Robert R. McCormick Foundation v. Arthur J. Gallagher Risk Management Services, Inc.

          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 ...