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Old Republic Insurance Co. v. Ness

January 11, 2006

OLD REPUBLIC INSURANCE COMPANY, PLAINTIFF,
v.
NESS, MOTLEY, LOADHOLT, RICHARDSON & POOLE, P.A.; RICHARDSON, PATRICK, WESTBROOK & BRICKMAN, LLC; H. BLAIR HAHN; MICHAEL J. BRICKMAN; TERRY E. RICHARDSON, JR.; INTERCLAIM HOLDINGS, LTD; INTERCLAIM RECOVERY, LTD; AND TWIN CITY FIRE INSURANCE COMPANY, DEFENDANTS.



The opinion of the court was delivered by: Judge Blanche M. Manning

MEMORANDUM AND ORDER

Before the court is Old Republic's motion for summary judgment as to Counts I, II, VI, VIII, and X of its First Amended Complaint and Twin City's cross-motion as to Count X. For the reasons stated herein, the motions are denied.

I. FACTS

The present action stems from a judgment entered against the now defunct law firm of Ness, Motley, Loadholt, Richardson & Poole, P.A. (NMLR&P). See Interclaim Holdings, Ltd. v. Ness, Motley, Loadholt, Richardson & Poole, 2001 WL 1313799 (N.D. Ill. Oct. 29, 2001) (hereinafter "Underlying Action"). Defendants Interclaim Holdings, Ltd. and Interclaim Recovery, Ltd. (collectively "Interclaim") filed the Underlying Action on December 4, 2000, against NMLR&P alleging that it engaged in wrongdoing in connection with its representation in the prosecution of certain class action claims that took place in the Circuit Court of Madison County, Illinois. The jury in the Underlying Action found NMLR&P breached its fiduciary duty and the parties' retainer agreement and awarded Interclaim $8.3 million in compensatory damages and $27.7 million in punitive damages. NMLR&P filed a motion for a new trial, judgment as a matter of law, and remittitur, which the district court denied. See Interclaim Holdings, Ltd. v. Ness, Motley, Loadholt, Richardson & Poole, 298 F.Supp.2d 746 (N.D. Ill. 2004) as amended 2004 WL 725287 (N.D. Ill. April 1, 2004). The defendants appealed. On appeal, the parties settled the case and the appeal was dismissed. Defendant Twin City Fire Insurance Company, who issued the $20 million primary professional liability insurance policy to NMLR&P ("Twin City Policy"), settled the Underlying Action in excess of the $20 million limit of liability of the Twin City policy.*fn1

The individual defendants in the present action are now members of and are practicing law with defendant Richardson Patrick, a South Carolina law firm. At issue are two "claims made and reported" Excess Professional Liability policies ("Policies") Old Republic issued to NMLR&P and its individual attorneys.*fn2 The Policies had effective dates of August 15, 2000 to August 15, 2001 ("First Policy") and August 15, 2001 to August 15, 2002 ("Second Policy").

Old Republic seeks a determination that it has no duty to defend, indemnify, or reimburse defense costs or make indemnity payments to the defendants.

The Policies are "claims made and reported" policies. Specifically, the Policies contain the following language:

The Company [Old Republic] shall provide to the Insured insurance coverage for any Loss on account of any Claim first made against the Insured during the Policy Period or the Extended Reporting Period (if exercised) and reported to the Company in accordance with Clause V.A.

Clause V.A. states:

The Insured shall as a condition precedent to their rights under this Policy, give to the Company written notice of any Claim made against the Insured as soon as practicable but in no event later than sixty (60) days after the end of the Policy Period or the Extended Period (if exercised) in which such Claim was made. Such written notice shall be given to the Company regardless of the amount of the Claim or the Underlying Limit.

Loss is defined as follows:

"Loss" means, to the extent for which coverage would be provided under the Primary Policy, (i) damages, judgments, or settlements and (ii) reasonable costs, charges, and expenses associated with the investigation, defense and appeal of any Claim.

Finally, the Policies contain a provision which states that "[a]ll notices under this Policy shall be in writing and be mailed or delivered to the appropriate party. Notice to the Company shall be mailed or delivered to Old Republic Insurance Company c/o Chicago Underwriting Group, Inc., 211 West Wacker Drive, Chicago, IL 60602."

Old Republic argues that the Policies do not cover the Underlying Action because (1) while the claim was first made against Ness Motley on December 4, 2000 (when the Underlying Action was filed), the Insureds did not report the claim to Old Republic until April 15, 2002, after the period of the First Policy---and since coverage is only provided for claims that are reported during the policy period in which the claim was first made, this claim is not covered; (2) coverage is unavailable because Illinois public policy prohibits insurance coverage for punitive damages arising out of one's own conduct; and (3) coverage for punitive damages is also barred by the exclusion for claims involving "actual dishonest, fraudulent, criminal or malicious" conduct and because the jury instruction in the Underlying Action provided that punitive damages could be awarded only if Ness Motley's conduct was willful or wanton and punitive damages were awarded, the exclusion applies.

II. SUMMARY JUDGMENT STANDARD

Summary judgment is appropriate if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuinely disputed 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); Schuster v. Lucent Techs., Inc., 327 F.3d 569, 573 (7th Cir. 2003). When reviewing a motion for summary judgment, the court must view the facts in the light most favorable to the nonmoving party and draw all reasonable inferences in its favor. See, e.g., Krchnavy v. Limagrain Genetics Corp., 294 F.3d 871, 875 (7th Cir. 2002). A triable fact issue exists "only if there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party." Schuster, 327 F.3d at 573 (quoting Wade v. Lerner New York, Inc., 243 F.3d 319, 321 (7 th Cir. 2001) (quotation omitted)).

The movant bears the initial burden of establishing that there is no genuinely disputed issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). "Because the purpose of summary judgment is to isolate and dispose of factually unsupported claims," the non-movant must then present specific facts showing that there is an issue for trial. Michael v. St. Joseph County, et al., 259 F.3d 842, 845 (7th Cir. 2001) (quoting Fed.R.Civ.P. 56(e)). To successfully oppose the motion, the non-movant cannot rest on the pleadings alone, but must designate specific facts in affidavits, depositions, answers to interrogatories, or admissions that establish that there is a genuine triable issue. Celotex, 477 U.S. at 324. A scintilla of evidence in support of the non-movant's position is insufficient to defeat a summary judgment motion; "there must be evidence on which the jury could reasonably find for the [non-movant]." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

III. ANALYSIS

A. Old Republic's Motion for Summary Judgment

1. Counts I & II -- Insureds Failed to Timely Report the Underlying Action

a. Did Ness Motley Timely Report the Underlying Action?

According to Old Republic, Ness Motley failed to provide written notice to Old Republic of the claim during the period of the First Policy when the claim was made. On the other hand, Ness Motley argues that it gave timely oral notice either through Terry Richardson and/or Francis Ray, both associated with Ness Motley. Ness Motley asserts that because a genuine issue of material fact exists as to whether Old Republic received oral notice of the claim during the appropriate time period, summary judgment should be denied.

As noted by Old Republic, coverage under the claims-made policies at issue is triggered only if: (a) the claim is made during the policy period; and (b) the claim is reported during the policy period. See American Nat. Fire Ins. Co. v. Abrams, No. 99 C 5807, 2002 WL 243455, at *3 (N.D. Ill. Feb. 19, 2002) ("Unless these two conditions occur, no coverage is provided under the claims-made policy.") (internal quotations marks and citation omitted). If the reporting requirements in the Policies were not satisfied, then Old Republic's duties to defend and indemnify were not triggered. Id. (citing cases); St. Paul Reinsurance Co. v. Williams & Montgomery, Ltd., 00 C 5037, 2001 WL 1242891, at *2 (N.D. Ill. Oct. 17, 2001) ( "If notice [under a claims-made policy] is not given, then the carrier is under no obligation to indemnify the insured.") (citations omitted).

One court has explained the reporting requirement in claims-made policies as follows:

[t]he reporting requirement in a claims made policy is an element of coverage because it helps define the scope of coverage under the policy.

It defines the scope of coverage by providing a date after which the insurer is no longer liable under the policy. This is because the purpose and function of the reporting requirement of a claims made policy is to eliminate an insurer's 'tail' exposure by minimizing the time between the insured event and the payment. As this provides insurers with greater certainty as to their exposure to liability, insureds under this type of policy pay lesser premiums and receive broader coverage.

Abrams, No. 99 C 5801, 2002 WL 243455, at *3 (internal quotations marks and citations omitted). "Given the purpose and function of the reporting requirement in a claims made policy, such reporting requirements are strictly construed." Executive Risk Indemnity, Inc., v. Chartered Benefit Servs. Inc., No. 03 C. 3224, 2005 WL 1838433 (N.D. Ill. July 29, 2005) (internal quotation marks and citation omitted).

Old Republic contends that because it did not receive written notice until April 2002, well after the claim was made in December 2000 and past the First Policy period which ended on August 15, 2001, the reporting requirement was not fulfilled. Ness Motley argues that since Old Republic had actual notice during the First Policy period, the reporting requirement has been met*fn3 . Specifically, Ness Motley asserts that Terry Richardson and Francis Ray provided oral notice of the claim during the First Policy Period. Because it does not have specific testimony from either individual, Ness Motley relies on the custom and practice testimony of each individual.

Terry Richardson was on the Ness Motley executive committee that was responsible for professional liability matters for Ness Motley. At his deposition, when asked if he recalled any conversations with Spooky Weeks*fn4 in December 2000 about the Underlying Action, Richardson testified as follows:

A: "That would have been my practice but I can't tell you as I sit here right this moment that I specifically remember the conversation about this particular claim."

Q: Do you recall ever speaking with Spooky Weeks about this particular claim? . . .

A: I think I did, I'd be surprised if I didn't, but I really don't have any specific date, time or recollection as to having done so.

Q: Can you recall anything that you said to Spooky about this claim? A No, no.

Earlier in the deposition, Richardson was also asked about giving notice to Old Republic.

Q: Did you have any further communications with Blair Hahn [another Ness

Motley lawyer] about placing any insurance carriers on notice of this Interclaim action? . . .

A You know, usually how it would happen is one of the lawyers would call somebody on the executive committee, maybe me, maybe Joe, and say, listen, this claim's come in. And at that time I'd either tell them to contact Terre*fn5 or Francis or Spooky and let's be sure we get this thing defended. And sometimes I'd talked to Spooky, sometimes maybe we patched in Francis or Terre right that second and turned it over. So it could have been that Blair called me before this and said, all right, get with them, write us a memo about it. And whether I or he talked to Spooky or directly to Francis at that time, I don't know. But yesterday I saw a letter where Blair did in fact write the insurance company after this memo.

Ness Motley also relies on the testimony of Francis Ray, an accounting assistant who was hired by Ness Motley in 1994.*fn6 According to Ness Motley's statement of fact at ¶21, Ray reported the Underlying Action to Weeks. Contrary to the implication by Ness Motley that Ray spoke with Weeks soon after the claim was filed, Ray's testimony actually states that he could not recall when he contacted Weeks about the Underlying Action and that he would contact Weeks only if instructed by someone else. Despite the above testimony by both Richardson and Ray that they would likely have spoken with Weeks about the Underlying Action at or around the time it was filed, Weeks denies having any knowledge of the Underlying Action until the judgment was entered against Ness Motley in July 2003.

Evidence submitted at summary judgment must be admissible at trial under the Federal Rules of Evidence. Woods v. City of Chicago, 234 F.3d 979, 988 (7th Cir. 2000). Old Republic argues that Richardson and Ray's testimony is inadmissible habit evidence without which Ness Motley fails to create a genuine issue of material fact that it notified Old Republic of the claim during the First Policy period. Federal Rule of Evidence 406 provides that:

Evidence of the habit of a person or of the routine practice of an organization, whether corroborated or not and regardless of the presence of eyewitnesses, is relevant to prove that the conduct of the person or organization on a particular occasion was in conformity with the habit or routine practice.

As the Advisory Committee notes to Rule 406 state, habit "describes one's regular response to a repeated specific situation."

Old Republic cites to the following excerpt from a Seventh Circuit case addressing habit evidence: before a court may admit evidence of habit, the offering party must establish the degree of specificity and frequency of uniform response that ensures more than a mere "tendency" to act in a given manner, but rather, conduct that is "semi-automatic" in nature. See Fed.R.Evid. 406 (Notes of Advisory Committee); 23 Wright and Graham, Federal Practice and Procedure, § 5273 (1980) p. 33 (evidence of habit must be highly particularized); See Wilson v. Volkswagen of America, Inc., 561 F.2d 494, 511 (4th Cir.1977) (pattern-of-conduct or habit evidence must be " 'numerous enough to base an inference of systematic conduct' and to establish 'one's regular response to a repeated specific situation' ").

Simplex, Inc. v. Diversified Energy Sys., Inc., 847 F.2d 1290, 1293 (7th Cir. 1988).

The Seventh Circuit has further stated:

The party offering the evidence must establish the habitual nature of the alleged practice. * * * Although there are no precise standards for determining whether a behavior pattern has matured into a habit, two factors are considered controlling as a rule: adequacy of sampling and uniformity of response. * * * The factors focus on whether the behavior at issue occurred with sufficient regularity making it more probable than not that it would be carried out in every instance or in most instances. * * * The requisite regularity is tested by the ratio of reaction to situations. * * * It is essential, therefore, that the regularity of the conduct alleged to be habitual rest on an analysis of instances numerous enough to [support] an inference of systematic conduct and to establish one's regular response to a repeated specific situation.

Thompson v. Boggs, 33 F.3d 847, 854 (7th Cir. 1994) (quoting United States v. Newman, 982 F.2d 665, 668 (1st Cir.1992), cert. denied, 510 U.S. 812 (1993) (quotations and citations omitted) (emphasis added).

However, in each of Simplex and Thompson, the court was concerned that the habit evidence being offered "will be used to establish a party's propensity to act in conformity with its general character, thereby thwarting Rule 404's prohibition against the use of character evidence except for narrowly prescribed purposes." Simplex, 847 F.2d at 1293 (citation omitted). That concern is not present here, and indeed, another court in this district has cautioned that the aforementioned "admonition cannot be read in a way that writes Rule 406 out of the Rules of Evidence." Brennan v. The Paul Revere Life Ins. Co., No. 00 C 0725, 2002 WL 1284385, at *3 (N.D. Ill. June 10, 2002) (stating that evidence that tended to establish "the existence of a routine practice more directly , such as by showing an entity had a general policy, procedure or rule which covered the specific scenario involved . . . . does not implicate Rule 404(b)'s concern with the misuse of evidence of specific instances of conduct.").

Essentially, Ness Motley is attempting to show that it had a specific procedure in place by which it would notify its insurance carriers of any claims filed against it. The court finds that such evidence is admissible in this instance. See Bowman v. Corrections Corp. of Am., 350 F.3d 537, 548-49 (6th Cir. 2003) (distinguishing Simplex on the ground that the testimony sought to be admitted in Simplex conflicted with Rule 404 while the evidence at issue in Bowman dealt with a warden's testimony as to whether he had received a phone call regarding an inmate's medical condition and the prison's "informal procedure" for dealing with phone calls from outside sources). Accordingly, the court concludes that the testimony of Ray and Richardson is admissible under Rule 406.

b. Was Spooky Weeks Old Republic's agent for purposes of notification?

Old Republic asserts that even if the testimony of Ray and Richardson is admissible as habit evidence, Weeks was not Old Republic's agent for purposes of notification of a claim under the Policies, and thus, notifying Weeks could not constitute actual notice.*fn7

Ness Motley contends that although the court has determined that Illinois law applies to the case, South Carolina law applies to the issue of whether Weeks was Old Republic's agent. Under the doctrine of depecage, the court must identify each issue raised in a case and then determine the controlling law on an issue-by-issue basis. Wilkow v. Forbes, Inc., 99 C 3477, 2000 WL 631344, at *5 (N.D. Ill. May 15, 2000) (citing Vantassell-Matin v. Nelson, 741 F.Supp. at 704; Restatement (Second) of Conflicts § 145, comment d ("[e]ach issue is to receive separate consideration if it is one which would be resolved differently under the local law rule of two or more of the potentially interested states").

While the court determined that Illinois law applies to the contract aspects of this case, whether Weeks is an agent of Old Republic is an entirely different issue. As such, the court will perform a conflict of law analysis as to the agency issue. When exercising diversity jurisdiction, the court must look to the choice-of-law rules of the forum state, Illinois, to determine which state's substantive law should apply. See, e.g., Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 497 (1941). Another court in this district has concluded after a detailed analysis that Illinois would follow the Restatement (Second) of Conflicts in ascertaining which state's law applies to an agency determination. FASA Corp. v. Playmates Toys, Inc., 869 F. Supp. 1334, 1344 ("the ...


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