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Nutmeg Insurance Co. v. East Lake Management & Development Corp.

November 21, 2006


The opinion of the court was delivered by: John F. Grady, United States District Judge


This case is before the court for ruling on the parties' cross-motions for summary judgment. For the reasons explained below, the court grants summary judgment in favor of defendant and against plaintiff.*fn1


Plaintiff Nutmeg Insurance Company ("Nutmeg"), a Connecticut corporation, is an insurance company that sells professional liability insurance. Defendant East Lake Management & Development Corporation ("East Lake"), an Illinois corporation engaged in the business of owning, operating and managing residential apartment buildings, is the insured under a professional liability insurance policy issued by Nutmeg. The core issue presented in the cross-motions for summary judgment is whether that policy - Miscellaneous Professional Liability Insurance Policy No. NPG0130163, effective from July 15, 2000 to June 26, 2001 ("the Policy") - covers the amount paid to settle a state court lawsuit against East Lake.

The Hale Lawsuit

In November 2000, East Lake was named as a defendant in a lawsuit brought in the Circuit Court of Cook County, Chancery Division, captioned Terrance Hale and Corliss Hale v. East Lake Management & Development Corp. and Urban Residential Services Co., 00 CH 16139 ("the Hale Lawsuit"). The Hale Lawsuit was a class action in which the tenant-plaintiffs alleged that defendants East Lake and Urban Residential Services ("Urban") violated the Chicago Residential Landlord and Tenant Ordinance ("RLTO") by (1) failing to pay interest on security deposits to tenants who resided in numerous Chicago apartment buildings, violating § 5-12-080(c) of RLTO, (2) failing to provide notice relating to the handling of security deposits to tenants who lived in an apartment building at 7000 South Shore Drive in Chicago ("7000 South Shore Drive") when management of that property was transferred from East Lake to Urban, violating § 5-12-080(e) of RLTO, and (3) failing to adequately maintain 7000 South Shore Drive, thus breaching the implied warranty of habitability and violating § 5-12-070 of RLTO. For the alleged failures to pay interest and to provide notice, the Hale plaintiffs sought recovery under § 5-12-080(f) of RLTO, which provides:

If the landlord or landlord's agent fails to comply with any provision of Section 5-12-080(a)-(e), the tenant shall be awarded damages in an amount equal to two times the security deposit plus interest at a rate determined in accordance with Section 5-12-081. This subsection does not preclude the tenant from recovering other damages to which he may be entitled under this chapter. Chicago, Ill., Code § 5-12-080(f).*fn2

Nutmeg provided the defense for East Lake in the Hale Lawsuit.*fn3 On May 27, 2005, following a settlement conference in the Hale Lawsuit, the Hale plaintiffs made a settlement demand to East Lake. The attorney hired by Nutmeg to defend East Lake conveyed the Hale plaintiffs' settlement demand to both East Lake and Nutmeg. That same day, East Lake, through other counsel, demanded that Nutmeg settle the Hale Lawsuit. Shortly thereafter, the Hale Lawsuit settled within Policy limits. On September 30, 2005, East Lake and the Hale plaintiffs executed a settlement agreement whereby East Lake agreed to settle all claims in the Hale Lawsuit for $439,625. As relevant here, the settlement agreement allocated $308,000 to East Lake tenants who were not timely paid or credited interest on their security deposits and who did not receive notice of the transfer of ownership of the subject buildings from East Lake to Urban, and $100,000 for attorneys' fees and costs.*fn4 On or about April 21, 2006, Nutmeg paid the full amount due under the settlement agreement.

The Declaratory Judgment Action

While the Hale Lawsuit was pending, Nutmeg filed the declaratory judgment action that is presently before the court. Originally, Nutmeg sought a declaration that none of the damages sought by the Hale plaintiffs were covered under the Policy. East Lake responded by filing a counterclaim under 215 ILCS 5/155 alleging that Nutmeg had unreasonably and vexatiously delayed settling the Hale Lawsuit. The Hale Lawsuit subsequently settled, as explained above. Later, at the Rule 16 conference in this case, the parties agreed with the court that the most efficient way to proceed would be for Nutmeg to file for summary judgment on the declaratory judgment claim after the parties conducted any necessary discovery relating to that claim. The parties' cross-motions for summary judgment regarding the declaratory judgment claim are now before the court for ruling.*fn5

The Policy covers "Damages" and "Claims Expenses" that East Lake becomes legally obligated to pay as the result of claims made against it for defined wrongful acts.*fn6 The "Damages" definition set forth in Section V.3 states:

"Damages" means a compensatory monetary amount for which [East Lake] may be held legally liable, including judgments (inclusive of any pre- or post-judgment interest), awards, or settlements negotiated with the approval of [Nutmeg].

Damages do not include: * * * * * * *

(b) fines, sanctions, taxes, penalties or awards deemed uninsurable pursuant ...

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