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Illinois School Dist. Agency v. Pacific Insurance Co.

November 13, 2007

ILLINOIS SCHOOL DISTRICT AGENCY, AN INTERGOVERNMENTAL COOPERATIVE, PLAINTIFF,
v.
PACIFIC INSURANCE COMPANY, LTD., DEFENDANT.



The opinion of the court was delivered by: Jeanne E. Scott, U.S. District Judge

OPINION

This matter came before the Court on September 6, 2007, for bench trial on the issue of liability. Plaintiff Illinois School District Agency (Agency or ISDA) appeared in person and by its attorney Timothy Eaton. Defendant Pacific Insurance Company, Ltd. (Pacific), appeared by its attorney John O'Malley. The sole issue before the Court was whether Pacific was liable to pay, as a covered loss under an errors and omissions insurance policy (E&O Policy) issued to the Agency, the cost of defending an estoppel claim in an underlying lawsuit brought against the Agency by the East Moline, Illinois, School District (East Moline Action). As explained below, the Court finds that Pacific is liable for the Agency's defense costs for the equitable estoppel action brought in the East Moline Action.

STATEMENT OF FACTS

The Court set forth the facts in this matter in detail in the summary judgment Order. Order entered July 13, 2004 (d/e 67) (Summary Judgment Order), at 2-8. Briefly, the Agency issued a general liability insurance policy (Liability Policy) to the East Moline School District (East Moline). A family named Mancilla sued East Moline in 1994 for injuries it suffered when a child in the family brought mercury home from an East Moline school (Mancilla Action). East Moline tendered the defense of the East Moline Action to the Agency. Initially, in May 1994, the Agency's third party administrator, the Martin Boyer Company, Inc. (Martin Boyer), agreed to defend East Moline. Two years later, the Agency changed third party administrators to the Hinz Claim Management (Hinz). Hinz determined that the claims in the Mancilla Action were excluded from the Liability Policy. On April 24, 1996, Hinz notified East Moline that it would stop defending East Moline. The Agency, however, continued to provide a defense after giving the initial notice. On June 3, 1996, East Moline filed the East Moline Action. The Agency stopped providing a defense in the Mancilla Action on July 26, 1996.

East Moline asked for a declaratory judgment that the Agency had a duty to defend the Mancilla Action. East Moline alleged the following in its Amended Complaint:

11. On May 20, 1994, ISDA, through its agent Martin Boyer Company, Inc., undertook the defense of the Mancilla lawsuit on behalf of the Plaintiffs with notice of policy limits only and otherwise without a reservation of rights. . . .

12. From on or about May 20, 1994, until on or about July 26, 1996, ISDA, . . ., employed the law firm Katz, McAndrews, Balch, Lefstein & Fieweger, P.C., . . . to provide Plaintiffs a defense in the Mancilla lawsuit.

13. From on or about May 20, 1994, until on or about July 26, 1996, Plaintiffs relied on ISDA's undertaking of the defense of the Mancilla lawsuit to the detriment and prejudice of Plaintiffs.

Pacific Insurance Company's Trial Brief (d/e 123), Exhibit E, East Moline v. ISDA, Amended Complaint, ¶¶ 11-13. East Moline further alleged that the Agency notified East Moline on April 24, 1996, that it would cease providing a defense or indemnification for the Mancilla Action, and later, stopped providing a defense on July 26, 1996. Id., ¶¶ 15-16. In its prayer, East Moline prayed for:

A declaration by this Court that: (1) ISDA is required under the [Liability] Policy to provide coverage for claims alleged in the Mancilla lawsuit; or in the alternative, (2) ISDA's conduct stops ISDA from denying a defense and indemnification in connection with the Mancilla lawsuit.

Id., at 5, Count I prayer for relief.

The Agency successfully defended the East Moline Action. Thereafter, the Agency sued Martin Boyer for its defense costs in the East Moline Action. The Agency secured a judgment against Martin Boyer for those costs in the sum of $564,000. Martin Boyer appealed the judgment, and posted an appeal bond in the sum of $725,000.00, to cover the judgment plus accrued interest. Pacific Insurance Company's Trial Brief (d/e 123), Exhibit C, ISDA v. Martin Boyer Co., Appeal Bond. The Illinois Appellate Court affirmed the Agency's judgment against Martin Boyer. Pacific Insurance Company's Trial Brief (d/e 123), Exhibit B, ISDA v. Martin Boyer Co., Order entered July 18, 2007. The parties represented at trial that Martin Boyer filed a Petition for Leave to Appeal (PLA) before the Illinois Supreme Court. At the time of trial, the PLA was pending.*fn1

In addition to suing Martin Boyer, the Agency also filed a claim with Pacific on the E&O Policy for its defense costs in the East Moline Action. The E&O Policy provided coverage for:

A. Loss which the Insured shall become legally obligated to pay from any claim made against the Insured during the Policy period, by reason of any actual or alleged negligent act, error or omission committed in the scope of the ...


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