United States District Court, N.D. Illinois, Eastern Division
MEMORANDUM OPINION AND ORDER
Z. Lee United States District Judge
2014, Blue Moon Lofts Condominium Association (“Blue
Moon”) obtained a default judgment against The
Structural Shop, Ltd. (“TSS”), in the Circuit
Court of Cook County. While TSS's insurer, Essex
Insurance Company (“Essex”), had earlier paid for
TSS's defense in the matter, it refused to indemnify TSS
for the judgment. Meanwhile, Blue Moon settled its claims
against TSS and received from it an assignment of TSS's
rights under its insurance policy with Essex.
2015, Essex filed this suit against TSS and Blue Moon,
seeking a declaratory judgment that it had no duty to
indemnify TSS for the Cook County default judgment. In turn,
Blue Moon asserted a counterclaim for a declaratory judgment
to the contrary, as well as a number of affirmative defenses,
including that Essex should be estopped from denying
coverage, that Essex waived its right to assert coverage
defenses, and that Essex refused, in bad faith, to settle
Blue Moon's case against TSS.
side has moved for summary judgment on Count I of Essex's
Amended Complaint, which asserts that the policy does not
provide coverage for TSS's insurance claim because the
claim arose outside of the policy period. Essex also moves for
summary judgment on Blue Moon and TSS's affirmative
defenses. For the reasons that follow, Essex's motion
 is granted in full and Blue Moon's motion  is
The First Default Judgment
September 2002, Blue Moon filed a lawsuit in the Circuit
Court of Cook County against several defendants, including
TSS, seeking damages arising out of the allegedly defective
design and construction of Blue Moon Lofts. Blue Moon's
LR 56.1(a)(3) Stmt. (“Blue Moon's LR Stmt.”)
¶ 1, ECF No. 156-10. On May 30, 2003, Blue Moon filed a
motion for default against TSS, presenting evidence of
service on Thomas H. Donahue, who was identified in an
affidavit by a special process server as TSS's registered
agent. Id. ¶ 2; Pl.'s Resp. Blue Moon's
LR Stmt., Ex. Affidavit of Special Process Server, ECF No.
159-4. The circuit court granted the motion, finding that TSS
was “in default for their failure to appear, answer or
otherwise plead.” Id. ¶ 3. Six years
later, in 2009, the court entered a default judgment against
TSS, and in favor of Blue Moon, in the amount of $1, 356, 435
plus costs. Id. ¶ 4.
The Essex Insurance Policy
issued professional liability insurance to TSS that covered
claims first made against TSS during the period from May 10,
2012, to May 10, 2013. Blue Moon's LR Stmt. ¶ 6.
Under the policy, a “claim” was defined as
“the insured's receipt” of either “a
written demand for money damages” or “the service
of suit or institution of arbitration proceedings against the
Insured.” Pl.'s LR 56.1(b)(3)(C) Stmt.
(“Pl.'s LR Stmt.”) ¶ 10, ECF No. 159;
Am. Compl. Ex. H, Insurance Policy at 14, ECF No. 21-8.
policy also provided that Essex “shall select defense
counsel, ” except in situations involving conflicts of
interest between Essex and the insured, Insurance Policy at
18, and that Essex “shall not settle any Claim without
the prior written consent” of TSS, Pl.'s LR Stmt.
TSS's Actions Prior to Notifying Essex of the Insurance
August 9, 2012, Blue Moon's counsel contacted Douglas
Palandech, who was TSS's registered agent at that time,
to discuss collection of the 2009 default judgment. Pl.'s
LR Stmt. ¶ 1. Palandech then notified TSS's
principal, Ken Veach, who found no evidence of the underlying
litigation, default order, or default judgment in TSS's
records. Id. ¶¶ 2, 3. Palandech had
previously represented TSS in third-party claims, contract
and professional responsibility matters, and Veach engaged
Palandech to vacate the default judgment. Id. ¶
2; Pl.'s Resp. Blue Moon's LR Stmt., Ex. D, Palandech
at 44:24-45:3, ECF No. 159-4.
September 7, 2012, TSS filed a petition in the circuit court
to vacate the default order and default judgment.
Id. ¶ 8. The petition argued that Donahue was
not TSS's registered agent at the time of service and,
therefore, that TSS had never been served during the
underlying litigation. Id. Attached to the petition
was an affidavit signed by Veach, averring that Donahue had
“never been a registered agent, shareholder, agent or
employee” of TSS. Id. ¶ 9. On November
29, 2012, the court granted the petition and vacated the
default judgment. Blue Moon's LR Stmt. ¶ 5.
Essex Initiates Defense of TSS
notified Essex of the litigation proceedings on December 10,
2012, and Essex acknowledged receipt of this information the
next day. Id. ¶¶ 8, 9. Essex was aware
from the beginning that service of process was at issue and
that the underlying lawsuit was filed in 2002. Id.
¶¶ 10, 11.
time, Essex used the company Markel as its claims servicer.
Pl.'s Resp. Blue Moon's LR Stmt., Ex. C, Sheehan
at 18:20-24, ECF No. 159-3. There were two Markel claims
managers responsible for the TSS claim file: Denis Sheehan,
until March 2013, and Melanie Brown, who followed Sheehan.
Blue Moon's LR 56.1(b)(3)(C) Stmt. ¶ 1, ECF No.
167-1; Blue Moon's Reply Supp. Mot. Summ. J. (“Blue
Moon's Reply”), Ex. 2, Brown Dep. at 55:4-12, ECF
to Palandech, he was “the attorney representing The
Structural Shop, ” and as Essex was the insurance
carrier for TSS, he was “reporting to [Essex] about
what the defense is about and what we are doing in the
defense.” Palandech Dep. at 199:3-14. Palandech
testified that his relationship with TSS predated his
relationship with Essex but that he had been involved in ten
to twelve matters with Markel or Essex. Id. at
February 2013, Palandech informed Sheehan that he had
received an invoice from Tri-County Investigations, a process
server, for service upon TSS's registered agent in
November 2002. Blue Moon's LR Stmt. ¶ 13; Sheehan
Dep. at 127:8-22; see also Id. at 18:20-24, 46:3-24.
The invoice indicated that Tri-County had received $60 for
serving TSS with summons in 2002. Pl.'s LR Stmt. ¶
16. In a February 8, 2013, email from another attorney at
Palandech's firm to Veach, on which Sheehan was copied,
the attorney contended that the invoice did not show that
service was effectuated, and was instead only “an
unverified source of very flimsy information.”
Pl.'s Resp. Blue Moon's LR Stmt., Ex. F, Kern 2/8/13
Email at ESSEX000867, ECF No. 159-6.
March 11, 2013, an attorney at Palandech's firm emailed
Veach, informing him that Blue Moon's counsel had
indicated that whether service had properly been effectuated
was still being investigated and that the judge in the
underlying case was open to revisiting his order vacating the
default judgment if evidence of service was presented. Blue
Moon's Mot. Summ. J., Ex. G, Kern 3/11/2013 Email, ECF
No. 156-7. Palandech, who had been copied on that email,
see id., testified that a copy of the email was
eventually sent to Brown on April 1, 2013. Palandech Dep. at
2014, Blue Moon offered to settle the state court case in
exchange for $25, 000, Blue Moon's LR Stmt. ¶ 17,
which happened to be the amount of TSS's deductible on
its insurance policy with Essex, id. ¶ 16.
Palandech had apparently earlier offered a mutual
“walk-away” from the case. See Pl.'s
Resp. Blue Moon's LR 56.1 Stmt., Ex. D, Palandech
6/2/2014 Email, ECF No. 159-2. According to Palandech, he
relayed the $25, 000 offer to Veach and Brown, recommending
that TSS reject the offer and instead file a motion to
dismiss. Palandech Dep. at 80:7- 82:9. Palandech further
testified that, by May 30, 2014, both Brown and Veach agreed
with his recommendation: Veach replied that he was
“firmly a NO!” on the offer, see
Pl.'s LR Stmt. ¶ 19, and Melanie Brown responded
that Palandech should “go ahead and file the motion to
dismiss.” Palandech Dep. at 86:22-87:2.
the $25, 000 offer was rejected, Blue Moon's counsel told
Palandech on June 1, 2014, that TSS “needs to make a
cash offer and we will try to work this out with you
guys.” Pl.'s LR Stmt. ¶ 20. Blue Moon again
reached out to Palandech on June 4, 2014, stating that Blue
Moon's prior counsel “insists there was service [on
TSS] and is urging to get the judgment reinstated, etc. I can
work with you but you need to make an offer.”
Id. ¶ 22. Palandech testified that he could not
specifically remember discussing these emails with Brown,
though he stated that, at the time, they were in regular
conversations about multiple matters. Palandech Dep. at
testified that he was not authorized to make a settlement for
money to be paid out by Essex without its permission,
id. at 52:15-19, and that, to his recollection,
neither he nor anyone at his firm had asked Essex for
permission for any settlement, id. at 52:20-53:16.
29, 2014, Blue Moon's counsel sent Palandech a copy of
the special process server's affidavit of service on
Thomas Donahue and informed him that the Secretary of State
had confirmed that Donahue had indeed been the registered
agent at the time of service. Blue Moon's LR Stmt. ¶
21; Palandech Dep. at 93:8- 23; Pl.'s Resp. Blue
Moon's LR Stmt., Ex. D, Ralsak 7/29/2014 Email, ECF No.
159- 4. The email also stated that Blue Moon would seek to
reinstate the default judgment, but also suggested that
before it did so, the parties should “see if the[re] is
a basis to resolve this matter.” Ralsak 7/29/2014
to Palandech, he had not believed that service was truly an
issue until he received this email. Pl.'s LR Stmt. ¶
25. Blue Moon's counsel, for his part, emailed Palandech
stating that he had “basically believed”
TSS's contention that service had not been effectuated
because TSS had filed affidavits attesting to that fact.
Id. ¶ 26.