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National Casualty Co. v. Forgeindustrial Staffing Inc.

June 3, 2009

NATIONAL CASUALTY COMPANY, PLAINTIFF-APPELLEE,
v.
FORGEINDUSTRIAL STAFFING INCORPORATED, DEFENDANT-APPELLANT.



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 06 CV 3745-James F. Holderman, Chief Judge.

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

ARGUED FEBRUARY 10, 2009

Before CUDAHY, WILLIAMS, and TINDER, Circuit Judges.

Fearful that its insurer, National Casualty Corporation ("NCC"), would surreptitiously control its defense in a way that would preclude coverage under the insurance policy, Forge declined to accept insurer-appointed counsel to defend it against claims brought before the Equal Opportunity Employment Commission ("EEOC"). The parties then filed cross-claims for declaratory judgment seeking to resolve whether an actual conflict of interest existed requiring NCC to reimburse Forge for the costs of retaining independent counsel to defend against these EEOC charges.

Because we find that the EEOC charges do not contain mutually exclusive claims (one of which would be covered under the policy and one of which would not), and we fail to detect any other evidence that NCC would provide a less than vigorous defense on behalf of Forge, we find that under Illinois law, appointment of conflict counsel was not required. Therefore, we affirm the district court's judgment.

I. BACKGROUND

This suit arises out of a dispute regarding the burden of bearing the defense costs of an insured's privately retained counsel in an action before the EEOC. NCC issued an insurance policy to Forge Industrial Staffing, Inc. Forge is a staffing company that places temporary, and occasionally permanent, employees at companies throughout the United States. Among other things, the policy insured Forge against any legal damages stemming from intentional acts, including intentionally discriminating against any of its employees. The parties do not dispute any of the following facts.

During February and April 2006, four of Forge's former employees filed anti-discrimination charges with the EEOC. The gist of their complaints was that Forge fired them: (1) due to their race and/or gender; and/or (2) in retaliation for complaining about Forge's staffing practices, which allegedly included honoring its clients' requests not to staff employees that were African-American, Hispanic, and/or female.

As a result of these charges, NCC agreed to defend Forge under the Employment Practices Liability Part of the insurance contract and assigned NCC's own counsel to do so. At the same time, NCC reserved the right to later deny coverage based on any of the exclusions in the policy. Most notably, the policy did not provide coverage for "punitive damage awards" or for any claim arising out of Forge's "willful failure . . . to comply with any law . . . or regulations relating to employment practices." The policy defined "willful" as "acting with intentional or reckless disregard for such employment-related laws, orders or regulations."

After receiving this reservation-of-rights letter, Forge requested that NCC provide independent counsel for Forge because a purported conflict of interest existed as a result of NCC's reservation of rights. Specifically, Forge asserted that whether the policy would indemnify Forge for its alleged conduct depended on how the EEOC charges were defended with respect to the issues of punitive damages and Forge's knowledge of the applicable anti-discrimination laws. When NCC refused to provide independent counsel, Forge hired its own counsel. Subsequently, NCC filed this declaratory judgment action to resolve the conflict of interest issue as well as a dispute regarding the appropriate deductible under the policy. Forge cross-filed, requesting that the district court order NCC to cover Forge's defense costs. The district court found that no actual conflict existed and determined that Forge had to bear the costs of retaining its own counsel. The district court also found that only the Employment Practices Liability Part of the policy applied, requiring Forge to pay a $25,000 deductible to NCC. Forge now appeals.

II. ANALYSIS

A. Conflict of Interest Determination

In Illinois, an insurer has a broad duty to defend its insured in any action where the allegations in the complaint are even potentially within the scope of the policy's coverage. Guillen v. Potomac Ins. Co. of Ill.,785 N.E.2d 1, 7(Ill. 2003); Am. Family Mut. Ins. Co. v. W. H. McNaughton Builders, Inc., 843 N.E.2d 492, 497 (Ill. App. Ct. 2006). Along with an insurer's obligation to defend its insured comes its right to control and direct the defense. Am. Family, 843 N.E.2d at 498. Policy dictates that an insurer has this right so that it "may protect its financial interest in the litigation's outcome and minimize unwarranted liability claims." Stoneridge Dev. Co. v. Essex Ins. Co., 888 N.E.2d 633, 644 (Ill. App. Ct. 2008); see also Clemmons v. Travelers Insurance Co., 430 N.E.2d 1104, 1108 (Ill. 1981). Insurer-appointed counsel has an ethical obligation to both the insurer and the insured. Stoneridge, 888 N.E.2d at 644; Am. Family, 843 N.E.2d at 498. However, in reality this counsel may have a closer relation-ship with the insurer and a greater desire to protect the insurer's interests. Ill. Masonic Med. Ctr. v. Turegum Ins. Co., 522 N.E.2d 611, 613 (Ill. App. Ct. 1988). This is of no import when the interests of the insurer and its insured are aligned, but when they diverge, a conflict of interest arises. Am. Family, 843 N.E.2d at 498.

If there is an actual conflict of interest between the insurer and insured, the insured has the right to obtain independent counsel at the insurer's expense. See id.; Md. Cas. Co. v. Peppers, 355 N.E.2d 24, 31 (Ill. 1976). An actual, not merely potential, conflict is required to trigger the insured's right to conflict counsel. See, e.g., Murphy v. Urso, 430 N.E.2d 1079, 1083-84 (Ill. 1981); Am. Country Ins. Co. v. Williams, 791 N.E.2d 1268, 1276 (Ill. App. Ct. 2003). An actual conflict does not arise merely because the insurer has an interest in negating coverage as to every count of the underlying complaint. See, e.g., Tews Funeral Home, Inc. v. Ohio Cas. Ins. Co., 832 F.2d 1037, 1047 (7th Cir. 1987); Turegum, 522 N.E.2d at 613-14. Conversely, it is not dispositive that insurer and insured have a shared interest in a finding of no liability; in ...


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