The opinion of the court was delivered by: Hon. Joan H. Lefkow
This case involves whether Zurich Specialties London Limited ("Zurich"), St. Paul Mercury Insurance Company ("St. Paul Mercury"), and St. Paul Fire & Marine Insurance Company ("St. Paul Fire") have the duty to defend and indemnify the Village of Bellwood ("the Village"), Gregory Moore, and Donald Lemm(collectively, "the insureds") in the underlying case of Narducci v. Village of Bellwood, No. 01 C 1425, which is currently pending in this district. Zurich seeks a declaratory judgment that St. Paul Mercury and St. Paul Fire have the duty to defend and indemnify the insureds and that it does not. The insureds filed a counter-claim against Zurich and an amended cross-claim against St. Paul Mercury and St. Paul Fire seeking declarations that the three insurance companies have the duty to defend and indemnify them. St. Paul Mercury also filed an intervening complaint against the insureds seeking a declaration that it does not have the duty to defend and indemnify them. Zurich and the insureds now seek judgment on the pleadings regarding St. Paul Mercury's and St. Paul Fire's duties to defend. Specifically, Zurich seeks judgment on Counts III, IV, IX, and X of its amended complaint, and the insureds seek judgment on Counts I and II of their amended cross-claim and all of St. Paul Mercury's intervening complaint.*fn1 St. Paul Mercury and St. Paul Fire have also filed a joint motion to dismiss the action as moot pursuant to Federal Rule of Civil Procedure 41(a)(2) and a cross-motion for judgment on the pleadings with respect to known loss. For the following reasons, Zurich's motion [#174] is granted in part and denied in part, the insureds' motion [#170] is granted, and St. Paul Mercury and St. Paul Fire's motion [#180] and cross-motion [#197] are denied.
I. The St. Paul Mercury Policy
St. Paul Mercury issued a comprehensive insurance policy to the Village covering June 1, 1999 to June 1, 2000 ("the 99-00 policies"). Zurich's Am. Compl. ¶ 13 & Ex. C (hereinafter, "Am. Compl. ¶ __"). The 99-00 policies included Commercial General Liability coverage ("the CGL policy"), Law Enforcement Liability coverage ("the LEL policy"), PublicEntity Management Liability coverage ("the PEML policy"), and Umbrella Liability coverage ("the umbrella policy"). Id. ¶ 13. Lemm, then the Village mayor, and Moore, then the Village police chief, are covered by the 99-00 policies. Id.Relevant provisions of the 99-00 policies are described below.
Among other things, the CGL policy covers bodily injury, personal injury, and advertising injury. Ex. C-2 to Am. Compl. at 20. Personal injury includes injury resulting from the "[m]aking known to any person or organization written or spoken material that violates a person's right of privacy." Id. at 21. The CGL policy does not cover personal injury "that results from:  the protected person knowingly breaking any criminal law; or  any person or organization breaking any criminal law with the consent or knowledge of the protected person." Id. at 33. It also excludes coverage for personal injury resulting from material that was made known before the agreement became effective. Id. at 35. Finally, as relevant here, the CGL policy includes a law enforcement duties exclusion, which excludes from coverage injury resulting from the conduct of "any of the duties or obligations that must be performed or fulfilled by a law enforcement agency in order to enforce or carry out local, state or federal government laws or regulations." Id. at 54.
The CGL policy is a claims-made policy and so applies to claims or suits made or brought while the policy is in effect or during the applicable limited reporting period. Id. at 23. A claim is "a demand which seeks damages," while a suit is "a civil proceeding which seeks damages." Id. at 22. Claims or suits are considered first made or brought on the earliest of "[t]he date that [St. Paul Mercury] or any protected person [such as Moore or Lemm] first receives written notice of such claim or suit" or "[t]he date that [St. Paul Mercury] first receive[s] notice of an event, personal injury offense, or advertising injury offense from any protected person."*fn2 Id. at 23. Although the CGL policy does not specify the form of notice, certain rules on reporting potentially covered losses are applicable to the 99-00 policies. Specifically, an insured is required to Tell [St. Paul Mercury] or [its] agent what happened as soon as possible. Do this even though no demand for damages has been made against you or any other protected person, but you or another protected person is aware of having done something that may later result in a demand for damages. This notice should include all of the following:  The time and place of the incident;  The protected person involved;  The specific nature of the accident or incident including the type of demand for damages that may result; and  The names and addresses of any witnesses and injured people.
Ex. C-1 to Am. Compl. at 32. The insured also must send St. Paul Mercury copies of all written demands and all legal documents if a lawsuit is initiated. Id.
The LEL policy covers amounts any protected person is legally required to pay for covered injury or damage that results from the conduct of law enforcement duties by or for the Village Police Department and that is caused by a wrongful act ("any act, error, or omission"). Ex. C-2 to Am. Compl. at 69--70. Law enforcement duties are "any of the duties or obligations that must be performed or fulfilled by or for [the Village's] law enforcement agency." Id. at 70. Covered personal injury includes the "[m]aking known to any person or organization written or spoken material that violates a person's right of privacy" and the "[v]violation of civil rights protected under any federal, state, or local law." Id. The LEL policy does not cover "injury or damage that results from any criminal, dishonest, or fraudulent act or omission committed:  by the protected person; or  with the consent or knowledge of the protected person." Id. at 74.
Like the CGL policy, the LEL policy operates on a claims-made basis. A claim or suit is considered first made or brought upon the earlier of St. Paul Mercury's or the insured's receipt of written notice of the claim or suit or St. Paul Mercury's receipt of notice of a wrongful act from the insured. Id. at 71. The LEL policy specifies that notice will not be accepted "unless it also describes what injury or damage may result from the wrongful act." Id.
The PEML policy, like the LEL policy, is a supplement to the CGL policy. Under it, St. Paul Mercury is to cover damages a protected person must pay for covered losses caused by a wrongful act that results from the conduct of duties by or for the Village. Id. at 81. Wrongful acts are any acts, errors, or omissions, including employment-related practices. Id. The PEML policy does not cover loss resulting from injury or damage, which includes personal injury offenses, unless the offense is an employment-related practice. Ex. C-3 to Am. Compl. at 1--2. It also does not cover losses resulting from "intentionally wrongful, criminal, dishonest, or fraudulent act[s] or omission[s]," but this exclusion only applies if a court has determined that such conduct occurred. Id. at 2. Losses resulting from known wrongful acts and law enforcement duties are excluded. Id.
As with the other parts of the 99-00 policies, the PEML policy operates on a claims-made basis. Ex. C-2 to Am. Compl. at 83. Notice of a wrongful act that subsequently results in a claim is sufficient to trigger coverage as long as the notice "describes with particularity details of the wrongful act, including the date and identity of involved persons and what loss may result from the wrongful act." Id.
The umbrella policy provides coverage for damages covered by the Village's basic insurance when the damages exceed the basic insurance limits.*fn3 Ex. C-4 to Am. Compl. at 41. It also covers damages covered by the umbrella policy but not the Village's basic insurance. Id. at 42. The umbrella policy covers personal injury offenses, defined as in the CGL policy, that are committed prior to the umbrella policy's expiration. Id. at 40.The umbrella policy provides that St. Paul Mercury does not have the duty to defend if the Village's basic or other insurance policy provides a duty to defend. The umbrella policy only requires St. Paul Mercury to assume the defense if the basic insurance has been exhausted and no other insurance covers the injury or damage. Id. at 42. As the CGL policy operates on a claims-made basis, so does the umbrella policy. Id. at 43--44. The umbrella policy does not cover personal injury resulting from the deliberate breaking of the law, id. at 50, from material that was made known prior to the policy's inception, id. at 52, or from law enforcement activities, id. at 66.The umbrella policy is excess insurance, applying only after all other insurance has been exhausted. Id. at 57.
II. The St. Paul Fire Policy
From July 1, 2000 to July 1, 2001, the Village had only Commercial General Liability coverage ("the 00-01 policy") from St. Paul Mercury's affiliate, St. Paul Fire. Am. Compl. ¶ 14 & Ex. D. The 00-01 policy operated on a claims-made basis on the same terms as the CGL policy. See generally Ex. D to Am. Compl. It is primary insurance, meaning that if the Village had other primary insurance that covered the loss, St. Paul Fire would share with the other insurance the amount the Village had to pay as damages. Ex. D-3 to Am. Compl. at 1.
As a supplement to the 00-01 policy, the Village obtained Public Officials and Employment Liability and Law Enforcement Liability policiesfrom Zurich ("the Zurich policies"), effective from July 1, 2000 to July 1, 2001. Am. Compl. ¶¶ 15--16. Moore and Lemm are covered by the Zurich policies. Id.The Zurich policies also operate on a claims-made basis. Id. While the Law Enforcement Liability policy is primary insurance, Ex. F to Am. Compl. at 8, the Public Officials and Employment Liability policy is excess insurance if other insurance covers the wrongful act at issue, Ex. E to Am. Compl. at 9.
IV. Events Leading to the Underlying Litigation
In January 1994, the Village Police Department began taping phone lines assigned to the Village Finance Department. St. Paul Mercury's Intervening Compl. ¶ 25. Lemm, the Village mayor, and Moore, the Village police chief, were aware of the taping at that time. Id. ¶¶ 25, 37.
On February 28, 2000, Narducci, then the Village comptroller, attended a Village meeting during which he allegedly first learned that Finance Department phone lines were being taped. Am. Compl. ¶ 17. As he believed that this taping was illegal, Narducci drafted a memorandum to Moore on March 1, 2000, demanding that the taping stop and inquiring about who had access to the tapes. Id. ¶¶ 19--20. Narducci also met with Lemm and Moore about the taping at some point between March 1, 2000 and May 10, 2000. Id. ¶ 32--33. During this meeting, Narducci ...