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Nautilus Insurance Co. v. Reuter

August 8, 2008


Appeals from the United States District Court for the Northern District of Indiana, South Bend Division. No. 05 C 30-Allen Sharp, Judge.

The opinion of the court was delivered by: Kanne, Circuit Judge


Before EASTERBROOK, Chief Judge, and MANION and KANNE, Circuit Judges.

After numerous small corporations submitted claims to Nautilus Insurance Company ("Nautilus") for the insurer's defense and indemnity for lawsuits the small corporations were facing, Nautilus sought a declaration that it did not owe such duties to the small corporations for the underlying claims. The insurance policies did not contain choice-of-law provisions; as a federal court sitting in Indiana, the district court applied Indiana choice-of-law rules to choose which state had the most intimate contacts with the contracts. After deciding that Indiana law governed the interpretation of the contracts, the district court granted summary judgment in favor of Nautilus on the ground that Indiana law does not contemplate insurance coverage for the types of claims arising under the insurance policies held by the insureds-claims for negligent hiring. The district court correctly applied Indiana law to the insurance policies involving two of the small corporations involved in this appeal. However, for the insurance policies involving one of the corporations, Phoenix Imagery, there is conflicting evidence about the small corporation's principal place of business. Because we cannot resolve the conflict on the basis of the paper record, we remand this particular choice-of-law determination to the district court for further proceedings, such as an evidentiary hearing.


This insurance-coverage case arose after several individuals tragically suffered violent crimes committed by door-to-door magazine salespersons. The assailants were employees of small corporations associated with American Community Services ("ACS"), an Indiana-based magazine clearinghouse that sells magazines by contracting with small corporations that, in turn, hire and employ their own door-to-door salespersons. The small corporations that employed the violent offenders were insured by Nautilus; ACS was listed as an additional insured on each of the relevant Comprehensive General Liability ("CGL") policies. When numerous civil lawsuits were brought against the small corporations and ACS by the victims of the crimes and their families, the insureds submitted claims to Nautilus, requesting the insurer's defense and indemnification. Nautilus then filed this suit in federal district court, under 28 U.S.C. § 1332, seeking rescission of the contracts and a judgment declaring that it did not owe duties of defense or indemnification under the CGL policies. Nautilus explained that the civil complaints alleged only negligent hiring by the small corporations and ACS, but in Indiana, negligent hiring and negligent supervision do not fall within the ambit of traditional CGL coverage, where an "occurrence" is defined as an accidental event. See Erie Ins. Co. v. Am. Painting Co., 678 N.E.2d 844, 846 (Ind. Ct. App. 1997). Nautilus argued that Indiana law governed the insurance contracts, because the small corporations were incorporated in Indiana and were mere "shells" of ACS.

The insurance policies secured by the small corporations (in which ACS is listed as an additional insured) contain no choice-of-law provisions. The small corporations were all incorporated in Indiana, but Illinois addresses were listed on their insurance applications. Accordingly, the insurance policies listed the corporations' locations at the Illinois addresses. The insurer (Nautilus or its agent, Jimcor) paid taxes on the policies in Illinois, and the policies were stamped by the Illinois Department of Insurance, in accordance with Section 445 of the Illinois Insurance Code, which outlines the requirements for "surplus line insurance" that insures an "Illinois risk." 215 Ill. Comp. Stat. 5/445.

The choice-of-law determination is especially important in this case because the substantive law in Indiana and Illinois differs on the point of law at the heart of the underlying lawsuits against the magazine-sale corporations: whether negligent hiring can constitute an "occurrence" under an insurance policy. Under Indiana law, allegations of negligent hiring do not trigger an insurer's duties to defend and indemnify the insured if the policy defines "occurrence" as an accidental event. See Am. Painting Co., 678 N.E.2d at 846. But under Illinois law, negligent hiring can constitute an "occurrence" under insurance policies that define the term as an accidental event. See Am. Family Mut. Ins. Co. v. Enright, 781 N.E.2d 394, 398-400 (Ill. App. Ct. 2002).

Nautilus named as defendants in its declaratory action ACS, the numerous small corporations that submitted claims to Nautilus for defense and indemnification, and the individual plaintiffs who had filed lawsuits against ACS and the small corporations, including David Reuter, individually and as a representative of the Estate of Shirley Reuter, and Justin Chretien. Shirley Reuter, David Reuter's mother, was murdered by a door-to-door salesman in her New Jersey home, and Justin Chretien was assaulted by a salesman in Virginia. In their respective lawsuits, David Reuter sued ACS and the small corporations Phoenix Imagery and G.O. Innovators; Chretien sued ACS and the small corporation Unified Stars.

The parties engaged in extensive discovery, which included document production, interrogatories, depositions, and declarations. The gathered evidence-which will be discussed more thoroughly below as it relates to the choice-of-law analysis-showed that the states of Illinois and Indiana both have contacts with the insurance contracts.

Following cross-motions for summary judgment, the district court granted summary judgment in favor of Nautilus. It concluded that Indiana law applied to the insurance policies and consequently, that Nautilus had no duty to defend or indemnify ACS or the small corporations in the civil lawsuits. The district court observed that ACS is an Indiana corporation with its principal place of business in Indiana. It labeled all of the small corporations "Shell Corporations" of ACS, and found that each had an Indiana registered agent. The court also relied on the fact that ACS procured the insurance policies for the small corporations from its base in Michigan City, Indiana. On these facts, the district court decided: "All of that is enough to get this court to the substantive law of Indiana with regard to the key question about the contents of the insurance contract here."


Neither ACS, nor any of the small corporations, appealed from the judgment. Of the individually named defendants, only Reuter and Chretien have appealed. Reuter and Chretien have a strong pragmatic interest in the application of Illinois law-so the insurer (with its deep pockets) may be liable for costs attributable to the allegedly negligent small companies (with their very shallow pockets).*fn1

Reuter and Chretien argue that the district court improperly pierced ACS's corporate veil by concluding that the small corporations were "shells" of ACS, and that the district court erred by deciding that the substantive law of Indiana, and not Illinois, governed the construction of the insurance policies. Reuter and Chretien contend that Illinois law should have applied because Illinois had the most intimate contacts with the insurance contracts. See Restatement (Second) of Conflicts ยง 188 (1971). Reuter and Chretien claim that the district court erred by granting summary judgment in favor of Nautilus as a result of its erroneous choice of law. ...

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