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FEDERAL INSURANCE COMPANY v. ANDERSEN

August 2, 2005.

FEDERAL INSURANCE COMPANY, Plaintiff,
v.
ARTHUR ANDERSEN LLP, ANDERSEN WORLDWIDE, S.C., and LARRY J. GORRELL, Defendant.



The opinion of the court was delivered by: AMY J. ST. EVE, District Judge

MEMORANDUM OPINION AND ORDER

Plaintiff Federal Insurance Company ("Federal") brought a twenty-six count complaint seeking declaratory judgment that Federal has neither a duty to defend nor a duty to indemnify its insureds — Arthur Andersen LLP ("Andersen"), Andersen Worldwide, S.C. ("Worldwide"), and Larry J. Gorrell ("Gorrell") — in connection with disputes arising from Andersen's refusal to disburse retired partners' benefits in lump-sum payments. In response, Andersen and Gorrell (collectively the "Insureds" or the "Defendants")*fn1 counterclaimed seeking: (1) a declaratory judgment that Federal breached its duty to defend and that, as a result, Federal is estopped from denying coverage in this case; (2) monetary damages to compensate Andersen for Federal's breach of duty; and (3) statutory damages for Federal's "vexatious and unreasonable" conduct as provided in Section 155 of the Illinois Insurance Code. Currently before the Court are the following summary judgment motions: (1) the Defendants' motion for partial summary judgment on their estoppel counterclaim; (2) Federal's motion for summary judgment on each of the Defendants' counterclaims, and (3) the Defendants' cross-motion for summary judgment on their second and third counterclaims. (R. 123-1, Pl.'s and Defs.' Renewed Mots. for Summ. J.) For the reasons below, the Court denies each motion.

BACKGROUND

  I. The Parties

  Federal is a corporation organized under the laws of the State of Indiana with its principal place of business in New Jersey. (R. 137-1, Pl.'s Stmt. of Mat. Facts in Supp. of Its Mot. for Summ. J. ("Pl.'s SMF") at ¶ 1.) Defendant Arthur Andersen LLP is an Illinois limited liability partnership with its principal place of business in Chicago, Illinois. (Id. at ¶ 2.) Currently, Arthur Andersen LLP has four partners, each of whom is a citizen of the State of Illinois. (Id. at ¶ 3.) Worldwide is a Societe Cooperative formed under the laws of the Swiss Confederation. (R. 135-1, Pl.'s Stmt. of Add. Mat. Facts in Opp. to Defs.' Mot. for Partial Summ. J. ("Pl.'s SAMF"), Ex. 3 at AA 0605.) Until August 2002, Mr. Gorrell was a partner at Andersen, and he currently resides in North Carolina. (R. 137-1, Pl.'s SMF at ¶ 4.)

  II. The Policy

  Federal issued an Executive Protection Policy (the "Policy"), including "Fiduciary Liability Coverage," to Worldwide for a policy period from January 1, 2000 to January 1, 2003.*fn2 (Id. at ¶ 7.) The Insuring Clause defines the scope of the Policy's coverage:
[Federal] shall pay on behalf of each of the Insureds all Loss for which the Insured becomes legally obligated to pay on account of any Claim first made against the Insured during the Policy Period . . . for a Wrongful Act committed, attempted, or allegedly committed or attempted, before or during the Policy Period by an Insured or by a person for whose Wrongful Acts the Insured is legally responsible.
(Pl.'s Third Am. Compl., Ex. A at ¶ 1.) The Policy further defines certain key terms used in the Insuring Clause:
• "`Loss' means the total amount which any Insured(s) becomes legally obligated to pay on account of each Claim and for all Claims in each Policy Period . . . made against them for Wrongful Acts for which coverage applies, including, but not limited to, damages, judgments, settlements, costs and Defense Costs. Loss does not include matters uninsurable under the law pursuant to which this coverage section is construed."
• "`Claim' means (a) a written demand for monetary damages, (b) a civil proceeding commenced by the service of a complaint or similar pleading, (c) a criminal proceeding commenced by a return of an indictment, or (d) a formal administrative or regulatory proceeding commenced by the filing of a notice of charges, for investigative order or similar document."
• "[W]ith respect to a Sponsored Plan," "Wrongful Act" means: "(i) any breach of responsibilities, obligations or duties imposed upon fiduciaries of the Sponsored Plan by [ERISA] or by the common or statutory law of the United States . . . (ii) any other matter claimed against the Sponsor Organization or an Insured Person solely because of the Sponsor Organization's or the Insured Person's service as a fiduciary of any Sponsored Plan; or (iii) any negligent act, error or omission in the Administration of any Sponsored Plan . . ."
• "`Sponsored Plan' means: (a) an Employee Benefit Plan [i.e. any plan so defined under ERISA] which is operated solely by the Sponsor Organization [i.e. Worldwide and Andersen] . . . for the benefit of the employees of the Sponsor Organization . . . (b) any other plan, fund, or program specifically included as a Sponsored Plan and named in Item 5 of the Declarations for this coverage section;*fn3 provided, however, Sponsored Plan shall not include any multiemployer plan, as defined in [ERISA]; or (c) any other employee benefit plan or program not subject to Title 1 of [ERISA], sponsored solely by the Sponsor Organization for the benefit of the employees of the Sponsor Organization." (Id., Ex. A at ¶ 15.) Inserting these definitions into the Insuring Clause as is relevant here, Federal must cover the total amount (including settlements and Defense Costs) that Andersen or Gorrell become legally obligated to pay as a result of a written demand or a civil proceeding against them for negligence in administering employee benefits or breach of their fiduciary duties under ERISA. Prior to triggering indemnification, however, the Policy requires the Insureds to cooperate with any Federal claim investigation and also to obtain Federal's consent before settling any Claim.*fn4 (Id., Ex. A at ¶ 3; Pl.'s SMF at ¶ 16.)
  In addition, the Policy carves out from coverage any Loss (other than Defense Costs) that "constitutes benefits due or to become due under the terms of a Benefit Program," meaning "any Sponsored Plan."*fn5 (Id., Ex. A at ¶¶ 6(d), 15.) The "benefits due" exclusion contains an exception, however: the Policy will cover "benefits due" "to the extent that, (i) the Insured is a natural person and the benefits are payable by such Insured as a personal obligation, and (ii) recovery for the benefits is based upon a covered Wrongful Act." (Id., Ex. A at ¶ 6(d).) III. The Underlying Claims
  On March 22, 2002, in the face of Andersen's well-publicized difficulties following Enron's collapse, ten of Andersen's retired partners filed a putative class action*fn6 against Andersen seeking a prompt, lump sum distribution of their retirement benefits under the Andersen Partnership Agreement (the "Partnership Agreement"). (R. 135-1, Pl.'s SAMF, Ex. 3 (attaching the complaint in Buchholz, et al. v. Arthur Andersen, LLP, et al, No. 02 C 2125 and the amended complaint in the same matter, restyled as Bryce, et al. v. Arthur Andersen, LLP, et al.).)*fn7 The Partnership Agreement allegedly entitled the Class Plaintiffs to certain guaranteed benefits (then at risk because Andersen funded the retirement plans from its then-current assets and revenue) including:
(1) a basic retirement benefit (paid for by each Andersen Retiree through payroll deductions over the course of his or her career) paid monthly, of a fixed amount, over the remainder of his/her lifetime.
(2) payment of each Andersen Retiree's pro forma capital balance, payable in either a lump sum upon demand or over a period of years; [and]
(3) payment of an early retirement benefit (available in a lump sum payment or in installment payments over ten years) to provide for the payment of a percentage of earnings to eligible participants from the early retirement date to the mandatory retirement date.
(Id., Ex. 7 at FED 01140, 01143-56, 01214, 01219-23.) The Buchholz/Bryce plaintiffs demanded recovery under a variety of legal theories, including breach of the Partnership Agreement and breach of ERISA's fiduciary requirements*fn8 — the latter claim resting, in part, on the fact that, as an informal practice, Andersen typically permitted retiring partners to receive retirement benefits in lump sums, if they so requested. (Id., Ex. 3 at AA 0625-41; R. 129-1, Defs.' Resp. to Pl.'s SAMF, Ex. 29 at FED 03657.)

  IV. Communications Between Federal and Andersen

  On May 16, 2002, Andrea Lieberman, in-house counsel for Andersen's insurance broker, Marsh USA Inc. ("Marsh"),*fn9 wrote Federal*fn10 to provide notice of the Buchholz and Bryce complaints. (R. 135-1, Pl.'s SAMF at ¶ 1.) Ms. Lieberman asked Federal to confirm coverage and to consent to Andersen's choice of counsel:
Pursuant to the [Policy's] Notice Provision . . . please find enclosed a complaint filed against your Insured . . . on or about March 22, 2002, styled David Buchholz, et al. v. Arthur Andersen LLP and Andersen Worldwide. We also enclose an amended complaint filed against your Insured . . . on or about April 26, 2002, styled Ronald A. Bryce, et al. v. Arthur Andersen LLP and Andersen Worldwide. Your acknowledgment of receipt of these materials and confirmation of coverage would be greatly appreciated. . . .
Your contact for the insured is: Lynne M. Raimondo . . . Defense counsel is: John M. Touhy, Mayer Brown Rowe & Maw . . .
Please prove Federal's written consent to the insured's choice of defense counsel at your earliest convenience.
On behalf of our client, Andersen Worldwide, S.C., we reserve all rights under the policy, at law and in equity. Should you have any questions regarding the enclosed or require any additional information, please do not hesitate to contact me.
(R. 135-1, Pl.'s SAMF, Ex. 3.) Ms. Lieberman sent copies of this letter to several parties, including Ms. Raimondo and Mr. Touhy.*fn11 (Id.) As the letter plainly indicates, Marsh had forwarded the complaints on behalf of "its client" and further invited Federal to contact Ms. Lieberman should it "require any additional information." (Id.) Notably, the letter does not ask Federal to join in the defense of the Buchholz/Bryce matter, but rather asks only that Federal confirm coverage and consent to the "insured's choice of defense counsel." (Id.)
  On May 22, 2002, Gregory Smith, Federal's claims examiner responsible for handling the Andersen matter, responded to Ms. Lieberman's letter and acknowledged that he had received both the Buchholz and Bryce complaints. (Id., Ex. 4.) Mr. Smith further stated:
I will be in contact with you as soon as I have an opportunity to review the documents and the policy. In the interim, Federal must reserve the right to raise all of the defenses available to it under the policy and the law.
  In order to assure proper attention, all future correspondence should . . . be addressed to my attention. If you have any questions or comments on this matter, please feel free to contact me [by phone or email]. (Id.) Mr. Smith sent a copy of this letter to Ms. Raimondo. (Id.)
  On May 23, 2002, Mr. Smith noted in his claims file (the "Claims File") that he had "[r]eviewed the [Andersen] matter on a preliminary basis." (R. 132-1, Defs.' Stmt. of Material Facts in Supp. of Cross Mot. for Summ. J. ("Defs.' CMSMF") at ¶ 14.) Also in that Claims File entry, Mr. Smith memorialized a phone conversation he had that same day with Ms. Lieberman:
[I] [c]alled Andrea and asked several questions — she didn't know but promised to get answers. She also requested that questions be addressed to her as she stated that there is a lot of confusion at the company right now. My initial questions are contained in my letter to her.
(R. 129-1, Defs.' Resp. to Pl.'s SAMF, Ex. 29 at FED 03633.) During his deposition, Mr. Smith testified that upon making this preliminary review, he questioned whether the Policy covered the Buchholz/Bryce complaint and requested that Claim Counsel (i.e. an in-house Federal attorney who gives legal advice on anticipated insurance coverage disputes) also review the matter. (R. 132-1, Defs.' CMSMF at ¶ 14.)

  On May 29, 2002, in a letter to Ms. Lieberman, Mr. Smith, following up on his May 22 letter and subsequent phone conversation with Ms. Lieberman, reiterated his "preliminary questions." (R. 135-1, Pl.'s SAMF at ¶ 2.) Specifically, Mr. Smith asked whether Mr. Touhy represented all defendants and what rates he proposed to charge and whether the Buchholz complaint had been amended and recaptioned as Bryce. (R. 135-1, Pl.'s SAMF, Ex. 5.) In addition, Mr. Smith asked Ms. Lieberman to forward the Partnership Agreement and other related documents. (Id.) In closing, Mr. Smith again stated that Federal reserved all of its rights under the Policy. (Id.) Mr. Smith copied Ms. Raimondo on this letter, as well. (Id.)

  On June 19, 2002, Mr. Smith emailed Ms. Lieberman to follow-up on his May 29 letter. (R. 137-1, Pl.'s SMF at ¶ 21.) As of that date, Mr. Smith had not yet received "various documentation from [Andersen]" and further asked Ms. Lieberman whether she had "[a]ny idea of when [he] might expect a response." (R. 129-1, Defs.' Resp. to Pl.'s SAMF, Ex. 29 at FED 03637.) That same day Ms. Lieberman responded, "[w]e did confirm that Lynne Raimondo received your letter, but haven't heard anything since then. I'll follow up with her and let you know what she says." (R. 137-1, Pl.'s SMF at ¶ 21; R. 129-1, Defs.' Resp. to Pl.'s SAMF, Ex. 29 at FED 03638.)

  On July 2, 2002, Mr. Smith and Ms. Lieberman exchanged emails regarding the status of Federal's pending requests to Andersen. (R. 137-1, Pl.'s SMF at ¶ 22.) On July 12, 2002, Mr. Smith again emailed Ms. Lieberman to advise that Federal had not received the requested information from Andersen and that Federal was "unable to assess coverage, and [is] deferring same, until receipt of the requested information." (Id. at ¶ 23.) Ms. Lieberman responded: "I understand. I have been sending emails to the client and will continue to do so in an attempt to get the info[rmation] you need." (Id.)

  On June 26, 2002, R. David Ades, an attorney for excess insurer AIG, contacted Federal about the Andersen matter. (R. 132-1, Defs.' CMSMF at ¶ 17; R. 129-1, Defs.' Resp. to Pl.'s SAMF, Ex. 29 at FED 03639.) Mr. Ades asked for a copy of the Policy and Federal's coverage opinion. (R. 129-1, Defs.' Resp. to Pl.'s SAMF, Ex. 29 at FED 03639.) In response, Mr. Smith stated that he "had not yet issued a cov[erage] opinion [because] there was an on-going investigation," but that he would do so "upon receipt of the information." (Id., Ex. 29 at FED 03639.) On July 16, 2002, Mr. Ades again asked for Federal's coverage opinion. (Id., Ex. 29 at FED 03644.) Mr. Smith replied, stating that he "had requested further info and would not be issuing a substantive cov[erage] opinion until [he] had reviewed that info[rmation]." (Id., Ex. 29 at FED 03644.) Mr. Smith's Claims File entry on this same date reflects that he received AIG's "standard excess letter" indicating that the Buchholz/Bryce complaint "may have been dismissed" and that he would "check" to confirm that such was the case. (Id., Ex. 29 at FED 03644.) To that end, Mr. Smith left a voicemail message for Ms. Lieberman. (Id., Ex. 29 at FED 03645.)

  On July 17, 2002, Mr. Smith reviewed the Buchholz/Bryce court file. (Id., Ex. 29 at FED 03646.) Mr. Smith learned that the plaintiffs had moved for voluntary dismissal, that Andersen had filed an opposition thereto, and that the Court had dismissed the case without prejudice. (Id., Ex. 29 at FED 03646.) He further noted that "[plaintiffs] can probably refile and don't know why [Andersen] opposed — perhaps [because Andersen] thought dismissal should have been [with] prejudice? Will follow-up." (Id., Ex. 29 at FED 03646.)

  On August 20, 2002, Ms. Raimondo wrote to Mr. Smith to address the "preliminary questions" that Mr. Smith raised in his May 29 letter. (R. 135-1, Pl.'s SAMF at ¶ 3.) Ms. Raimondo stated that Mayer Brown represented only Andersen, not Worldwide, and further provided Mayer Brown's hourly rate information. (Id.) Addressing Mr. Smith's request that Andersen confirm Federal's understanding of the relationship between the Buchholz and Bryce complaints, Ms. Raimondo responded: "Your understanding is correct; however, you should note that the above-referenced [Bryce] federal lawsuit has been dismissed. The plaintiffs indicated that they may pursue similar claims by way of arbitration pursuant to Article 29 of the Partnership Agreement." (Id.) Ms. Raimondo's letter enclosed a copy of the Partnership Agreement and the Andersen policy governing "retired partner payments and benefits." (Id.)

  On August 23, 2002, Mr. Smith noted that he had received documents from Andersen and that a "quick review" indicated to him that the breach of fiduciary duty claim appears not to be a central issue." (R. 132-1, Defs.' CMSMF at ¶ 19.) Mr. Smith further noted that he had "not reviewed further at present because matter is dismissed and are waiting to see what Arb[itration] Demand actually says" and that "[f]or now" he was "closing [the] file." (Id.)

  On September 25, 2002, Marsh's representative, Ms. Mary K. Meinert, forwarded to Mr. Smith another copy of the amended complaint in the Bryce action and advised him that counsel "for the plaintiffs tendered this amended complaint along with a purported arbitration demand." (R. 135-1, Pl.'s SAMF, Ex. 8.) Ms. Meinert also enclosed: (1) a complaint filed in an action captioned Waters, et al. v. Arthur Andersen LLP, pending in a California state court (filed July 1, 2002); (2) a demand for arbitration in a proceeding captioned Samore v. Arthur Andersen LLP, et al. (dated May 14, 2002); and (3) "numerous letters [received by Andersen] from retired partners making a variety of demands." (Id.) According to Ms. Meinert, "[m]any of these letters threaten arbitration or legal proceedings." (Id.) Much like Ms. Lieberman's initial letter to Federal, Ms. Meinert did not expressly request that Federal participate in Andersen's defense to the referenced actions:
Your acknowledgment of receipt of these materials*fn12 and confirmation of coverage would be greatly appreciated. . . . Your contact for the insured is [Ms. Raimondo]. Defense counsel is: [Mr. Touhy]. Please confirm Federal's consent to the insured's selection of defense counsel at your earliest convenience. On behalf or our client, [Worldwide], we reserve all rights under the policy, at law and in equity. Should you have any questions regarding the enclosed or require any additional information, please do not hesitate to contact me.
(Id., Ex. 8.) As with the Buchholz/Bryce complaint, the enclosed arbitration demands, the lawsuit, and the election letters (the "Election Letters") sought payment from Andersen under the terms of the Partnership Agreement. (R. 137-1, Pl.'s SMF at ¶ 26.) Ms. Meinert sent copies of this letter to Ms. Raimondo, Mr. Touhy, and Ms. Lieberman, among others. (R. 135-1, Pl.'s SAMF, Ex. 8.)

  On October 14, 2002, Mr. Smith acknowledged receipt of these materials. (Id. at ¶ 6.) He further indicated that he would review the materials provided in conjunction with the Policy and that, "[i]n the interim, Federal must reserve the right to raise all of the defenses available to it under the policy and the law." ...


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