
matter, the place of delivery of the contract, the domicile of the
insured or of the insurer, the place of
the last act to give rise to a valid contract, the place of
performance, or other place bearing a rational relationship to the
general contract." Id. (quotation marks and citation omitted).
In this case, the factors set forth in Lapham-Hickey point in
several different directions. The subject matter of the CGL policy
in other words, the risks insured is located in the
various states in which eHome operated, including Illinois. The policy
was delivered to eHome at its headquarters in New York, which is also
eHome's domicile. St. Paul's domicile is Minnesota. New York appears to
be the place of the last act needed to give rise to a valid contract
(eHome's acceptance of the policy). The "place of performance" is
unclear. Several states, including Illinois, have some relationship to
the general contract.
Schlosser argues that Illinois law should apply, relying on two
factors: eHome has operations here, and the liability for which it seeks
coverage arose here. As a general rule, "the location of the insured risk
is given special emphasis." Society of Mount Carmel v. National Ben
Franklin Ins. Co. of Ill, 268 Ill. App.3d 655, 664,
643 N.E.2d 1280, 1287 (1994) (citing Restatement (Second) of Conflict of
Laws § 193 (1971)). But in the present situation, the insured risks were
located in every state in which eHome did business, not just Illinois. In
such circumstances, several decisions from other judges in this District
appear to give controlling weight to the law of the state in which the
claim arose that forms the basis of the coverage dispute, which in this
case is Illinois. See, e.g., Flodine v. State Farm Ins. Co., No.
99 C 7466, 2001 WL 1394977, at *3 (N.D. Ill. Mar. 19, 2003); Western
American Ins. Co. v. Moonlight Design, Inc., 95 F. Supp.2d 838,
841-42 (N.D. Ill. 2000); Evangelical Lutheran Church in America v.
Atlantic Mut. Ins. Co., 973 F. Supp. 820, 823-24 (N.D. Ill. 1997);
American Builders & Contractors Supply Co. v. Home Ins. Co.,
No. 96 C 5041,
1997 WL 43017, at *2 n.5 (N.D. Ill. Jan. 28, 1997).
The primary Illinois case on which the judges in each of these cases
relied is Society of Mount Carmel, which was decided by the
First District of the Illinois Appellate Court. Society of Mount
Carmel concerned a liability insurance policy issued to a religious
order headquartered in Illinois but with operations in several states.
The order was sued in California on an employment-related claim, and it
sought a declaratory judgment that the claim was covered by its insurance
policy with the defendant. The Appellate Court concluded that California
law applied to its determination of whether coverage existed. We quote
the court's discussion in its entirety:
As stated in the Restatement (Second) of Conflict of Laws §
"The validity of a contract of fire, surety or
casualty insurance and the rights created
thereby are determined by the local laws of the
state which the parties understood was to be the
principal location of the insured risk during
the term of the policy, unless with respect to
the particular issue, some other state has a
more significant relationship under the
principles stated in § 6 to the transaction
and the parties, in which event the local law of
the other state will be applied."
This section recognizes that the "location of the
insured risk will be given greater weight than any
other single contact in determining the state of
the applicable law provided that the risk can be
located, at least principally in a single state."
(Restatement (Second) of Conflict of Laws §
193, comment b, at 611 (1971).) This is so even
where the policy in question covers multiple risks
located in several states, as is the case here.
(See Diamond State Insurance Co. v.
Chester-Jensen Co., 243 11. App.3d at
489-90, 183 Ill. Dec. at 446-47, 611 N.E.2d at I
1094-95; cf Restatement (Second) of
Conflict of Laws § 193, comment f (policy
insuring against risks located in different states
treated as separate policies each insuring a
Plaintiffs argue that the use of the most
significant contacts test would result in the law
of several jurisdictions being applied to the same
policy in this instance as the policies in
question cover risks located in several states.
They urge, instead, that the place where the
insurance contract was executed should exclusively
control the choice of law. The use of such a test
which looks exclusively to only one factor could
easily lead to the application of the law of a
forum which lacked any significant contact with
the dispute in question. We rejected the proposed
application of a similar bright-line test
which also, in effect, advocated the application
of the law of the insured's home state in
Diamond State v. Chester-Jensen, and see no
persuasive reason to now adopt plaintiffs' unduly
narrow test. 243 Ill. App.3d at 489, 183 Ill.
Dec. at 447, 611 N.E.2d at 1095.
Applying the most significant contacts analysis,
we conclude that California law governs the
interpretation of the policies in question.
Although these policies were executed in Illinois,
all other significant factors favor the
application of California law. Most importantly,
the insured risk involved in this instance, Crespi
High School, was located in California.
(See Restatement (Second) of Conflict of
Laws § 193 (1971); Alien v. State Farm
Mutual Auto Insurance Co. (1991),
214 Ill. App.3d 729, 158 Ill. Dec. 261, 574 N.E.2d 55;
see also Diamond State Insurance Co. v.
Chester-Jensen Co., 243 Ill. App.3d at 489,
183 Ill. Dec. at 446-47, 611 N.E.2d at 1094-95;
International Surplus Lines Insurance Co. v.
Pioneer Life Insurance Co. (1990),
209 Ill. App.3d 144, 154 Ill. Dec. 9, 568 N.E.2d 9.)
Moreover, the underlying plaintiff was a
California resident and the underlying action was
brought in a California court against defendants
who were predominately domiciled in California.
(See International Surplus Lines Insurance Co.
v. Pioneer Life Insurance Co., 209 Ill. App.3d
at 154-55, 154 Ill. Dec. at 14, 568 N.E.2d at
14 (application of Arizona law deemed proper in
action for punitive damages against an insured
where the insured risk was located in Arizona and
the insured was sued in Arizona); Boise
Cascade Home and Land Corp. v. Utilities,
Inc., 127 Ill. App.3d at 13, 82 Ill. Dec. at
187, 468 N.E.2d at 449; see also Diamond State
Insurance Co. v. Chester-Jensen Co., 243
Ill. App.3d at 487, 183 Ill. Dec. at 446, 611 N.E.2d
at 1094 (which in determining that the law of
Illinois properly controlled, predicated its
conclusion on the convergent facts that the policy
was issued in Illinois, the insured risk was
located in Illinois, that the underlying action
was filed in Illinois courts, and that application
of Illinois law was not contrary to Pennsylvania's
Society of Mount Carmel, 268 Ill. App.3d at 664-65, 643
N.E.2d at 1287.
Were the Court to follow these decisions, we would find that Illinois
law governs the present case, as the claim for which coverage is sought
arose in Illinois and has been litigated in an Illinois court. The
Seventh Circuit, however, has gone in a different direction. In
Jupiter Aluminum Corp. v. Home Ins. Co., 225 F.3d 868 (7th Cir.
2000), the court, interpreting Illinois law, stated that the
location-of-the-risk factor has little weight in the choice of law
analysis when the insured risks are located in more than one state.
Id. at 874. In this regard, the Seventh Circuit relied on
Employers Ins. of Wausau v.
Ehlco Liquidating Trust, 309 Ill. App.3d 730,
723 N.E.2d 687 (1999), a decision by the First District of the Appellate Court
regarding coverage of insurance policies issued to an entity that had
operations in over twenty states, with more locations in Illinois than in
any other single state. The coverage dispute concerned a claim that arose
in Arkansas. In the passage relied upon by the Seventh Circuit in
Jupiter, the court stated that
the location of the subject matter of the
contract, such as the location of the risk insured
by an insurance policy, is entitled to little
weight when the subject matter or risk is located
in more than one state. See Lapham-Hickey
Steel Corp. v. Protection Mutual Insurance
Co., 166 Ill.2d 520, 527, 211 Ill. Dec. 459,
655 N.E.2d 842, 845 (1995); Restatement (Second)
of Conflict of Laws § 193, Comment b, at
611-12(1971) (while state where risk is located
bears significant relationship to casualty
insurance contract and will govern issues of
contract validity and rights of the parties, risk
must be located in one state; if contract covers a
group of risks that are scattered throughout two
or more states, location of risk is not given
Id. at 729, 723 N.E.2d at 694-95. The court went on to
discuss how the Illinois Supreme Court had applied this approach in
In determining the weight to be given the various
contacts present in this case, we find the
decision in Lapham-Hickey,
166 Ill.2d 520, 211 Ill. Dec. 459, 655 N.E.2d 842, cited by
Ehlco, to be instructive. In that case, the
insured sought a declaration regarding its right
to recover defense costs associated with EPA
proceedings relative to Minnesota property insured
under a policy issued by Protection Mutual
Insurance Company. The court found that the
insured was not entitled to recovery because no
lawsuit had been filed. Lapham-Hickey,
166 Ill.2d at 533, 211 Ill. Dec. 459, 655 N.E.2d
at 848. Before reaching that conclusion, however,
the court was required to determine whether
Illinois or Minnesota substantive law governed the
construction and interpretation of the all-risk
insurance policy that covered property located in
six states. The court chose Illinois law based on
that state's contact with the insurance contract.
Those contacts included the fact that the policy
was delivered to Lapham-Hickey in Illinois, that
Lapham-Hickey was incorporated in Illinois, and
that Protection Mutual was licensed to do business
in Illinois. The court gave little weight to the
fact that the property was located in Minnesota
because the policy covered property located in six
states. Instead, the court chose to apply Illinois
law "to obtain a consistent interpretation of the
policy." Lapham-Hickey, 166 Ill.2d at
527, 211 Ill. Dec. 459, 655 N.E.2d at 845.
Id. at 740, 723 N.E.2d at 695.
Having assessed these two apparently competing lines of Illinois
authority, this Court concludes, consistent with the Seventh Circuit's
decision in Jupiter, that the fact that Schlosser's lawsuit
against eHome was filed in Illinois should carry no significant weight in
the "most significant contacts" analysis. When state law is unclear, our
task is to determine how the Illinois Supreme Court would decide the
point. Decisions of intermediate appellate courts are to be considered in
this regard, but they are not dispositive. See, e.g., Allstate Ins.
Co. v. Menard's Inc., 285 F.3d 630, 636-37 (7th Cir. 2002). This
Court believes that Employers Ins. of Wausau accurately marks
the path that the Illinois Supreme Court would take. The Appellate
Court's decision in Society of Mount Carmel preceded the Supreme
Court's decision in Lapham-Hickey by nearly a year; one would
not have expected the court to be able to predict with complete certainty
how the Supreme Court would handle the choice of law issue in a case in
which the insured risks were in multiple states. But once
Lapham-Hickey was decided, the same First District of the
Illinois Appellate Court (albeit a different Division of that District)
changed its approach in Employers Ins. of Wausau. The latter
case is faithful to the Illinois Supreme Court's treatment of the matter
in Lapham-Hickey. Like the Seventh Circuit in Jupiter,
this Court finds that Employers Ins. of Wausau accurately states
Illinois law in this regard.
After consideration of the remaining factors set forth in
Lapham-Hickey, this Court concludes that New York law governs
the determination of the parties' rights and responsibilities under the
insurance policies at issue. As the court suggested in that case, it does
not make a great deal of sense to have the law governing eHome's
insurance policies depend upon the particular place where it is sued in a
particular case; rather, it makes more sense to have a consistent basis
for interpreting its rights and responsibilities under the policies.
See Lapham-Hickey, 166 Ill.2d at 527, 655 N.E.2d at 845. The
law of New York, where eHome is headquartered and has operations,
and where the insurance policies were delivered, is the law appropriately
The next question is whether Schlosser can maintain this action. Under
ordinary circumstances, an injured party is precluded from maintaining an
action against an insured tortfeasor's insurer (a so-called "direct
action") until after a judgment is entered against the tortfeasor. This
is the general rule under both New York and Illinois law. See, e.g.,
Richardson v. Economy Fire & Cas. Co., 109 Ill.2d 41, 47,
485 N.E.2d 327, 329 (1985); Mansul Constr. Corp. v. State Insur.
Fund, 118 A.D.2d 983, 984-85, 500 N.Y.S.2d 87, 88 (1986); see
generally, Vargas v. Boston Chicken, Inc., 269 F. Supp.2d 92, 95-97
(E.D.N.Y. 2003). Schlosser, however, is an assignee of the insured
tortfeasor and thus claims the right to be able to step into eHome's
shoes. St. Paul contends that determination of its obligation to pay the
face amount of the policy is inappropriate, as the policy only requires
it to pay sums that eHome is "legally required to pay," and under the
settlement the only amount eHome might be legally required to pay is
$20,000. To support the maintenance of this action in view of the
contingent nature of the settlement, Schlosser relies on Guillen v.
Potomac Inc. Co., 203 Ill.2d 141, 785 NE.2d 1 (2003), in which the
Illinois Supreme Court dealt with a settlement similar to the one that
Schlosser and eHome made in this case. The court held that because the
insurer had wrongfully refused to defend the insured in the underlying
litigation (as Schlosser claims St. Paul did with regard to eHome), it
had forfeited the right to argue that the insured was not legally
obligated to pay, or otherwise to object to the settlement on grounds
other than reasonableness. Id. at 162-64, 785 N.E.2d at 13-14.
But because New York law, not Illinois law, governs the determination of
the parties' rights and responsibilities under eHome's insurance
policies, Guillen is of no assistance to Schlosser. Schlosser
has made no effort to address how New York law deals with this
subject. Under the circumstances, Schlosser is not entitled to summary
2. Schlosser's motion to enjoin St. Paul from "interfering
with the res"
The Court believes that Schlosser's motion to enjoin St. Paul from
"interfering with the res" is based on an erroneous premise:
that St. Paul, having removed this case to federal court, is somehow
estopped from proceeding in the still-pending case in which it was sued
by eHome in New York. The Court assumes that both sides would agree that
it makes little sense to have the selfsame coverage issues decided in two
separate courts. And there is little doubt that each side is doing its
utmost to have the dispute decided in its own "home court." But we see no
authority for the proposition that St. Paul's mere removal of this case
creates any sort of bar to proceeding in the New York case.
That said, there are certainly bases on which Schlosser could seek to
have this Court make the definitive determination of this dispute (among
other things, it is not entirely clear why eHome, irrespective of St.
Paul's filing of the second New York case, did not follow Schlosser's
direction to dismiss the case it had filed in that state; and if as
Schlosser argues it is a necessary party to the coverage dispute but has
not been served in New York, that court may be unable to make a decision
that has a binding effect), or alternatively to step aside in favor of
the earlier-filed New York case. Because there may be a basis on which
Schlosser could seek to bar St. Paul from proceeding with the New York
case, rather than denying its motion we will enter and continue it for a
reasonable period so that the parties can determine their next moves.
For the reasons stated above, the Court denies plaintiff's motion for
summary judgment [docket
# 9-1]. The status hearing set for January 21, 2004 is vacated and
reset to January 29, 2004 at 9:30 a.m. Plaintiff's motion to enjoin St.
Paul from interfering with the res before the Court [docket #
8-1] and its motion for interim restraining order [docket #7-1] are
entered and continued to that date.
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