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National Cas. Co. v. White Mountains Reinsurance Co. of America

United States Court of Appeals, Seventh Circuit

October 30, 2013

NATIONAL CASUALTY COMPANY, et al., Plaintiffs-Appellees,
v.
WHITE MOUNTAINS REINSURANCE COMPANY OF AMERICA, now known as Sirius America Insurance Company, Defendant-Appellant.

Argued Nov. 27, 2012.

Rehearing and Rehearing En Banc Denied Nov. 27, 2013.

Page 550

[Copyrighted Material Omitted]

Page 551

James L. Craney, Attorney, T. Michael Ward, Attorney, Brown & James, St. Louis, MO, for Plaintiffs-Appellees.

Lawrence David Mason, Attorney, John Lee, Attorney, Segal, McCambridge, Singer & Mahoney, Chicago, IL, Michael E. Raub, Attorney, Heyl, Royster, Voelker & Allen, Urbana, IL, for Defendant-Appellant.

Janis M. Susler, Attorney, People's Law Office, Ronald H. Balso, Attorney, Stone, Pogrund & Korey LLC, Carrie A. Hall, Attorney, Michael Best & Friedrich LLP, Chicago, IL, for Defendants.

Before FLAUM and TINDER, Circuit Judges, and THARP, District Judge. [*]

TINDER, Circuit Judge.

The wrongful convictions of Gordon Randy Steidl and Herbert Whitlock are a sad chapter in the history of Edgar County, Illinois. Steidl and Whitlock were convicted in 1987 of murdering a local married couple, and their convictions were largely based on the testimony of two supposed eyewitnesses who connected the two men to the crimes. Only long after Steidl's and Whitlock's convictions did a subsequent investigation reveal that much of the key testimony had been perjured, and furthermore, a great deal of exculpatory evidence had been withheld from the two men's defenses. Eventually, these revelations led to the release of the two men as well as dismissal of all charges against them. By then, Steidl had spent almost seventeen years in an Illinois prison; Whitlock had spent close to twenty-one.

This unfortunate tale of Steidl's and Whitlock's wrongful imprisonment has provided the backdrop for much litigation in the years following their release from prison. Steidl was the first to file a lawsuit on May 27, 2005— approximately one year after his release from prison— against the City of Paris, Illinois, the city in Edgar County where the murders occurred; Edgar County, Illinois; several Illinois State Police officers; two Paris police officials; and Michael McFatridge, the former Edgar County State's Attorney who had been responsible for prosecuting him, and whom Steidl alleged had been the mastermind behind the plot to frame him for murder. Against these defendants, Steidl alleged false imprisonment, due process, malicious prosecution, intentional infliction of emotional distress, and conspiracy claims under state and federal law. Whitlock followed Steidl's lead and filed a similar lawsuit upon his release from prison three years later. By March 2013, both Steidl and Whitlock had settled their lawsuits with all defendants.

Although Steidl's and Whitlock's lawsuits have entirely settled, the involved parties have not yet been able to put this matter fully behind them. Steidl's and Whitlock's suits proved to be only the tip of the litigation iceberg. Because the defendants in the two lawsuits were all public officials and public entities, disputes soon arose over who bore the responsibility for paying the defense costs. The disputes have been particularly heated with regard to the costs incurred by two defendants, Michael McFatridge and Edgar County. Indeed, three different cases have been litigated regarding who is responsible for paying McFatridge's and Edgar County's defense costs. This case is the last one remaining of the three.

The first of the three spinoff defense-cost cases was brought in 2007 by National Casualty Company (hereinafter " National Casualty" ), the plaintiff in the present

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case, in federal district court. In that case, National Casualty Co. v. McFatridge, 604 F.3d 335, 337 (7th Cir.2010) (hereinafter " McFatridge I " ), National Casualty sought a declaratory judgment that it was not liable for the defense costs of either McFatridge or Edgar County under a 1989 insurance policy that its predecessor had issued to " County of Edgar S.D." Id. Although National Casualty contested its liability for McFatridge's and Edgar County's defense costs, National Casualty nonetheless agreed to pay for the defense costs of both McFatridge and Edgar County under a reservation of rights until the coverage issue was resolved. In 2010, after reading the language of the National Casualty policy in question, our court agreed with National Casualty that neither McFatridge nor Edgar County were covered by the 1989 policy, and as a result, we held that National Casualty had " no duty to defend or indemnify McFatridge or Edgar County." Id. at 345.

The second of the three spinoff defense-cost cases was brought by McFatridge himself in Illinois state court in 2010. There, McFatridge asked the court to order the Illinois Attorney General " to approve all of McFatridge's reasonable litigation expenses and attorney fees in defense of the Steidl and Whitlock suits as they are incurred by him." McFatridge v. Madigan, __ Ill.2d __, 370 Ill.Dec. 777, 989 N.E.2d 165, 168-69 (2013). In May of this year, the Illinois Supreme Court affirmed the state trial court's dismissal of McFatridge's case, finding that McFatridge had failed to show " a clear duty on the part of the Attorney General to approve payment by the state of [his] defense expenses." Id., 370 Ill.Dec. 777, 989 N.E.2d at 173.

The third of the three spinoff defense-cost cases— and the case at hand— was filed by National Casualty in 2009. In its complaint, National Casualty asked the federal court for another declaratory judgment. But instead of asking the court to find National Casualty not liable for McFatridge's and Edgar County's defense costs, National Casualty asked the court to find another insurer liable for these costs. Specifically, National Casualty asked the court to find that White Mountains Reinsurance Company (hereinafter " White Mountains" ) had " a duty to defend Edgar County and McFatridge" under a policy issued by its predecessor to " Edgar County Sheriff's Department & Edgar County" in 1986. In addition to seeking a court order for White Mountains to " assume the defense of Edgar County and McFatridge ... and assume all costs of defense," National Casualty further sought a court order for White Mountains to reimburse National Casualty for its defense expenditures on Edgar County and McFatridge prior to the resolution of McFatridge I. Appealing to equity, National Casualty pointed out in its complaint that it had heretofore paid the defense costs for Edgar County and McFatridge under a reservation of rights. But once a district court had declared National Casualty not liable for these defense costs, and particularly once our court affirmed the district court in the McFatridge I decision, National Casualty believed it was entitled to reimbursement by the entity actually liable for McFatridge's and Edgar County's defense costs. White Mountains, according to National Casualty, was the insurer actually liable.

This third spinoff case is perhaps the most procedurally complicated one. Unfortunately, the procedural complications have only continued to multiply throughout the case's pendency. National Casualty principally sought relief from White Mountains, but it also sued McFatridge, Edgar County, Steidl, and Whitlock since it had expended funds on McFatridge's and Edgar

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County's behalf in the Steidl and Whitlock lawsuits despite the fact that National Casualty had no duty to defend either party. White Mountains, in turn, filed a cross-claim against McFatridge and Edgar County, asking the court to declare that it had no duty to defend them under the 1986 policy. White Mountains also filed a counterclaim against National Casualty, asking the court to declare that it had no duty to reimburse National Casualty for its prior expenditures on McFatridge's and Edgar County's defense costs.

Several months into the litigation, McFatridge and Edgar County filed a motion for summary judgment against White Mountains, asking the court to find that, as a matter of law, " White Mountains ha[d] a duty to defend Mr. McFatridge and the County in the lawsuits filed by plaintiffs Steidl and Whitlock." White Mountains responded a month later by filing a cross-motion for summary judgment against McFatridge, Edgar County, and National Casualty, asserting that White Mountains had no duty to pay McFatridge's and Edgar County's defense costs, and thus no duty to reimburse National Casualty. Not to be left behind, National Casualty filed its own cross-motion for summary judgment the following month, arguing that White Mountains owed a legal duty to defend McFatridge and Edgar County, and as a result, " must immediately assume paying all costs of [their] defense" and " must reimburse [National Casualty] for all defense costs."

Confronted with six parties and three cross-motions for summary judgment, the district judge, in his own words, faced a " thicket of filings." After sorting through the thicket, however, the judge realized that the motions all asked him to address the same legal issues: whether White Mountains had a duty to defend McFatridge and/or Edgar County under the 1986 policy, and if so, whether White Mountains had a duty to reimburse National Casualty for its previous expenditures on McFatridge's and/or Edgar County's defense costs. On August 31, 2011, the district judge decided both legal issues against White Mountains. In granting summary judgment for McFatridge, Edgar County, and National Casualty, the district court reached the following conclusions:

1. White Mountains owes a duty to defend McFatridge and Edgar County in the Steidl and Whitlock lawsuits,
2. That this duty to defend exists under White Mountains' 1986 Policy (83LE006626);
3. That White Mountains must immediately begin paying all costs of defense in the Steidl and Whitlock lawsuits, and
4, That White Mountains must reimburse National Casualty for all defense fees and costs expended since White Mountains was on ...

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