ROBERT R. McCORMICK FOUNDATION et al, Appellants,
v.
ARTHUR J. GALLAGHER RISK MANAGEMENT SERVICES, INC., Appellee.
JUSTICE THOMAS delivered the judgment of the court, with
opinion. Chief Justice Burke and Justices Kilbride, Garman,
Karmeier, Theis, and Neville concurred in the judgment and
opinion.
OPINION
THOMAS
JUSTICE
¶
1 The issue presented is whether the common-interest
exception to the attorney-client privilege as set forth in
Waste Management, Inc. v. International Surplus Lines
Insurance Co., 144 Ill.2d 178, 190 (1991), extends to
the circumstances of this case, where there is no
insured-insurer relationship between the parties and the
party claiming the privilege is bringing suit based on the
defendant's negligence in failing to procure appropriate
insurance as a broker. We find that the common-interest
exception does not extend to the facts of this case.
¶
2 BACKGROUND
¶
3 Plaintiffs, the Robert R. McCormick Foundation and the
Cantigny Foundation (Foundations), brought the instant suit
against their former insurance broker, Arthur J. Gallagher
Risk Management Services, Inc. (Gallagher), in Du Page County
circuit court. The Foundations' complaint included four
counts: breach of contract to procure insurance, contractual
indemnity, professional negligence, and negligent
misrepresentation.
¶
4 The complaint alleged the following facts. The Foundations
are among the largest charitable organizations in the United
States and engage in numerous philanthropic activities. As
large charitable enterprises whose livelihoods flow from
extensive securities holdings, the Foundations have need of
robust insurance coverage, including directors and officers
(D&O) coverage. Gallagher is a for-profit insurance
brokerage firm. In 2008, the Foundations hired Gallagher as
their insurance broker, and thereafter, the parties entered
into a series of annual compensation agreements. An agreement
signed by the parties in 2009 was in effect when the key
events underlying the Foundations' claims against
Gallagher took place.
¶
5 In February 2010, the parties began discussions as to
whether the Foundations should renew their primary D&O
insurance coverage (the Chubb policy) through (what was
essentially) a single policy with Federal Insurance Company,
a member of the Chubb group of insurance companies, which
gave the Foundations a total of $25 million in D&O
coverage for 2008-10. The Foundations repeatedly advised
Gallagher during the course of these discussions that their
goal was to obtain the same breadth of coverage provided by
the Chubb policy, while also seeking a reduced premium if
possible.
¶
6 In June 2010, Gallagher offered the Foundations two
choices-either renew the existing Chubb policy, or purchase a
two-year $25 million policy from Chartis Insurance Company
(the Chartis policy). Gallagher assured the Foundations that
the Chartis policy provided the same coverage as the Chubb
policy and that the coverage would be "apples to
apples." The proposed Chartis policy, however, had the
added benefit that it carried a premium that was $3400 less
than the Chubb policy. Given the difference in premiums,
Gallagher recommended that the Foundations bind coverage with
Chartis.
¶
7 Unbeknownst to the Foundations, the Chartis policy actually
contained a broad exclusion of claims that in any way related
to the purchase or sale of securities. By contrast, the
expiring Chubb policy contained a narrower securities
exclusion that barred coverage only with respect to claims
involving alleged violations of securities laws.
¶
8 In 2007, the Foundations were the second largest
shareholder group in the Tribune Company (the Tribune), a
large multimedia corporation. At that time, the Foundations
sold their preferred stock in the Tribune for some $2 billion
during a leveraged buyout (LBO) of the company. About a year
after that transaction, the Tribune filed for bankruptcy
protection.
¶
9 After the Tribune exited bankruptcy in 2011, aggrieved
shareholders filed a number of federal suits across the
country against more than 5000 defendants; the suits were
eventually consolidated in the Southern District of New York.
See In re Tribune Co. Fraudulent Conveyance
Litigation, 831 F.Supp.2d 1371 (J.P.M.L. 2011). The
Foundations were named as defendants in three of the suits.
These suits generally allege that the Foundations-through
their directors and officers and acting in concert with other
controlling shareholders-orchestrated the LBO through actual
and constructive fraud. Accordingly, the suits seek to unwind
the LBO and to claw back creditors' funds.
¶
10 The Foundations tendered the suits (the LBO Litigation) to
their new insurer Chartis under their D&O policy, but
Chartis denied coverage under the policy exclusion for claims
"in any way relating to any purchase of
securities." The Foundations allege that this exclusion
was not found in their prior policy with Chubb. As a result,
the Foundations have been forced to fund the extremely costly
defense of the sprawling and complex LBO Litigation. That
defense has been largely successful to date, but it has been
expensive, and the litigation will likely continue for years.
¶
11 The Foundations assert that Chubb would have defended and
indemnified them under their former policy. On that basis,
the Foundations sued Gallagher for breach of contract and
professional negligence resulting in loss of coverage.
¶
12 On Gallagher's motion for summary judgment, the
circuit court determined that an exclusion in the Chubb
policy, too, would have barred coverage for the LBO
Litigation. On appeal (the first of two appeals in this
case), the appellate court disagreed with the circuit
court's ruling, holding instead that the Chubb exclusion
in question did not necessarily bar coverage. See 2016 IL App
(2d) 150303, ¶¶ 14-16. The appellate court
therefore reversed the circuit court's grant of summary
judgment for Gallagher. Id. ¶ 17.
¶
13 On remand, Gallagher raised several affirmative defenses,
and the parties proceeded to discovery. Gallagher's
affirmative defenses asserted that the Foundations'
conduct in the LBO transaction was fraudulent and therefore
uninsurable. Moreover, Gallagher alleged, the Foundations
knew of "an ongoing, progressive loss" before they
changed insurers in June 2010 and therefore would never have
been entitled to coverage under an insurance policy purchased
in June 2010 regardless of its terms. Gallagher stated to the
circuit court that, in order to prove its defenses, it hoped
to garner facts relating to the following: (1) the extent to
which the Foundations advocated for the LBO, (2) the
Foundations' knowledge that the sustainable debt burden
that the LBO structure placed on the Tribune would result in
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