Brief Briefs

Context is Critical:  an Employment-Related Practices Exclusion PRECLUDES COVERAGE FOR SOME EMPLOYEE DEFAMATION CLAIMS

The Illinois Appellate Court, First District recently decided when  an employment-related practices exclusion in a Commercial General Liability policy bars coverage for defamation claims made by an insured’s employes in West Bend Mutual Insurance Co. v. Rosemont Exposition Services, Inc., No. 1-07-0644 (1st Dist., 6th Div. December 7, 2007).  Rosemont Exposition Services, Inc. (“RES”), the insured, tendered coverage to its insured, West Bend Mutual Insurance Co. (“West Bend”).  The tender pertained to a lawsuit filed by Joseph and Marilyn Bagnall against RES, involving defamation and retaliatory discharge claims.  It specifically alleged that while employed by RES, Marilyn was injured and that subsequently, the president and general manager of RES distributed a letter accusing the Bagnalls of being “involved in a fraudulent claim against RES” and requesting that the local union no longer refer the Bagnalls as employees of RES. 

West Bend agreed to defend RES under an “Employment Practices Liability Insurance” policy until exhaustion of the policy’s $100,000 limit.  However, once the limit was exhausted by defense fees, alone, West Bend denied further defense or indemnity, pursuant to the commercial general liability policy’s endorsement excluding employment-related practices.  According to the endorsement, there was to be no coverage for “ ‘personal and advertising injury’ to [a] person arising out of any … [t]ermination of that person’s employment; or [e]mployment-related practices, policies, acts or omissions, such as coercion, demotion, evaluation, discipline, reassignment, defamation, harassment, humiliation, or discrimination directed at that person.”

After settling the lawsuit for $75,000, RES made a final demand for coverage to West Bend.  West Bend responded by filing a declaratory judgment action, seeking a declaration, in pertinent part, that the employment-related practices exclusion of the commercial general liability policy excluded coverage for the Bagnall lawsuit.  Following cross-motions for summary judgment, the trial court ruled in West Bend’s favor.

On appeal, RES contended that the underlying claim was not employment-related because the letter did not address “actual work performance.”  In interpreting the scope of the employment-related practices exclusion, the appellate court narrowed its previous ruling on the issue, American Alliance Insurance Co. v. 1212 Restaurant Group, L.L.C., 342 Ill. App. 3d 500, 794 N.E.2d 892 (2003).  In 1212 Restaurant, the underlying plaintiff alleged that while employed by the defendant, he was defamed by a myriad of insulting remarks and was threatened that people would be told that he was “robbing the joint.”  342 Ill. App. 3d at 503.  The appellate court determined there that the insurer had a duty to defend the lawsuit because the insulting remarks were not employment-related. 1212 Restaurant, 342 Ill. App. 3d at 510.  In particular, the court found that the salient issue was whether the statements were made in the context of the plaintiff’s employment and related to the plaintiff’s employment performance.  1212 Restaurant, 342 Ill. App. 3d at 510.
Here, the appellate court rejected RES’ argument that the defamatory statements concerned matters beyond the context of the Bagnalls’ employment.  In particular, the court distinguished the insulting remarks in 1212 Restaurant from the statements here by noting that in 1212 Restaurant, the alleged defamatory statements pertained to the plaintiff’s sexuality, rather than his employment, whereas here, the alleged defamatory statements were the thrust of RES’ reason for requesting that the union no longer refer the Bagnalls for employment by RES.  Thus, the court found that the alleged defamatory statements related to the Bagnalls’ employment performance and hence, fell under the exclusion. 

Moreover, the court noted that even were the statements not employment-related, the Bagnalls’ claim was still encompassed by the exclusion’s “termination of that person’s performance” provision.  Therefore, since the letter directly pertained to RES no longer employing the Bagnalls, it clearly fell under the termination of employment language of the exclusion.  While this may have been a more efficient way to dispose of the summary judgment motion, the appellate court seemed predisposed to providing guidance with respect to its prior 1212 Restaurant ruling.  Accordingly, any defamatory statement, related or not to the person’s employment, made in the context of a termination letter would not warrant coverage pursuant to the employment-related practices exclusion.

Fighting the Battle After the War’s Already Over:  Statute of Limitations Triggers for Bad Faith Duty to Settle Claims

The Illinois Appellate Court, Fourth District, recently ruled that postjudgment settlement offers do not trigger the statute of limitations for bad faith duty to settle claims.  Rather, the court identified the entry of judgment as the trigger for such claims.  This ruling is very favorable for insurers who are confronted with postjudgment settlement offers.

In Chandler v. American Fire & Casualty Company, No. 4-06-0994 (4th Dist. November 1, 2007), the Appellate Court considered a bad faith failure to settle action filed by the assignees of American Fire & Casualty Company’s (“American Fire”) insured, Otis Doherty (“Doherty”).  Following an automobile accident, the Chandlers filed a personal injury lawsuit against Doherty, who tendered the claim to American Fire.  American Fire refused to defend the claim on the basis that there was no coverage for the lawsuit, as Doherty was driving a nonscheduled auto under the policy.  On August 19, 1993, a default judgment was entered against Doherty in excess of the policy limits. 

After Doherty assigned his rights under the American Fire policy to the Chandlers, the Chandlers made settlement demands on both August 1, 1996 and March 19, 1998 to American Fire for the policy limits plus interest.  These were the first settlement offers within the policy limits.  The offers were refused.  These refusals led to the instant action, which was filed on September 4, 2001.  After the trial court granted summary judgment to American Fire, the Chandlers appealed.

On appeal, the Chandlers contended, in pertinent part, that the trigger for the five year statute of limitations for their action was either of the postjudgment settlement demands.  The Appellate Court disagreed and maintained that the latest possible statute of limitations trigger for a bad faith failure to settle action is the date on which an excess judgment is entered.  Further, the court noted that an insurer is only liable for a failure to settle within the policy limits before or during trial (emphasis in original).  The Court distinguished the case upon which the Chandlers relied, Olympia Fields Country Club v. Bankers Indemnity Insurance Co., 325 Ill. App. 649, 60 N.E.2d 896 (1945), finding that the postjudgment settlement demands there were not the initial settlement offers within the policy limits.  Accordingly, the court found that the trigger for the statute of limitations here was the entry of judgment on August 19, 1993.  Therefore, the Chandlers’ bad faith failure to settle action was time-barred. 

Despite that the Appellate Court characterized the facts here as unique, this decision has great significance for insurers confronted with postjudgment settlement offers.  In the interests of finality and in promoting a narrow construction for bad faith actions against insurers, the court here established a clear demarcation for bad faith failure to settle actions, such that the proverbial clock begins to run on the date of judgment, at the very latest.  As a result of this decision, insurers can rest easier knowing five years after judgment, they should be immune from bad faith failure to settle actions.

Illinois Appellate Court Strictly Construes Additional Insured Endorsements To Restrict Coverage for Putative Insureds.

The Illinois Appellate Court, First District, First Division recently considered two related cases involving Blanket Insured Endorsements and heavily scrutinized the extrinsic evidence upon which the putative insureds relied. The court held that the extrinsic evidence, i.e., another agreement involving parties to an insurance policy, must be crystal clear in setting forth an obligation of coverage. Effectively, the court clamped down on putative insureds’ broad interpretations of the “obligated by valid written contract” language of the Blanket Insured Endorsement, thereby requiring greater specificity in contract drafting.

In Clarendon America Insurance Co. v. 69 West Washington Management LLC (No. 1-06-1864, June 18, 2007) and Clarendon America Insurance Co. v. Aargus Security Systems, Inc. (No. 1-06-2121, June 18, 2007), the Appellate Court considered whether a CGL policy (“Policy”) issued by Clarendon American Insurance Co. (“Clarendon”) to B.G.K. Security Services (“BGK”), as the named insured, afforded coverage to certain entities as additional insureds. Both cases involved the interpretation of a Blanket Insured Endorsement (“Endorsement”) in the Policy, which amended the definition of “additional insured” to “any person or organization” so long as two requirements were met: (1) BGK must have been “obligated by valid written contract to provide such coverage,” and (2) the liability for “bodily injury” or “property damage” arose “solely out of ‘your work’ on behalf of said additional insured for which coverage is provided by the policy.”

Management, LLC (“69 WW”) and owned by the County of Cook (“Cook”). 22 2 lawsuits were filed (and later consolidated) against 69 WW, Aargus Security Systems, Inc. (“Aargus”), Cook, and BGK.

Prior to the fire, Aargus entered into a written security guard Service Contract with 69 WW. The Service Contract specifically provided that Aargus was required to purchase and maintain insurance, including liability insurance, which covered 69 WW and Cook as additional insureds for liability arising out of Aargus’ negligence in providing security services at the building. BGK was not a party to this Service Contract.

Aargus also entered into an agreement with BGK to jointly provide security guard service at the building managed by 69 WW. The agreement provided that BGK was Aargus’ “exclusive subcontractor under the Contract.” Paragraph 16 of the agreement stated that “[a]ll insurance that may from time to time be required shall be obtained in such manner as the parties hereto agree.” This Agreement made no reference to the Service Contract.

After the fire, Aargus, BGK, and 69 WW tendered the defense of the lawsuits to Clarendon, who in turn, filed separate declaratory judgment actions against 69 WW, Cook, and Aargus, seeking a finding that it owed no duty to defend or indemnify those parties as additional insureds. All the parties then filed cross-motions for summary judgment. With respect to 69 WW and Cook, the trial court denied Clarendon’s motion and granted the motion of 69 WW and Cook, finding that both entities were additional insureds at the time of the fire loss. With respect to Aargus, the trial court granted Clarendon’s motion, finding that Aargus was not an additional insured under the Policy.

In the 69 WW appeal, Clarendon argued that the trial court erred in reading the Aargus- BGK Agreement in conjunction with the Aargus-69 West Washington Contract as evincing an intent that 69 WW and Cook were to be covered under the Policy. In reversing the trial court, the appellate court agreed and found compelling that BGK was not a party to the Aargus-69 West Washington Contract. The court concluded that because the Aargus-BGK Agreement did not contain an express reference to the 69 WW-Aargus Contract, the Agreement did not indicate any intention that the parties were to be bound by the Aargus-69 WW Contract. Therefore, the Aargus-BGK Agreement did not satisfy the Endorsement such that it triggered coverage for 69 West Washington as an additional insured under the Policy.1 For the foregoing reasons, the appellate court reversed the trial court’s ruling.

Similarly, in the Aargus appeal, Clarendon argued that paragraph 16 of the Aargus-BGK Agreement failed to satisfy the Blanket Insured Endorsement requirement that there be a “valid written contract to provide such coverage.” Again, the court found in Clarendon’s favor, reasoning that the language of paragraph 16 did not specifically refer to any obligations undertaken by either BGK or Aargus to provide insurance. Further, it found persuasive that paragraph 16 did not indicate with particularity the nature of the insurance required by either party. Accordingly, the court concluded that paragraph 16 did not create any coverage obligations and affirmed the trial court’s ruling that Clarendon did not owe coverage under the Policy to Aargus for the claims arising out of the fire loss as sought in the underlying lawsuits.2

Here, the appellate court expressed an unusual preference for construing agreements in favor of the insured, relying on strict contract interpretation principles in finding that the terms of the Blanket Insured Endorsements were not satisfied. In both instances, the court realized that while the parties, 69 WW, Cook and Aargus, might want to read these agreements liberally among themselves, in order to require a third party, such as an insurer, to undertake an exposure such as here, the written requirements must be crystal clear and without doubt. For the future, these rulings should aid in rejecting the overtures of putative insureds.

1 The court also refused to reform the contract to explicitly incorporate 69 West Washington’s interpretation because Aargus and BGK were not parties to that appeal. The court was unwilling to reform a document to the detriment of an innocent third party.

2 The court also rejected Aargus’ contention that certain certificates of insurance satisfied the additional insured endorsement. The court found that the plain language of paragraph 16 did not require Aargus to be added as an additional insured, and the existence of the certificates did not change that finding.

First District Appellate Court Reiterates Forum Non Conveniens Analysis

In the recent opinion of Smith v. Jewel Food Stores, Inc., the Appellate Court for the First District of Illinois took the opportunity to re-examine the doctrine of forum non conveniens in Illinois, affirming a Cook County Circuit Court's transfer of the wrongful death auto accident case to Kendall County, Illinois. In the opinion, the Court reviewed the salient factors that have been developed in previous examinations of this doctrine.

The first factor that must be considered is plaintiff's choice of forum, which, at first glance, is a substantial factor in plaintiff's favor in deciding a forum non conveniens motion. But, when a plaintiff chooses a forum that is neither the site of the accident nor the county in which the plaintiff resides, that choice is no longer “entitled to the same weight.” By selecting a foreign county, a plaintiff's choice is given much less deference. This should always be the first step in defense counsel's analysis when considering a forum non conveniens motion.

Next, the court considered both the public and private interest factors. The public factors are (1) the interest in deciding controversies locally; (2) the unfairness of imposing trial expense and the burden of jury duty on residents of a forum that has little connection to the litigation; and (3) the administrative difficulties presented by adding litigation to already congested court dockets. In determining the first public factor, Illinois courts note the significant interest a county has in deciding a controversy concerning an accident that occurred within its borders. Alternately, it is important to note that with regard to cases involving corporate business defendants, defense counsel must be aware that “merely conducting business” in a particular county does not affect the forum non conveniens issue, despite the fact that many plaintiffs' attorneys will attempt to rely on this argument in defending against such a motion.

The private interest factors include (1) the convenience of the parties; (2) the relative ease of access to sources of testimonial, documentary and real evidence; and (3) all other practical problems that make trial of a case easy, expeditious, and inexpensive.  The first factor relates to the travel that the parties will have to undergo to attend trial. The second factor is the factor with plenty of room for interpretation. It includes the convenience of witnesses and their travel, the location of accident scenes or premises that a jury ultimately may have to view, and the cost of transporting documents to the courthouse. These are analyzed by courts with an eye toward a trial of the matter, and not necessarily considering the discovery and pre-trial process. Where is it most convenient to have witnesses and documents appear? What if the jury has to make a trip to the accident scene or manufacturing plant as part of their deliberations? This is the factor that most defendants will focus on in making the best argument for forum non conveniens transfers. This is particularly true because courts have found that the potential for jury travel is to be determined based on the possibility of it happening, not the necessity of it happening. Finally, the third factor is the proverbial “catch-all” provision to throw in any other persuasive arguments that were not previously made -the least persuasive of which is where the attorneys' offices are located. Courts tend to assume that attorneys will have no problem traveling for their clients.

The final key to this analysis is to note that Illinois courts have found that the ultimate balancing of these six factors is to be done without emphasizing any one factor. This should be kept in mind by defense counsel if there seems to be that one sticking point that cannot be explained away.

Speaking more generally, the Smith opinion reveals that a thoughtful and critical assessment can be made by a Cook County Court when presented with a well-reasoned motion to transfer pursuant to the doctrine of forum non conveniens. Finally, when analyzing the venue of a new suit, defense counsel must also take into account whether or not the venue is proper, not just inconvenient.   The analysis for a defendant's motion to dismiss and transfer a case pursuant to improper venue, while similar, contains different factors for the court's consideration. This analysis will be the basis for the next update. Posted by Adam C. Carter.

Another Settlement Caution ...

While employers are protected from direct suit by the exclusivity provisions of the Illinois Worker's Compensation laws, the Appellate Court of Illinois, First District, Sixth Division in Stickler v. Am. Augers, Inc., 2001 Ill. App. LEXIS 701, decided on September 14, 2001, has reffirmed the strength of its earlier 1999 ruling which set forth the test to be employed by trial courts when considering an employer's request for a good faith settlement finding in an effort to cut off the contribution rights of direct defendants. For historical perspective, the words of the 1999 Appellate Court holding were as follows:

"The trial court should not equate the validity of the settlement as between plaintiff and the settling defendant with whether the settlement was in good-faith for purposes of the Contribution Act. Rather, the court should conduct a totality of circumstances analysis, considering the present cash value of the settling defendant's workers' compensation liability (Chaney v. National Steel Corp., 272 Ill. App. 3d 850, 651 N.E.2d 731, 209 Ill. Dec. 553 (1995)),the policy underlying the Contribution Act which encourages the equitable apportionment of damages and the relationship of the parties (Warsing v. Material Handling Services, Inc., 271 Ill. App. 3d 556, 648 N.E.2d 1126, 208 Ill. Dec. 204 (1995)). If, after considering all the circumstances, the court finds that plaintiff gave the settling defendant a release supported by some nominal consideration without regard to the settling defendant's potential liability or the relationship between the consideration received and the settling defendant's relative culpability, that settlement conflicts with the policy of the Contribution Act and does not satisfy the good-faith requirement of section 2(c). Because the settlement releases Cee-Jay (the employer) from liability for relatively nominal consideration without regard for its relative culpability and shifts nearly half of Cee-Jay's statutory liability to Augers (the product defendant) while giving a dismissal to the construction defendants, the settlement conflicts with the policy of the Contribution Act which encourages equitable apportionment of damages. Accordingly, the trial court erred in finding that the settlement was made in good-faith for purposes of the Contribution Act. See Warsing v. Material Handling Services, Inc., 271 Ill. App. 3d 556, 560, 648 N.E.2d 1126, 208 Ill. Dec. 204 (1995) (finding bad faith because $1,000 settlement was grossly disproportionate to settling defendant's "apparent primary liability" and $300,000 insurance coverage, and because plaintiff and settling defendant had a "close personal relationship," all of which suggested agreement was an attempt to shift primary liability to nonsettling defendant)."

In its recent decision, the Appellate Court struck down the same attempted settlement, after it was approved by the Illinois Industrial Commission (which administers Workers Compensation matters) by counselling: "[A]s noted in our earlier opinion, the validity of the settlement as between the plaintiff and the settling defendant does not ipso facto mean the settlement was made in good faith for purposes of the Contribution Act. Stickler v. American Augers, 303 Ill. App. 3d 689, 693, 708 N.E.2d 403, 406, 236 Ill. Dec. 817 (1999). [A]bsent an agreement of the parties, the court may not credit nonsettling parties with a setoff for the future workers' compensation liability" ( Stickler v. American Augers, 303 Ill. App. 3d at 696, 708 N.E.2d at 408) because section 2(c) of the Joint Tortfeasor Contribution Act limits the setoff to the amount stated or the amount paid for the release... The court may, however, find that a settlement failing to provide for a fair and adequate setoff was not made in good faith. Thus, the absence of a good-faith finding prevents the court from dismissing a third-party's complaint for contribution... "Augers is entitled to a setoff fairly reflecting Cee-Jay's readily ascertainable liability." Thus, defense counsel and insurers should note that the Appellate Court will not ipso facto sanction with a finding of good faith a settlement by the employer that does not give fair credit to the employer's culpability or ultimate Worker's Compensation exposure. Posted by Michael D. Huber

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