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Westport Insurance Corp. v. M.L. Sullivan Insurance Agency Inc.

United States District Court, N.D. Illinois, Eastern Division

January 5, 2017

WESTPORT INSURANCE CORPORATION, Plaintiff,
v.
M.L. SULLIVAN INSURANCE AGENCY, INC., d/b/a Sullivan & Associates Insurance and Risk Management, SEBASTIAN MIKLOWICZ, and AMERICAN INTER-FIDELITY CORP., as attorney-in-fact for AMERICAN INTER-FIDELITY EXCHANGE, Defendants.

          MEMORANDUM OPINION AND ORDER

          Gary Feinerman Judge.

         This is an insurance coverage suit. In the underlying litigation, American Inter-Fidelity Corporation (“AIFC”), acting as attorney-in-fact for American Inter-Fidelity Exchange (“AIFE”), an insurance company, sued M.L. Sullivan Insurance Agency, Inc., an insurance broker, and its employee Sebastian Miklowicz for misrepresenting important data that AIFE used to calculate its premiums. See Am. Inter-Fidelity Corp. v. M.L. Sullivan Ins. Agency, Inc., No. 15 C 4545 (N.D. Ill. filed Sept. 14, 2015) (Pallmeyer, J.) (operative complaint reproduced at Doc. 51-1). Sullivan and Miklowicz asked their insurer, Westport Insurance Corporation, to defend them, and in response Westport brought this diversity action seeking a declaratory judgment that it is not required to defend them or to reimburse them for any judgment they might incur in the underlying suit.

         After the parties filed cross-motions for judgment on the pleadings under Federal Rule of Civil Procedure 12(c), Docs. 30, 31, 33, certain procedural and jurisdictional detours ensued. Because Illinois law requires an insurer in a coverage suit to name the underlying plaintiff as a defendant, see Great W. Cas. Co. v. Mayorga, 342 F.3d 816, 817 (7th Cir. 2003) (“Under Illinois law, the tort claimant is a necessary party to a suit to determine coverage.”); M.F.A. Mut. Ins. Co. v. Cheek, 363 N.E.2d 809, 811 (Ill. 1977) (holding that the plaintiffs in the underlying tort suit were not bound by a default judgment against the insureds in the insurer's declaratory judgment action because the underlying plaintiffs were “necessary parties defendant” to the declaratory judgment action), the court ordered Westport to do just that. Doc. 43. Westport obliged by filing a second amended complaint that joined AIFC as a defendant “as Attorney in Fact for” AIFE. Doc. 44 at 1.

         That complaint presented two jurisdictional problems, which the court described in an opinion. Doc. 59 (reported at 2016 WL 7569263 (N.D. Ill. Aug. 22, 2016)). The first concerned Miklowicz's citizenship: while the complaint alleged that Miklowicz is a “resid[ent]” of Illinois, Doc. 44 at ¶ 3, an individual's citizenship for diversity purposes “depends not on residence but on domicile.” RTP LLC v. ORIX Real Estate Capital, Inc., 827 F.3d 689, 692 (7th Cir. 2016). Westport easily fixed this problem, alleging in a jurisdictional addendum that Miklowicz is a citizen of Illinois. Doc. 66.

         The second jurisdictional problem concerned the addition as a defendant of AIFC as AIFE's representative. As the court explained, the complaint did not indicate whether AIFC (a corporation and indisputably an Indiana citizen) exercised the necessary amount of control over AIFE (an unincorporated association whose citizenship depends on the citizenship of its members, who had not been identified) to make AIFC rather than AIFE the jurisdictionally relevant party. See Lincoln Prop. Co. v. Roche, 546 U.S. 81, 91-93 (2005); 13E Charles Alan Wright & Arthur R. Miller, Federal Practice & Procedure Jurisdiction § 3606 (3d ed. 2016) (“In order to come within the rule that a bona fide representative's citizenship controls, the representative must have actual powers with regard to the matter in litigation.”). Given this, the court could not determine whether AIFC or AIFE was the proper defendant and thus whether there was complete diversity. In light of this problem, the court ordered the parties to show cause why the suit should not be dismissed for want of subject matter jurisdiction. Doc. 58.

         In response, Westport sought leave to file a third amended complaint, which alleged that both AIFE and AIFC were Indiana corporations with their principal places of business in Indiana, thus obviating the need to determine which one was the jurisdictionally relevant party. Doc. 60. As the court noted days later, however, a search of the Indiana Secretary of State website revealed that the allegation as to AIFE was incorrect. Doc. 62. Westport then withdrew its motion for leave to amend; it acknowledged that AIFE was an Indiana “reciprocal or interinsurance exchange” (not a corporation), but demonstrated that AIFC was the jurisdictionally relevant party because, under the governing Indiana authorities, see Wyson v. Auto. Underwriters, Inc., 184 N.E. 783, 786 (Ind. 1986); Ind. Dept. of Revenue v. Am. Underwriters, Inc., 429 N.E.2d 306, 310 (Ind. App. 1981); Ind. Code 27-6-6-2, 27-6-7-1, it exercises complete and exclusive control over AIFE's business. Doc. 63. This makes AIFC the jurisdictionally relevant party. So the parties are completely diverse, as Westport is a citizen of Missouri and Kansas, Doc. 44 at ¶ 1, while Miklowicz and Sullivan are citizens of Illinois, id. at ¶ 2; Doc. 66, AIFC is a citizen of Indiana, Doc. 44 at ¶ 4, and AIFE's citizenship, which is unknown, does not matter.

         With subject matter jurisdiction secure, the court turns to the parties' cross-motions for judgment on the pleadings. Westport's motion is granted, and Sullivan's and Miklowicz's motions are denied.

         Background

         A. The Underlying Suit

         In the underlying suit, AIFE (the court will refer to AIFE rather than AIFC as that suit's plaintiff) alleges that Sullivan and Miklowicz provided false information to AIFE that resulted in its losing out on insurance premiums it was owed. Sullivan acquired insurance from AIFE on behalf of trucking and interstate transportation concerns that Sullivan represented. Doc. 51-1 at ¶¶ 16-17. Each insured provided Sullivan with information about its power units and miles driven, and AIFE used that information to calculate the premium it would charge. Id. at ¶¶ 19, 22-23. The insured paid the premium to Sullivan, and Sullivan would turn over the premium to AIFE, presumably minus a commission. Id. at ¶¶ 23, 25, 31. The trouble, according to AIFE, is that Sullivan misrepresented to AIFE the information that the insureds provided, leading AIFE to believe that a lower premium was owed. Id. at ¶ 24. So, Sullivan would collect the correct (and higher) premium from the insured, and then, based on the incorrect information it provided to AIFE, would remit to AIFE an amount lower than what was rightfully owed. Id. at ¶¶ 27-28, 31-32. AIFE brought the underlying suit “to recover premiums collected and wrongfully withheld” by Sullivan. Id. at ¶ 6.

         AIFE's complaint has nine counts. Id. at ¶¶ 35-115. The complaint accuses Sullivan and Miklowicz of intentional wrongdoing, but it also charges Sullivan with negligent misrepresentation as well as negligent supervision of Miklowicz and its other employees. Id. at ¶¶ 71-86. The negligence claims allege that “Plaintiff AIFE suffered damages, specifically economic losses, for AIFE's quoting premium rates far less than would have been quoted based on the false information supplied by SULLIVAN, ” and request “compensatory damages suffered by Plaintiff AIFE, ” pre- and post-judgment interest, costs, and “all such further and other relief as the Court deems just and appropriate.” Id. at ¶¶ 77, 86.

         B. The Westport Policy

         At all relevant times, Westport insured Sullivan under a Professional Liability Insurance Policy. Doc. 1 at ¶ 7; Doc. 1-1 (the policy). The policy provides coverage for claims that “seek DAMAGES arising from a WRONGFUL ACT committed either by the INSURED, or by a person for whose WRONGFUL ACTS the INSURED is legally liable ….” Doc. 1-1 at 8. The policy defines “wrongful acts” to include “any negligent act, error, or omission of an INSURED in rendering PROFESSIONAL SERVICES or OTHER RELATED SERVICES for others.” Id. at 15. The policy excludes coverage for “[a]ny CLAIM for intentional acts, including but not limited to, acts of dishonesty, fraud, [and] criminal conduct ….” Id. at 17. “Damages” are defined as “monetary amounts for which an INSURED is held legally liable, ” but do not include:

… matters deemed uninsurable under the law pursuant to which this POLICY will be construed; the return of any fees, commissions, profit sharing, or other remuneration, or costs or expenses for PROFESSIONAL SERVICES or OTHER RELATED SERVICES rendered or to be rendered by the INSURED; … reimbursement or return of premiums or funds; or redress in any form other than monetary relief, including, but not limited to, any form of injunctive ...

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