United States District Court, N.D. Illinois, Eastern Division
August 2, 2005.
FEDERAL INSURANCE COMPANY, Plaintiff,
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.
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
[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
"`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
"[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
(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
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.
(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
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
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.
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
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
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." (Id.) Again, Mr. Smith copied Ms. Raimondo on this
letter. (R. 135-1, Pl.'s SAMF, Ex. 9.)
On October 16, 2002, Mr. Smith spoke to Ms. Raimondo regarding
the "preliminary questions . . . relating to the amounts
sought, counsel, status, etc." that Mr. Smith originally posed in
the letter he sent five months earlier. (R. 129-1, Defs.' Resp.
to Pl.'s SAMF, Ex. 29 at FED 03657 (emphasis added).) In
summarizing their conversation, Mr. Smith notes that Andersen
"would likely want to settle this matter." (Id., Ex. 29 at FED
03657.) Furthermore, he states:
[Ms. Raimondo] also indicated that they are doing all
of the right things to contest the various matters,
including answering where appropriate and moving to
dismiss where appropriate. . . . Re[garding] coverage
I advised [Ms. Raimondo] that I was still reviewing,
but expected to have an opinion to her within a few
weeks. [Ms. Raimondo] said that if she could provide
any further information to just call her. . . .
(Id., Ex. 29 at FED 03657; R. 137-1, Pl.'s SMF at ¶ 29.)
Noticeably absent from this conversation was any mention of
whether Federal would participate in or undertake Andersen's
defense. (R. 129-1, Defs.' Resp. to Pl.'s SAMF, Ex. 29 at FED
V. Andersen's Settlement with the Retired Partners On October 25, 2002, Andersen distributed a letter to the
retired partners inviting them to attend a meeting during the
first week of November "to present [Andersen's] proposal to
resolve all Basic Retirement Benefit (BRB) and Early Retirement
Benefit (ERB) claims." (R. 137-1, Pl.'s SMF at ¶ 35.) This letter
also stated, "[w]e wrote to you in August that we would try to
continue payments through November as part of this resolution
which we have done and would try to develop a plan to pay
future amounts albeit at a significant discount within the
limitations imposed by the firm's current circumstances." (Id.)
On November 15, 2002, Ms. Raimondo informed Mr. Smith that
Andersen had "engaged in dialogue" with and circulated a
settlement proposal to the retired partners, which she attached
to her letter. (Id. at ¶ 34.) The settlement agreement and
corresponding release describe the nature of Andersen's proposal:
BRB/ERB SETTLEMENT STATEMENT
* * *
This Agreement is made for the purpose of settling
all claims of the undersigned retiree . . . relating
to: (1) Basic Retirement Benefits under Article 19 of
the AA Partnership Agreement or any related
agreements ("BRB") and (2) Early Retirement Benefits
under Article 12 of the AA Partnership Agreement or
any related agreements ("ERB"). Upon the
effectiveness of their Agreement . . . [Andersen]
shall pay to the undersigned the BRB Settlement
Payments and the ERB Settlement Payments . . . set
forth on the attached Signature Page [which was to be
executed individually by each settling retired
partner]. . . .
Agreements and Acknowledgments . . .
Notwithstanding anything to the contrary contained
herein, the undesigned, for him- or herself . . .
acknowledges that (1) in no event shall the
Administrator of [Andersen], any member of the
Administrative Board of [Andersen] . . . [or] any
present or former directors, officers . . . or
similar persons of [Andersen] . . . (collectively,
the "Covered Persons") have any personal liability
with respect to [Andersen's] obligations to make
Settlement payments hereunder, and (ii) no Covered
Person shall be obligated to make, and no Covered
Person in fact will make, any capital contribution or
other payment of any kind to [Andersen] in order for
[Andersen] to satisfy its obligations to make Settlement Payments hereunder. . . .
* * *
General Release and Covenant Not to Sue
* * *
The undersigned . . . does hereby release and forever
discharge [Andersen and Worldwide] . . . from any and
all actions . . . including . . . any Benefits Claims
. . . that in any way arise from or out of, are based
upon or relate to, the employment by, relationship
to, association with or ownership of [Andersen] . . .
As used herein "Benefits Claims" means, collectively,
any and all Claims that the undersigned now has . . .
arising out of or in respect of (i) the Basic
Retirement Benefit as provided in Article 19 or
elsewhere in the AA Partnership Agreement or as
provided in any other agreement or otherwise, (ii)
the Early Retirement Benefit as provided in Article
12 and/or Article 18 or elsewhere in the AA
Partnership Agreement or as provided in any other
agreement or otherwise; including, without
limitation, any Claim against any person or entity
for damages based on the loss of Basic Retirement
Benefits or Early Retirement Benefits. . . .
(R. 135-1, Pl.'s SAMF, Ex. 10 at FED 01335-36, 01338-39.) The
settlement agreement as drafted would obligate Andersen to make
settlement payments to the retired partners, but Gorrell (a
"Covered Person" and the "Administrator" to which the settlement
agreement refers) would not "have any personal liability"
In her letter, Ms. Raimondo further stated that "[t]o
accomplish this settlement, we will need at least $75 million
from our insurance carriers." (Id., Ex. 10 at FED 01332.) In
support of the request, Andersen advised the insurers that it had
"received an overall evaluation of this controversy from [its]
defense counsel" and that "[b]ased on that evaluation, [Andersen]
concluded that the prudent and reasonable course of action is to
attempt to settle. . . ." (Id., Ex. 10 at FED 01332.) The
settlement proposal indicated that the retired partners had until
December 1, 2002 to accept or reject Andersen's proposal. (R.
135-1, Pl.'s SAMF at ¶ 7.)
On November 25, 2002, Mr. Smith responded to Andersen's request
for settlement funds, stating that Federal "decline[d] at this time to contribute to
the settlement." (Id. at ¶ 8.) In addition, Mr. Smith asked Ms.
Raimondo to provide Federal "with the overall evaluation of this
controversy from defense counsel" referenced in Ms. Raimondo's
November 15, 2002 letter. (Id.) In a series of letters dated
between November 27, 2002 and December 3, 2002, Mr. Smith
informed Andersen that it "reserved its rights" and that it
consented to Andersen's choice of counsel, but that it denied
coverage as to the claims raised in: (1) the (already dismissed)
Bryce action and related arbitration demand, (2) the "[l]etters
from retired partners," (3) the Waters action, and (4) the
Samore arbitration demand. (Id., Exs. 12-15.) In each letter,
Mr. Smith invited Ms. Raimondo to contact him if Andersen had any
questions about Federal's coverage opinions. (Id. at ¶ 9.)
On January 7, 2003, after receiving a positive response from
the retired partners (the proposed settlement required 90% of the
retired partners to approve the settlement), Andersen agreed to
settle the partners' demands and claims for a total of $168
million. (R. 132-1, Defs.' CMSMF at ¶ 30; R. 135-1, Pl.'s SAMF,
Ex. 10 at 01333.) In exchange, the retired partners released
Andersen (and affiliated parties) from all exposures involving
"any Claim against any person or entity for damages based on the
loss of Basic Retirement Benefits or Early Retirement Benefits."
(R. 132-1, Defs.' CMSMF at ¶ 30.)
On February 18, 2003, Federal filed this suit against the
Insureds, but the Court, acting sua sponte, dismissed the
Complaint without prejudice for failing to properly plead federal
jurisdiction. (R. 128-1, Defs.' SMF at ¶ 12.) On March 18, 2003,
Federal filed an amended complaint. (Id. at ¶ 13.)
On March 28, 2003, Ms. Raimondo forwarded to Mr. Smith three
new arbitration demands (Connolly v. Arthur Anderesn LLP, Moriarty v. Arthur
Andersen LLP, and Small v. Arthur Andersen LLP and Larry
Gorrell, Individually and as Administrator), a class action
complaint comprising a group of non-settling claimant retirees
(Viets v. Deloitte & Touche LLP, et al.), and the two hundred
plus Election Letters Ms. Raimondo had forwarded under her
September 25 letter. (R. 132-1, Defs.' CMSMF at ¶ 34; R. 135-1,
Pl.'s SAMF at ¶ 10; id., Ex. 16.) Mr. Smith wrote to Ms.
Raimondo, on May 6 and 7, 2003, informing her that Federal denied
coverage as to the Connolly, Moriarty, and Small
actions.*fn13 (R. 135-1, Pl.'s SAMF, Exs. 18-22.)
On May 18, 2004, the Court granted Andersen's motion for
partial judgment on the pleadings, finding that the
Buchholz/Bryce complaints triggered Federal's duty to defend.
(R. 77-1, Order of May 18, 2004.) Because the parties did not
raise the issue, the Court's opinion did not address whether
Federal breached its duty to defend. (Id.)
I. Legal Standard
Summary judgment is proper when "the pleadings, depositions,
answers to interrogatories, and admissions on file, together with
the affidavits, if any, show that there is no genuine issue as to
any material fact and that the moving party is entitled to a
judgment as a matter of law." Fed.R.Civ.P. 56(c). A genuine
issue of material fact exists only if "the evidence is such that
a reasonable jury could return a verdict for the nonmoving
party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248,
106 S. Ct. 2505, 2510, 91 L. Ed. 2d 202 (1986). In determining whether a genuine issue of material fact
exists, the Court must construe all facts in a light most
favorable to the non-moving party and draw all reasonable and
justifiable inferences in favor of that party. Id. at 255. The
party seeking summary judgment must establish that no genuine
issue of material fact exists and that it is entitled to judgment
as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317,
323, 106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986). To prevail, the
responding party must then come forward with facts "sufficient to
establish the existence of an element essential to the party's
case, and on which the party will bear the burden of proof at
trial." Id. at 322. The existence of a factual dispute is not
sufficient to defeat a summary judgment motion, instead the
non-moving party must present definite, competent evidence to
rebut the summary judgment motion. Butts v. Aurora Health Care,
Inc., 387 F.3d 921, 924 (7th Cir. 2004).
These "principles apply to cross-motions for summary judgment
just as they would to a garden-variety summary judgment motion."
Steinberg v. Railroad Maint. and Indus. Health and Welfare
Fund, No. 03 C 4539, 2004 WL 1151619, *2 (N.D. Ill. Apr. 13,
2004) (citing Int'l Bhd. of Elec. Workers, Local 176 v. Balmoral
Racing Club, Inc., 293 F.3d 402, 404 (7th Cir. 2002)). That
is to say, "the court is to evaluate each motion on its merits,
resolving factual uncertainties and drawing all reasonable
inferences against the movant." Crespo v. Unum Life Ins. Co. of
Am., 294 F. Supp. 2d 980, 991 (N.D. Ill. 2003). Because "each
motion must be assessed independently ? denial of one does not
necessitate the grant of the other." Local 710 I.B.T. Pension
Fund v. United Parcel Serv., Inc., No. 02 C 4420, 2004 WL
2403123, *3 (N.D. Ill. Oct. 26, 2004) (citation omitted). With
these standards in mind, the Court turns to the merits of the
parties' motions. I. Andersen's Motion for Partial Summary Judgment
In its motion for partial summary judgment, Andersen contends
that Federal breached its duty to defend and that, as a result,
Federal is estopped from contesting coverage in this case.
Specifically, Andersen contends that Federal waited too long (six
months) and until too late (after Andersen executed its
settlement with the retired partners) to seek declaratory
judgment. (R. 128-1, Defs.' Mem. in Supp. of Mot. for Partial
Summ. J. at 10.)
A. Breaching the Duty to Defend*fn14
Whenever the duty to defend arises an insurer "may not simply
refuse to defend the insured." Employers Ins. of Wausau v. Ehlco
Liquidating Trust, 186 Ill. 2d 127, 150, 237 Ill. Dec. 82, 94,
708 N.E.2d 1122, 1134 (1999).*fn15 "Rather, the insurer has
two options: (1) defend the suit under a reservation of rights or
(2) seek a declaratory judgment that there is no coverage."
Ehlco, 186 Ill. 2d at 150, 237 Ill. Dec. at 94-95,
708 N.E.2d at 1134-35.
As to the first alternative, "[t]he issuance of a reservation
of rights letter to an insured is not the equivalent of
defending the insured under a reservation of rights."
Commercial Underwriters v. Utica Mut. Ins. Co., No. 98 C 5484,
2002 WL 31357047, *9 (N.D. Ill. Oct. 18, 2002) (emphasis added).
Instead, when an insurer undertakes its duty to defend (even if
accompanied by a reservation of rights) it must put forward an
effective defense. See Willis Corroon Corp. v. The Home Ins.
Co., 203 F.3d 449, 452 (7th Cir. 2000). As to the second alternative, an insurer must file a
declaratory judgment action "in a timely manner." Aetna Cas. &
Sur. Co. v. O'Rourke Bros., Inc., 333 Ill. App. 3d 871, 880,
267 Ill. Dec. 216, 224, 776 N.E.2d 588, 596 (3d Dist. 2002); Ehlco,
186 Ill. 2d at 150, 157, 237 Ill. Dec. at 94-95, 98,
708 N.E.2d at 1134-35, 1138. The timeliness of the insurer's declaratory
judgment should be determined with respect to when each
underlying claim arose. O'Rourke Bros.,
333 Ill. App. 3d at 880, 267 Ill. Dec. at 224, 776 N.E.2d at 596 (insurer breached
its duty to defend where it waited 11 months to file declaratory
judgment, but did not breach its duty to defend as to related
suits filed just before the insurer filed its declaratory
judgment). "The most important factor in determining whether an
insurer has breached its duty to defend is not the raw
chronological delay in an insurer's filing a declaratory judgment
action, but whether the insurer waited until trial or settlement
was imminent." Id. "Where an insurer waits to bring its
declaratory judgment until after the underlying action has been
resolved by judgment or settlement, the insurer's declaratory
judgment is untimely as a matter of law." Ehlco,
186 Ill. 2d at 157, 237 Ill. Dec. at 98, 708 N.E.2d at 1138.
Yet "[i]f the insured indicates that it does not want the
insurer's assistance, or is unresponsive or uncooperative, the
insurer is relieved of its duty to defend." Cincinnati,
183 Ill. 2d at 326, 233 Ill. Dec. at 654, 701 N.E.2d at 504; see
also Employers Reinsurance Corp. v. E. Miller Ins. Agency, Inc.,
332 Ill. App. 3d 326, 339-340, 265 Ill. Dec. 943, 954-54,
773 N.E.2d 707, 717-18 (1st Dist. 2002) (estoppel not appropriate
where insured failed to respond to insurer's request for
cooperation). "If, after being contacted, the insured indicates
that it desires the insurer's assistance, then the insurer's duty
to defend continues." Cincinnati, 183 Ill. 2d at 326,
233 Ill. Dec. at 654, 701 N.E.2d at 504. "[An] insurer does not become
liable [for indemnification] simply by inquiring of the insured whether it
desires the insurer to defend." Id. at 327,
233 Ill. Dec. at 654, 701 N.E.2d at 504. In addition, whether an insured has
excused its insurer from the duty to defend is a question of
fact. See Commercial Underwriters, 2002 WL 31357047 at *8.
When an insurer fails to file a timely declaratory judgment
action or defend under a reservation of rights and "is later
found to have wrongfully denied coverage, the insurer is estopped
from raising policy defenses to coverage" against its insured.
Ehlco, 186 Ill. 2d at 1505-1, 237 Ill. Dec. at 94-95,
708 N.E.2d at 1134-35; see also RLI Ins. Co. v. Illinois Nat'l Ins.
Co., 335 Ill. App. 3d 633, 644-45, 269 Ill. Dec. 524, 534,
781 N.E.2d 321, 331 (1st Dist. 2002) (breaching the duty to defend
estops an insurer from "raising policy exclusions or noncoverage
as a defense"); Insurance Co. of Illinois v. Federal Kemper Ins.
Co., 291 Ill. App. 3d 384, 387, 225 Ill. Dec. 444, 446,
683 N.E.2d 947, 949 (1st Dist. 1997) (same). The estoppel doctrine
"[arises] out of the recognition that an insurer's duty to defend
under a liability insurance policy is so fundamental an
obligation that a breach of that duty constitutes a repudiation
of the contract." Ehlco, 186 Ill. 2d at 150-51,
237 Ill. Dec. at 94-95, 708 N.E.2d at 1134-35; Schal Bovis, Inc. v. Casualty
Ins. Co., 315 Ill. App. 3d 353, 370, 247 Ill. Dec. 847,
860,732 N.E.2d 1179, 1192 (1st Dist. 2000) ("This principle is based upon
the general principle of contract law that a party who has
breached the terms of its contract may not rely on the terms of
the same contract to avoid its obligations.").
"[S]erious consequences ? result due to an insurer's
unjustified refusal to defend a covered claim . . ." Guillen v.
Potomac Ins. Co. of Illinois, 323 Ill. App. 3d 121, 132,
256 Ill. Dec. 51, 61, 751 N.E.2d 104, 114 (1st Dist. 2001) (breaching
duty to defend eliminates an insurer's right to approve a
settlement). Indeed, "[o]nce the insurer breaches its duty to
defend ? the estoppel doctrine has broad application and
operates to bar the insurer from raising policy defenses to
coverage, even those defenses that may have been successful had
the insurer not breached its duty to defend." Ehlco,
186 Ill. 2d at 152, 237 Ill. Dec. at 95, 708 N.E.2d at 1135. Despite its
broad effect, however, the "estoppel doctrine applies only where
an insurer has breached its duty to defend" and, conversely,
"[a]pplication of the estoppel doctrine is not appropriate if the
insurer had no duty to defend, or if the insurer's duty to defend
was not properly triggered." American Nat. Fire Ins. Co. v.
National Union Fire Ins. Co. of Pittsburgh, PA,
343 Ill. App. 3d 93, 101, 277 Ill. Dec.767, 774, 796 N.E.2d 1133, 1140-1140
(1st Dist. 2003) (citation omitted); see also E. Miller Ins.
Agency, 332 Ill. App. 3d at 340, 265 Ill. Dec. at 954,
773 N.E.2d at 718 ("if the insurer had no duty to defend or its duty
to defend was not properly triggered, estoppel cannot be applied
against the insurer. Such is the case where the insurer was given
no opportunity to defend or participate in the underlying suit
. . .").
C. An Issue of Material Fact Exists as to Whether Federal
Breached Its Duty to Defend, and, Hence, Whether the Estoppel
Doctrine Applies Here
According to these controlling principles, if Federal breached
its duty to defend, then it is estopped from raising policy
defenses against Andersen in this case. These principles also
establish, however, that if Andersen did not want Federal to
assist in its defense or if Andersen was "unresponsive or
uncooperative," then Federal was relieved of its duty to defend.
Cincinnati Cos. v. West American Ins. Co., 183 Ill. 2d 317,
327, 233 Ill. Dec. 649, 654, 701 N.E.2d 499, 504 (1998); E.
Miller Ins. Agency, 332 Ill. App. 3d at 339-340,
265 Ill. Dec. at 9545-4, 773 N.E.2d at 717-18; see also Commercial
Underwriters, 2002 WL 31357047 at *8. Construing the facts in a light most favorable to Federal, as the
Court must, a reasonable jury could conclude that Andersen had,
in effect, relieved Federal of its duty to defend.
First, in the initial letter to Federal, Ms. Lieberman, acting
on behalf of Andersen, did not ask Federal to defend Andersen.
Rather, she asked only that Federal consent to Andersen's
(already-retained) choice of independent defense counsel. (R.
135-1, Pl.'s SAMF, Ex. 3 ("Defense counsel is: John M. Touhy . . .
Please prove Federal's written consent to the insured's choice
of defense counsel at your earliest convenience."); id., Ex. 8
(letter to Federal enclosing additional claims against Andersen
and asking only that Federal consent to Andersen's choice of
counsel); see also R. 129-1, Defs.' Resp. to Pl.'s SAMF, Ex. 29
at FED 03657 (summary of the initial conversation between Federal
and Andersen showing that the parties did not discuss whether
Federal would participate in or undertake Andersen's defense).)
Second, Andersen did not respond to Mr. Smith's preliminary
inquiries for three months, thus leaving Federal's claims
examiner without the items he needed to conduct a duty to defend
or coverage analysis, including the Partnership Agreement under
which the retired partners asserted their right to retirement
benefits. Third, by the time Andersen responded to Federal's
initial inquiries (in August 2002) the court had dismissed the
Bryce action and, hence, Federal arguably had nothing to defend
Finally, Defendants rely heavily on the fact that, despite
having contact information for both Ms. Raimondo and Mr. Touhy,
Federal did not "pick up the phone" to inquire as to the progress
of the underlying proceedings. (R. 132-1, Defs.' Mem. in Supp. of
Cross Mot. for Summ. J. at 9-14.) A reasonable jury could conclude, however,
that Federal acted appropriately, only to be met with an
unresponsive insured. Indeed, Ms. Lieberman specifically
requested that Mr. Smith communicate with her, and not Andersen,
because of Andersen's then-current state of "confusion." (R.
129-1, Defs.' Resp. to Pl.'s SAMF, Ex. 29 at FED 03633.) Mr.
Smith obliged, submitting several unanswered requests to Ms.
Lieberman (many of which were copied to Ms. Raimondo)*fn17
for information essential to formulating a coverage opinion.
(Id.; R. 135-1, Pl.'s SAMF at ¶ 2; R. 137-1, Pl.'s SMF at ¶
21-23.) Moreover, Ms. Lieberman further informed Mr. Smith that
she "[had] been sending emails to the client and will continue to
do so in an attempt to get the info[rmation] [he] requested"
(Id.; R. 137-1, Pl.'s SMF at ¶ 21) a statement implicitly
suggesting that, even if Mr. Smith contacted Andersen directly,
he would fare no better in getting a response to his preliminary
Thus, when viewing the facts in Federal's favor, an issue of
material fact exists as to whether Andersen was sufficiently unresponsive and uncooperative
to relieve Federal of its duty to defend. Cincinnati,
183 Ill. 2d at 327, 233 Ill. Dec. at 654, 701 N.E.2d at 504; E. Miller
Ins. Agency, Inc., 332 Ill. App. 3d at 339-340,
265 Ill. Dec. at 954-54, 773 N.E.2d at 717-18. Accordingly, the Court denies the
Defendants' motion for partial summary judgment.*fn18
III. Federal's Motion for Summary Judgment
In its motion for summary judgment, Federal asserts that: (1)
the Court should dismiss the Defendants' counterclaims because
the estoppel doctrine does not apply, (2) the Policy does not
cover Andersen's loss, and (3) Defendants cannot recover
statutory penalties under Section 155 of the Illinois Insurance
Code. Although Federal correctly concludes that the Policy does
not cover Andersen's loss, the Court cannot grant summary
judgment because an issue of material fact exists as to whether
Federal is estopped from raising policy defenses.
Like Defendants' motion on the same claim, an issue of material
fact exists as to whether Federal breached its duty to defend.
Construing the facts in a light most favorable to Defendants, by
May 16, 2002, Federal had received notice of the Buchholz/Bryce
class action (purporting to represent a class of all retired
partners) and also the direct contact information for both Ms.
Raimondo, of Andersen, and Mr. Touhy, Andersen's counsel. (R.
135-1, Pl.'s SAMF, Ex. 3.) In addition, by May 23, 2002, Federal
had reviewed the complaints and recognized a potential coverage
dispute. (R. 132-1, Defs.' CMSMF at ¶ 14; R. 129-1, Defs.' Resp.
to Pl.'s SAMF, Ex. 29 at FED 03633.) Yet despite sufficient notice and
despite recognizing a potential coverage dispute, Federal failed
to conduct a duty to defend analysis until late November 2002 and
failed to file a declaratory judgment action until after Andersen
had settled the underlying proceedings. (R. 135-1, Pl.'s SAMF at
¶ 9.) Moreover, Federal did not even contact Andersen or
Andersen's defense counsel for five months, choosing instead to
communicate exclusively with a Marsh representative who proved
unable to respond to Federal's inquiries. (R. 129-1, Defs.' Resp.
to Pl.'s SAMF, Ex. 29 at FED 03657, 03633; R. 135-1, Pl.'s SAMF
at ¶ 2; R. 137-1, Pl.'s SMF at ¶ 21-23.) These facts, if credited
by the jury, could establish that Federal breached its duty to
defend, thus giving rise to estoppel. Ehlco,
186 Ill. 2d at 150, 237 Ill. Dec. at 94-95, 708 N.E.2d at 1134-35.*fn19
Accordingly, the Court denies Federal's motion for summary judgment on the Defendants' estoppel claim.
Federal also moves for summary judgment contending that,
estoppel aside, various provisions in the Policy preclude
coverage of Andersen's settlement. Specifically, Federal contends
that: (1) Andersen's settlement is not a Loss because it did not
result from a "Claim" against the Insureds "for a Wrongful Act;"
(2) Andersen failed to abide by the Policy's "Consent to
Settlement" provision; and (3) the "benefits due" exclusion
precludes coverage. (R. 137-1; Pl.'s Mem. in Supp. of Mot. for
Summ. J. at 23-27.) Even though a material issue of fact
precludes summary judgment for either party on the Defendants'
estoppel claim a claim that, if successful, would bar Federal
from asserting policy defenses*fn20 the Court will
determine whether the Policy covers the settlement because "[t]he
construction of an insurance policy . . . is a question of law to
be determined by a court." See The Private Bank and Trust Co. v.
Progressive Cas. Ins. Co., No. 03 C 6031, 2004 WL 1144048, *3
(N.D. Ill. May 18, 2004) (quoting Alpine State Bank v. Ohio Cas.
Ins. Co., 941 F.2d 554, 559 (7th Cir. 1991)).
"In construing an insurance policy, the primary function of the
court is to ascertain and enforce the intentions of the parties
as expressed in the insurance contract." Id. (citing Outboard
Marine Corp. v. Liberty Mut. Ins. Co., 154 Ill. 2d 90, 108,
180 Ill. Dec. 691, 607 N.E.2d 1204, 1212 (1992)). To that end, "the
court must construe the policy as a whole and take into account
the type of insurance purchased, the nature of the risks
involved, and the overall purpose of the contract." Premcor USA,
Inc. v. American Home Assurance Co., 400 F.3d 523, 527 (7th
Cir. 2005) (citing Emerson Elec. Co. v. Aetna Sur. & Cas. Co.,
352 Ill. App. 3d 399, 287 Ill. Dec. 280, 815 N.E.2d 924, 937 (1st
Dist. 2004)). In addition, "an insurance policy that contains no
ambiguity is to be construed according to the plain and ordinary
meaning of its terms, just as would any other contract." The
Private Bank, 2004 WL 1144048 at *3 (citing National Fid. Life
Ins. Co. v. Karaganis, 811 F.2d 357, 361 (7th Cir. 1987));
see also Dowd & Dowd, Ltd. v. Gleason, 181 Ill. 2d 460, 479,
230 Ill. Dec. 229, 693 N.E.2d 358, 368 (1998) ("The terms of an
agreement, if not ambiguous, should be generally enforced as they
appear, and those terms will control the rights of the
parties."). "If the language of the policy is susceptible to more
than one meaning, it is considered ambiguous and will be
construed strictly against the insurer who drafted the policy and
in favor of the insured." Premcor USA, 400 F.3d at 527
(citation omitted). "Nonetheless, courts should not search for an
ambiguity where none exists." The Private Bank, 2004 WL 1144048
at *3 (citing Crum & Forster Managers Corp. v. Resolution Trust
Corp., 156 Ill. 2d 384, 391, 189 Ill. Dec. 756, 620 N.E.2d 1073,
When an insured seeks indemnification for a settled claim
without an actual finding of liability, the insured is required
to show only that "it settled an otherwise covered loss in
reasonable anticipation of personal liability." Commonwealth
Edison Co. v. National Union Fire Ins. Co. of Pittsburgh, PA.,
323 Ill. App. 3d 970, 978, 256 Ill. Dec. 675, 681,
752 N.E.2d 555, 561 (1st Dist. 2001) (further noting that the "reasonable
anticipation" "rule avoid[s] placing insureds in the position of
having to refute liability in the underlying action until
settlement and then instantly turn around and prove their own
liability in the insurance action") (internal quotation and
citation omitted). Stated differently, the insured must show that
it settled the underlying lawsuits in reasonable anticipation of
a claim covered under its insurance policy. See Flodine v. State Farm Ins. Co., No. 99 C 7466, 2003 WL 1394977,
*7 (N.D. Ill. Mar. 9, 2003) ; TIG Ins. Co. v. Joe Rizza
Lincoln-Mercury, Inc., No. 00 C 5182, 2002 WL 406982, *11 (N.D.
Ill. Mar. 14, 2002). With these principles in mind, the Court
will address whether the Policy covers Andersen's settlement with
the retired partners.
1. The Definition of Loss
Andersen seeks coverage for the claims it settled with its
retired partners. Federal contends, however, that Andersen's
settlement is not an insured Loss because the retired partners'
Election Letters did not allege that the Insureds committed a
Wrongful Act. (R. 137-1, Pl.'s Mem. in Supp. of Summ. J. at 23.)
Federal further argues that the Policy does not cover the six
hundred plus settlements that Andersen executed with retired
partners who had not previously submitted any form of written
The Court agrees, to an extent. The Policy defines a Loss as a
"legal? obligat[ion] to pay" for a Claim "made against [the
Insureds] for Wrongful Acts," i.e. "any breach of
responsibilities, obligations or duties imposed upon fiduciaries
of the Sponsored Plan by [ERISA]" and "any negligent act . . . in
the Administration of any Sponsored Plan . . ." (Pl.'s Third Am.
Compl., Ex. A at ¶ 15.) The Election Letters, however, do not
allege any such breach, but rather ask only that Andersen
accelerate benefits in line with its established
practice.*fn21 (See, e.g., R. 135-1, Pl.'s SAMF, Ex. 8 at
FED 01041; see generally R. 26-1, Defs.' Ans. to Pl.'s Second
Am. Compl., Ex. A.) In addition, the Policy covers only those
Claims arising from a written demand, thus Federal would not
have to indemnify Andersen for its settlement with those partners who did not submit demands in
writing. (Pl.'s Third Am. Compl., Ex. A at ¶ 15.)
Nonetheless, contrary to Federal's suggestion, the Policy may
cover Andersen's settlement. Federal ignores the fact that the
settlement likely included amounts aimed at resolving the
Buchholz/Bryce class action complaint (purporting to represent
all of Andersen's retired partners), the Waters complaint, and
the Samore arbitration demand. Each of these proceedings,
unlike the Election Letters, alleged that the Insureds committed
"Wrongful Acts" by breaching their fiduciary duties.*fn22
The record, however, does not indicate to what extent Andersen's
settlement pertains to the claims raised in the Buchholz/Bryce,
Waters, and Samore proceedings as opposed to the Election
Letters. Thus, the Court cannot conclude at this juncture
whether, or to what extent, the settlement constitutes a Loss.
For the reasons below, however, the Court finds that the Policy
would not cover the settlement in any event.
2. The "Consent To Settlement" Provision
Federal contends that the Policy precludes coverage for the
additional reason that Andersen failed to comply with the
"Consent to Settlement" provision. The Court agrees. The "Consent
to Settlement" provision unambiguously requires Andersen to
obtain Federal's consent before settling a claim for more than
$250,000: The Insureds agree not to settle any Claim or incur
any Defense Costs in an amount greater than $250,000,
assume any contractual obligation or admit any
liability with respect to any Claim without the
[Federal's] written consent, which shall not be
unreasonably withheld. [Federal] shall not be liable
for any settlement and/or Defense Costs above
$250,000, assumed obligation or admission to which it
has not consented.
(Pl.'s Third Am. Compl., Ex. A at ¶ 3.) Andersen concedes that it
failed to obtain Federal's consent before settling for $168
million, but argues that it nonetheless complied with this
provision by giving Federal the opportunity to consent. (R.
132-1, Defs.' Mem. in Supp. of Cross Mot. for Summ. J. at 26-27.)
Andersen's cited authority, however, does not support such a
conclusion. (Id.) Moreover, Andersen fails to explain how
giving Federal the opportunity to consent squares with the
Policy's unambiguous requirement that Andersen actually obtain
written consent. (Id.) Thus, assuming that Federal reasonably
withheld its consent to Andersen's settlement, the "Consent to
Settlement" clause would preclude coverage.
3. The "Benefits Due" Exclusion
In its last policy-based attack, Federal asserts that the
Policy's "benefits due" exclusion eliminates coverage. That
clause excludes losses "constitut[ing] benefits due or to become
due under the terms of a Benefit Program," but further provides
that 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." (Pl.'s Third
Am. Compl., Ex. A at ¶ 6(d).) In response, Andersen alleges that
the settlement is not a payout for "benefits due" to the retired
partners, but rather reflects damages based on the loss of
benefits caused by the Insureds' breach of fiduciary
duty.*fn23 Andersen further contends that because the Buchholz/Bryce
plaintiffs alleged that both Andersen and Gorrell (in his
individual capacity) were liable, the exception to the "benefits
due" provision applies, thereby giving rise to coverage.
The Court finds Defendants' first contention unpersuasive.
Here, the retired partners alleged that the Partnership Agreement
entitled them to retirement benefits, that ERISA governed those
benefits,*fn24 and that they lost their benefits because
Andersen breached its fiduciary duties. Indeed, the settlement
agreement itself recognizes that the underlying claims centered
upon the benefits allegedly due to the retired partners:
[The Settlement] Agreement is made for the purpose of
settling all claims of the undersigned retiree . . .
relating to: (1) Basic Retirement Benefits under . . .
[the] Partnership Agreement . . . and (2) Early
Retirement Benefits under . . . [the] Partnership
Agreement . . . [Andersen] shall pay to the
undersigned the BRB Settlement Payments and the ERB
Settlement Payments . . .
(R. 135-1, Pl.'s SAMF, Ex. 10 at FED 01335.) Simply put, Andersen
settled claims for benefits. Andersen cannot now create coverage
by characterizing its loss otherwise. See May Dep't Stores,
305 F.3d at 602 (construing the same "benefits due" exclusion and
finding loss excluded because "[w]hat was being sought were
benefits, and characterizing an award of benefits as a from of
equitable relief would not bring it outside the exclusion in the
Furthermore, the record does not support Andersen's second
argument. Under the settlement agreement, Gorrell is not legally
obligated to pay any settlement amounts. Andersen, and Andersen
alone, is on the hook:
[Andersen] shall pay to the undersigned the BRB
Settlement Payments and the ERB Settlement Payments
. . .
[The settling retired partner] acknowledges that (i)
in no event shall the Administrator of [Andersen], . . .
[or] any present or former director . . . or
similar persons of [Andersen] . . . have any personal
liability with respect to [Andersen's] obligations to
make Settlement payments . . .
(R. 135-1, Pl.'s SAMF, Ex. 10 at FED 01335 (Andersen's proposed
settlement agreement).) Because the settlement agreement
specifically excepts Gorrell from incurring a "personal
obligation" the exception to the "benefits due" exclusion does
not apply and the Policy does not cover Andersen's loss.
C. Section 155 of the Illinois Insurance Code
Federal also moves for summary judgment on Defendants' claim
for statutory damages under Section 155 of the Illinois Insurance
Code. That Section provides, in relevant part:
In any action by or against a company wherein there
is in issue the liability of a company on a policy or
policies of insurance or the amount of the loss
payable thereunder, or for an unreasonable delay in
settling a claim, and it appears to the court that
such action or delay is vexatious and unreasonable, the court may
allow as part of the taxable costs in the action
reasonable attorney fees, other costs . . .
215 ILCS 5/155. "Section 155 applies only against insurers who
act vexatiously and unreasonably in delaying or denying a claim,
and ? wrongful denial of coverage by itself is not enough."
Knoll Pharm. Co. v. Automobile Ins. Co. of Hartford,
210 F. Supp. 2d 1017
, 1028 (N.D. Ill. 2002) (citing among other
authorities Citizens First Nat'l Bank v. Cincinnati Ins. Co.,
200 F.3d 1102, 1110 (7th Cir. 2000)). "Section 155 of the
Code is the legislature's remedy to an insured . . . `who
encounters unnecessary difficulties when an insurer withholds
policy benefits.'" Peerless Enter., Inc. v. Kruse,
317 Ill. App. 3d 133
,144, 250 Ill. Dec. 519
, 530, 738 N.E.2d 988
(2d Dist. 2000) (quoting Richardson v. Illinois Power Co.,
217 Ill. App. 3d 708
, 711, 160 Ill. Dec. 498
, 577 N.E.2d 823
(5th Dist. 1991)).
"In determining whether an insurer's conduct is vexatious and
unreasonable, courts must look at the totality of the
circumstances . . . including the insurer's attitude . . ."
Knoll, 210 F. Supp. 2d at 1028-29 (citation omitted);
Marcheschi v. Illinois Farmers Ins. Co., 298 Ill. App. 3d 306,
313, 232 Ill. Dec. 592, 597, 698 N.E.2d 683, 688 (1st Dist. 1998)
(same). "Illinois courts agree that, in determining whether an
insurer has acted vexatiously or unreasonably in processing a
claim, no single factor is dispositive." Yoon v. Investors Life
Ins. Co. of N. Am., No. 88 C 6768, 1990 WL 16478, *8 (N.D. Ill.
Jan. 31, 1990) (citing authorities); see also Green v.
International Ins. Co., 238 Ill. App. 3d 929, 935,
179 Ill. Dec. 111, 115, 605 N.E.2d 1125, 1129 (2d Dist. 1992) ("Neither the
length of time, the amount of money involved, nor any other
single factor is dispositive; rather it is the attitude of the
[insurer] which must be examined") (internal quotation omitted).
Because no particular factor determines whether an insurer has
acted vexatiously or unreasonably, "circumstances may exist where
[a two and one-half month] delay can be vexatious and unreasonable." Maduff v. Life Ins.
Co. of Virginia, 657 F. Supp. 437, 439 (N.D. Ill. 1987).
Accordingly, "[w]hether an insurer's conduct is vexatious and
unreasonable is a factual issue best left to the discretion of
the finder of fact." Knoll, 210 F. Supp. 2d at 1028-29
In addition, "[o]ne important benefit of a liability policy is
the defense of liability claims that have been filed in court."
Richardson, 217 Ill. App. 3d at 711, 160 Ill. Dec. at 501,
577 N.E.2d at 826. Indeed, "[i]t would defeat the purpose of the
statute to allow an insurer to escape any penalty when it fails
to provide one of the most important benefits of a liability
policy a defense." Bedoya v. Illinois Founders Ins. Co.,
293 Ill. App. 3d 668, 679, 228 Ill. Dec. 59, 66, 688 N.E.2d 757, 764
(1st Dist. 1997) (quoting Richardson,
217 Ill. App. 3d at 711, 160 Ill. Dec. at 501, 577 N.E.2d at 826); Ehlco,
186 Ill. 2d at 159, 237 Ill. Dec. at 99, 708 N.E.2d at 1139 ("[a]n award
under section 155 is proper where an insurer has acted
vexatiously and unreasonably in refusing to defend its insured").
"The law, however, is well-settled by the Illinois Supreme
Court that where a bona fide dispute concerning coverage
exists, the insurer's actions in denying or delaying coverage are
not vexatious and unreasonable and that sanctions and costs are
therefore not appropriate." Knoll, 210 F. Supp. 2d at 1028-29
(citation omitted). "The definition of bona fide is `[r]eal,
genuine, and not feigned.'" Id. (quoting McGee v. State Farm
Fire & Cas. Co., 315 Ill. App. 3d 673, 248 Ill. Dec. 436,
734 N.E.2d 144, 153 (2000)). "An insurer may in good faith entertain
a difference of opinion regarding policy coverage, and no penalty
should be assigned unless this conduct was without reasonable
cause." Id. (citation omitted). "Additionally, a difference of
opinion is not rendered unreasonable simply because judgment was
later adverse to the insurer." Id. (citation omitted). But when an insurer fails to raise its bona fide
disputes in a declaratory judgment action or defend its insured
under a reservation of rights, an insurer may be found liable
under Section 155. See Korte Const. Co. v. Am. States Ins.,
322 Ill. App. 3d 451, 460, 750 N.E.2d 764, 772, 255 Ill. Dec.847, 855
(5th Dist. 2001); see also Ehlco, 186 Ill. 2d at 159,
237 Ill. Dec. at 99, 708 N.E.2d at 1139.
Issues of material fact preclude summary judgment on the
Defendants' Section 155 claim. Federal contends that the
"significant briefing generated in this action over the meaning
of the Policy" "irrefutably proves" that a bona fide dispute
exists such as to warrant dismissal. (R. 137-1, Pl.'s Mem. in
Supp. of Summ. J. at 28.) Construing the facts in a light most
favorable to Andersen, however, Section 155 could apply here. By
May 2002, Federal had everything it needed (the Buchholz/Bryce
complaint and the Policy) to conduct a duty to defend analysis
and to confirm coverage, but yet it did neither until late
November 2002. Because Federal waited six months to issue its
coverage opinion during which time Andersen had to defend
itself against the retired partners' claims a reasonable jury
could conclude that until that time the parties did not have a
dispute at all, and that Federal's conduct was vexatious and
unreasonable. See, e.g., Korte Const., 322 Ill. App. 3d at 460,
255 Ill. Dec. at 855, 750 N.E.2d at 772. Moreover, looking to the
"totality of the circumstances," Federal's delay may be even more
egregious given that Federal did not directly communicate with
Andersen or its counsel even though Andersen at the time was at
"the center of Hurricane Enron." Roquet v. Arthur Andersen LLP,
398 F.3d 585, 587 (7th Cir. 2005). Accordingly, the Court
denies Federal's motion for summary judgment as to Defendants'
claim under Section 155 of the Illinois Insurance Code.
CONCLUSION For the above stated reasons, the Court denies: (1) Defendants'
motion for partial summary judgment as to counterclaim I; (2)
Federal's motion for summary judgment on counterclaims I-III; (2)
and Defendants' cross-motion for summary judgment as to
counterclaim II and III.