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Essex Insurance Co. v. Structural Shop, Ltd.

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

March 21, 2018



          John Z. Lee United States District Judge

         In 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.

         In 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, [1] 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.

         Each 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[2] also moves for summary judgment on Blue Moon and TSS's[3] affirmative defenses. For the reasons that follow, Essex's motion [157] is granted in full and Blue Moon's motion [156] is denied.


         I. The First Default Judgment

         In 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.

         II. The Essex Insurance Policy

         Essex 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.

         The 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. ¶ 37.

         III. TSS's Actions Prior to Notifying Essex of the Insurance Claim

         On 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 Dep.[5] at 44:24-45:3, ECF No. 159-4.

         On 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.

         IV. Essex Initiates Defense of TSS

         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.

         At the time, Essex used the company Markel as its claims servicer. Pl.'s Resp. Blue Moon's LR Stmt., Ex. C, Sheehan Dep.[6] 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.[7] at 55:4-12, ECF No. 167-2.

         According 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 137:1-24.

         In 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.

         On 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 164:14-165:9.

         V. Settlement Discussions

         In May 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.

         After 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 90:13-92:24.

         Palandech 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.

         On July 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 Email.

         According 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.

         VI. ...

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