The opinion of the court was delivered by: Magistrate Judge Geraldine Soat Brown
MEMORANDUM OPINION AND ORDER
Before the court are Plaintiffs' Rule 56 Motion for Partial Summary Judgment on Coverage [dkt 27], and Defendant's Motion for Summary Judgment [dkt 22]. For the reasons set out below, both motions are denied.
Federal jurisdiction exists in this case because of diversity of citizenship. 28 U.S.C. § 1332.
Plaintiffs Patrick Schaumburg Automobiles, Inc., d/b/a Patrick Cadillac ("Patrick Cadillac") and Patrick European, LLC, d/b/a Patrick BMW ("Patrick BMW"), (collectively, "Plaintiffs"), are Illinois corporations with their principal places of business in Cook County, Illinois. (Pls.' LR Resp. ¶ 1.)*fn1 Defendant Hanover Insurance Company ("Hanover") is a Massachusetts corporation with its principal place of business in Worcester, Massachusetts. (Id. ¶ 2.) The parties do not dispute that the amount in controversy exceeds $75,000. (Id. ¶ 3.)
On June 9, 2004, Patrick Cadillac filed a complaint against Hanover, alleging breach of contract and seeking damages and declaratory relief. [Dkt 1.] On the same day, Patrick BMW filed an almost identical complaint against Hanover. [Dkt 1, 04 C 3926.] The only respect in which the complaints appear to differ is the amount sought by each plaintiff. Patrick Cadillac claims it suffered damages of $317,240 (Compl. ¶ 12), whereas Patrick BMW claims it suffered damages in the amount of $1,272,378 (Compl. ¶ 12, 04 C 3926). Hanover's motion to consolidate the two cases was granted [dkt 6, 7], and the cases were consolidated under Case No. 04 C 3925. The parties consented to the jurisdiction of a magistrate judge [dkt 8, 9], and the cases were assigned to this court pursuant to 28 U.S.C. § 636(c). [Dkt 10.]
Plaintiffs are automobile dealerships. (Def.'s LR Resp. ¶ 9.) This action arises out of Plaintiffs' insurance claim for financial losses resulting from the dishonest activities of their former employee, David Hoffman ("Hoffman"). As part of their business, Plaintiffs purchase and sell used cars in the wholesale market from various wholesalers. (Id.) Hoffman worked for both Plaintiffs as a used car manager for approximately two years from 1999 to 2001.*fn2 (Pls.' LR Resp. ¶¶ 5, 8.) Over that time, Hoffman received kickbacks from accomplice wholesalers as part of a scheme in which he sold Plaintiffs' cars to accomplice wholesalers for an amount less than the cars' worth and bought cars from accomplice wholesalers for more than the cars' worth.*fn3
Hanover issued a Commercial Crime Insurance Policy (the "Policy") that named Plaintiffs, among other Patrick companies, as insureds. (Id. ¶ 4; Def.'s LR Ex. A, Policy.) The Policy, described further below, includes coverage for loss resulting from employee dishonesty. (Def.'s LR Resp. ¶ 7.) The Policy was in effect during the relevant period. (Pls.' LR Resp. ¶ 5.) Plaintiffs made a claim under the Policy, and Hanover has already paid Plaintiffs part of their claimed loss. (Def.'s LR Resp. ¶¶ 5, 10, 11.) Hanover does not dispute that Hoffman's activities constituted "employee dishonesty" as defined by the Policy. (Id. ¶¶ 7, 11.) Likewise, Hanover does not dispute that Plaintiffs incurred at least some covered financial loss resulting from Hoffman's dishonest activities. (Def.'s Mem. at 1-2.) At issue in the lawsuits is whether Hanover is liable for an additional amount that Plaintiffs claim is a covered loss under the Policy, and whether Plaintiffs' total recovery is subject to one or more limits of liability under the Policy. (See Pls.' Mem. at 2; Def.'s Mem. at 5-6, 14.)*fn4
I. Hoffman's Dishonest Activities
Hoffman's actions involved two types of schemes, which the parties refer to as "Dishonest Activity One" and "Dishonest Activity Two."
A. "Dishonest Activity One"
In Hoffman's first scheme, he bought cars on behalf of one of the Plaintiffs from wholesaler accomplices for amounts greater than the cars were worth. As a hypothetical example, Hoffman would arrange for one of the Plaintiffs to pay a wholesaler $20,000 for a car worth only $10,000. In exchange, the wholesaler paid Hoffman a kickback. (See Pls.' Mem. at 3-4; Def.'s Resp. at 3-5.)
As further discussed below, the actual "worth" of the cars is part of the parties' dispute.
B. "Dishonest Activity Two"
Hoffman's second scheme involved selling cars on behalf of one of the Plaintiffs to wholesaler accomplices for less than the cars were worth. (Def.'s LR Resp. ¶ 10; see Pls.' Mem. at 4; Def.'s Resp. at 5-7.) As a hypothetical example, Hoffman would arrange for one of the Plaintiffs to sell a car worth $20,000 to a wholesaler for only $15,000. Hoffman then received a kickback from the wholesaler. (See Pls.' Mem. at 4.) Again, the actual "worth" of the cars is part of the dispute.
II. Plaintiffs' Insurance Claim
Plaintiffs discovered Hoffman's activities in October 2001. (Pls.' LR Resp. ¶ 12.) Hundreds of cars were involved in both schemes. (See Def.'s LR Ex. E, 12/22/03 Report of Studler, Doyle & Co., LLC ("SDC Report") at 5; Tr. at 4.) On August 27, 2003, Plaintiffs submitted a Proof of Loss to Hanover, in the amount of $938,711, which Plaintiffs call a "Partial" Proof of Loss. (Pls.' LR Resp. ¶ 12; Def.'s LR Ex. D at 1.) Plaintiffs' calculation of their claimed loss in the August 27, 2003 Proof of Loss was based on a comparison between amounts earned from transactions that Hoffman arranged with colluding wholesalers and amounts earned from transactions with honest wholesalers involving cars of the same make and model. (See SDC Report at 8-9.)*fn5
In March 2004, Plaintiffs submitted a supplemental analysis to Hanover for their Proof of Loss, which the parties refer to as the "Black Book analysis." (Pls.' LR Resp. ¶ 14.) The "Black Book" database provides estimates of the wholesale values of cars. (Def.'s LR Stmt. ¶ 14; Pls.' LR Resp. ¶ 14.) The parties do not provide information about how "Black Book" estimates are made, or by whom, or how they are used in the industry or by Plaintiffs in the ordinary course of business. Plaintiffs' March 2004 Black Book analysis was based on their submission of VIN numbers, year, make, model, and mileage information for the cars involved in the Hoffman transactions to the Black Book database. (Def.'s LR Stmt. ¶ 14.)*fn6 Plaintiffs considered the Black Book estimates accurate estimates of the wholesale values of cars at any given point in time, but acknowledge that those estimates change weekly. (Pls.' LR Resp. ¶ 14.) During oral argument, Plaintiffs' counsel stated that the Black Book analysis was not part of Plaintiffs' initial Proof of Loss calculation because Plaintiffs were not aware at the time that the company that produces the Black Book maintains historical databases of Black Book estimates. (See Tr. at 38.) Plaintiffs submitted the Black Book analysis to Hanover as further support for their initial August 27, 2003 Proof of Loss. (Pls.' LR Resp ¶ 14.) Based on the Black Book analysis, Plaintiffs assert that their loss from Hoffman's dishonest acts while he was employed by Patrick Cadillac is $317,240.00. (Id. ¶ 5.) Patrick BMW's claimed loss for the period of Hoffman's employment is $1,272,378.00. (Id.)
Hanover's consultant, SDC, a CPA firm, calculated the "direct loss" to Plaintiffs at $79,178.55. (SDC Report at 10.) Hanover paid Plaintiffs $74,178.55 on their claim for loss resulting from Hoffman's dishonest activities, which Hanover asserts is payment of Plaintiffs' total covered loss (less a $5,000 deductible). (Pls.' LR Resp. ¶ 7.)
Several provisions of the Policy are relevant to the present motions. The Employee Dishonesty Coverage of the Policy states, "We will pay for loss of, and loss from damage to, Covered Property resulting directly from the Covered Cause of Loss." (Policy at Employee Dishonesty Coverage Form § A, emphasis added.) "Covered Property" is defined as "'Money,' 'securities,' and 'property other than money and securities.'" (Id. § A.1.) The Employee Dishonesty Coverage is subject to other terms and conditions of the Policy, including the Crime General Provisions ("General Provisions"). (Id. § D.)
The General Provisions contain an exclusion, which states in relevant part:
We will not pay for loss as specified below:
3. Indirect Loss: Loss that is an indirect result of any act or "occurrence" covered by this insurance including, but not limited to, loss resulting from:
a. Your inability to realize income that you would have realized had there been no loss of, or loss from damage to, Covered Property.
(Pls.' LR Resp. ¶ 4; Policy at General Provisions § A.3.a, emphasis added.)
The Policy contains a limit of liability clause limiting the amount paid for any one "occurrence" to $500,000 (subject to the deductible). (Pls.' LR Resp. ¶ 4; Policy at Employee Dishonesty Form § B, 10/01/98 Endorsement.) "Occurrence" is defined as "all loss caused by, or involving, one or more 'employees', whether the result of a single act or series of acts." (Id. § D.3.b.) Finally, the General Provisions contain a subsection titled "Joint Insured," which states that "[a]n 'employee' of any Insured is considered to be an 'employee' of every Insured." (Id. at General Provisions § B.6.c.) The Joint Insured subsection also provides that Hanover "will not pay more for loss sustained by more than one Insured than the amount [it] would pay if all the loss had been sustained by one Insured." (Id. § B.6.e.)
IV. The Parties' Disputes about the Additional Claimed Loss
It is undisputed that Plaintiffs suffered some covered loss as a result of Hoffman's actions. Plaintiffs believe that the additional amounts they seek also represent a loss of Covered Property that resulted directly from Hoffman's acts. Hanover believes that it has satisfied its obligations under the Policy, and that the "lost value" claimed by Plaintiffs is simply lost profits, which is not a loss covered by the Policy. (Def.'s Resp. at 1-2.) The dispute is best illustrated by taking hypothetical examples.
With respect to Dishonest Activity One, if Hoffman arranged for one of the Plaintiffs to pay an accomplice wholesaler $30,000 for a car with a Black Book estimate of $20,000, Plaintiffs argue that coverage in this situation should be calculated based on the difference between the amount the Plaintiff actually paid for the car and the car's Black Book estimate at the time of the purchase, which in this example would be $10,000. In Plaintiffs' view, the transaction is equivalent to taking $10,000 out of Plaintiffs' checking account. (See Pls.' Mem. at 3-4.)*fn7
Hanover, however, argues that, in this example, after the purchase Plaintiffs had a vehicle which on their books they valued at $30,000. (Def.'s Resp. at 3-5.) In Hanover's view, the covered "direct loss" should be calculated based on whether Plaintiffs later "recouped" the initial purchase price in the transaction in which Plaintiffs later sold the car. (Id. at 3-5.) If Plaintiffs subsequently sold the car for less than $30,000 (say, $28,000), Hanover paid Plaintiffs the difference, in this example, $2,000. (See SDC Report at 7-8; Def.'s Resp. at 3.) However, if Plaintiffs subsequently sold the car for the same amount or more than the amount they paid the colluding wholesaler, Hanover determined the Plaintiffs had no direct loss (or possibly made a profit if the sale price was more than the purchase price) and therefore Plaintiffs were entitled to nothing from Hanover. (See SDC Report at 6-7; Def.'s Resp. at 3-5.) Plaintiffs, however, argue that the subsequent sale has nothing to do with the loss on the dishonest initial purchase which, they state, is never recouped. (Pls.' Mem. at 9.)
With respect to Dishonest Activity Two, if Hoffman sold a car with a Black Book estimate of $30,000 to an accomplice for $20,000, Plaintiffs argue that the covered loss is the difference, $10,000. (Id. at 4.) Plaintiffs characterize this as a "shortfall of cash." (Id. at 10.) According to Plaintiffs, the loss is calculated by deducting the amount received from the "wholesale 'value'" of the vehicle. (Id.)
Hanover, however, argues that coverage should be based on the difference between the amount Plaintiffs initially paid for the car, which is the cost of the car reflected on Plaintiffs' books, and the amount that Plaintiffs received for the car from the colluding wholesaler. (Def.'s Resp. at 5.) For example, if Plaintiffs initially bought a car for $30,000, it would be reflected on Plaintiffs' books at $30,000. If Hoffman later sold it to a colluding wholesaler for $28,000, Hanover would have paid Plaintiffs $2,000. (Id.) However, in cases where Plaintiffs sold the car to the accomplice wholesaler for more than the amount that the Plaintiff paid for it initially (e.g., ...