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Santa's Best Craft, L.L.C., A Delaware Limited Liability Company v. Zurich American Insurance Company

December 21, 2010

SANTA'S BEST CRAFT, L.L.C., A DELAWARE LIMITED LIABILITY COMPANY;
SANTA'S BEST, AN ILLINOIS GENERAL PARTNERSHIP ; AND
H.S. CRAFT MANUFACTURING COMPANY, A TAIWANESE CORPORATION, PLAINTIFFS-APPELLANTS,
v.
ZURICH AMERICAN INSURANCE COMPANY, A NEW YORK CORPORATION, DEFENDANT AND THIRD-PARTY PLAINTIFF-APPELLEE ST. PAUL FIRE AND MARINE INSURANCE COMPANY,
THIRD-PARTY DEFENDANT.



Appeal from the Circuit Court of Cook County. No. 04 CH 01885 Honorable Richard J. Siebel and Stuart Palmer, Judges Presiding.

The opinion of the court was delivered by: Justice Connors

SECOND DIVISION

JUSTICE CONNORS delivered the judgment of the court, with opinion.

Presiding Justice Cunningham and Justice Karnezis concur in the judgment and opinion.

OPINION

This case arises out of an insurance coverage dispute. After being sued by a competitor for various forms of intellectual property infringement and deceptive trade practices, plaintiffs, Santa's Best Craft, L.L.C., Santa's Best, and H.S. Craft Manufacturing Company, tendered defense of the lawsuit to defendant Zurich American Insurance Company under two insurance policies issued by Zurich. Due to a conflict of interest, Zurich agreed to reimburse plaintiffs for expenses incurred by their independent legal counsel in defending the lawsuit. Nevertheless, plaintiffs filed the instant lawsuit, ultimately alleging that Zurich breached the insurance policies by failing to provide a complete defense of the underlying lawsuit and failing to reimburse plaintiffs for the cost of settling the underlying lawsuit, and alleging that such conduct was vexatious and unreasonable. Through a series of partial summary judgment motions filed by the parties, the circuit court granted summary judgment in Zurich's favor on all issues.

Plaintiffs now appeal from the circuit court's orders, contending that: (1) Zurich's failure to immediately reimburse plaintiffs for defense expenses incurred was a breach of the duty to defend; (2) Zurich was obligated to reimburse plaintiffs for the amount of the settlement in the underlying lawsuit; (3) Zurich was obligated to reimburse plaintiffs for the cost of defending a third party pursuant to a license agreement; and (4) plaintiffs were entitled to prejudgment interest on defense expenses owed. For the following reasons, we affirm the judgment of the circuit court.

I. BACKGROUND

Plaintiffs are manufacturers and wholesalers of seasonal products, specifically, Christmas lights. As a wholesaler, plaintiffs sell their Christmas lights directly to retailers, who then sell the lights to customers in a retail store. There are approximately 75 to 100 retailers to whom plaintiffs would potentially sell their products. Plaintiffs do not produce mailers, fliers, or internet ads to promote their products. Rather, plaintiffs and their competitors invite retailers to their respective showrooms approximately 18 months before the Christmas season in which their products would appear on the retailers' store shelves. The retailers make individual appointments to visit the showrooms. During these appointments, they view prototypes of the products that plaintiffs and their competitors intend to produce for the next Christmas season and the packages in which they will be sold. Occasionally, sales staff make presentations to each retailer about new products in the showrooms. The retailers do not purchase any of the Christmas lights during these visits to the showroom but order products later as the next Christmas season approaches.

In the fall of 2001, plaintiffs produced a brand of Christmas lights called "Stay On," which would remain lit even if one of the bulbs on the strand burned out or was removed. Plaintiffs developed "Stay On" lights in conjunction with General Electric Company. Pursuant to that collaboration, plaintiffs entered into a license agreement with Monogram Licensing, Inc., under General Electric's authority, to use trademarks owned by General Electric on its "Stay On" packaging. Section 12.01 of that license agreement provided that plaintiffs, as "Licensee,"

"shall defend, indemnify and hold harmless [Monogram] and [General Electric], and their *** representatives *** from and against any and all claims, liabilities, losses, costs, damages and expenses (including reasonable attorneys' fees) arising out of or in connection with (a) Licensee's acts or omissions in connection with this Agreement, the Licensed Marks and/or the Licensed Products including, but not limited to *** any infringement of any rights (including intellectual property) of anyone in connection with the manufacture, advertising, promotion, sale, possession or use of Licensed Products."

Section 12.03 further provided that plaintiffs "shall obtain and maintain at its own expense commercial general liability insurance including broad form coverage for *** advertiser's liability insurance, as set forth in Appendix I attached hereto." Appendix I specifically required plaintiffs to "nam[e] [General Electric] and [Monogram] *** as additional insureds" on those insurance policies and to provide Monogram with certificates of insurance listing them as additional insureds "as proof of such insurance." Plaintiffs' failure to provide the required insurance would be considered a material breach of the contract, but would not affect plaintiffs' obligations under section 12.01.

In late 2002, plaintiffs and Monogram were named as defendants in a lawsuit filed by JLJ, Inc., and Inliten, L.L.C., in the United States District Court for the Southern District of Ohio, which was subsequently amended (the underlying lawsuit). JLJ, Inc. v. Santa's Best Craft, L.L.C., No. C-3-02-00513 (S.D. Ohio). The underlying lawsuit alleged that JLJ and Inliten manufactured and sold Christmas lights under the name "Stay Lit," which competed with plaintiffs' "Stay On" lights. JLJ and Inliten alleged that plaintiffs copied their packaging and slogans and put them on the products and packages that plaintiffs displayed in their showroom. JLJ and Inliten alleged that plaintiffs traded on their name and good will, which resulted in lost profits. Consequently, JLJ and Inliten alleged eight state and federal causes of action: (1) trademark infringement; (2) false designation of origin and trade dress infringement; (3) false advertising; (4) trademark dilution; (5) deceptive trade practices; (6) piercing the veil of limited liability; (7) unjust enrichment; and (8) civil conspiracy. JLJ and Inliten sought injunctive relief as well as monetary damages.

Plaintiffs had acquired two insurance policies from Zurich for the period covering January 1, 2001 to January 1, 2002. The first policy, a commercial general liability (CGL) policy, provided coverage for, among other things, "Personal and Advertising Injury Liability" up to $1 million. The second policy was a "Custom Cover Policy" that provided, among other things, "Special Liability Occurrence" coverage for advertising injuries (umbrella policy). Plaintiffs tendered defense of the underlying lawsuit to Zurich under the CGL policy. Initially, Zurich denied that it had a duty to defend plaintiffs because the alleged injuries occurred outside the policy period. After plaintiffs asked Zurich to reconsider its denial, Zurich agreed to provide plaintiffs with a defense subject to a full reservation of rights. In a May 3, 2003, letter to plaintiffs, Zurich additionally stated that "[b]ecause a conflict of interest exist[ed] between [plaintiffs] and Zurich," plaintiffs were permitted to select their own legal counsel and Zurich agreed to pay for those "reasonable and necessary attorneys' fees and other defense costs."

Zurich retained a law firm to review defense expense invoices submitted by plaintiffs to determine whether the charges were reasonable and whether they pertained to claims covered by the insurance policy. Upon receipt of each invoice, Zurich reimbursed plaintiffs for half of the amount of the invoice and agreed to reimburse the remaining amount, less any recommended adjustments, after its legal consultants completed their review. In total, plaintiffs submitted $1,322,063 in legal fees incurred through December 2003 on a rolling basis. Although Zurich's legal consultants determined that only $342,922 of those fees were reasonable or pertinent to claims covered by the insurance policy, Zurich had at that time reimbursed plaintiffs $650,061.

On February 2, 2004, plaintiffs filed the instant lawsuit against Zurich, seeking a declaration that Zurich had breached its duty to defend the underlying lawsuit by failing to "promptly and fully" reimburse them the entire amount of the expenses incurred. In their second amended complaint, plaintiffs dropped the declaratory judgment count and pursued relief based on a breach of contract theory. Specifically, plaintiffs alleged that Zurich breached the insurance contract by

"failing to fully, promptly and completely reimburse [plaintiffs'] defense expenses as they were incurred, failing to properly provide [plaintiffs'] defense in the [underlying] lawsuit, hindering and interfering in the defense of the [underlying] lawsuit, failing to settle the [underlying] lawsuit within policy limits, [and] failing to reimburse the reasonable cost of a reasonable settlement."

Plaintiffs also included a separate claim for relief from Zurich's allegedly unreasonable and vexatious conduct pursuant to section 155 of the Illinois Insurance Code (Code) (215 ILCS 5/155 (West 2004)).

Shortly thereafter, Zurich filed a third-party complaint against St. Paul Fire and Marine Insurance Company seeking a declaratory judgment as to St. Paul's obligations in the underlying lawsuit and seeking contribution. Zurich alleged that St. Paul had issued a CGL policy and an umbrella policy to plaintiffs for the period covering January 1, 2002, to January 1, 2003. Zurich also alleged that the St. Paul policies provided coverage for the injuries alleged in the underlying complaint. Plaintiffs filed a separate declaratory judgment action against St. Paul in the United States District Court for the Northern District of Illinois seeking a declaration of coverage for the injuries alleged in the underlying lawsuit. Santa's Best Craft, L.L.C. v. St. Paul Fire & Marine Insurance Co., No. 04-C-1342 (N.D. Ill. 2004).

Plaintiffs then filed a "Motion for Partial Summary Judgment Quantifying Defense Expenses" incurred by plaintiffs in the underlying lawsuit. On the agreement of the parties, the circuit court converted plaintiffs' motion into a petition for attorney fees. The court conducted a three-day evidentiary hearing to determine whether the fees sought by plaintiffs were reasonable and what portion of the fees were owed by Zurich. Zurich filed a motion in limine at the start of the fee petition hearing seeking to exclude any evidence or testimony regarding defense expenses paid by plaintiffs on behalf of Monogram pursuant to its license agreement because those fees were not recoverable under the insurance policies. The court insisted on evaluating the reasonableness of the Monogram defense expenses along with all other claimed expenses for purposes of the hearing, but agreed to convert Zurich's motion in limine into a motion for partial summary judgment on the issue of whether Zurich was obligated to pay Monogram's defense costs.*fn1

The court ultimately determined that plaintiffs sought reimbursement of $4,076,397.29 in fees and costs incurred. However, after deducting certain ineligible expenses for which there was insufficient documentation or that were beyond the scope of coverage of the insurance policy, the court reduced the amount of recoverable fees and costs to $3,611,841 in "reasonable" expenses. The court further determined that Zurich had already reimbursed plaintiffs $790,016 and St. Paul had reimbursed plaintiffs $1,285,690.80, leaving a balance of $1,536,134.20 in fees owed to plaintiffs. It entered judgment against Zurich in that amount. However, the court noted that the Monogram defense expenses represented $1,265,116.30 of that balance. Thus, the court stayed enforcement of the judgment against Zurich with respect to the Monogram defense expenses pending the outcome of Zurich's motion for partial summary judgment on the issue, but ordered Zurich to pay the remaining $271,017.90 without delay. The court further denied plaintiffs' request for prejudgment interest on the amount owed, stating that the invoices were not "liquidated amounts on which prejudgment interests [sic] would accrue."

With respect to the Monogram defense expenses, the court later determined that Zurich had no duty to defend Monogram under the CGL policy and, therefore, no duty to reimburse plaintiffs for the cost of Monogram's defense. Plaintiffs had argued that the CGL policy provided coverage for contract indemnitees that plaintiffs were obligated to defend vis-a-vis an "insured contract." Thus, they argued, the license agreement gave rise to plaintiffs' obligation to defend Monogram, and in turn, Zurich was obligated to pay Monogram's defense costs. However, the court ruled that the CGL policy specifically excluded coverage for personal and advertising injuries "for which the insured has assumed liability in a contract or agreement." Additionally, the court recognized that there was an exception to the exclusion if plaintiffs had an independent legal obligation to indemnify Monogram based on the parties' relationship absent the license agreement. However, the court determined that in this case, absent the license agreement, based on the parties' relationship, Monogram would have an obligation to indemnify plaintiffs. Thus, the exception did not apply.

The court also determined that, unlike the CGL policy, the language of the umbrella policy did not provide a duty to defend a contract indemnitee. It then determined that Zurich had no duty to indemnify plaintiffs for Monogram's defense expenses under the umbrella policy. The court determined that although the umbrella policy provided coverage for "sums [plaintiffs] become[ ] legally obligated to pay *** under an insured contract," the actual injury alleged in the underlying lawsuit was not an "advertising injury" covered by the policy. The court construed the policy to require that an "advertising injury" must arise out of an "advertisement," and that displaying the offending products and packaging in plaintiffs' showroom was not an "advertisement."

After settling the underlying lawsuit for $3.5 million, plaintiffs filed a "Motion for Partial Summary Judgment On Zurich's Settlement Reimbursement Obligations." As part of their motion, plaintiffs again argued that Zurich was estopped from raising any coverage defenses with respect to its duty to reimburse plaintiffs for the amount of the settlement because Zurich breached its duty to defend by failing to promptly and fully reimburse defense costs. The court did not rule on the specific question of whether Zurich breached its duty to defend. Rather, it concluded that "[e]ven if Zurich [had] breached its duty to defend, the estoppel doctrine applies only to policy defenses (e.g. late notice)," and, therefore, Zurich was not estopped from raising coverage defenses.

Zurich then filed a motion for partial summary judgment on the issue of whether it was obligated to indemnify plaintiffs for the cost of the settlement. Zurich again argued, and the court again found, that plaintiffs' display of the allegedly infringing "Stay On" lights and packaging in the showroom was not an "advertisement" under either the CGL policy or the umbrella policy and was not an "advertising injury" as defined by the policies. Therefore, the alleged injuries did not fall within the scope of coverage and Zurich had no obligation to indemnify plaintiffs for the cost of the settlement.

Because the circuit court determined that Zurich had no obligation to indemnify plaintiffs for the settlement or Monogram's defense fees, it dismissed the third-party complaint against St. Paul. Additionally, because Zurich did not act unreasonably in reimbursing plaintiffs' defense expenses, there was no basis on which to pursue the vexatious conduct claim. After all issues were finally disposed of in the circuit court, plaintiffs filed this appeal.

II. ANALYSIS

Plaintiffs appeal from several orders of the circuit court granting summary judgment in favor of Zurich. We review de novo the circuit court's orders granting summary judgment. Salerno v. Innovative Surveillance Technology, Inc., 402 Ill. App. 3d 490, 496 (2010). Ultimately, we must determine whether the circuit court reached the proper result. Salerno, 402 Ill. App. 3d at 496. Therefore, we need not defer to the circuit court's ...


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