United States District Court, N.D. Illinois, Eastern Division
November 7, 2005.
GREY DIRECT, INC. Plaintiff,
ERIE INSURANCE EXCHANGE, Defendant.
The opinion of the court was delivered by: AMY ST. EVE, District Judge
MEMORANDUM OPINION AND ORDER
In its Second Amended Complaint, Plaintiff Grey Direct, Inc.
("Grey Direct") alleges that Defendant Erie Insurance Exchange
("Erie") breached its duty to defend and duty to indemnify under
the terms of an insurance policy. Before the Court are the
parties' cross-motions for summary judgment pursuant to Federal
Rule of Civil Procedure 56(c).*fn1 For the following
reasons, the Court grants Erie's motion for summary judgment and
denies Grey Direct's motion for summary judgment.
Grey Direct is a Delaware corporation with its principal place
of business in New York. (R. 61-1, Def.'s Local Rule 56.1 Stmt.
Facts, ¶ 1.) Erie is a Pennsylvania corporation with its principal place of business in Pennsylvania. (Id. ¶ 2.)
CommDirect, Inc. ("CommDirect") is a direct mail advertising
production company. (Id. ¶ 6.) The sole shareholder of
CommDirect, Mary Manade ("Manade") and her husband started a
separate corporation, Unicomm Direct, Inc. ("Unicomm Direct") in
May 2001. (R. 69-1, Grey Direct's Local Rule 56.1 Stmt. Addl.
Facts, ¶ 1.) Unicomm Direct had personalization, bindery, and
inserting equipment to do the physical work of direct mailing.
(Id. ¶ 2, Def.'s Stmt. ¶ 9.)
II. Grey Direct's Advertising Campaign
Grey Direct managed the "Fly Three, Fly Free" advertising
campaign for United Air Lines. (Def.'s Stmt. ¶ 10.) If a customer
purchased three round trip tickets on United Air Lines, the
customer qualified for one free round trip ticket. (Id.) On
July 16, 2003, Grey Direct contracted with CommDirect to print,
address, and mail travel certificates for free round trip tickets
to qualified customers. (Id. ¶ 11; R. 63-1, Pl.'s Resp. to
Def.'s Stmt. ¶ 11.) CommDirect brokered the work to Unicomm
Direct. (Def.'s Stmt. ¶ 12.) On September 11, 2003, Unicomm
Direct mailed two travel certificates instead of one to 5,997
qualified customers, and thus Grey Direct had to honor more
travel certificates than it expected. (Id. ¶ 24.)
In a letter dated September 18, 2003, Manade, on behalf of
Unicomm Direct, notified Grey Direct of the September 11, 2003
duplication error. (Id. ¶ 25; R. 49-1, Second Ad. Compl. ¶
15(c), Ex. D.) On September 24, 2003, Manade signed an agreement
with Grey Direct in which she agreed, among other things, to
obtain "Errors and Omissions Insurance Policies." (Def.'s Stmt. ¶
27; Pl.'s Resp. to Def.'s Stmt. ¶ 27.)
III. Insurance Policy & Endorsement
In early August 2003, Manade contacted Chris Bechtold of the
Bechtold Insurance Agency to obtain business owners' insurance for Unicomm Direct.
(Def.'s Stmt. ¶¶ 14, 15.) Thereafter, Bechtold arranged for Erie
to provide insurance coverage for Unicomm Direct. (Id. ¶¶ 12,
18; Pl.'s Stmt. ¶ 5.) On September 4, 2003, Erie issued Unicomm
Direct an insurance policy that was in effect from August 25,
2003 to August 25, 2004. (Second Ad. Compl., Ex. A; Def.'s Stmt.
¶ 21.) This original insurance policy did not contain a Printers
Errors and Omissions endorsement. (Def.'s Stmt. ¶ 19.)
Around October 15, 2003, Manade contacted Bechtold and
requested information concerning Printers Errors and Omissions
coverage for Unicomm Direct. (Id. ¶ 29.) On October 23 or 24,
2003, Manade told Bechtold to add the Printers Errors and
Omissions endorsement to Unicomm Direct's underlying insurance
policy. (Id. ¶ 31.) On October 24, 2003, Erie issued an amended
declaration stating that the Printers Errors and Omissions
coverage was effective as of October 15, 2003. (Id. ¶¶ 35, 36;
R. 51-1, Def.'s Resp. Memo. to Judgment on Pleadings, Ex. C.) On
January 8, 2004, Erie issued another amended declaration stating
that the Printers Errors and Omissions coverage was effective as
of August 25, 2003. (Second Ad. Compl., Ex A.)
On December 3, 2003, Grey Direct filed a complaint against
CommDirect, but not Unicomm Direct, in federal district court
concerning the "Fly Three, Fly Free" advertising campaign.
(Def.'s Stmt. ¶¶ 43, 44.) On May 20, 2004, Grey Direct
voluntarily dismissed the action against CommDirect. (03 C 8774,
R.15-1.) Meanwhile, on May 11, 2004, Grey Direct filed a claim
for breach of contract against Unicomm Direct. (Case No. 04 C
3328, R. 1-1). On June 22, 2004, Judge Der-Yeghiayan of the
United States District Court for the Northern District of
Illinois entered a default judgment against Unicomm Direct in the
amount of $967,720, plus court costs and attorney's fees. (Case No. 04 C 3328, R. 5-1.) On
August 26, 2004, Judge Der-Yeghiayan entered an "Agreed Order for
the Turnover Rights to Insurance Policy," that assigned Unicomm
Direct's insurance policy rights against Erie to Grey Direct.
(Id., R. 10-1.) On September 2, 2004, Grey Direct filed the
present action against Erie alleging breach of Erie's duties to
defend and indemnify Unicomm Direct in the underlying action. (R.
SUMMARY JUDGMENT 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 construes all
facts in a light most favorable to the non-moving party and draws
all reasonable inferences in favor of that party. Id. at 255.
The party seeking summary judgment has the burden of establishing
the lack of any genuine issue of material fact. Celotex Corp. v.
Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265
Grey Direct contends that Erie breached its duty to defend and
indemnify Unicomm Direct based on the Printers Errors and
Omissions endorsement. Erie, on the other hand, argues that it
had no duty to defend or indemnify because the September 11, 2003
duplication error was a "known loss" and that Manade knew of this
loss before she purchased the Printers Errors and Omissions coverage on October 23 or 24, 2003.
In general, an insurance policy is based on contingent or
future risks that may or may not occur. Outboard Marine v.
Liberty Mut. Ins., 154 Ill.2d 90, 103, 180 Ill.Dec. 691,
607 N.E.2d 1204 (1992). If an insured knows or has reason to know
that she has already suffered a loss at the time of purchasing an
insurance policy, the risk is no longer contingent, but is
considered a "known loss." Id. at 104. Accordingly, for the
known loss doctrine to apply, an insured must know or reasonably
know that at the time she purchased insurance there was a
substantial probability that a loss had already occurred. See
Spearman Indus., Inc. v. St. Paul Fire & Marine Ins. Co.,
138 F.Supp.2d 1088, 1100 (N.D. Ill. 2001) (citing St. Paul Fire &
Marine Ins. Co. v. Lefton Iron & Metal Co., 296 Ill.App.3d 475,
230 Ill.Dec. 771, 694 N.E.2d 1049, 1055 (Ill.App.Ct. 1998)). If
the insured has such knowledge, "the insurer has no duty to
defend or indemnify the insured with respect to the known loss
ab initio, unless the parties intended the known loss to be
covered." Outboard Marine, 154 Ill.2d at 104; see also
Crete-Monee Sch. Dist. 201-U v. Indiana Ins. Comp., No. 96 C
0275, 1997 WL 305310, *2 (N.D. Ill. May 30, 1997) ("the known
loss doctrine essentially reforms the contract to exclude the
known loss, apparently under the presumption that no reasonable
insurer would assume such a `risk'").
The Illinois Appellate Court, Second District, elucidates the
known loss doctrine and the Illinois Supreme Court's decision in
Outboard Marine as such:
For example, suppose an individual, while standing in
his basement in three feet of water, calls an
insurance company to obtain flood insurance. Later,
the insurer argues that it is not liable for any loss
because under the known loss doctrine the individual
knew that he had already suffered or would suffer a
loss from the water. In such a case, the insurer
would not have to show that the insurance policy
excluded known losses to avoid liability; it would
have to show only that the insured knew that there
was a substantial probability he would suffer a loss
from the water. Missouri Pac. R.R. v. American Home Assur. Co.,
286 Ill.App.3d 305, 316, 221 Ill.Dec. 648, 675 N.E.2d 1378 (Ill.App.Ct. 1997)
(emphasis added). Because the known loss doctrine goes to whether
the insurance policy has been triggered, the Court turns to
Erie's extrinsic evidence on the issue of known loss before
determining whether a duty to defend existed under the Printers
Errors and Omissions endorsement. See id.; see also
International Envtl. Corp. v. National Fire Ins. Comp.,
860 F.Supp. 511, 517 (N.D. Ill. 1994).
Here, Erie contends that Manade knew of the September 11, 2003
duplication error when she purchased the Printers Errors and
Omissions coverage for Unicomm Direct on October 23 or 24, 2003.
Erie bases its argument on Manade's September 18, 2003 letter to
Grey Direct acknowledging the September 11, 2003 duplication
error and Manade's September 24, 2003 agreement with Grey Direct
to obtain "Errors and Omissions Insurance policies." Based on
this undisputed evidence, there is no doubt that Manade knew of
the September 11, 2003 duplication error when she purchased the
Printers Errors and Omissions coverage on October 23 or 24, 2003.
In addition, there is no evidence in the record that the parties
intended the September 11, 2003 duplication error to be covered
under the Printers Errors and Omissions coverage. Accordingly,
Erie did not have a duty to defend or indemnify Unicomm Direct in
the underlying breach of contract claim as matter of law. See
Outboard Marine, 154 Ill.2d at 104 (if insured has evidence of
loss when purchasing policy, the loss is "uninsurable" because
risk is known).
Although the Printers Errors and Omissions coverage was never
triggered, Grey Direct nonetheless contends that Erie is estopped
from arguing that it does not have a duty to defend because Erie
did not defend the lawsuit under a reservation of rights or seek
a timely declaratory judgment that there was no insurance
coverage under the policy. See Employers Ins. of Wausau v. Ehlco Liquidating Trust, 186 Ill.2d 127, 150-51, 153,
1237 Ill.Dec. 82, 708 N.E.2d 1122 (1999). Indeed, under Illinois law,
if an insurer refuses to defend an insured and "is later found to
have wrongfully denied coverage, the insurer is estopped from
raising policy defenses to the coverage." Id. The estoppel
doctrine, however, only applies when an insurer has breached its
duty to defend. Id. at 151. As discussed, because the
duplication error was a known loss that was uninsurable, Erie did
not have a duty to defend or indemnify Unicomm Direct in the
first instance.*fn2 Therefore, Grey Direct's estoppel
For these reasons, the Court grants Defendant's Motion for
Summary Judgment and denies Plaintiff's Motion for Summary
© 1992-2005 VersusLaw Inc.