United States District Court, N.D. Illinois, Eastern Division
MEMORANDUM OPINION AND ORDER
REBECCA R. PALLMEYER, District Judge.
In 2009, several former employees of Plaintiff Kane County Personnel filed suit against KCP, an Illinois corporation, alleging that their former employer's vacation policy violated the Illinois Wage Payment and Collection Act by requiring that employees work a minimum number of hours before they could qualify for vacation pay. Plaintiff attempted to tender the defense of that litigation to its insurer, Defendant Federal Insurance Company, a New Jersey corporation, but Federal denied coverage, claiming that the suit's allegations were not covered by the insurance policy. KCP later reached a settlement with its former employees, and filed this diversity action on December 10, 2013, seeking to recover the amount it paid to settle the case, plus attorneys' fees and costs incurred in defense of the underlying suit. Defendant moves to dismiss pursuant to Rule 12(b)(6), and for the reasons stated below, the motion  is granted.
Plaintiff KCP is a temporary staffing agency organized under the laws of Illinois; its principal place of business is also in this state. (Compl. ¶ 4.) KCP is a franchisee of Manpower, Inc., which also provides temporary staffing services ( id. ¶ 8), and, as a franchisee, KCP distributed Manpower's employee handbook to its own workers and also adopted that company's employment policies, including the vacation pay policy challenged in the 2009 lawsuit. ( Id. ¶¶ 9, 11.)
I. The 2009 Suit
In June 2009, former Manpower employees filed a class action suit against Manpower in this court (the "2009 suit"), alleging that the vacation policy violated the Illinois Wage Payment and Collection Act by barring participation for new employees who failed to meet a threshold number of hours on the job. (Complaint in Romo v. Manpower, Inc., No. 09 C 3429 (N.D. Ill. June 5, 2009), Ex. 1 to Compl.) The plaintiffs in Romo later amended their complaint to add KCP as a defendant. ( Id. ¶ 13.) The 2009 plaintiffs alleged that Manpower and KCP afforded them paid vacation as a term of employment under the vacation pay policy, but that the policy violated the law by, among other things: (1) denying employees the right to have vacation time vest proportionally as they work; and (2) causing a forfeiture of vested vacation for employees whose employment terminates prior to the completion of a pre-designated number of hours. (5th Am. Compl., Romo v. Manpower, Inc., No. 09 C 3429 (N.D. Ill. March 24, 2010), Ex. 1 to Def.'s Am. Mem., ¶¶ 34-35.) The fifth amended complaint in that earlier suit alleged that these provisions violated the IWPCA, which "provides that vacation time vests proportionately as labor is rendered; that upon termination of employment an employee is entitled to a pro rata share of vested vacation pay; and that accrued vacation is part of an employee's wages and thus cannot be forfeited." ( Id. ¶ 36 (citing 215 ILCS § 5/155).)
On May 25, 2010, KCP submitted the 2009 suit as a claim on its policy (discussed below) with its liability insurer, Defendant Federal Insurance Company. (Compl. ¶ 17.) In two letters, Federal denied coverage, stating that "[a]s no negligent act, error, or omission is alleged against the Insured, there is no coverage for this matter under this Policy." ( Id. ) KCP eventually settled the Romo litigation. (Compl. ¶ 14.)
II. The Insurance Policy
Federal sold Manpower a number of insurance policies, including the policy at issue in this dispute. ( Id. ¶ 15.) The policy's coverage extended to KCP as an authorized franchisee of Manpower and established a duty to defend and indemnify Plaintiff against lawsuits brought by its employees for "employee benefits errors or omissions." ( Id. ¶ 16.) The disputed policy- Number XXXX-XX-XX-was in effect at all times relevant to the 2009 suit, and reads in pertinent part as follows:
Coverage: Subject to the applicable Limits of Insurance, we will pay damages the insured becomes legally obligated to pay for any claims arising out of a negligent act, error or omission to which this insurance applies, by or on behalf of the insured in the administration of employee benefit programs....
Investigation, Defense and Payment of Damages: [Insurer] will have the right and duty to defend any insured against a suit seeking damages for any claim arising out of a negligent act, error, or omission.
(Insurance Policy, Ex. B to Compl., at 14, 15 (emphases omitted).) The policy further defines "Administration" as four different types of conduct: (1) "informing employees of the content of"; (2) "giving advice, other than legal advice, about"; (3) "handling of records in connection with"; or (4) "effecting enrollment, termination or cancellation of employees under, employee benefit programs, provided such acts are authorized by [KCP]." ( Id. at 23 (emphasis omitted).)
III. This Litigation
KCP filed this insurance coverage suit against Federal on December 10, 2013. The complaint includes three counts. It alleges (1) a breach of the duty to defend; (2) a breach of the duty to indemnify; and (3) a vexatious and unreasonable delay in payment in violation of section 155 of the Illinois Insurance Code, 215 ILCS § 5/155. Plaintiff seeks defense costs and indemnity for beach of the insurance contract. (Compl. ¶ 43.) This court has jurisdiction over these state law claims based on the diversity of the parties (Plaintiff is an Illinois corporation ...