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UTICA MUTUAL INSURANCE COMPANY v. DAVID AGENCY INS.

July 6, 2004.

UTICA MUTUAL INSURANCE COMPANY, Plaintiff,
v.
THE DAVID AGENCY INSURANCE, INC.; DAVID MEILAHN; and G.F. MANN AGENCY, LTD. Defendants.



The opinion of the court was delivered by: MATHEW KENNELLY, District Judge

MEMORANDUM OPINION AND ORDER

Utica Mutual Insurance Company ("Utica") filed suit seeking a declaratory judgment that it is not obligated to indemnify its insured, the David Agency Insurance, Inc. and David Meilahn (collectively "David"), for a judgment entered against them in favor of G.F. Mann Agency, Ltd. on January 14, 2004. David has moved for partial judgment on the pleadings. It argues that Utica breached its duty to defend by not effectively reserving its rights prior to defending David in the Mann lawsuit and therefore should be estopped from asserting coverage defenses and be held responsible for the full amount of the judgment. Utica has likewise moved for judgment on the pleadings, saying that it had no duty to defend and now has no duty to indemnify David. For the reasons stated below, the Court denies Utica's motion for judgment on the pleadings and grants David's motion for partial judgment on the pleadings.

Background

  The Amended Complaint in the Mann lawsuit contained five claims against The David Agency Insurance, Inc. and David Meilahn, owner and operator of the company. Count 1 alleged violations of the Illinois Consumer Fraud Act, including solicitation of sales and contracts "by deceit, fabrication and false statements." Counterclaim at Ex. A, ¶¶ 17-18. Count 2 alleged defamation for statements made by David that were "false and known to be false at all relevant times. . . ." Id. ¶ 27. Count 3 alleged that David violated the Illinois Trade Secrets Act "with the knowledge that [the confidential] information was acquired by improper means." Id. ¶¶ 38-39. Count 4 alleged tortious interference with prospective economic advantage, and finally, Count 5 alleged violation of the Illinois Uniform Deceptive Trade Practice Act for solicitation of customers by making false and misleading statements about Mann's business. Id. ¶¶ 44, 48-49. Mann sought significant compensatory damages on each claim and punitive damages on Count 1, 2 and 3. Id. at 6, 8, 10-12. Notably, Count 2, the defamation claim, included the largest prayer for damages, seeking $500,000 in compensatory damages and $500,000 in punitive damages. Id. ¶¶ 29-30.

  Utica sent a letter to David on September 8, 2000 stating that it had retained counsel to defend David in the Mann lawsuit but was doing so under a full reservation of its rights. Utica Mot., Ex. 1(C). Utica's reason for reserving its rights was that "[t]he Complaint alleges intentional acts and violation of the Consumer Fraud Deceptive Practices Act." Id. Further, Utica noted several exclusions in David's policy that "may apply in this instance" and stated that "if the allegations of this suit are proven, there would be no coverage." Id. Utica also said the complaint was seeking punitive damages "which are not insurable under this policy." Id. Utica listed the name and contact information for the law firm it had selected to represent David and also stated, "[y]ou may, at your own expense, hire a personal attorney to protect you for the punitive damages or any uncovered portions of this policy." Id.

  David seeks to be indemnified under the insurance policy for liability arising from "personal injury" and "advertising injury." "Personal injury" is defined in the policy as that "caused by an offense arising out of your business, excluding advertising, publishing, broadcasting or telecasting done by or for you." Counterclaim, Ex. B, ¶ A.1.b.2.a. "[A]dvertising injury" is defined as that "caused by an offense committed in the course of advertising your goods, products or services." Id. ¶ A.1.b.2.b.

  The policy also states under the heading "Liability and Medical Expense Definitions" that both "personal injury" and "advertising injury" may arise from one or more of the following offenses:
(1) Oral or written publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products, or services or (2) Oral or written publication of material that violates a person's right of privacy.
Id. ¶ F. 13.d-e; F.1.a-c. The policy excludes coverage for injuries:
(1) Arising out of oral or written publication of material, if done by or at the direction of the insured with knowledge of its falsity and (2) [a]rising out of the willful violation of a penal statue or ordinance committed by or with the consent of the insured.
Id. ¶ B.1, p. 1, 3 (emphasis added).

  Judgment was entered against David on January 14, 2004 for $987,087.02, including $462,087.02 in compensatory damages and $525,000 in punitive damages. David seeks to be reimbursed for the entire judgment, as well as for the attorney's fees it incurred following the entry of the judgment and that they will incur on appeal. David also seeks an order directing Utica to post the policy in lieu of a bond in connection with the appeal. David argues that Utica had a duty to defend under the policy because the allegations in the Mann lawsuit made David potentially liable for acts covered as personal injury and advertising injury. David contends that Utica created a conflict of interest by reserving its right to deny coverage. David also contends that Utica's reservation of rights letter was ineffective because it failed to disclose the conflict of interest and misinformed David that it would have to pay for the cost of retaining independent counsel. David says it was prejudiced because Utica did not disclose that the defense of their case could affect coverage under the policy. For these reasons, David argues that Utica is estopped from using coverage defenses to the claim for indemnification.

  Utica states that it was not required under the policy to defend David and that it is not now required to indemnify David for the Mann judgment. Utica says it properly reserved its rights because it specifically referred to the policy defenses it now asserts against David's claim for indemnification. It says the allegations in the Mann lawsuit were based solely on intentional acts which were excluded from coverage under the insurance policy.

  Both sides have moved for judgment on the pleadings.

  Discussion

  Judgment on the pleadings is proper where the pleadings raise only questions of law and no questions of material fact. Alexander v. City of Chicago, 994 F.2d 333, 335 (7th Cir. 1993). See also Conley v. Team Info Age, No. 03 C 0639, 2004 WL 528004, *1 (N.D. Ill. Jan. 27, 2004). Both sides agree on the material facts and raise only issues of law as to Utica's duty to defend and indemnify David. The parties agree that Illinois law applies.

  David argues that if the Court rejects its contention that Utica is estopped from asserting policy defenses, then judgment on the pleadings in Utica's favor on the duty to indemnify is inappropriate because fact issues remain. Because the Court ...


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