April 4, 2016
from the United States District Court for the Northern
District of Illinois, Eastern Division. No. 14 C 1906 -
Samuel Der-Yeghiayan, Judge.
Easterbrook and Hamilton, Circuit Judges, and Pepper,
District Judge [*]
Hamilton, Circuit Judge.
appeal illustrates a recurring issue for liability insurers
and their insureds: how to determine whether the insurer owes
a duty to defend its insured when a claim is first asserted
against the insured, before the insurer knows the underlying
facts. The insured here was Chicago Abstract Title Agency
LLC, which was in the title and escrow services business. In
2008, Chicago Abstract was sued in state court by a title
insurance company and two financial firms. Chicago Abstract
tendered these lawsuits to its "errors and
omissions" liability insurer, plaintiff Title Industry
Assurance Company, R.R.G., known in this case as TIAC. TIAC
then faced a choice. It could (a) defend Chicago Abstract
without reservation; or (b) defend while reserving its
rights; or (c) seek a declaratory judgment concerning the
scope of coverage. TIAC could also (d) decline to defend, but
only if the allegations in the complaints against Chicago
Abstract clearly fell outside the scope of the insurance
policy, and then only at its peril. Under Illinois law, when
a liability insurer unjustifiably refuses to defend a suit
against its insured, the insurer will be estopped from later
asserting policy defenses to coverage.
declined to defend the suits. The suits proceeded and years
passed without further communications between TIAC and its
insured. In 2014, one of the state court plaintiffs, Coastal
Funding, LLC, filed a fourth amended complaint against
Chicago Abstract. An attorney appointed by TIAC then made a
belated appearance in that case. At about the same time, TIAC
filed this diversity jurisdiction action in federal court,
seeking a declaration that coverage was unavailable primarily
because of two exclusions in the policy. Chicago Abstract did
not defend in the federal case (the company had been
involuntarily dissolved in 2009), but two of the state-court
plaintiffs-Coastal Funding and First American Title Insurance
Company-appeared in this federal case as defendants. To avoid
confusion, we refer to these two firms as the Claimants.
and the Claimants filed cross-motions for summary judgment.
The district court granted judgment to the Claimants. We
affirm. We disagree with portions of the district court
opinion, particularly its ruling that TIAC was required to
plead legal theories in its federal complaint. That ruling is
squarely at odds with settled federal pleading practice. See
Johnson v. City of Shelby, 574 U.S. -, 135 S.Ct. 346
(2014) (summarily reversing dismissal of action for failure
to identify legal theory in complaint). Nevertheless, we
agree that the undisputed facts show that TIAC breached its
duty to defend Chicago Abstract in the underlying litigation.
TIAC is therefore estopped from asserting at this very late
stage any policy defenses to coverage that might have been
available if TIAC had made a different choice when the
complaints were first tendered.
Undisputed Facts and Procedural Background
Errors and Omissions Policy
Abstract was a title insurance agency operating in Cook
County Illinois. As an agent for First American, a title
insurance company with a nationwide footprint, Chicago
Abstract provided property owners and lenders with real
estate closing, loan closing, and title and escrow services.
In 2008, TIAC issued to Chicago Abstract an
"Abstracters, Title Insurance Agents and Escrow Agents
Professional Liability Insurance" policy, more commonly
known as an errors and omissions policy. The policy provided
that TIAC would pay costs for which its "Insured"
became liable "by reason of a wrongful act ... aris[ing]
out of professional services rendered or that should have
been rendered." The term "Insured" was defined
to include Chicago Abstract as well as its members and
employees acting within the scope of their duties. Coverage
applied both to acts occurring during the policy period and
to prior acts if, as of the policy's effective date, the
Insured had no knowledge of those prior acts.
policy listed two exclusions relevant in this appeal. Under
exclusion (a), coverage did not apply to any claim arising
out of or relating to "any dishonest, fraudulent,
criminal, malicious or intentional wrongful acts committed by
or at the direction of the Insured." A caveat in the
policy, labeled condition (1), stated that whenever exclusion
(a) was triggered, insurance would remain available for each
Insured "who did not personally commit or personally
participate in committing any of the wrongful acts described
in [that] exclusion ... and who had neither notice nor
knowledge of such wrongful acts, if such Insured, upon
receipt of notice or knowledge thereof, immediately notifies
the Company of the aforesaid wrongful acts." Under
exclusion (j), coverage did not apply to any claim arising
out of or relating to "any defalcation, commingling of,
or failure to pay any funds, notes, drafts, or other
Underlying Complaints and Procedural History
fall of 2008, Chicago Abstract was underwater and failing
fast. Records were out of order. Transactions were askew.
Employees were unsupervised. Most alarming, an outside audit
uncovered a significant shortfall in the agency's escrow
account. In this unfolding crisis, without the benefit of a
comprehensive investigation and with only a hazy
understanding of the facts, First American and two lenders
that had done business with Chicago Abstract sought help in
November 5, 2008, First American sued Chicago Abstract and
its two members, Michael Kons and Steve Knupp, in the Circuit
Court of Cook County. First American alleged that Chicago
Abstract had facilitated escrow closings for "irregular
and suspicious" real estate "flip"
transactions using First American's insurance policies
and closing protection letters. A "flip" or A-B-C
transaction involves an investor (B) who buys discounted
property from a defaulting homeowner or foreclosing lender
(A) using a short-term unsecured loan and then immediately
"flips" the property by selling to a third-party
buyer (C) for a higher price. Assuming both sides of the
transaction close, the investor (B) pays off the short-term
loan and pockets the profits. First American's complaint
accused Chicago Abstract of executing "flip"
transactions "contrary to the spirit and purpose"
of its agency contract. First American added that Chicago
Abstract was not maintaining proper documentation; that
Chicago Abstract had commingled escrow funds belonging to
property owners, investors, and lenders; and that Chicago
Abstract may have misappropriated some of those funds. First
American sought emergency injunctive relief, up to and
including appointment of a receiver, as well as damages for
breach of contract.
weeks later, 1st Funding Source, LLC, a private capital firm,
intervened in the First American action. 1st Funding had
agreed to finance the A-B side of four "flip"
transactions for which Chicago Abstract served as title
agent. For each transaction, Chicago Abstract was authorized
to disburse the short-term loan proceeds only on condition
that both sides (A-B and B-C) had irrevocably closed. Chicago
Abstract allegedly breached its agreement with 1st Funding by
disbursing the proceeds before ensuring that the B-C
transaction closed. 1st Funding pled counts for breach of
contract, breach of fiduciary duty, and negligence.
on Christmas Eve 2008-less than two months after First
American filed suit-Coastal Funding brought a separate action
in the Circuit Court of Cook County against Chicago Abstract,
First American, and a person named Donnel Thomas (elsewhere
spelled "Donel"). Like 1st Funding, Coastal Funding
had supplied short-term financing for "flip"
transactions for which Chicago Abstract served as title
agent. Back in October 2008, Coastal Funding had wired $1,
370, 000 into Chicago Abstract's general escrow account
with the expectation that the funds would be segregated in a
fiduciary trust account. According to Coastal Funding,
Chicago Abstract breached its fiduciary duty and committed
the tort of conversion by "misappropriating" those
funds. Coastal Funding also alleged that Donnel Thomas duped
it into participating in a Ponzi scheme using Chicago
Abstract's services and that the "flip"
transactions-which it had believed were lawful and
legitimate-were mere stages of the scheme.
Abstract tendered the three underlying complaints to TIAC
"for defense and indemnification" on February 3,
2009. On July 8, 2009, Chicago Abstract, operating by then
under receivership, notified TIAC of two potential claims by
First American for missing escrow funds. In letters dated
July 31 and August 13, 2009, TIAC denied coverage for the
underlying suits and the potential claims. The denial letters
cited policy exclusions (a) and (j) and asserted that the
policy did not cover the remedies that the state court
plaintiffs sought. TIAC reiterated its coverage position
without explanation in a letter dated August 12, 2011.
state-court litigation proceeded without TIAC's
involvement. In 2011, the state court entered two orders
granting default judgment against Chicago Abstract on six
counts of Coastal Funding's then-controlling complaint.
In 2013, First American and 1st Funding reached a settlement
agreement that had the effect of resolving 1st Funding's
claims against Chicago Abstract. First American has not
settled with Chicago Abstract.
2014, Coastal Funding filed its fourth amended complaint in
state court. Chicago Abstract defaulted. Shortly after
that, in an about-face, TIAC appointed counsel to defend
Chicago Abstract in the Coastal Funding action. The state
court then entered an order vacating the default,
though the parties dispute whether that order also vacated
the prior default judgments. (That's a question
for the state courts; we do not consider it here.)
the same time that it began defending in state court, TIAC
filed this action for a declaration of non-coverage on the
bases of exclusions (a) and (j), as well as a third defense
no longer at issue. Claimants First American and Coastal
Funding appeared as defendants in the federal action. Coastal
Funding filed a counterclaim seeking a declaration that TIAC
breached its duty to defend Chicago Abstract. On the
parties' cross-motions for summary judgment, the district
court granted judgment in favor of the Claimants, finding
TIAC in breach and holding that TIAC is estopped from
asserting any defenses to coverage. Title Industry
Assurance Co. v. Chicago Abstract Title Agency, No. 14 C
1906, 2015 WL 5675544, at *6-7 (N.D. 111. Sept. 24, 2015).
This appeal followed.
review de novo the district court's grant of
summary judgment, viewing all facts and drawing all
reasonable inferences in favor of TIAC, the party against
whom judgment was entered. Ezell v. City of Chicago,846 F.3d 888, 892 (7th Cir. 2017), citing Dunnet Bay
Construction Co. v. Borggren, 799 F.3d 676, 688 (7th
Cir. 2015). The interpretation of an insurance policy and the