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Strategic Capital Bancorp, Inc. v. St. Paul Mercury Insurance Co.

United States District Court, C.D. Illinois, Urbana Division

January 24, 2014

STRATEGIC CAPITAL BANCORP, INC., Plaintiff,
v.
ST. PAUL MERCURY INSURANCE CO., Defendant.

REPORT AND RECOMMENDATION

DAVID G. BERNTHAL, Magistrate Judge.

This insurance dispute is back before the Court on remand from the Seventh Circuit Court of Appeals. Strategic Capital Bancorp., Inc. (SCBI), the only remaining plaintiff, has filed a Second Amended Complaint (#87) against Defendant St. Paul Mercury Insurance Company (St. Paul), seeking a declaration that St. Paul has a duty to defend and indemnify SCBI for certain claims in an underlying state court action, pursuant to a director and officer liability insurance policy (D&O policy) that SCBI purchased from St. Paul. SCBI also brings claims for breach of contract and bad faith refusal to provide coverage.

In September 2013, St. Paul filed a Motion to Dismiss Second Amended Complaint (#90), seeking to strike an introductory section of SCBI's complaint and dismiss SCBI's breach of contract and bad faith claims. SCBI opposes (#92). After careful review of the parties' arguments, the Court recommends that St. Paul's Motion to Dismiss Second Amended Complaint (#90) be GRANTED to the extent it seeks to strike paragraphs 1-39 of the Second Amended Complaint and DENIED in all other respects.

I. Background[1]

The Court quotes the Seventh Circuit's opinion to explain the underlying state action that gave rise to this case:

The dispute here concerns a lawsuit that we call the " Miller action" brought by five plaintiffs-Dwight Miller, Wells Anderson, Gene King, Teresa King, and Glenda L. Lane, as trustee of the Glenda L. Lane Trust. Those plaintiffs sued SCBI and two of the company's directors and officers, John Gorman and Gary Svec. In the state court complaint, each of the five plaintiffs asserted three claims against each defendant: fraud, civil conspiracy, and violation of the Illinois Consumer Fraud and Deceptive Business Practices Act.[2]

Miller v. St. Paul Mercury Ins. Co. , 683 F.3d 871, 873 (7th Cir. 2012).

SCBI contacted St. Paul about the Miller action and requested coverage under the D&O policy that SCBI had purchased from St. Paul. On November 4, 2009, St. Paul wrote SCBI that the D&O policy did not cover the Miller action, pursuant to the insured v. insured policy exclusion, a common provision in D&O policies that "exclude[s] from coverage losses for claims brought by one insured' against another insured, ' often defined to include current and former corporate directors and officers as well as the corporation itself." Id. at 872.[3] SCBI asked St. Paul to reconsider its position. On January 20, 2010, St. Paul wrote SCBI that, although its position continued to be that the insured v. insured exclusion barred coverage of the Miller action, it would advance forty percent of the defense costs in the Miller action, subject to a reservation of rights. On January 25, 2010, SCBI rejected that offer and proposed instead that St. Paul advance all defense costs except for claims that fell within the policy exclusion.

It appears that the parties dispute the course of the following events, but the Court accepts as true all well-pleaded allegations in SCBI's complaint, as required when considering a motion to dismiss. AnchorBank, FSB v. Hofer , 649 F.3d 610, 614 (7th Cir. 2011). When St. Paul did not respond to the January 25, 2010, letter, SCBI filed this lawsuit on February 2, 2010. That day, St. Paul's counsel emailed SCBI a letter that offered, under a full reservation of rights, to advance all defense costs except for claims that fell within the policy exclusion. The letter also indicated that St. Paul would send SCBI an interim funding agreement. SCBI's counsel called St. Paul's counsel later that day, accepted the offer, and explained that SCBI would voluntarily dismiss this lawsuit once it received the funding agreement and payment from St. Paul. SCBI's counsel sent an email the following day confirming the telephone conversation. On February 11, 2010, St. Paul's counsel sent a letter revoking the coverage offer, explaining that St. Paul viewed SCBI's filing of this lawsuit as a rejection of its coverage offer. SCBI's counsel wrote St. Paul's counsel, recounted their phone conversation on February 2, 2010, and maintained that SCBI had accepted St. Paul's coverage offer. St. Paul's position continues to be that SCBI's filing of the lawsuit constituted a rejection of the coverage offer.

Therefore, this case continued. SCBI sought a declaration from this Court that St. Paul had a duty to provide coverage for the Miller action and brought breach of contract and bad faith claims against St. Paul. St. Paul moved to dismiss the complaint, on the basis that St. Paul had no duty to defend or indemnify SCBI in the Miller action due to the insured v. insured exclusion. This Court agreed with St. Paul. The Court found that, of the plaintiffs in the underlying suit, Miller, Anderson, and Lane, as former directors of SCBI, were insureds under the D&O policy, and that the Kings were not. The Court reasoned that the presence of any insured plaintiff in a suit against an insured defendant invoked the insured v. insured exclusion and barred coverage for the entire suit. Accordingly, the Court dismissed the case with prejudice.

The Seventh Circuit reversed in part, explaining that although the insured v. insured exclusion barred coverage of the claims brought by the insured plaintiffs, St. Paul, nevertheless, has a duty to defend and indemnify SCBI against claims brought by the non-insured plaintiffs, the Kings. The Seventh Circuit remanded for further proceedings consistent with its opinion.

After the parties were unable to reach a settlement, SCBI filed a three-count Second Amended Complaint (#87) against St. Paul: Count I seeks a declaratory judgment that St. Paul has a duty provide coverage for the Kings' claims in the Miller action; Count II is a breach of contract claim; and Count III is a bad faith refusal to provide coverage claim. St. Paul moves to strike an introductory section of SCBI's complaint and dismiss SCBI's breach of contract and bad faith claims.

II. Motion to Strike

St. Paul first moves to strike the "Introduction" and "Overview" sections of SCBI's complaint (¶¶ 1-39) as argumentative, confusing, and duplicative of the complaint's "Factual Statement" (¶¶ 47-75). In response, SCBI argues that its complaint sets forth a short, plain statement of the claim for relief, as required by Federal Rule of Civil Procedure 8. SCBI does not respond ...


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