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Federal Insurance Company v. Illinois Funeral Director's Association.

December 8, 2010

FEDERAL INSURANCE COMPANY, PLAINTIFF,
v.
ILLINOIS FUNERAL DIRECTOR'S ASSOCIATION., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Samuel Der-yeghiayan, District Judge

MEMORANDUM OPINION

This matter is before the court on the parties' cross motions for summary judgment. For the reasons stated below, we grant Plaintiff Federal Insurance Company's (Federal) motion for partial summary judgment and dismiss the remaining counts. We also deny Defendants' motion for summary judgment.

BACKGROUND

Federal alleges that it issued ForeFront Portfolio Policy No. 8169-9276 to Defendant Illinois Funeral Director's Association (IFDA), as named insured and parent company of Defendant I.F.D.A. Services, Inc. (IFDAS). ForeFront Portfolio Policy No. 8169-9276 allegedly provided insurance coverage to Defendants during the periods from August 11, 2005 to August 11, 2006 (2005 Policy), August 11, 2006 to August 11, 2007 (2006 Policy), August 11, 2007 to August 11, 2008 (2007 Policy), and August 11, 2008 to August 11, 2009 (2008 Policy)(collectively referred to as "Policies"). The Policies allegedly contained a Directors & Officers Liability Coverage Section (D&O Section), which specified that Federal would pay "Loss . . . resulting from any D&O Claim first made against an Insured Person during the Policy Period . . . for Wrongful Acts . . ." and "Loss . . . resulting from any Insured Organization Claim first made against such Insured Organization during the Policy Period . . . for Wrongful Acts." (Compl. Par. 33).

Federal alleges that Defendants are administrators of a pre-need burial trust fund (Trust), which was established by IFDA. (Compl. Par. 46). Federal also alleges that on June 21, 2006, the Illinois Office of the Comptroller, Cemetery Care and Burial Trust Division (IOC) sent a letter (IOC Letter) to IFDAS, which allegedly stated that, based on the IOC's audits of IFDA, it appeared that IFDAS had taken "unauthorized excess fees of approximately $8.6 million from fiscal year-end 2000 to fiscal year-end 2005." (Compl. Par. 39). In addition, the IOC Letter allegedly stated that "an additional $793,163 was owed" to the Trust, based on what the annual yield of the Trust would have been during the time period in question had IFDAS not taken such fees. (Compl. Par. 39). The IOC Letter also allegedly noted that the "'discrepancy, exacerbated by other practices contributing to the under-funding of the [T]rust,' raised a number of 'serious concerns regarding the state of the [T]rust and the overall lack of formal compliance procedures.'" (Compl. Par. 40). Federal alleges that the IOC Letter also indicated that the IOC had "determined that the [T]rust was under-funded by approximately $39,000,000." Federal also alleges that the IOC Letter demanded that IFDA "rectify" the "intolerable situation." (Compl. Par. 41). According to Federal, the IOC Letter "requested that IFDA contact the IOC within 7 days and provide written responses to the audit findings within twenty-one days." (Compl. Par. 42). The IOC Letter also allegedly notified IFDA that the IOC was discussing certain issues raised by the audit with the Illinois Department of Financial and Professional Regulation.

Federal alleges that on November 26, 2008, a civil action (Dunkle Action) was filed against IFDA, IFDAS, Defendant Geoff Hurd, Defendant Charles Childs, Defendant Paul Dixon, Defendant Kevin Burke, and Defendant Eric Trimble. According to Federal, the Dunkle Action relates to the same problems with the Trust that were previously identified in the IOC Letter, including IFDAS's alleged payment of an inflated rate of return to IFDA members, an alleged resulting deficit in Trust assets, and other alleged mismanagement of Trust funds. (Compl. Par. 47, 49- 50). Federal alleges that it received notice of the Dunkle Action on or about December 18, 2008, and copies of the complaint and amended complaint shortly thereafter, were tendered under the D&O Section of the 2008 Policy.

Federal also alleges that on January 28, 2009, a derivative action (Calvert Action) was filed against various "current or former directors and/or officers of IFDA and/or IFDAS," including Defendant Mark Cullen (Cullen). (Compl. Par. 51-52). Federal alleges that Cullen was the Managing Staff Director of IFDA from February 2008 until an unknown date, and that Cullen and his law firm provided legal services to IFDA and the Trust. According to Federal, the Calvert Action is based on alleged improper investment of Trust assets, IFDAS's alleged failure to maintain a valid license to act as a trustee, alleged taking of excessive administrative fees from the Trust, alleged under-funding of the Trust, and the Trust's alleged failure to reimburse "pre-paid burial services as contemplated." (Compl. Par. 54-57). Federal states that it received a copy of the complaint filed in the Calvert Action on January 29, 2009, which was tendered under the D&O Section of the 2008 Policy. The complaint in the Calvert Action allegedly referenced the IOC Letter.

In addition, Federal alleges that on March 25, 2009, IFDA, IFDAS, and Defendant IFDA Capital, Inc. (IFDA Capital) received grand jury subpoenas (Subpoenas) seeking documents relating to the Trust and "any loans made by or on behalf of the Trust." (Compl. Par. 58). Federal states that it received copies of the Subpoenas on April 13, 2009, which was tendered under the D&O Section of the 2008 Policy.

Federal also alleges that on May 21, 2009, another action (Tipsword Action) was filed against IFDA, IFDAS, and various individual "current or former directors and/or officers of IFDA and/or IFDAS," including Cullen. (Compl. Par. 59-60). According to Federal, the Tipsword Action is based on alleged improper investment of Trust assets, alleged failure to maintain a proper license, and alleged taking of excessive administrative fees. Federal states that it received notice of the Tipsword Action on May 27, 2009, which was tendered under the D&O Section of the 2008 Policy, and that it received a copy of the amended complaint in the Tipsword Action shortly thereafter.

As Federal received documents relating the Dunkle Action, the Calvert Action, the Tipsword Action (collectively referred to as the "Litigation"), and the Subpoenas, Federal allegedly acknowledged to Defendants the receipt of such documents. According to Federal, after a series of correspondence with Defendants, Federal ultimately informed Defendants that Federal was denying coverage for the Litigation and the Subpoenas, as well as denying coverage relating to Cullen in his capacity as legal counsel to IFDA and IFDAS. Federal also allegedly provided notice to Defendants regarding the instant declaratory judgment action. Federal includes in its amended complaint a request for a declaratory judgment finding that the Policies do not provide coverage for the Subpoenas because the Subpoenas do not constitute a Claim under the Policies (Count I), a request for declaratory judgment finding that the 2006 Policy, the 2007 Policy, and the 2008 Policy do not provide coverage for the Litigation or the Subpoenas because the IOC Letter constitutes an Insured Organization Claim under the Policies and the Litigation and the Subpoenas constitute Related Claims under the Policies (Count II), a request for declaratory judgment finding the 2006 Policy, the 2007 Policy, and the 2008 Policy do not provide coverage for the Litigation or the Subpoenas based on Defendants' prior knowledge of the IOC Letter (Count III), a request for declaratory judgment finding the 2006 Policy, the 2007 Policy, and the 2008 Policy do not provide coverage for the Litigation or the Subpoenas based on certain policy exclusions in the 2006 Policy, the 2007 Policy, and the 2008 Policy (Count IV), a request for declaratory judgment finding that the 2005 Policy does not provide coverage for the Litigation or the Subpoenas based on Defendants' failure to provide timely notice regarding the IOC Letter (Count V), and a request for declaratory judgment finding the 2005 Policy does not provide coverage for the Litigation or the Subpoenas based on certain policy exclusions in the 2005 Policy (Count VI). Federal has filed a motion for summary judgment on Counts I, II, III, and V. Defendants have moved for summary judgment on all Counts, and have suggested that the court stay its decision on the cross motions for summary judgment until such time that Counts IV and VI can be resolved based on the outcome of the Litigation.

LEGAL STANDARD

Summary judgment is appropriate when the record, viewed in the light most favorable to the non-moving party, reveals that there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c). In seeking a grant of summary judgment, the moving party must identify "those portions of 'the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,' which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986)(quoting Fed. R. Civ. P. 56(c)). This initial burden may be satisfied by presenting specific evidence on a particular issue or by pointing out "an absence of evidence to support the non-moving party's case." Id. at 325. Once the movant has met this burden, the non-moving party cannot simply rest on the allegations in the pleadings, but, "by affidavits or as otherwise provided for in [Rule 56], must set forth specific facts showing that there is a genuine issue for trial." Fed. R. Civ. P.

56(e). A "genuine issue" in the context of a motion for summary judgment is not simply a "metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). Rather, a genuine issue of material fact exists when "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Insolia v. Philip Morris, Inc., 216 F.3d 596, 599 (7th Cir. 2000). The court must consider the record as a whole, in a light most favorable to the non-moving party, and draw all reasonable inferences that favor the non-moving party. Anderson, 477 U.S. at 255; Bay v. Cassens Transport Co., 212 F.3d 969, 972 (7th Cir. 2000). When there are cross motions for summary judgment, the court should "construe all inferences in favor of the party against whom the motion under consideration is made." Mote v. Aetna Life Ins. Co., 502 F.3d 601, 606 (7th Cir. 2007)(internal quotations omitted); see also Krieg v. Seybold, 481 F.3d 512, 516 (7th Cir. 2007).

DISCUSSION

I. Characterization of Subpoenas (Count I)

Defendants argue that summary judgment should be entered in their favor on Count I, since the Subpoenas constitute Claims under the terms of the Policies, and Federal moves for summary judgment in its favor, contending that the Subpoenas are not Claims under the terms of the Policies. When interpreting an insurance policy, "[b]oth the policy terms and the allegations in the underlying complaint are liberally construed in favor of the insured, and any doubts and ambiguities are resolved against the insurer." Amerisure Mut. Ins. Co. v. Microplastics, Inc., 622 F3d 806, 811 (7th Cir. 2010)(citations omitted). Nonetheless, "the general rules that favor the insured must yield to the paramount rule of reasonable construction which guides all contract interpretations." Id. (citations omitted)(internal quotations omitted). When interpreting a contract under Illinois law, a court should "first ask if the language of the contract is ambiguous" or, in other words, whether the terms of the contract "are indefinite or have a double meaning." Lewitton v. ITA Software, Inc., 58 ...


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