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Landmark American Insurance Co. v. Deerfield Construction, Inc.

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

January 12, 2017



          Ruben Castillo, Chief United States District Court Judge.

         Following the entry of an adverse judgment in a personal injury case, secondary insurance provider Landmark American Insurance Company ("Landmark"') brought this action against Deerfield Construction, Inc., and its employee Shawn Graff (collectively, "Deerfield") seeking a declaratory judgment that Deerfield is not entitled to coverage under the Landmark insurance policy. (R. 1, Compl.) Presently before the Court are Landmark's motion for summary judgment pursuant to Federal Rule of Civil Procedure 56, (R. 86, Mot. for Summ. J.), and Deerfield's motion for disqualification and sanctions against Landmark and its law firm, Traub Lieberman Straus & Shrewsberry LLP ("Traub"), (R. 128, Mot. to Disqualify). For the reasons stated below, both motions are denied.


         The following facts are undisputed unless otherwise stated.[1] Deerfield took out two commercial automobile liability policies effective March 1, 2007, to March 1, 2008: a primary insurance policy from American States Insurance Company ("American States") with a policy limit of $1 million, and a "follow-form" secondary insurance policy, which adopts the terms and conditions of the primary insurance policy, from Landmark with a policy limit of $10 million. (R. 121, Deerfield's Resp. to Facts ¶¶ 1-2.)

         On January 16, 2008, Deerfield's employee Shawn Graff was involved in an automobile accident with third-party Ryan Keeping ("'Keeping"). (Id. ¶ 8.) On December 22, 2009, Keeping filed a personal injury lawsuit (the '"Keeping case") against Deerfield in the Circuit Court of Cook County, Illinois, and served notice on Deerfield shortly thereafter. (Id. ¶¶ 9-10.) Shortly after receiving notice of the lawsuit, Deerfield provided notice to American States and Arthur J. Gallagher Risk Management Services, Inc. ("AJG"), the insurance broker Landmark used to procure its insurance policies. (Id. ¶ 11; id, Deerfield's Add'l Facts ¶ 6.) Between December 2009 and December 2014, Deerfield did not directly communicate with Landmark regarding the Keeping case or provide it with any related documents, nor did American States or AJG take such actions. (Id., Deerfield's Resp. to Facts ¶¶ 13-16.) Landmark first received direct notice of the accident and the Keeping case on December 5, 2014. (Id. ¶ 20.)

         From 2009 to 2014, the parties in the Keeping case engaged in discovery. (Id. ¶ 17.) Throughout this period, Deerfield was represented by David Olmstead ("Olmstead"), an attorney with the firm of Meachum. Starck, Boyle & Trafman, who was assigned to the defense by American States. (Id., Deerfield's Add'l Facts ¶ 3.) At all times prior to the entry of a verdict in the Keeping case, American States and Olmstead believed that Deerfield would probably receive a verdict in its favor and believed that damages, if awarded, would be less than the $1 million policy limit of the American States policy. (Id. ¶ 4.)

         On December 5, 2014, Tiffany Krueger of AJG notified Landmark of the Keeping case. (Id. ¶ 6.) It is common industry practice for an excess insurer to receive notice of accidents and lawsuits through the broker or insurance agent, and it is Landmark's custom and practice to receive notification in this manner and to communicate with its insureds using brokers and agents rather than directly. (Id. ¶ 7.) Landmark does not intend for its insureds to give notice of every claim, but instead only those where the excess policy is implicated. (Id.)

         Landmark was informed that Keeping had made a demand of $1.25 million, $250, 000 more than the limit of the American States policy. (Id. ¶ 6.) On December 10, John Graham ("Graham"), a vice president of Landmark, spoke with Lisa Cruser ("Cruser") from American States. (Id. ¶ 8.) After consulting with Cruser, Graham requested a pretrial report and informed Cruser that he did not see the Keeping case exceeding American States's policy limits, so he would not follow the case and would close his file on it. (Id.) Later that day, Cruser emailed Graham the pretrial report, and he responded that he had changed his mind and would keep his file open. (Id. ¶ 9.)

         Graham assigned the claim to Kevin O'Connor (“O'Connor"). (Id.) On December 12, O'Connor emailed a letter to AJG-but not to Deerfield-acknowledging receipt of the claim. (Id. ¶ 10.) On the same day, O'Connor informed Cruser that Landmark "has the excess coverage for this loss" and requested copies of all Olmstead's reports on the Keeping case going forward. (Id. ¶ 11.) Landmark was provided access to anything needed to evaluate the claim. (Id.) After reviewing these materials, O'Connor evaluated the case as having a settlement value of between $500, 000 and $750, 000, and Landmark set a reserve of one dollar on the Keeping case, which is the minimum requirement for any open claim. (Id. ¶ 12.)

         The Keeping case went to trial on January 12, 2015. (Id., Deerfield's Resp. to Facts ¶ 21.) On January 16, the final day of trial, O'Connor emailed Cruser and asked whether the trial had begun: in response, Cruser provided an independent adjuster's trial reports to O'Connor. (Id., Deerfield's Add'l Facts ¶ 14.) O'Connor evaluated the trial and suggested that further settlement discussions occur. (Id.) Cruser attempted to negotiate a high-low settlement with Keeping to set a maximum and minimum award regardless of the jury's verdict. (Id. ¶ 15.) The parties agreed on a high of $1 million, but could not agree to a minimum verdict. (Id.) Cruser offered a low of $75, 000 and Keeping last demanded $175, 000 as a low. (Id.) Cruser asked Landmark whether it was willing to contribute to the high-low settlement, but it did not offer any money. (Id. ¶ 16.) Graham suggested that Cruser settle the case for "$100k-$500k or $750k first" and, if necessary, $1 mill ion. (Id.) At no point during trial did Landmark demand that mediation occur, demand that Olmstead be replaced as counsel, request that the trial be continued, or offer money to contribute toward a settlement. (Id. ¶ 13.) O'Connor and Graham later testified that, if Landmark had received notice earlier, the only thing they would have done differently would be to receive litigation reports earlier and encourage that dispute resolution or mediation occur. (Id. ¶ 19.)

         On January 16, 2015, the jury returned a verdict in Keeping's favor for $2, 368, 000. (Id., Deerfield's Resp. to Facts ¶ 22.) Cruser informed O'Connor of the verdict on January 19. and O'Connor replied to this email informing her that he was "assigning counsel to review the case for us." (Id., Deerfield's Add'l Facts ¶ 22.) After learning of the verdict, O'Connor conducted "a lengthy phone conference" with an AJG employee. (Id.) On January 19, O'Connor assigned Traub to meet with Olmstead and to review the case, trial, post-trial motions, and any appealable issues. (Id. ¶ 23.) O'Connor also assigned Traub to provide him with a report of Olmstead's files and to identify any coverage issues. (Id. ¶ 24.) Sometime between January 19 and January 27, Traub attorneys met with Olmstead, reviewed his file, and provided a lengthy report and analysis of the file to Landmark. (Id. ¶ 25.) On January 27, Cruser wrote to O'Connor and informed him that Olmstead had identified issues for a post-trial motion and appeal and asked that Landmark contact him to work with him for Deerfield. (Id. ¶ 26.) Cruser also asked whether Landmark wished to take over the handling of the Keeping case. (Id.)

         On January 29, 2015, Landmark notified Deerfield for the first time through a letter authored by O'Connor and Traub attorneys that it was reserving its rights to deny coverage due to late notice. (Id. ¶ 28-29.) According to Deerfield, Landmark had never directly communicated with Deerfield prior to this reservation of rights letter.[2] (Id. ¶ 28.) Cruser later testified that, if she knew that O'Connor had assigned Traub as coverage counsel, she would not have authorized Olmstead to provide his files or work product to Traub. (Id. ¶ 27.)


         On February 27, 2015, Landmark filed its complaint in this case, seeking declaratory judgment that it was not required to indemnify Deerfield because of late notice. (R. 1, Compl.) Deerfield filed its amended answer and counterclaim on June 24, 2015, (R. 22, Am. Answer & Countercl.), and on July 22, 2015, filed a third-party complaint against American States, AJG, Olmstead, and Meachum, Starck, Boyle & Trafman, (R. 28, Third-Party Compl.). On September 18, 2015. third-party defendant AJG filed a motion to dismiss the third-party complaint, (R. 55, AJG"s Mot. to Dismiss), which was joined by Olmstead and Meachum, (R. 59, Olmstead's Mot. to Dismiss), and American States, (R. 75, American States's Joinder). On May 19, 2016, this Court entered a memorandum opinion and order dismissing all counts of the third-party complaint against AJG but denying the motions with respect to the other third-party defendants. (R. 105. Mem. Op. & Order.)

         On January 19, 2016, Landmark filed the present motion for summary judgment. (R. 86, Mot. for Summ. J.) Landmark argues that, based on the undisputed sequence of events in the Keeping case, it is entitled to summary judgment as Deerfield did not provide it with timely notice of the accident or the Keeping case. Landmark argues that its secondary insurance policy, which adopts all the terms of the American States policy, requires that it be given "prompt” notice of an accident and that Deerfield "immediately" provide Landmark with information regarding a suit. (R. 87, Mem. at 5-8.) Because the Landmark policy does not specify that only claims "reasonably likely" to implicate the policy must be reported, Landmark argues that Deerfield had no discretion regarding whether to report the claim and that reporting the lawsuit to Landmark five years after its initiation-just one month before trial-was per se unreasonable. (Id. at 8-11.) Due to the "extreme delay" in reporting the claim, Landmark argues that it need not establish prejudice from Deerfield's alleged tardiness; even if required to show prejudice, however. Landmark argues that its late entry into the case deprived it of the opportunities to investigate the claim, take part in discovery, and engage in early settlement discussions. (Id. at 12-14.) At a motion hearing on February 17, 2016, this Court entered and continued Landmark's motion until the close of discovery, which was ultimately extended until August 31, 2016. (R. 99. Min. Entry; R. 117, Min. Entry.)

         On September 16, 2016, Deerfield filed its response. (R. 119, Deerfield's Resp.) Deerfield argues that AJG was Landmark's agent for purposes of notification on either an express or apparent theory of agency. (R. 120, Mem. in Opp'n at 3.) First, Deerfield argues that the American States policy designated AJG as American States's agent; by adopting all the terms of that policy without identifying its own authorized representative, Deerfield claims that Landmark adopted AJG as its actual agent. (Id. at 3-4.) Alternatively, Deerfield argues that notice to AJG was effective on Landmark under the doctrine of apparent agency. (Id. at 4-6.) Based on Landmark's alleged practice of communicating with Deerfield exclusively through AJG. Deerfield contends that a reasonable insured would believe that AJG was Landmark's agent for purposes of notice. (Id. at 5-6.) Even if AJG was not Landmark's actual or apparent agent. Deerfield argues that the notice Landmark received in December 2014 was reasonable as to an excess insurer. (Id. at 6-14.) Deerfield contends that under Illinois law, excess policies allow the insured more discretion when to report claims than primary policies. (Id. at 8.) Deerfield points out that O'Connor testified in his deposition that Landmark does not intend for its insureds to automatically give it notice of every claim, but instead only those claims that implicate the excess policy. (Id.; see R. 121, Deerfield's Add'l Facts ¶ 7.) Because no party involved in the Keeping case reasonably believed that the Landmark policy would be implicated, and because Deerfield contends that Landmark suffered no prejudice from the late notice, Deerfield argues that its pretrial notice was reasonable.[3] (R. 120, Mem. in Opp'n at 10-12.) Finally. Deerfield argues that Landmark is estopped from denying coverage because it failed to notify Deerfield of its intent to do so when settlement negotiations were proceeding. (Id. at 14-15.)

         Landmark replied on October 7, 2016. (R. 136, Reply.) Landmark argues that it did not adopt AJG as its agent through its follow-form policy, and that its use of and sole communication with Deerfield through its own agent, McAuley Woods, demonstrates that it granted no authority to AJG. (Id. at 8-16.) Landmark further argues that the policy language on its face granted Deerfield no discretion in when to report the claim, superceding Illinois law regarding the differences between primary and excess insurance. (Id. at 21-28.) It also contends that Deerfield"s notice was unreasonably late under the circumstances and that it is not required to show prejudice from the delay. (Id. at 28-33.) Finally, Landmark argues that it is not estopped from raising a late-notice coverage defense as it had no obligation to disclose its coverage defense and Deerfield did not detrimentally rely on Landmark providing coverage, especially as the breakdown in settlement negotiations was over the "low" of the high-low settlement, with the "high" agreed to at the American States policy's limit. (Id. at 16-20.)

         On September 28, 2016, Deerfield filed its motion to disqualify Traub and to impose sanctions on Traub and Landmark. (R. 128, Mot. to Disqualify.) Deerfield argues that, by simultaneously assisting with post-trial issues and investigating coverage defenses on Landmark's behalf. Traub violated its ethical obligations under ABA Model Rules of Professional Conduct 1.7 and 1.9, which prohibit conflicts of interest against current clients and former clients, respectively. (Id. at 4-5.) Deerfield further argues that Traub intentionally violated its attorney-client obligations in bad faith, obtaining access to confidential information in OlmsteacTs case file by misrepresenting that it was acting only in Deerfield's interest.[4] (Id. at 8-9.)

         Landmark and Traub responded separately on November 1, 2016, raising similar issues. (R. 143, Landmark's Resp.; R. 144, Traub's Resp.) Landmark argues that there was no impropriety in its gaining access to the Keeping case file, as it had a right to access the file under Illinois law. (R. 143, Landmark's Resp. at 6-7.) Further, because Landmark argues its late-notice defense does not rely upon any privileged materials from Olmstead's file, it contends that Deerfield has failed to show any prejudice from the alleged conduct. (Id. at 7-9.) Finally, even if Traub did misrepresent its intentions as Deerfield claims, Landmark argues that any such misrepresentation occurred without Landmark's direction as there is no evidence that it instructed Traub to lie, but instead that Landmark retained Traub to promote Landmark's own interests in the Deerfield matter. (Id. at 9-11.) Traub concurs that it was retained solely to represent Landmark's interests, not Deerfield's, and that it did not state otherwise to Deerfield. (R. 144, Traub's Resp. at 2-3.) Traub argues further that it never formed an attorney-client relationship with Deerfield, which was unaware of Traub's involvement in the case, and thus that it cannot have violated the Model Rules regarding conflicts of interest between clients. (Id. at 4-8.) Traub also contends that it did not obtain any confidential information from Olmstead's file. as Landmark had a right to access these materials and they were not relevant to the controversy before this Court. (Id. at 11-15.)

         In its reply, Deerfield argues that Traub created an attorney-client relationship by suggesting to Olmstead that it was assisting in Deerfield's post-trial defense and performing work on its behalf. (R. 147, Reply at 5-8.) Deerfield argues that the discoverability of Olmstead's file is beside the point, as the alleged ethical violation arises from obtaining access to the file under the false pretenses that Traub was representing Deerfield and "[a]ny information gained from that disclosure is the result of unethical conduct and may have caused Landmark to deny coverage " (Id. at 8.) Finally, Deerfield contends that it was prejudiced in various ways: (1) if Traub was assigned to review the case file to determine whether to deny coverage, "then the review of Olmstead's file was important to Landmark's decision to file this lawsuit against Deerfield." (id at 10); (2) violation of Model Rules 1.7 and 1.9 "in and of itself[] prejudices Deerfield, " (id. at 11); (3) Traub was materially limited in its assignment to assist in Deerfield's defense by its simultaneous assignment to identify coverage issues, (id.); and (4) Traub's "conduct, in and of itself, prejudices Deerfield because it sows distrust in the members of the bar." (id).


         Rule 56 provides that "[t]he court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). Summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986) (citation omitted).A genuine dispute as to any material fact exists if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Kvapil v. Chippewa Cty., 752 F.3d 708. 712 (7th Cir. 2014) (citation and internal quotation marks omitted). In deciding whether a dispute exists, the Court must "construe all facts and reasonable inferences in the light most favorable to the non-moving party/' Nat 7 Am. Ins. Co. v. Artisan & Truckers Cas. Co., 796 F.3d 717. 723 (7th Cir. 2015) (citation omitted).

         Under Rule 56, the movant has the initial burden of establishing that a trial is not necessary. Sterk v. Redbox Automated Retail LLC, 770 F.3d 618, 627 (7th Cir. 2014). "That burden may be discharged by showing .. . that there is an absence of evidence to support the nonmoving party's case." Id. (internal quotation marks and citation omitted). If the movant carries this burden, the nonmovant "must make a showing sufficient to establish the existence of an element essential to that party's case/' Id. (citation and internal quotation marks omitted). The nonmovant "must go beyond the pleadings (e.g., produce affidavits, depositions, answers to interrogatories, or admissions on file) to demonstrate that there is evidence upon which a jury could properly proceed to find a verdict in [their] favor." Id. (internal quotation marks and citation omitted). "The existence of a mere scintilla of evidence, however, is insufficient to fulfill this requirement." Wheeler v. Lawson, 539 F.3d 629, 634 (7th Cir. 2008).

         At this juncture, the Court cannot weigh conflicting evidence, assess the credibility of the witnesses, or determine the ultimate truth of the matter, as these are functions of the jury. Anderson v. Liberty Lobby. Inc., 477 U.S. 242, 255 (1986); Omnicare. Inc. v. UnitedHealth Grp.. Inc.. 629 F.3d 697. 704-05 (7th Cir. 2011). In other words, "summary judgment cannot be used to resolve swearing contests between litigants." Payne v. Pauley, 337 F.3d 767, 770 (7th Cir. 2003). Instead, the Court's role is simply "to determine whether there is a genuine issue for trial." Tolan v. Cotton, 134 S.Ct. 1861, 1866 (2014) (quoting Anderson, 477 U.S. at 249).


         Currently pending before this Court are Landmark's motion for summary judgment and Deerfield"s motion for disqualification and sanctions. ...

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