Smith v. Neumann
Annotate this Case
No. 2--96--1154
_________________________________________________________________
IN THE
APPELLATE COURT OF ILLINOIS
SECOND DISTRICT
_________________________________________________________________
KEVIN GRAEME SMITH and CERTAIN ) Appeal from the Circuit
OTHER UNDERWRITERS AT LLOYD'S ) Court of Du Page County.
LONDON, )
)
Plaintiffs and Counter- )
defendants-Appellees, ) 96--MR--0082
)
v. )
)
CARL A. NEUMANN, )
)
Defendant and Counter- )
plaintiff-Appellant ) Honorable
) John W. Darrah,
(Arnstein and Lehr, Defendants).) Judge, Presiding.
_____________________________________________________________
JUSTICE HUTCHINSON delivered the opinion of the court:
Defendant, Carl A. Neumann, appeals from the order of the
circuit court of Du Page County granting summary judgment to
plaintiffs, Kevin Graeme Smith and other underwriters at Lloyd's
London. On appeal, defendant contends that the trial court erred
in finding that the provisions within clause (bb) of plaintiffs'
insurance policy precluded defendant from receiving insurance
coverage. We affirm.
The record on appeal reveals the following facts. In 1985,
defendant was a partner at the law firm of Arnstein & Lehr. One of
defendant's clients was Indeck Energy Services, Inc. (Indeck).
Defendant provided legal services for Indeck beginning in 1985.
While at Arnstein & Lehr, defendant drafted an employment agreement
and a shareholders' agreement for Indeck. Shortly thereafter,
Indeck hired Michael Polsky to be its chief executive officer.
Indeck and Polsky entered into the employment agreement and
shareholders' agreement that had been drafted by defendant. The
agreement allowed Polsky to acquire stock shares in Indeck.
On November 30, 1987, defendant resigned from Arnstein & Lehr,
and on December 1, 1987, defendant became a partner at Keck, Mahin
& Cate (Keck). At Keck, defendant continued to perform legal
services for Indeck.
In August 1990 Indeck gave Polsky notice of its intent to
terminate Polsky's employment, effective in September 1990. In
1991 this employment dispute was submitted to the commercial
arbitration tribunal. The arbitration also addressed Polsky's
rights under the related shareholders' agreement. Indeck was
represented at the arbitration by defendant and another Keck
attorney, Steven Adelman.
On November 27, 1991, the arbitrator found that Indeck's
termination of Polsky violated the terms of the employment
agreement. The arbitrator awarded Polsky approximately $21.6
million in compensatory damages and for redemption of Polsky's
Indeck stock pursuant to the shareholders' agreement.
Following the results of the arbitration, in or about April
1992, Indeck terminated the services of Keck, defendant, and
Adelman. Indeck also refused to pay outstanding invoices for work
performed by defendant and Keck in the Polsky arbitration.
On April 8, 1992, defendant and representatives of Indeck and
Keck met at Indeck's offices to discuss Keck's unpaid billing
invoices. At that meeting, Indeck claimed that Keck and defendant
had committed professional malpractice. Indeck presented Keck and
defendant with a written list identifying alleged instances of
malpractice. With regard to purported malpractice in professional
services performed by defendant while he was employed by Arnstein
& Lehr, Indeck alleged with respect to the Polsky matter:
"6. Substance of Shareholders Agreement. Failure to
have minority shareholder discount provision or even to
discuss it with the client."
On April 28, 1992, written notice of a potential claim by
Indeck for professional malpractice was given to Keck and
defendant's professional liability insurer, Attorney's Liability
Assurance Society, Inc. (ALAS). Attached to the notice was the
list of alleged errors that defendant received at the April 8,
1992, meeting. ALAS acknowledged the Indeck claim in May 1992 and
has provided insurance coverage to Keck and defendant for the
entire claim, without any reservation of rights.
In November 1993 Indeck tendered to Keck, defendant, and
Adelman a proposed agreement to toll the statute of limitations.
The proposed tolling agreement was also forwarded to ALAS on or
before November 12, 1993. Defendant signed the tolling agreement
on November 18, 1993. Defendant was specifically named a party to
this agreement, "individually and as present or former partner of
the law firm [Keck]." The agreement purports to toll "any and all
statute of limitations and statute of repose which would otherwise
expire *** between Indeck and Keck."
On October 14, 1994, Indeck filed suit in the Lake County
circuit court against Keck, Adelman, and defendant. In its second
amended complaint, Indeck alleged acts of professional malpractice
committed by Keck, Adelman, and defendant from 1985 to 1992.
On October 28, 1994, Lawrence Wojcik, a partner at Keck,
transmitted a photocopy of the original Indeck complaint to
Arnstein & Lehr. On October 31, 1994, Arnstein & Lehr forwarded a
copy of the complaint to its insurance broker, Rollins Hudig Hall
of Illinois, Inc. On August 28, 1995, defendant sent a letter to
Arnstein & Lehr's insurance broker, requesting that plaintiffs
coordinate their defense and indemnity obligations with defendant's
and Keck's defense counsel.
Defendant is insured for the Indeck claim under an ALAS policy
issued to Keck effective from April 1, 1992, to April 1, 1993. In
addition to insuring defendant for claims arising out of
professional services he performed while at Keck, the ALAS policy
contains a "prior acts endorsement," providing coverage for
defendant while he is a partner at Keck, for claims made against
him "by reason of any ACT" committed "in his *** professional
capacity as an Attorney, Counselor of Law or Notary prior to such
assured becoming a partner or employee of the FIRM." Thus, the
ALAS policy covers defendant for claims made while defendant is a
partner at Keck, by reason of his acts at Arnstein & Lehr or any
other firm where he may have been employed before he became a
partner at Keck.
Defendant admitted in both the present case and the underlying
Indeck action that ALAS covered him for all acts, errors, or
omissions in the underlying Indeck suit without a reservation of
rights.
On January 25, 1996, plaintiffs denied coverage to defendant
for the claims made against him in the Indeck action. On February
1, 1996, plaintiffs filed a complaint against defendant and
Arnstein & Lehr, seeking the trial court's declaration that they
have no obligation to defend or indemnify defendant in the Indeck
action.
On June 4, 1996, plaintiffs moved for summary judgment;
defendant moved for summary judgment the following day. Defendant
submitted his own affidavit in response to plaintiff's motion for
summary judgment.
In the present case, in his counterclaim, defendant seeks
coverage under plaintiffs' policies for his acts, errors, or
omissions at Arnstein & Lehr under one primary and two excess
policies of insurance effective from May 4, 1994, to May 4, 1995.
The two excess policies are "subject to the same warranties, terms
and conditions" that are contained in the primary policy. The
"Declarations Page" of plaintiffs' primary policy identifies the
"Named Insured" and "the Insured" as follows:
"1. The Insured: The unqualified word, 'Insured,'
whenever used in this policy means:
a. the Named Insured firm or predecessor firm set forth
in the Declarations;
***
c. any former partner, officer, director or stockholder
employee of the firm or predecessor firms named in the
Declarations while acting solely in a professional capacity on
behalf of such firms."
The insuring agreement of plaintiff's primary policy reads as
follows:
"1. The Coverage
Professional Liability and Claims Made Clause: To pay on
behalf of the Insured all sums in excess of the Deductible
amount stated in the Declarations which the Insured shall
become legally obligated to pay as damages as a result of
CLAIMS FIRST MADE AGAINST THE INSURED DURING THE POLICY
PERIOD:
a. by reason of any act, error or omission in
professional services rendered or that should have been
rendered by the Insured ***
PROVIDED ALWAYS THAT such act, error or omission or such
Personal Injury happens:
aa. during the policy period, or
bb. prior to the policy period provided that, prior to
the effective date of this policy:
1. the Insured did not give notice to any prior
insurer of any such act, error, omission or Personal Injury,
and
2. the Insured did not have a basis to believe that
the act, error or omission or Personal Injury was a breach of
professional duty or may result in a claim, and
3. there is no prior policy or policies which
provide insurance for such liability or claim, whether or not
the available Limits of Liability of such prior policy or
policies are sufficient to pay any liability or claim or
whether or not the deductible provisions and amount of such
prior policy or policies are different from this policy."
On August 30, 1996, after briefing and oral argument, the
trial court ruled on the two motions. The trial court first
determined that all three clause (bb) conditions to prior acts
coverage had to be satisfied. The trial court then found that the
terms "prior policy" and "prior insurer" of clause (bb) were plain
and unambiguous. The trial court stated:
"[T]he most obvious construction of prior insurer or prior
policy is just that. Any policy of insurance that was issued
prior to the insurance carrying this clause is the most
reasonable, straightforward and logical conclusion."
The trial court disagreed with defendant's argument that these
terms had to apply to prior insurer or prior policies only of the
named insured, Arnstein & Lehr, stating defendant's interpretation
would "torture, if not commit a homicide on that phrase."
The trial court next addressed defendant's argument that
clause (bb)(3) was an "unenforceable escape other insurance"
clause. The trial court found that clause (bb)(3) was not an
escape other insurance clause, but rather an initial qualified
extension of coverage. The trial court relied on the following
passage from Evanston Insurance Co. v. Affiliated FM Insurance Co.,
556 F. Supp. 135 (D. Conn. 1983):
"It is logical and reasonable, from the point of view of both
the insurer and the insured, that such coverage would not be
extended to acts already covered by prior policies. 'Claims-
made' premiums are undoubtedly structured to reflect this
explicit exclusion of coverage." Evanston Insurance Co., 556 F. Supp. at 138.
The trial court also addressed defendant's argument that the
list of alleged professional errors that he received from Indeck
did not constitute notice of each act, error, or omission in
services performed at Arnstein & Lehr on which Indeck later sued.
The trial court found that defendant's argument that clause (bb)(1)
should not apply because the list did not specifically list all
drafting errors subsequently alleged in the claim "would turn this
into Metaphysics 101."
With respect to clause (bb)(2), the trial court found that
because defendant
"was apprised on April 8, 1992, *** that there were drafting
errors, albeit in failing to provide protection against the
diminished value that a minority shareholder's shares always
carry, that he should have either objectively or ***
subjectively known that *** [a]n error or omission was a
breach of a professional duty or may result in a claim."
The trial court granted summary judgment to plaintiffs on all three
(bb) clauses, noting that "there's a failure to comply with all
three in the conjunctive, although the failure as to any one would
be dispositive on the issue of coverage." Defendant timely
appeals.
Nonpublishable material under Supreme Court Rule 23 omitted.
In the present case, both parties filed motions for summary
judgment; thus, they invite this court to decide the issues
presented as a question of law. Giannetti v. Angiuli, 263 Ill.
App. 3d 305, 312 (1994). Summary judgment is properly granted if
"the pleadings, depositions, and admissions on file, together with
the affidavits, if any, show that there is no genuine issue as to
any material fact and that the moving party is entitled to a
judgment as a matter of law." 735 ILCS 5/2--1005(c) (West 1994).
The use of the summary judgment procedure encourages the
expeditious disposition of a lawsuit. Bryant v. Glen Oaks Medical
Center, 272 Ill. App. 3d 640, 649 (1995). The purpose of summary
judgment is not to try questions of fact, but to determine whether
such questions exist. Allegro Services, Ltd. v. Metropolitan Pier
& Exposition Authority, 172 Ill. 2d 243, 256 (1996). Summary
judgment should be granted only when the right of the moving party
is clear and free from doubt. Guerino v. Depot Place Partnership,
273 Ill. App. 3d 27, 30 (1995). We review summary judgment
orders de novo. State Farm Mutual Automobile Insurance Co. v.
Universal Underwriters Group, 285 Ill. App. 3d 115, 120 (1997). An
appellate court may affirm a summary judgment on any basis found in
the record. Monticello Insurance Co. v. Wil-Freds Construction,
Inc., 277 Ill. App. 3d 697, 701 (1996). The issue before us in the
present case involves the interpretation of an insurance policy and
is, therefore, a question of law subject to de novo review. See
Oakley Transport, Inc. v. Zurich Insurance Co., 271 Ill. App. 3d
716, 720 (1995).
On appeal, defendant first contends that the trial court erred
in finding that clauses (bb)(1) and (bb)(3) precluded coverage for
defendant for the Indeck complaint. Defendant takes issue with the
trial court's interpretations of the phrases "prior policy" and
"prior insurer." He contends that plaintiffs' failure to define
the phrases created an ambiguity in the policy. Defendant urges
this court to find the phrases "prior policy" and "prior insurer"
to mean prior policies and prior insurers of Arnstein & Lehr, and
not insurers of other law firms. Defendant argues that his
interpretation is consistent with the purpose of claims-made
policies, i.e., to prevent "stacking" more than one claims-made
policy in the same "stream of coverage," and that plaintiffs'
interpretation would lead to an unlawful result, describing clause
(bb)(3) an "unenforceable escape other insurance" clause. In the
alternative, defendant argues that, even if Keck's insurer, ALAS,
was a "prior insurer," defendant did not give notice to ALAS in
1992 or 1993 of the alleged acts, errors, or omissions in drafting
the employment agreement or the shareholders' agreement, rendering
clause (bb)(1) inapplicable. Defendant contends that the April
1992 letter to ALAS was merely to advise ALAS of criticisms leveled
against Keck, and not defendant.
Plaintiffs counter that "prior policy" and "prior insurer" are
not ambiguous terms. Plaintiffs argue that "prior policy" should
be interpreted to mean prior policies and prior insurers of
defendant. They contend that ALAS is defendant's prior insurer and
the ALAS policy is defendant's prior policy. They further argue
that clause (bb)(3) is a valid qualified extension of prior acts
coverage and not an "unenforceable escape other insurance" clause
and that the "stream of coverage" was the sequence of policies
insuring defendant. Plaintiffs also contend that the present case
does not present an "other insurance" situation because it does not
involve competing, concurrent policies. Moreover, plaintiffs argue
that clause (bb)(1) bars coverage because defendant gave notice to
ALAS prior to the effective date of plaintiffs' policies.
An agreement reduced to writing must be presumed to reflect
the intention of the parties who signed it. Western Illinois Oil
Co. v. Thompson, 26 Ill. 2d 287, 291 (1962); Central Illinois
Public Service Co. v. American Empire Surplus Lines Insurance Co.,
267 Ill. App. 3d 1043, 1048 (1994). To ascertain the meaning of
the policy's words and the intent of the parties, the court must
construe the policy as a whole with due regard to the risk
undertaken, the subject matter that is insured, and the purposes of
the contract in its entirety. Outboard Marine Corp. v. Liberty
Mutual Insurance Co. (Outboard Marine Corp.), 154 Ill. 2d 90, 108
(1992); Outboard Marine Corp. v. Liberty Mutual Insurance Co.
(Outboard Marine Corp. (II)), 283 Ill. App. 3d 630, 649 (1996).
Illinois law governing the construction of insurance contracts
dictates that, if a policy term is subject to more than one
reasonable interpretation, any ambiguity must be construed in favor
of the policyholder. See Outboard Marine Corp., 154 Ill. 2d at
119-21. Where the terms of an agreement are plain and unambiguous,
a court must afford them their plain, ordinary, and popular
meaning. Outboard Marine Corp., 154 Ill. 2d at 108-09; see also
Caterpillar, Inc. v. Aetna Casualty & Surety Co., 282 Ill. App. 3d
1065, 1071 (1996). In addition, the absence of a definition does
not render a policy term ambiguous, nor is it ambiguous simply
because the parties can suggest creative possibilities for its
meaning. Lapham-Hickey Steel Corp. v. Protection Mutual Insurance
Co., 166 Ill. 2d 520, 529 (1995); Bruder v. Country Mutual
Insurance Co., 156 Ill. 2d 179, 193 (1993). The alternate
interpretation must also be reasonable. Bruder, 156 Ill. 2d at
193. Although ambiguities in an insurance policy will be construed
against the insurer, courts will not distort the language of a
policy to create an ambiguity where none exists. Dixon
Distributing Co. v. Hanover Insurance Co., 161 Ill. 2d 433, 441
(1994), citing Outboard Marine Corp., 154 Ill. 2d at 108-09.
Whether an ambiguity exists is a question of law for the trial
court to determine. Central Illinois Public Service Co., 267 Ill.
App. 3d at 1048.
"A word generally has several meanings, even in the
dictionary. You have to consider the sentence in which it
stands to decide which of those meanings it bears in the
particular case, and very likely will see that it there has a
shade of significance more refined than any given in the
word." Oliver Wendell Holmes, Jr., The Theory of Legal
Interpretation, 12 Harv. L. Rev. 417, 417 (1899).
Our analysis must begin with an examination of the policy, as
written. Subject to other terms and conditions, coverage is
provided for all professional services rendered "during the policy
period" or "prior to the policy period" provided that the three
conditions precedent of clause (bb) set forth in subsections (1),
(2), and (3) are satisfied. We agree with the trial court's
finding that, because the word "and" follows subsections (1) and
(2), all three conditions must be met to receive coverage. As a
result, plaintiffs need not defend or otherwise indemnify defendant
for the defense costs in the Indeck action should defendant fail to
satisfy any one of the three clause (bb) conditions.
The trial court relied on Evanston Insurance Co. in its
determination that ALAS was a prior insurer of defendant and that
the ALAS policy was a prior policy providing coverage for the
Indeck claim. To that effect, the trial court found that defendant
failed to satisfy subsections (1) and (3) of clause (bb). We agree
with the trial court that Evanston Insurance Co. is persuasive. In
Evanston Insurance Co., a real estate agent was sued for alleged
negligent misrepresentation. Evanston Insurance Company (Evanston)
provided a defense for the agent, and subsequently Evanston sought
a declaratory judgment to have Affiliated FM Insurance Company
(Affiliated) defend or indemnify the agent and to reimburse
Evanston for its defense costs. Affiliated's policy contained an
"other insurance" clause. However, Evanston's policy, a claims-
made policy, contained a provision such that the agent would be
covered for acts that occurred
"[p]rior to the policy period provided that *** there is no
prior policy or policies which provide insurance *** resulting
from such act, *** whether or not the available limits of
liability of such prior policy or policies are sufficient ***
or whether or not the deductible provisions and amount of such
prior policy or policies are different from this policy."
Evanston Insurance Co., 556 F. Supp. at 136.
In granting Evanston's motion for summary judgment, the court
determined that Affiliated was a "prior insurer" of the agent;
Evanston's proviso was not an "escape" clause, but, rather, a valid
exclusion of coverage; and that Affiliated was obligated to defend
the agent. Evanston Insurance Co., 556 F. Supp. at 138-39.
In the present case, we find no ambiguity in plaintiffs'
coverage section with respect to "prior insured" and "prior
policy." In plaintiffs' policy, the section entitled "THE
COVERAGE" sets forth two different principles for determining when
the coverage is available to defendant. No limitation on coverage
is listed when a negligent act occurs during this period. However,
when the negligent act occurs prior to the effective date of the
policy period, coverage extends only when no other policy can
provide coverage. In the present case, there was a prior insurer
that provided coverage in a prior policy--ALAS and its policy.
Because we also agree with the trial court and courts of other
jurisdictions that insurance companies have an unquestionable right
to limit the coverage of their insurance policies, we determine
that plaintiffs' clause (bb)(3) is a valid exclusion from coverage
and not an "unenforceable escape other insurance" clause. See
Chamberlin v. Smith, 72 Cal. App. 3d 835, 140 Cal. Rptr. 493
(1977); see generally Annotation, Event Triggering Liability
Insurance Coverage as Occurring Within Period of Time Covered by
Liability Insurance Policy Where Injury or Damage is Delayed--
Modern Cases, 14 A.L.R.5th 695 (1993) (discussing cases and
providing examples in which courts have held liability insurance
was not established for attorneys).
We also note the case of Associated Physicians Insurance Co.
v. Obasi, 262 Ill. App. 3d 343 (1994), a case we refer to solely
for an excerpt of a policy provision. According to Associated's
policy, a "Claim First Made" means, inter alia, that "a CLAIM has
been received, for the first time, by the INSURED during the POLICY
PERIOD or immediately prior to the POLICY PERIOD at a time when
said INSURED was covered under a prior professional liability
policy issued by the Company which has been renewed by this
policy." (Emphasis added.) Associated Physicians Insurance Co.,
262 Ill. App. 3d at 344. What this excerpt suggests to us is that
an insurer may limit its scope of coverage by including appropriate
language to the policy. See also Outboard Marine Corp. (II), 283
Ill. App. 3d at 646-47 (discussing a "prior policy" provision). In
the present case, we find that the policy's unambiguous and plain
meaning should be given effect. Therefore, if plaintiffs intended
to limit clause (bb) to prior policies of Arnstein & Lehr, they
could have done so in a fashion similar to that of Associated
Physicians Insurance Co. Because no limiting language as such
exists in clause (bb)(3) of the present case, we decline to
interpret clause (bb)(3) as limiting coverage to prior policies of
Arnstein & Lehr.
Because defendant failed to satisfy clause (bb) in its
entirety, defendant in the present case is precluded from receiving
insurance coverage from plaintiffs. Typically, this would obviate
the need to address defendant's other issues on appeal. However,
the dynamics of the present case necessitate further discussion.
Therefore, we will address each of defendant's issues in turn.
Defendant argues alternatively that clause (bb)(1) is
inapplicable because, even if Keck's insurer, ALAS, was a "prior
insurer," ALAS received no notice of defendant's alleged drafting
errors in the employment agreement or the shareholders' agreement
until they were raised in the Indeck complaint filed in October
1994. Defendant contends that the April 28, 1992, letter to ALAS
was merely to advise ALAS of criticisms leveled against Keck, and
not defendant. Plaintiffs argue that clause (bb)(1) bars coverage
because defendant gave notice to ALAS prior to the effective date
of plaintiffs' policies. The trial court found that Keck's April
28, 1992, notice to ALAS of potential claims raised by Indeck
against Keck constituted notice to a prior insurer of defendant.
We find defendant's argument lacks merit. Defendant is
attempting to distinguish and distance himself from "the firm," but
this is impossible. At the very heart of the arbitration between
Indeck and Polsky, and the subsequent litigation between Indeck and
defendant and Keck, lies the employment agreement and the
shareholders' agreement that defendant drafted while at Arnstein &
Lehr. We have already determined that ALAS is a "prior insurer" of
defendant. Thus, the issue becomes: who is the "insured," and at
what point did the "insured" give notice to ALAS?
We find that defendant is an "insured" under plaintiff's
policy definition of "the Insured." Defendant is an "Insured"
under subsection (c) as a "former partner *** of the firm named in
the Declarations," i.e., Arnstein & Lehr, but only "while acting
solely in a professional capacity on behalf of such firms."
Arnstein & Lehr is separately defined as an "Insured" under
subsection (a) as the "Named Insured firm *** in the Declarations."
We also agree with the trial court's finding that the April 28,
1992, letter to ALAS constituted defendant's notice to a prior
insurer. We agree with defendant that the April 28, 1992, letter
refers to "the firm" and not defendant specifically by name.
However, in reading the letter, logic dictates that "the firm"
means not only Keck but also "[members of] the firm." To read the
letter in any other fashion would be absurd. For example, one
sentence of the letter reads, "At a meeting between the principal
officers of Indeck and the firm ***, the Indeck officers presented
a list of *** matters which they asserted had been improperly
handled by the firm." "Firm" is defined as a "business entity or
enterprise." Black's Law Dictionary 634 (6th ed. 1990). One
example of an entity is a partnership, that includes professional
corporations, such as Keck. A "corporation" is defined as "[a]n
artificial person or legal entity created by or under the authority
of the laws of a state." Black's Law Dictionary 340 (6th ed.
1990); see generally 805 ILCS 5/1.01 et seq. (West 1994). A
"partnership" is a "business that is owned by two or more persons
that is not organized as a corporation." Black's Law Dictionary
1120 (6th ed. 1990); see also 805 ILCS 205/6 (West 1996).
Clearly, a literal interpretation of the foregoing sentence
from the April 28, 1992, letter would be inane. A "firm" does not
walk into a building and attend a meeting with corporate officers--
human beings, or members of a firm, partnership, or corporation,
do. Defendant admitted in his May 17, 1996, affidavit that he
attended the April 8, 1992, meeting with the principal officers of
Indeck where the Indeck officers presented a list of matters which
they asserted had been improperly handled by "[him] and other Keck
attorneys." Without further belaboring our exercise in semantics,
we agree with the trial court and find that the April 28, 1992,
letter to ALAS constituted notice to a prior insurer of defendant
and that defendant, through that letter, gave notice to a prior
insurer of defendant.
Defendant's final issue on appeal is whether clause (bb)(2)
bars coverage to defendant. Clause (bb)(2) requires that defendant
"did not have a basis to believe that [defendant's] act, error or
omission *** was a breach of professional duty or may result in a
claim." Defendant contends that a subjective standard should be
applied to determine whether defendant had a basis to believe that
his prior acts may result in a claim. He cites to Gibraltar
Casualty Co. v. A. Epstein & Sons, International, Inc., 206 Ill.
App. 3d 272 (1990), and Estate of Logan v. Northwestern National
Casualty Co., 424 N.W.2d 179 (Wis. 1988), in support of his
argument. Defendant states in his May 31, 1996, affidavit, inter
alia:
"2. After the November 1991 arbitration award, Indeck fired
[Keck] and me and obtained other counsel ***. ***
3. On April 8, 1992, *** Indeck presented us with a list of
specific alleged negligent acts, errors and omissions that
Indeck believed [Keck] attorneys had committed ***.
4. The list contained a section entitled 'Polsky
Arbitration[,'] but it did not refer to any *** negligent
acts, errors or omissions concerning my drafting work at
Arnstein that were later asserted in an October 14, 1994
complaint filed by Indeck.
5. In November 1993, [Keck], Adelman and I signed an
agreement tolling the statute of limitations. Neither the
tolling agreement nor the discussions relating to it disclosed
to me that Indeck believed I had committed any of the alleged
negligent acts, errors or omissions concerning my drafting
work ***.
6. The first time I was made aware that Indeck believed I had
committed any of the alleged negligent acts, errors or
omissions concerning my drafting work at Arnstein was when I
read the October 14, 1994 Indeck Complaint shortly after it
was filed.
7. The only time prior to reading the *** complaint that I
was apprised of any concerns regarding my drafting work at
Arnstein was the listing in the April 8, 1992 memorandum of a
concern regarding the lack of a minority discount provision in
the shareholders agreement ***. *** I thought nothing of this
item because I had discussed having a minority discount
provision in the shareholders agreement with *** the majority
shareholder of Indeck. *** [T]he parties agreed not to have
a minority discount provision." (Emphasis added.)
Where a party moving for summary judgment files supporting
affidavits containing well-pleaded facts and the party opposing the
motion files no counteraffidavits, the material facts set forth in
the moving party's affidavits stand as admitted. Diversified
Realty Group, Inc. v. Davis, 257 Ill. App. 3d 417, 420 (1993). In
the present case, plaintiffs failed to file counteraffidavits in
opposition. Therefore, defendant's affidavits of May 17 and May
31, 1996, are taken as true. See Soderlund Brothers, Inc. v.
Carrier Corp., 278 Ill. App. 3d 606, 614 (1996). Defendant's
affidavit dated May 17, 1996, states that at the April 8, 1992,
meeting, the attorney for Indeck presented defendant "with a[n] ***
outline setting forth a number of purported instances of
malpractice supposedly committed by me and other Keck attorneys,
and *** damages *** ranging from $13 million to $29 million."
We note that the mere existence of factual questions that are
unrelated to the essential elements of the cause of action will not
preclude a court from granting summary judgment. Staley
Continental, Inc. v. Venterra Sales & Management Co., 228 Ill. App.
3d 174, 179 (1992), citing Village of Beckmeyer v. Wheelan, 212
Ill. App. 3d 287, 294 (1991). Accordingly, facts and circumstances
surrounding why defendant failed to include a minority shareholder
provision in the shareholders' agreement are of no consequence to
the determination of any matter in dispute in this case.
The relevant inquiry is not whether defendant had a basis to
believe that Indeck believed defendant had committed any act,
error, or omission that may have resulted in a claim, but rather
whether defendant, himself, had a basis to believe that his alleged
drafting errors may result in a claim. Therefore, we return to the
issue on appeal: whether this court should apply a subjective or
objective standard to determine whether defendant had a basis to
believe that his alleged errors may result in a claim.
We believe that the logic and reasoning of Ratcliffe v.
International Surplus Lines Insurance Co., 194 Ill. App. 3d 18
(1990), is persuasive. In Ratcliffe, the plaintiffs brought an
action seeking a declaration of the scopes of coverage under two
claims-made professional liability policies underwritten by
International Surplus Lines Insurance Company. The trial court
determined that plaintiffs had made a material misrepresentation
because they had not disclosed a dispute with a construction
company in their application. On appeal, the plaintiffs argued
that the trial court erroneously applied an objective standard in
determining whether a misrepresentation occurred. The plaintiffs
contended that they honestly and subjectively believed that no
circumstances existed at the time of application which might have
given rise to a claim. The reviewing court in Ratcliffe relied
upon Evanston Insurance Co. v. Security Assurance Co. (Evanston),
715 F. Supp. 1405 (N.D. Ill. 1989), and considered the facts known
to the plaintiffs at the time of the policy application. By
applying an objective standard, the Ratcliffe court determined
that the facts known to the plaintiffs were circumstances which
might have given rise to a claim against them and affirmed the
trial court on the issue of material misrepresentation. Ratcliffe,
194 Ill. App. 3d at 27.
In the present case, both the trial court and plaintiffs rely
on Evanston for the proposition that an objective standard should
apply in determining whether defendant had a basis to believe that
his alleged drafting errors may result in a claim. In Evanston,
the court considered an errors and omissions policy application
question asking whether the applicant knew of "[any] fact,
circumstance or situation indicating the probability of a claim
against which indemnification is or would be afforded by the
proposed insurance." Evanston, 715 F. Supp. at 1413. The Evanston
court concluded that the question "calls for no judgmental or
subjective evaluation, but in traditional objective language
requires the disclosure of any facts indicating the probability of
a covered claim." Evanston, 715 F. Supp. at 1414. We agree with
the reasoning and result in Evanston. Although Ratcliffe involves
issues of misrepresentations contained in an application for
insurance coverage, we believe that the rationale found in both
Evanston and Ratcliffe leads us to determine that an objective
standard should apply.
Applying an objective standard in the present case, we note
defendant's cognizance of the following facts: that Indeck was
defendant's client; that defendant drafted the employment agreement
and the shareholders' agreement; that at the heart of the Polsky
arbitration were disputes between Polsky and Indeck concerning
provisions of the employment agreement and shareholders' agreement;
that in November 1991 the arbitrator construed the agreements and
issued a multimillion dollar award against Indeck; that, subsequent
to the arbitration, Indeck fired defendant and refused to pay
Keck's outstanding invoices; that on April 8, 1992, Indeck
presented defendant with a list of "purported instances of
malpractice supposedly committed by [him]"; that on April 28, 1992,
Keck sent ALAS a letter, notifying ALAS of circumstances that might
give rise to a claim against the firm by Indeck; and that in
November 1993 defendant signed an agreement tolling the statute of
limitations with Indeck, "individually and as present or former
partner of the law firm [Keck]." Under an objective standard, we
hold that the above facts gave defendant a "basis to believe" that
defendant's acts, errors, or omissions may result in a claim.
Therefore, the trial court was correct in determining that clause
(bb)(2) bars coverage for defendant.
We conclude that defendant failed to satisfy clause (bb) in
the conjunctive, rendering him excluded from coverage under
plaintiffs' insurance policy.
For the foregoing reasons, the judgment of the circuit court
of Du Page County is affirmed.
Affirmed.
BOWMAN and THOMAS, JJ., concur.
_________________________________________________________________
IN THE
APPELLATE COURT OF ILLINOIS
SECOND DISTRICT
_________________________________________________________________
KEVIN GRAEME SMITH and CERTAIN ) Appeal from the Circuit
OTHER UNDERWRITERS AT LLOYD'S ) Court of Du Page County.
LONDON, )
)
Plaintiffs and Counter- )
defendants-Appellees, ) 96--MR--0082
)
v. )
)
CARL A. NEUMANN, )
)
Defendant and Counter- )
plaintiff-Appellant ) Honorable
) John W. Darrah,
(Arnstein and Lehr, Defendants).) Judge, Presiding.
_____________________________________________________________
JUSTICE HUTCHINSON delivered the opinion of the court:
Defendant, Carl A. Neumann, appeals from the order of the
circuit court of Du Page County granting summary judgment to
plaintiffs, Kevin Graeme Smith and other underwriters at Lloyd's
London. On appeal, defendant contends that the trial court erred
in finding that the provisions within clause (bb) of plaintiffs'
insurance policy precluded defendant from receiving insurance
coverage. We affirm.
The record on appeal reveals the following facts. In 1985,
defendant was a partner at the law firm of Arnstein & Lehr. One of
defendant's clients was Indeck Energy Services, Inc. (Indeck).
Defendant provided legal services for Indeck beginning in 1985.
While at Arnstein & Lehr, defendant drafted an employment agreement
and a shareholders' agreement for Indeck. Shortly thereafter,
Indeck hired Michael Polsky to be its chief executive officer.
Indeck and Polsky entered into the employment agreement and
shareholders' agreement that had been drafted by defendant. The
agreement allowed Polsky to acquire stock shares in Indeck.
On November 30, 1987, defendant resigned from Arnstein & Lehr,
and on December 1, 1987, defendant became a partner at Keck, Mahin
& Cate (Keck). At Keck, defendant continued to perform legal
services for Indeck.
In August 1990 Indeck gave Polsky notice of its intent to
terminate Polsky's employment, effective in September 1990. In
1991 this employment dispute was submitted to the commercial
arbitration tribunal. The arbitration also addressed Polsky's
rights under the related shareholders' agreement. Indeck was
represented at the arbitration by defendant and another Keck
attorney, Steven Adelman.
On November 27, 1991, the arbitrator found that Indeck's
termination of Polsky violated the terms of the employment
agreement. The arbitrator awarded Polsky approximately $21.6
million in compensatory damages and for redemption of Polsky's
Indeck stock pursuant to the shareholders' agreement.
Following the results of the arbitration, in or about April
1992, Indeck terminated the services of Keck, defendant, and
Adelman. Indeck also refused to pay outstanding invoices for work
performed by defendant and Keck in the Polsky arbitration.
On April 8, 1992, defendant and representatives of Indeck and
Keck met at Indeck's offices to discuss Keck's unpaid billing
invoices. At that meeting, Indeck claimed that Keck and defendant
had committed professional malpractice. Indeck presented Keck and
defendant with a written list identifying alleged instances of
malpractice. With regard to purported malpractice in professional
services performed by defendant while he was employed by Arnstein
& Lehr, Indeck alleged with respect to the Polsky matter:
"6. Substance of Shareholders Agreement. Failure to
have minority shareholder discount provision or even to
discuss it with the client."
On April 28, 1992, written notice of a potential claim by
Indeck for professional malpractice was given to Keck and
defendant's professional liability insurer, Attorney's Liability
Assurance Society, Inc. (ALAS). Attached to the notice was the
list of alleged errors that defendant received at the April 8,
1992, meeting. ALAS acknowledged the Indeck claim in May 1992 and
has provided insurance coverage to Keck and defendant for the
entire claim, without any reservation of rights.
In November 1993 Indeck tendered to Keck, defendant, and
Adelman a proposed agreement to toll the statute of limitations.
The proposed tolling agreement was also forwarded to ALAS on or
before November 12, 1993. Defendant signed the tolling agreement
on November 18, 1993. Defendant was specifically named a party to
this agreement, "individually and as present or former partner of
the law firm [Keck]." The agreement purports to toll "any and all
statute of limitations and statute of repose which would otherwise
expire *** between Indeck and Keck."
On October 14, 1994, Indeck filed suit in the Lake County
circuit court against Keck, Adelman, and defendant. In its second
amended complaint, Indeck alleged acts of professional malpractice
committed by Keck, Adelman, and defendant from 1985 to 1992.
On October 28, 1994, Lawrence Wojcik, a partner at Keck,
transmitted a photocopy of the original Indeck complaint to
Arnstein & Lehr. On October 31, 1994, Arnstein & Lehr forwarded a
copy of the complaint to its insurance broker, Rollins Hudig Hall
of Illinois, Inc. On August 28, 1995, defendant sent a letter to
Arnstein & Lehr's insurance broker, requesting that plaintiffs
coordinate their defense and indemnity obligations with defendant's
and Keck's defense counsel.
Defendant is insured for the Indeck claim under an ALAS policy
issued to Keck effective from April 1, 1992, to April 1, 1993. In
addition to insuring defendant for claims arising out of
professional services he performed while at Keck, the ALAS policy
contains a "prior acts endorsement," providing coverage for
defendant while he is a partner at Keck, for claims made against
him "by reason of any ACT" committed "in his *** professional
capacity as an Attorney, Counselor of Law or Notary prior to such
assured becoming a partner or employee of the FIRM." Thus, the
ALAS policy covers defendant for claims made while defendant is a
partner at Keck, by reason of his acts at Arnstein & Lehr or any
other firm where he may have been employed before he became a
partner at Keck.
Defendant admitted in both the present case and the underlying
Indeck action that ALAS covered him for all acts, errors, or
omissions in the underlying Indeck suit without a reservation of
rights.
On January 25, 1996, plaintiffs denied coverage to defendant
for the claims made against him in the Indeck action. On February
1, 1996, plaintiffs filed a complaint against defendant and
Arnstein & Lehr, seeking the trial court's declaration that they
have no obligation to defend or indemnify defendant in the Indeck
action.
On June 4, 1996, plaintiffs moved for summary judgment;
defendant moved for summary judgment the following day. Defendant
submitted his own affidavit in response to plaintiff's motion for
summary judgment.
In the present case, in his counterclaim, defendant seeks
coverage under plaintiffs' policies for his acts, errors, or
omissions at Arnstein & Lehr under one primary and two excess
policies of insurance effective from May 4, 1994, to May 4, 1995.
The two excess policies are "subject to the same warranties, terms
and conditions" that are contained in the primary policy. The
"Declarations Page" of plaintiffs' primary policy identifies the
"Named Insured" and "the Insured" as follows:
"1. The Insured: The unqualified word, 'Insured,'
whenever used in this policy means:
a. the Named Insured firm or predecessor firm set forth
in the Declarations;
***
c. any former partner, officer, director or stockholder
employee of the firm or predecessor firms named in the
Declarations while acting solely in a professional capacity on
behalf of such firms."
The insuring agreement of plaintiff's primary policy reads as
follows:
"1. The Coverage
Professional Liability and Claims Made Clause: To pay on
behalf of the Insured all sums in excess of the Deductible
amount stated in the Declarations which the Insured shall
become legally obligated to pay as damages as a result of
CLAIMS FIRST MADE AGAINST THE INSURED DURING THE POLICY
PERIOD:
a. by reason of any act, error or omission in
professional services rendered or that should have been
rendered by the Insured ***
PROVIDED ALWAYS THAT such act, error or omission or such
Personal Injury happens:
aa. during the policy period, or
bb. prior to the policy period provided that, prior to
the effective date of this policy:
1. the Insured did not give notice to any prior
insurer of any such act, error, omission or Personal Injury,
and
2. the Insured did not have a basis to believe that
the act, error or omission or Personal Injury was a breach of
professional duty or may result in a claim, and
3. there is no prior policy or policies which
provide insurance for such liability or claim, whether or not
the available Limits of Liability of such prior policy or
policies are sufficient to pay any liability or claim or
whether or not the deductible provisions and amount of such
prior policy or policies are different from this policy."
On August 30, 1996, after briefing and oral argument, the
trial court ruled on the two motions. The trial court first
determined that all three clause (bb) conditions to prior acts
coverage had to be satisfied. The trial court then found that the
terms "prior policy" and "prior insurer" of clause (bb) were plain
and unambiguous. The trial court stated:
"[T]he most obvious construction of prior insurer or prior
policy is just that. Any policy of insurance that was issued
prior to the insurance carrying this clause is the most
reasonable, straightforward and logical conclusion."
The trial court disagreed with defendant's argument that these
terms had to apply to prior insurer or prior policies only of the
named insured, Arnstein & Lehr, stating defendant's interpretation
would "torture, if not commit a homicide on that phrase."
The trial court next addressed defendant's argument that
clause (bb)(3) was an "unenforceable escape other insurance"
clause. The trial court found that clause (bb)(3) was not an
escape other insurance clause, but rather an initial qualified
extension of coverage. The trial court relied on the following
passage from Evanston Insurance Co. v. Affiliated FM Insurance Co.,
556 F. Supp. 135 (D. Conn. 1983):
"It is logical and reasonable, from the point of view of both
the insurer and the insured, that such coverage would not be
extended to acts already covered by prior policies. 'Claims-
made' premiums are undoubtedly structured to reflect this
explicit exclusion of coverage." Evanston Insurance Co., 556 F. Supp. at 138.
The trial court also addressed defendant's argument that the
list of alleged professional errors that he received from Indeck
did not constitute notice of each act, error, or omission in
services performed at Arnstein & Lehr on which Indeck later sued.
The trial court found that defendant's argument that clause (bb)(1)
should not apply because the list did not specifically list all
drafting errors subsequently alleged in the claim "would turn this
into Metaphysics 101."
With respect to clause (bb)(2), the trial court found that
because defendant
"was apprised on April 8, 1992, *** that there were drafting
errors, albeit in failing to provide protection against the
diminished value that a minority shareholder's shares always
carry, that he should have either objectively or ***
subjectively known that *** [a]n error or omission was a
breach of a professional duty or may result in a claim."
The trial court granted summary judgment to plaintiffs on all three
(bb) clauses, noting that "there's a failure to comply with all
three in the conjunctive, although the failure as to any one would
be dispositive on the issue of coverage." Defendant timely
appeals.
Nonpublishable material under Supreme Court Rule 23 omitted.
In the present case, both parties filed motions for summary
judgment; thus, they invite this court to decide the issues
presented as a question of law. Giannetti v. Angiuli, 263 Ill.
App. 3d 305, 312 (1994). Summary judgment is properly granted if
"the pleadings, depositions, and admissions on file, together with
the affidavits, if any, show that there is no genuine issue as to
any material fact and that the moving party is entitled to a
judgment as a matter of law." 735 ILCS 5/2--1005(c) (West 1994).
The use of the summary judgment procedure encourages the
expeditious disposition of a lawsuit. Bryant v. Glen Oaks Medical
Center, 272 Ill. App. 3d 640, 649 (1995). The purpose of summary
judgment is not to try questions of fact, but to determine whether
such questions exist. Allegro Services, Ltd. v. Metropolitan Pier
& Exposition Authority, 172 Ill. 2d 243, 256 (1996). Summary
judgment should be granted only when the right of the moving party
is clear and free from doubt. Guerino v. Depot Place Partnership,
273 Ill. App. 3d 27, 30 (1995). We review summary judgment
orders de novo. State Farm Mutual Automobile Insurance Co. v.
Universal Underwriters Group, 285 Ill. App. 3d 115, 120 (1997). An
appellate court may affirm a summary judgment on any basis found in
the record. Monticello Insurance Co. v. Wil-Freds Construction,
Inc., 277 Ill. App. 3d 697, 701 (1996). The issue before us in the
present case involves the interpretation of an insurance policy and
is, therefore, a question of law subject to de novo review. See
Oakley Transport, Inc. v. Zurich Insurance Co., 271 Ill. App. 3d
716, 720 (1995).
On appeal, defendant first contends that the trial court erred
in finding that clauses (bb)(1) and (bb)(3) precluded coverage for
defendant for the Indeck complaint. Defendant takes issue with the
trial court's interpretations of the phrases "prior policy" and
"prior insurer." He contends that plaintiffs' failure to define
the phrases created an ambiguity in the policy. Defendant urges
this court to find the phrases "prior policy" and "prior insurer"
to mean prior policies and prior insurers of Arnstein & Lehr, and
not insurers of other law firms. Defendant argues that his
interpretation is consistent with the purpose of claims-made
policies, i.e., to prevent "stacking" more than one claims-made
policy in the same "stream of coverage," and that plaintiffs'
interpretation would lead to an unlawful result, describing clause
(bb)(3) an "unenforceable escape other insurance" clause. In the
alternative, defendant argues that, even if Keck's insurer, ALAS,
was a "prior insurer," defendant did not give notice to ALAS in
1992 or 1993 of the alleged acts, errors, or omissions in drafting
the employment agreement or the shareholders' agreement, rendering
clause (bb)(1) inapplicable. Defendant contends that the April
1992 letter to ALAS was merely to advise ALAS of criticisms leveled
against Keck, and not defendant.
Plaintiffs counter that "prior policy" and "prior insurer" are
not ambiguous terms. Plaintiffs argue that "prior policy" should
be interpreted to mean prior policies and prior insurers of
defendant. They contend that ALAS is defendant's prior insurer and
the ALAS policy is defendant's prior policy. They further argue
that clause (bb)(3) is a valid qualified extension of prior acts
coverage and not an "unenforceable escape other insurance" clause
and that the "stream of coverage" was the sequence of policies
insuring defendant. Plaintiffs also contend that the present case
does not present an "other insurance" situation because it does not
involve competing, concurrent policies. Moreover, plaintiffs argue
that clause (bb)(1) bars coverage because defendant gave notice to
ALAS prior to the effective date of plaintiffs' policies.
An agreement reduced to writing must be presumed to reflect
the intention of the parties who signed it. Western Illinois Oil
Co. v. Thompson, 26 Ill. 2d 287, 291 (1962); Central Illinois
Public Service Co. v. American Empire Surplus Lines Insurance Co.,
267 Ill. App. 3d 1043, 1048 (1994). To ascertain the meaning of
the policy's words and the intent of the parties, the court must
construe the policy as a whole with due regard to the risk
undertaken, the subject matter that is insured, and the purposes of
the contract in its entirety. Outboard Marine Corp. v. Liberty
Mutual Insurance Co. (Outboard Marine Corp.), 154 Ill. 2d 90, 108
(1992); Outboard Marine Corp. v. Liberty Mutual Insurance Co.
(Outboard Marine Corp. (II)), 283 Ill. App. 3d 630, 649 (1996).
Illinois law governing the construction of insurance contracts
dictates that, if a policy term is subject to more than one
reasonable interpretation, any ambiguity must be construed in favor
of the policyholder. See Outboard Marine Corp., 154 Ill. 2d at
119-21. Where the terms of an agreement are plain and unambiguous,
a court must afford them their plain, ordinary, and popular
meaning. Outboard Marine Corp., 154 Ill. 2d at 108-09; see also
Caterpillar, Inc. v. Aetna Casualty & Surety Co., 282 Ill. App. 3d
1065, 1071 (1996). In addition, the absence of a definition does
not render a policy term ambiguous, nor is it ambiguous simply
because the parties can suggest creative possibilities for its
meaning. Lapham-Hickey Steel Corp. v. Protection Mutual Insurance
Co., 166 Ill. 2d 520, 529 (1995); Bruder v. Country Mutual
Insurance Co., 156 Ill. 2d 179, 193 (1993). The alternate
interpretation must also be reasonable. Bruder, 156 Ill. 2d at
193. Although ambiguities in an insurance policy will be construed
against the insurer, courts will not distort the language of a
policy to create an ambiguity where none exists. Dixon
Distributing Co. v. Hanover Insurance Co., 161 Ill. 2d 433, 441
(1994), citing Outboard Marine Corp., 154 Ill. 2d at 108-09.
Whether an ambiguity exists is a question of law for the trial
court to determine. Central Illinois Public Service Co., 267 Ill.
App. 3d at 1048.
"A word generally has several meanings, even in the
dictionary. You have to consider the sentence in which it
stands to decide which of those meanings it bears in the
particular case, and very likely will see that it there has a
shade of significance more refined than any given in the
word." Oliver Wendell Holmes, Jr., The Theory of Legal
Interpretation, 12 Harv. L. Rev. 417, 417 (1899).
Our analysis must begin with an examination of the policy, as
written. Subject to other terms and conditions, coverage is
provided for all professional services rendered "during the policy
period" or "prior to the policy period" provided that the three
conditions precedent of clause (bb) set forth in subsections (1),
(2), and (3) are satisfied. We agree with the trial court's
finding that, because the word "and" follows subsections (1) and
(2), all three conditions must be met to receive coverage. As a
result, plaintiffs need not defend or otherwise indemnify defendant
for the defense costs in the Indeck action should defendant fail to
satisfy any one of the three clause (bb) conditions.
The trial court relied on Evanston Insurance Co. in its
determination that ALAS was a prior insurer of defendant and that
the ALAS policy was a prior policy providing coverage for the
Indeck claim. To that effect, the trial court found that defendant
failed to satisfy subsections (1) and (3) of clause (bb). We agree
with the trial court that Evanston Insurance Co. is persuasive. In
Evanston Insurance Co., a real estate agent was sued for alleged
negligent misrepresentation. Evanston Insurance Company (Evanston)
provided a defense for the agent, and subsequently Evanston sought
a declaratory judgment to have Affiliated FM Insurance Company
(Affiliated) defend or indemnify the agent and to reimburse
Evanston for its defense costs. Affiliated's policy contained an
"other insurance" clause. However, Evanston's policy, a claims-
made policy, contained a provision such that the agent would be
covered for acts that occurred
"[p]rior to the policy period provided that *** there is no
prior policy or policies which provide insurance *** resulting
from such act, *** whether or not the available limits of
liability of such prior policy or policies are sufficient ***
or whether or not the deductible provisions and amount of such
prior policy or policies are different from this policy."
Evanston Insurance Co., 556 F. Supp. at 136.
In granting Evanston's motion for summary judgment, the court
determined that Affiliated was a "prior insurer" of the agent;
Evanston's proviso was not an "escape" clause, but, rather, a valid
exclusion of coverage; and that Affiliated was obligated to defend
the agent. Evanston Insurance Co., 556 F. Supp. at 138-39.
In the present case, we find no ambiguity in plaintiffs'
coverage section with respect to "prior insured" and "prior
policy." In plaintiffs' policy, the section entitled "THE
COVERAGE" sets forth two different principles for determining when
the coverage is available to defendant. No limitation on coverage
is listed when a negligent act occurs during this period. However,
when the negligent act occurs prior to the effective date of the
policy period, coverage extends only when no other policy can
provide coverage. In the present case, there was a prior insurer
that provided coverage in a prior policy--ALAS and its policy.
Because we also agree with the trial court and courts of other
jurisdictions that insurance companies have an unquestionable right
to limit the coverage of their insurance policies, we determine
that plaintiffs' clause (bb)(3) is a valid exclusion from coverage
and not an "unenforceable escape other insurance" clause. See
Chamberlin v. Smith, 72 Cal. App. 3d 835, 140 Cal. Rptr. 493
(1977); see generally Annotation, Event Triggering Liability
Insurance Coverage as Occurring Within Period of Time Covered by
Liability Insurance Policy Where Injury or Damage is Delayed--
Modern Cases, 14 A.L.R.5th 695 (1993) (discussing cases and
providing examples in which courts have held liability insurance
was not established for attorneys).
We also note the case of Associated Physicians Insurance Co.
v. Obasi, 262 Ill. App. 3d 343 (1994), a case we refer to solely
for an excerpt of a policy provision. According to Associated's
policy, a "Claim First Made" means, inter alia, that "a CLAIM has
been received, for the first time, by the INSURED during the POLICY
PERIOD or immediately prior to the POLICY PERIOD at a time when
said INSURED was covered under a prior professional liability
policy issued by the Company which has been renewed by this
policy." (Emphasis added.) Associated Physicians Insurance Co.,
262 Ill. App. 3d at 344. What this excerpt suggests to us is that
an insurer may limit its scope of coverage by including appropriate
language to the policy. See also Outboard Marine Corp. (II), 283
Ill. App. 3d at 646-47 (discussing a "prior policy" provision). In
the present case, we find that the policy's unambiguous and plain
meaning should be given effect. Therefore, if plaintiffs intended
to limit clause (bb) to prior policies of Arnstein & Lehr, they
could have done so in a fashion similar to that of Associated
Physicians Insurance Co. Because no limiting language as such
exists in clause (bb)(3) of the present case, we decline to
interpret clause (bb)(3) as limiting coverage to prior policies of
Arnstein & Lehr.
Because defendant failed to satisfy clause (bb) in its
entirety, defendant in the present case is precluded from receiving
insurance coverage from plaintiffs. Typically, this would obviate
the need to address defendant's other issues on appeal. However,
the dynamics of the present case necessitate further discussion.
Therefore, we will address each of defendant's issues in turn.
Defendant argues alternatively that clause (bb)(1) is
inapplicable because, even if Keck's insurer, ALAS, was a "prior
insurer," ALAS received no notice of defendant's alleged drafting
errors in the employment agreement or the shareholders' agreement
until they were raised in the Indeck complaint filed in October
1994. Defendant contends that the April 28, 1992, letter to ALAS
was merely to advise ALAS of criticisms leveled against Keck, and
not defendant. Plaintiffs argue that clause (bb)(1) bars coverage
because defendant gave notice to ALAS prior to the effective date
of plaintiffs' policies. The trial court found that Keck's April
28, 1992, notice to ALAS of potential claims raised by Indeck
against Keck constituted notice to a prior insurer of defendant.
We find defendant's argument lacks merit. Defendant is
attempting to distinguish and distance himself from "the firm," but
this is impossible. At the very heart of the arbitration between
Indeck and Polsky, and the subsequent litigation between Indeck and
defendant and Keck, lies the employment agreement and the
shareholders' agreement that defendant drafted while at Arnstein &
Lehr. We have already determined that ALAS is a "prior insurer" of
defendant. Thus, the issue becomes: who is the "insured," and at
what point did the "insured" give notice to ALAS?
We find that defendant is an "insured" under plaintiff's
policy definition of "the Insured." Defendant is an "Insured"
under subsection (c) as a "former partner *** of the firm named in
the Declarations," i.e., Arnstein & Lehr, but only "while acting
solely in a professional capacity on behalf of such firms."
Arnstein & Lehr is separately defined as an "Insured" under
subsection (a) as the "Named Insured firm *** in the Declarations."
We also agree with the trial court's finding that the April 28,
1992, letter to ALAS constituted defendant's notice to a prior
insurer. We agree with defendant that the April 28, 1992, letter
refers to "the firm" and not defendant specifically by name.
However, in reading the letter, logic dictates that "the firm"
means not only Keck but also "[members of] the firm." To read the
letter in any other fashion would be absurd. For example, one
sentence of the letter reads, "At a meeting between the principal
officers of Indeck and the firm ***, the Indeck officers presented
a list of *** matters which they asserted had been improperly
handled by the firm." "Firm" is defined as a "business entity or
enterprise." Black's Law Dictionary 634 (6th ed. 1990). One
example of an entity is a partnership, that includes professional
corporations, such as Keck. A "corporation" is defined as "[a]n
artificial person or legal entity created by or under the authority
of the laws of a state." Black's Law Dictionary 340 (6th ed.
1990); see generally 805 ILCS 5/1.01 et seq. (West 1994). A
"partnership" is a "business that is owned by two or more persons
that is not organized as a corporation." Black's Law Dictionary
1120 (6th ed. 1990); see also 805 ILCS 205/6 (West 1996).
Clearly, a literal interpretation of the foregoing sentence
from the April 28, 1992, letter would be inane. A "firm" does not
walk into a building and attend a meeting with corporate officers--
human beings, or members of a firm, partnership, or corporation,
do. Defendant admitted in his May 17, 1996, affidavit that he
attended the April 8, 1992, meeting with the principal officers of
Indeck where the Indeck officers presented a list of matters which
they asserted had been improperly handled by "[him] and other Keck
attorneys." Without further belaboring our exercise in semantics,
we agree with the trial court and find that the April 28, 1992,
letter to ALAS constituted notice to a prior insurer of defendant
and that defendant, through that letter, gave notice to a prior
insurer of defendant.
Defendant's final issue on appeal is whether clause (bb)(2)
bars coverage to defendant. Clause (bb)(2) requires that defendant
"did not have a basis to believe that [defendant's] act, error or
omission *** was a breach of professional duty or may result in a
claim." Defendant contends that a subjective standard should be
applied to determine whether defendant had a basis to believe that
his prior acts may result in a claim. He cites to Gibraltar
Casualty Co. v. A. Epstein & Sons, International, Inc., 206 Ill.
App. 3d 272 (1990), and Estate of Logan v. Northwestern National
Casualty Co., 424 N.W.2d 179 (Wis. 1988), in support of his
argument. Defendant states in his May 31, 1996, affidavit, inter
alia:
"2. After the November 1991 arbitration award, Indeck fired
[Keck] and me and obtained other counsel ***. ***
3. On April 8, 1992, *** Indeck presented us with a list of
specific alleged negligent acts, errors and omissions that
Indeck believed [Keck] attorneys had committed ***.
4. The list contained a section entitled 'Polsky
Arbitration[,'] but it did not refer to any *** negligent
acts, errors or omissions concerning my drafting work at
Arnstein that were later asserted in an October 14, 1994
complaint filed by Indeck.
5. In November 1993, [Keck], Adelman and I signed an
agreement tolling the statute of limitations. Neither the
tolling agreement nor the discussions relating to it disclosed
to me that Indeck believed I had committed any of the alleged
negligent acts, errors or omissions concerning my drafting
work ***.
6. The first time I was made aware that Indeck believed I had
committed any of the alleged negligent acts, errors or
omissions concerning my drafting work at Arnstein was when I
read the October 14, 1994 Indeck Complaint shortly after it
was filed.
7. The only time prior to reading the *** complaint that I
was apprised of any concerns regarding my drafting work at
Arnstein was the listing in the April 8, 1992 memorandum of a
concern regarding the lack of a minority discount provision in
the shareholders agreement ***. *** I thought nothing of this
item because I had discussed having a minority discount
provision in the shareholders agreement with *** the majority
shareholder of Indeck. *** [T]he parties agreed not to have
a minority discount provision." (Emphasis added.)
Where a party moving for summary judgment files supporting
affidavits containing well-pleaded facts and the party opposing the
motion files no counteraffidavits, the material facts set forth in
the moving party's affidavits stand as admitted. Diversified
Realty Group, Inc. v. Davis, 257 Ill. App. 3d 417, 420 (1993). In
the present case, plaintiffs failed to file counteraffidavits in
opposition. Therefore, defendant's affidavits of May 17 and May
31, 1996, are taken as true. See Soderlund Brothers, Inc. v.
Carrier Corp., 278 Ill. App. 3d 606, 614 (1996). Defendant's
affidavit dated May 17, 1996, states that at the April 8, 1992,
meeting, the attorney for Indeck presented defendant "with a[n] ***
outline setting forth a number of purported instances of
malpractice supposedly committed by me and other Keck attorneys,
and *** damages *** ranging from $13 million to $29 million."
We note that the mere existence of factual questions that are
unrelated to the essential elements of the cause of action will not
preclude a court from granting summary judgment. Staley
Continental, Inc. v. Venterra Sales & Management Co., 228 Ill. App.
3d 174, 179 (1992), citing Village of Beckmeyer v. Wheelan, 212
Ill. App. 3d 287, 294 (1991). Accordingly, facts and circumstances
surrounding why defendant failed to include a minority shareholder
provision in the shareholders' agreement are of no consequence to
the determination of any matter in dispute in this case.
The relevant inquiry is not whether defendant had a basis to
believe that Indeck believed defendant had committed any act,
error, or omission that may have resulted in a claim, but rather
whether defendant, himself, had a basis to believe that his alleged
drafting errors may result in a claim. Therefore, we return to the
issue on appeal: whether this court should apply a subjective or
objective standard to determine whether defendant had a basis to
believe that his alleged errors may result in a claim.
We believe that the logic and reasoning of Ratcliffe v.
International Surplus Lines Insurance Co., 194 Ill. App. 3d 18
(1990), is persuasive. In Ratcliffe, the plaintiffs brought an
action seeking a declaration of the scopes of coverage under two
claims-made professional liability policies underwritten by
International Surplus Lines Insurance Company. The trial court
determined that plaintiffs had made a material misrepresentation
because they had not disclosed a dispute with a construction
company in their application. On appeal, the plaintiffs argued
that the trial court erroneously applied an objective standard in
determining whether a misrepresentation occurred. The plaintiffs
contended that they honestly and subjectively believed that no
circumstances existed at the time of application which might have
given rise to a claim. The reviewing court in Ratcliffe relied
upon Evanston Insurance Co. v. Security Assurance Co. (Evanston),
715 F. Supp. 1405 (N.D. Ill. 1989), and considered the facts known
to the plaintiffs at the time of the policy application. By
applying an objective standard, the Ratcliffe court determined
that the facts known to the plaintiffs were circumstances which
might have given rise to a claim against them and affirmed the
trial court on the issue of material misrepresentation. Ratcliffe,
194 Ill. App. 3d at 27.
In the present case, both the trial court and plaintiffs rely
on Evanston for the proposition that an objective standard should
apply in determining whether defendant had a basis to believe that
his alleged drafting errors may result in a claim. In Evanston,
the court considered an errors and omissions policy application
question asking whether the applicant knew of "[any] fact,
circumstance or situation indicating the probability of a claim
against which indemnification is or would be afforded by the
proposed insurance." Evanston, 715 F. Supp. at 1413. The Evanston
court concluded that the question "calls for no judgmental or
subjective evaluation, but in traditional objective language
requires the disclosure of any facts indicating the probability of
a covered claim." Evanston, 715 F. Supp. at 1414. We agree with
the reasoning and result in Evanston. Although Ratcliffe involves
issues of misrepresentations contained in an application for
insurance coverage, we believe that the rationale found in both
Evanston and Ratcliffe leads us to determine that an objective
standard should apply.
Applying an objective standard in the present case, we note
defendant's cognizance of the following facts: that Indeck was
defendant's client; that defendant drafted the employment agreement
and the shareholders' agreement; that at the heart of the Polsky
arbitration were disputes between Polsky and Indeck concerning
provisions of the employment agreement and shareholders' agreement;
that in November 1991 the arbitrator construed the agreements and
issued a multimillion dollar award against Indeck; that, subsequent
to the arbitration, Indeck fired defendant and refused to pay
Keck's outstanding invoices; that on April 8, 1992, Indeck
presented defendant with a list of "purported instances of
malpractice supposedly committed by [him]"; that on April 28, 1992,
Keck sent ALAS a letter, notifying ALAS of circumstances that might
give rise to a claim against the firm by Indeck; and that in
November 1993 defendant signed an agreement tolling the statute of
limitations with Indeck, "individually and as present or former
partner of the law firm [Keck]." Under an objective standard, we
hold that the above facts gave defendant a "basis to believe" that
defendant's acts, errors, or omissions may result in a claim.
Therefore, the trial court was correct in determining that clause
(bb)(2) bars coverage for defendant.
We conclude that defendant failed to satisfy clause (bb) in
the conjunctive, rendering him excluded from coverage under
plaintiffs' insurance policy.
For the foregoing reasons, the judgment of the circuit court
of Du Page County is affirmed.
Affirmed.
BOWMAN and THOMAS, JJ., concur.
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