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Sentry Insurance v. Continental Casualty Co.

Court of Appeals of Illinois, First District, Fifth Division

March 24, 2017

SENTRY INSURANCE, a Mutual Company, Plaintiff and Counterdefendant,
v.
CONTINENTAL CASUALTY COMPANY; NORTHWESTERN MEDICAL FACULTY FOUNDATION; THEODORE FRANK; NICHOLAS HARRIS; JOE DOES 1-59; JANE DOES 1-50; JOSEPH DOE; JAMES DOES 1-2; JANE DOE; JAMES ANONYMOUS; JOHN ANONYMOUS; and JEFFREY DOE, Defendants(Continental Casualty Company, Defendant and Counterplaintiff-Appellant; Northwestern Medical Faculty Foundation, Defendant and Counterdefendant-Appellee).

         Appeal from the Circuit Court of Cook County. No. 14 CH 16745 The Honorable Kathleen Pantle, Judge Presiding.

          PRESIDING JUSTICE GORDON delivered the judgment of the court, with opinion. Justices Hall and Lampkin concurred in the judgment and opinion.

          OPINION

          GORDON PRESIDING JUSTICE

         ¶ 1 The instant interlocutory appeal concerns the trial court's grant of a stay on the issue of whether Continental Casualty Company (Continental) owes a duty to indemnify Northwestern Medical Faculty Foundation (the Foundation) for any liability the Foundation incurs as a result of a number of lawsuits filed against it based on the failure of the Foundation's cryogenic tanks, which had held semen and testicular tissue specimens that were rendered unusable. Continental argues that the trial court erred in granting the stay because interpreting the two applicable exclusions to insurance coverage would not have involved the determination of an ultimate fact in the underlying litigation. Alternatively, Continental argues that if the trial court stayed the analysis concerning the applicability of the policy's exclusions, it should have also stayed the litigation concerning whether there was a duty to defend the Foundation under the policy. Continental also argues in the alternative that the trial court should have, at a minimum, determined coverage issues concerning two lawsuits that had already been settled. For the reasons that follow, we affirm.

         ¶ 2 BACKGROUND

         ¶ 3 On October 16, 2014, Sentry Insurance[1] (Sentry) filed a complaint for declaratory judgment against the Foundation and Continental, alleging that Sentry had issued a commercial general liability insurance policy to the Foundation and that the Foundation claimed that Sentry owed it a duty to defend and indemnity for approximately 65 lawsuits in which the Foundation had been named as a defendant (the underlying lawsuits), and which had been consolidated for pretrial activities. Continental was named in the complaint as the Foundation's excess insurer. Sentry's complaint alleged that its policy did not provide coverage for the claims alleged against the Foundation and sought a declaratory judgment that it owed no duty to defend or indemnify the Foundation and reimbursement of the amount spent thus far in defending the underlying lawsuits.

         ¶ 4 According to Sentry's complaint, the Foundation owned and operated a cryopreservation and storage tank for semen and testicular tissue and certain Foundation patients, including the plaintiffs in the underlying lawsuits (the underlying plaintiffs), provided semen or testicular tissue to the Foundation for storage and safekeeping; the Foundation received storage fees for the cryopreservation of the semen and testicular tissue from the underlying plaintiffs. Certain patients who had stored semen or testicular tissue with the Foundation between April and June 2012, including the underlying plaintiffs, alleged that their samples had thawed and were irreversibly damaged due to the failure of the Foundation's cryopreservation tank. The underlying plaintiffs accordingly filed the underlying lawsuits against the Foundation and Northwestern Memorial Hospital (the Hospital), seeking damages relating to the allegedly damaged semen and testicular tissue.

         ¶ 5 According to Sentry's complaint, the Foundation admitted in the underlying lawsuits that it owned and operated the cryopreservation tank for semen and testicular tissue; that certain patients provided semen for storage and safekeeping with the Foundation; that the Foundation accepted the semen supplied by certain patients for safekeeping; and that the Foundation received storage fees for cryopreservation of the semen. Additionally, the Hospital denied in the underlying lawsuits that it owned, operated, managed, or controlled the cryopreservation tank for semen and testicular tissue; that certain patients provided semen for storage and safekeeping with the Hospital; that the Hospital accepted the semen supplied by certain patients for safekeeping; and that the Hospital received storage fees for cryopreservation of the semen.

         ¶ 6 Sentry's complaint alleges that the Foundation tendered the underlying lawsuits to Sentry, seeking defense and indemnity pursuant to the Foundation's insurance policy with Sentry, and that Sentry accepted the Foundation's tender of the defense under a reservation of rights.

         ¶ 7 According to Sentry's complaint, John Anonymous, [2] one of the underlying plaintiffs, filed a motion for summary judgment against the Foundation, contending that the Foundation was liable to him under a bailment theory. Sentry alleged that in order to prevail on a bailment claim, it was necessary to establish (1) an express or implied agreement to create a bailment, (2) delivery of the property in good condition, (3) the bailee's acceptance of the property, and (4) the bailee's failure to return the property or the bailee's redelivery of the property in a damaged condition. Sentry's complaint alleged that on March 12, 2014, the trial court in the consolidated underlying lawsuits entered summary judgment in favor of John Anonymous "relative to elements (1), (3) and (4), thereby establishing that a bailment was created and that [the Foundation] had exclusive possession of the specimens."

         ¶ 8 Sentry's complaint set forth 15 "claims, " each serving as a basis for exclusion under its policy, and requested a declaration that Sentry had no obligation to defend or indemnify the Foundation against the claims asserted in the underlying lawsuits. Sentry also requested reimbursement of the funds it had expended in defending the Foundation in the underlying lawsuits.

         ¶ 9 The Sentry insurance policy, which was attached to Sentry's complaint, contained two exclusions that are relevant to the instant appeal: a "care, custody, or control" exclusion and a "professional services" exclusion. The "care, custody, or control" exclusion provided that the insurance did not apply to property damage to "[p]ersonal property in the care, custody or control of the insured." The "professional services" exclusion provided that "[t]his insurance does not apply to 'bodily injury', 'property damage' or 'personal and advertising injury' due to the rendering of or failure to render any professional service." The exclusion further defined "professional services" as "all professional liability relating to health care medical malpractice, druggist liability, to include accountants E & O as well as directors and officers liability."

         ¶ 10 On November 20, 2014, Continental filed an answer and counterclaim. The counterclaim contained substantially identical factual allegations as Sentry's complaint regarding the allegations of the underlying lawsuits. Continental's counterclaim also alleged that (1) the Foundation made a number of admissions in a third-party complaint that the Foundation had filed in the underlying lawsuits, including that the Foundation provided storage in a cryogenic tank located on the 20th floor of the Foundation for the semen and testicular tissue of the male underlying plaintiffs; (2) the Foundation was a faculty medical practice at the hospital; (3) the Foundation used an electronic controls system on the cryogenic tank that was designed to cause a page to be sent to a Foundation lab technician when an alarm was triggered by the control system; and (4) on the afternoon of April 23, 2012, a Foundation lab technician discovered that the cryogenic tank at the Foundation had failed to maintain a proper temperature.

         ¶ 11 In its counterclaim, Continental alleged that it issued to the Foundation a commercial umbrella policy and that in order for the Foundation to obtain coverage from Continental's policy, "it must prove that it is entitled to coverage under the [Continental] Umbrella Policy insuring provision, including all of [Continental's] terms, definitions and conditions, " which it could not do. First, Continental alleged that the Foundation could not establish that "bodily injury" or "property damage" occurred during the policy period, as required under the policy. Additionally, like Sentry's policy, Continental's policy included a "care, custody, or control" exclusion and a "professional services" exclusion. The "care, custody, or control" exclusion provided that the insurance coverage did not apply to property damage to "[p]ersonal property in the care, custody or control of the insured." The "professional services" exclusion provided:

"This insurance does not apply to any liability arising out of any act or omission, or rendering of or failure to render professional services by you or any other person for whose acts you are legally responsible, and arising out of the performance of professional services for others in your capacity as a (an):
(Insert Profession of Service)
Professional Healthcare Services"

         Continental's counterclaim alleged that, even if the Foundation could establish that it complied with all of the policy's terms, conditions, and definitions, coverage in connection with the underlying lawsuits would still be excluded by the "care, custody, or control" or "professional services" exclusions. Accordingly, Continental sought a declaration that Continental owed no coverage to the Foundation.

         ¶ 12 On January 12, 2015, the Foundation filed a combined motion under section 2-619.1 of the Code of Civil Procedure (Code) (735 ILCS 5/2-619.1 (West 2014)) to dismiss Sentry's complaint or, alternatively, to stay the complaint. On the same day, the Foundation also filed a section 2-619.1 motion to dismiss Continental's counterclaim and expressly adopted its arguments in support of its motion to dismiss Sentry's complaint into its motion to dismiss Continental's counterclaim.

         ¶ 13 The Foundation argued that Sentry's request for an adjudication of its duty to defend should be dismissed under section 2-619 of the Code (735 ILCS 5/2-619 (West 2014)) because the resolution of that issue required the adjudication of facts that overlapped with disputed liability issues in the underlying lawsuits. The Foundation argued that Sentry's arguments concerning the care, custody, or control exclusion and the professional services exclusion were premature "because it is not clear and free from doubt from the face of the allegations in any of the underlying complaints that either of these policy exclusions precludes coverage and the Court cannot make coverage determinations based on disputed liability facts at issue in the pending Underlying Actions." Sentry argued that determining whether the exclusions applied would require the trial court to determine "ultimate facts" in the underlying lawsuits, including whether the Foundation had exclusive possessory control over the semen samples at the time they were allegedly damaged and the responsibilities of the parties involved with the cryogenic process. Sentry similarly argued that the determination of whether the underlying lawsuits sought damaged for "bodily injury" or "property damage" would require an adjudication of disputed liability issues in the underlying lawsuits.

         ¶ 14 The Foundation also argued that Sentry's request for an adjudication that it owed no duty to indemnify the Foundation should be dismissed under section 2-615 of the Code (735 ILCS 5/2-615 (West 2014)) because the Foundation had not yet incurred any liability in the underlying lawsuits. With respect to Continental, the Foundation claimed that Continental was not presently defending the Foundation and so its "request for a declaration concerning its duty to defend is premature and should be dismissed for this reason alone."

         ¶ 15 In the alternative, the Foundation argued that if dismissal was not the proper course, then the declaratory judgment claims should be stayed because "[a] stay would conserve judicial resources by reducing the discovery required in the coverage action, narrowing the scope of disputed issues, and otherwise avoiding the duplication of effort that is inherent when litigation proceeds on parallel tracks."

         ¶ 16 In response, Continental argued that the issues in the declaratory judgment action would not require the trial court to determine ultimate facts in the underlying lawsuits because the court "will only need to apply undisputed facts to the pertinent policy language." Continental further argued that since there was no potential for coverage, the issues concerning both the duty to defend and the duty to indemnify were ripe for adjudication. Continental also adopted Sentry's response to the motion to dismiss, which claimed that the grant of summary judgment in John Anonymous' favor against the Foundation established that the Foundation had exclusive possession of the specimens, as did the Foundation's answers to the pleadings in the underlying lawsuits. Thus, determination of whether the care, custody, or control exception applied would not require adjudication of an ultimate fact. Sentry's response further argued that the Foundation's arguments concerning the litigation of the Foundation's third-party claims were not applicable, as the Foundation's third-party claims concerned the tank that allegedly failed and its component parts and did not concern possession of the specimens themselves.

         ¶ 17 In supplemental briefing, Continental also argued that two of the plaintiffs in the underlying lawsuits had voluntarily dismissed their complaints against the Foundation with prejudice. Continental thus argued that even if the coverage litigation was not appropriate for most of the cases, at the very least, coverage litigation should proceed with respect to the two cases the Foundation had resolved. Continental further requested that, if a stay was entered, the stay should only apply until each underlying lawsuit was resolved.

         ¶ 18 On May 19, 2016, the trial court granted in part and denied in part the Foundation's motion. In its order, it discussed Sentry's arguments and noted that "[t]he arguments raised by [Continental] in its counterclaim are substantially identical to those asserted by Sentry in its complaint." First, the court found that "[a]t this point, the appropriate action is to stay the determination of the duty to indemnify until the duty to defend has been determined, " not to dismiss it, as dismissal would result in a waste of judicial resources. Next, the court found that the determination of whether the care, custody, or control exclusion applied would require the determination of an ultimate fact in the underlying litigation, since the court would need to make a determination as to whether the Foundation had exclusive control, and one of the ultimate facts in the underlying litigation was who had possession of the specimens. The court thus found that "a stay is appropriate." The court rejected Sentry's reliance on the partial summary judgment entered in the John Anonymous case, finding that the judge in that case had not made any factual findings as to whether the Foundation had exclusive care, custody, or control over the specimens at the time of the loss and that the issue in a bailment action was possession at the beginning of the bailment, not at the time of the loss. The court also rejected Sentry's reliance on the Foundation's discovery responses in the underlying lawsuits, noting that the Foundation had never conceded that it exercised exclusive possession of the specimens at the time of the tank's failure.

         ¶ 19 The court also found that the professional services exclusions in the insurers' policies were not ripe for adjudication. The court found that the language of the exclusion in the Continental policy differed from that in the Sentry policy, but did not otherwise differentiate the two policies. In analyzing a professional services exclusion, the court found that the question was whether the activity "involves specialized knowledge, labor, or skill, and is predominantly mental or intellectual as opposed to physical or manual." The court found that "[i]t is not apparent from the underlying complaints whether the maintenance of cryogenically preserved sperm requires 'specialization or expertise', or is merely incidental to any professional services [the Foundation] provides. The underlying complaints contain no description or detail as to how sperm samples are cryogenically preserved, much less whether cryogenic preservation of sperm is 'predominantly mental or intellectual as opposed to physical or manual.' " The court found that, to make that determination, "the Court would have to look at extrinsic evidence (outside the pleadings) which the Court cannot do if it tends to determine an issue crucial to the determination of the underlying lawsuit." The court additionally found that "in order to determine whether the professional services exclusion applied[, ] the Court would have to find that the underlying complaints assert claims for 'health care malpractice'.[3] A trial court presiding over an insurance coverage declaratory judgment action should not decide whether an underlying defendant committed malpractice when that decision would bind the parties in the underlying litigation."

         ¶ 20 With respect to the issue of whether the underlying lawsuits sought damages for "bodily injury" or "property damage" under the policies such that there was a duty to defend, the court found that this issue was ripe for adjudication. The court found that, in determining whether there was a duty to defend, it could decide whether the allegations of the underlying complaints contained sufficient facts to show the potential for coverage and, accordingly, determined that it would "proceed with litigating the duty to defend analysis."

         ¶ 21 Finally, the trial court found that it could not adjudicate coverage issues in the two underlying lawsuits that had settled, since a ruling concerning those cases could still have a collateral estoppel effect on the remaining underlying plaintiffs. The court further noted that the Foundation also had third-party complaints pending "which could be impacted by a ruling by this Court."

         ¶ 22 On June 8, 2016, Sentry filed a notice of appeal, and on June 17, 2016, Continental joined in Sentry's notice of appeal and also filed its own notice of appeal. Sentry ultimately settled with the Foundation and asked this court to dismiss its appeal, which we did on October 25, 2016, leaving only Continental's appeal remaining.

         ¶ 23 ANALYSIS

         ¶ 24 On appeal, we are asked to consider whether the trial court properly entered a stay on Continental's insurance coverage issues. While our appellate jurisdiction is normally limited to review of final judgments (see State Farm Mutual Automobile Insurance Co. v. Illinois Farmers Insurance Co., 226 Ill.2d 395, 415 (2007)), we have jurisdiction in the instant interlocutory appeal pursuant to Illinois Supreme Court Rule 307(a)(1) (eff. Feb. 26, 2010), which allows for appeals from interlocutory orders "granting, modifying, refusing, dissolving, or refusing to dissolve or modify an injunction." See, e.g., Blumenthal v. Brewer, 2016 IL 118781, ¶ 39 ("Under established Illinois law, the denial of a stay of trial court proceedings is treated as a denial of a request for a preliminary injunction and is appealable as a matter of right under Illinois Supreme Court Rule 307(a)(1) (eff. Feb. 26, 2010)."); Marzouki v. Najar-Marzouki, 2014 IL App (1st) 132841, ¶ 8 ("This court has consistently held that a stay is injunctive in nature and a stay order is immediately appealable under Rule 307(a)(1)."); Cholipski v. Bovis Lend Lease, Inc., 2014 IL App (1st) 132842, ΒΆ 33 (noting that "the appellate court has repeatedly held that Rule 307 permits the interlocutory appeal of a stay of court ...


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