Call One Inc. v. Berkley Ins. Co.

587 F.Supp.3d 706

CALL ONE INC., Plaintiff,

v.BERKLEY INSURANCE CO., Defendant.

No. 21-cv-00466

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

Signed February 25, 2022

Carrie Ellen Davenport, Kalli Kling Nies, David Benjamin Goodman, Goodman Law Group | Chicago, Chicago, IL, for Plaintiff.

Edward Keating, Keith M. St. Aubin, Mark Albert Bradford, Duane Morris LLP, Chicago, IL, for Defendant.

MEMORANDUM OPINION AND ORDER

Andrea R. Wood, United States District Judge In 2019, Plaintiff Call One Inc. ("Call One"), a telecommunications business, received a subpoena duces tecum ("OAG Subpoena") served by the Office of the Illinois Attorney General ("OAG") and issued pursuant to the Illinois False Claims Act ("IFCA"), 740 ILCS 175/1 et seq. Call One had purchased a Directors, Officers, and Corporate liability insurance policy ("Berkley Policy") from Defendant Berkley Insurance Company ("Berkley"). When faced with the OAG Subpoena, Call One tendered a claim to Berkley seeking defense costs in connection both with the OAG Subpoena and the potential underlying IFCA action. After initially denying any defense, Berkley agreed to cover the costs incurred by Call One in responding to the OAG Subpoena. Berkley, however, denied any coverage related to the underlying IFCA claims. On its own, faced with mounting defense costs and significant financial exposure, Call One entered into a settlement agreement with the State of Illinois. Contending that Berkley had both a duty to defend and indemnify the IFCA claims, Call One has filed the present action for breach of contract (Count I) and bad faith denial of coverage (Count II). Berkley now seeks dismissal the complaint in its entirety. (Dkt. No. 12.) For the reasons discussed below, its motion is denied.

BACKGROUND

For purposes of the motion to dismiss, the Court accepts all well-pleaded facts in the complaint as true and views those facts in the light most favorable to Call One, the non-moving party. Killingsworth v. HSBC Bank Nev., N.A. , 507 F.3d 614, 618 (7th Cir. 2007). The complaint alleges as follows.

I. Underlying Litigation

Call One sells and provides telecommunications services to customers. (Compl. ¶ 8, Dkt. No. 1.) Call One purchased a policy of liability insurance from Berkley for the policy period of June 30, 2018 through June 30, 2019, with a coverage limit of $2,000,000.00. (Id. ¶ 1.) On March 14, 2019, the OAG served a subpoena on Call One pursuant to the IFCA. (Id. ¶¶ 26–27.) Among other documents, the OAG Subpoena sought business records related to Call One's collection and payment of Illinois taxes and fees. (Id. ¶ 29.) The OAG Subpoena was the first notice Call One received that it was potentially the target of an IFCA action. (Id. ¶ 28.)

Call One promptly tendered the OAG Subpoena to Berkley. (Id. ¶ 33.) Through that tender, Call One sought coverage for its response to the OAG's investigation and a defense against the underlying IFCA claims. (Id. ) Berkley initially denied this request, contending that the OAG Subpoena was not a "claim" within the meaning of the Berkley Policy. (Id. ¶¶ 34–35.) After Call One pushed back on this determination, Berkley agreed to cover the costs of defense arising from the OAG Subpoena. (Id. ¶ 38.) Yet Berkley also made clear that its obligation would cease upon compliance with the OAG Subpoena—that is, its obligation to defend did not cover any other litigation or investigation into Call One. (Id. ¶¶ 39, 41.) In response to that coverage position, Call One demanded independent counsel; Berkley denied the request and asserted its right to appoint its own counsel ("Subpoena Counsel") and to control the defense. (Id. ¶¶ 43–45.) Berkley limited Subpoena Counsel's appointment solely to responding to the OAG Subpoena. (Id. ¶ 46.)

Over several months in 2019, Subpoena Counsel worked to respond to the OAG Subpoena. (Id. ¶¶ 48–49.) In August 2019, Subpoena Counsel prepared a report analyzing Call One's potential liability, which indicated that Call One faced potential exposure that would exceed coverage limits for a "reverse IFCA claim."¹ (Id. ¶¶ 49–50.) Again, realizing the scope of its potential exposure, Call One demanded the appointment of counsel with subject matter expertise. (Id. ¶ 51.) Once more, Berkley refused to do so. (Id. ¶ 52.) Later, in October 2019, Subpoena Counsel met with OAG attorneys to go over the claims pending against Call One.² (Id. ¶ 53.) The OAG explained that it was not Call One's failure to remit taxes and fees that formed the basis of the claims against Call One. (Id. ¶ 55.) Rather, the claims were based on what the OAG characterized as Call One's reckless failure to collect taxes and fees imposed by Illinois law from its customers. (Id. ¶¶ 54–55.) After the meeting, Subpoena Counsel advised Call One to settle the claims promptly, as litigation would be both expensive and difficult to defend. (Id. ¶ 57.)

Leaving Subpoena Counsel to respond to continuing document requests, Call One engaged outside counsel ("Defense Counsel") at significant expense to engage in discussions with the OAG. (Id. ¶¶ 58–59.) Through Defense Counsel's communications with the OAG, Call One confirmed that a complaint with claims brought under the IFCA ("IFCA Complaint") was pending under seal in Illinois state court. (Id. ¶ 60.) While the OAG declined to provide a copy of the IFCA Complaint to Call One (as was its customary practice), Call One was nonetheless able to communicate the substance of the underlying IFCA lawsuit to Berkley. (Id. ¶ 61.) Berkley maintained that its duty to defend Call One in the IFCA lawsuit was separate from any duty to defend the OAG Subpoena and asserted that it had no such duty, denying that the issue of duty to defend for the IFCA lawsuit was ripe and asserting that, even if it were, the claims asserted in the sealed IFCA Complaint fell outside the Berkley Policy's coverage. (Id. ¶¶ 65–66.)

Meanwhile, the OAG informed Defense Counsel that the pending lawsuit against Call One would be litigated absent settlement. (Id. ¶¶ 60–61.) As communicated to Call One by the OAG, Call One's potential exposure in the IFCA Lawsuit (predicated on its alleged failure to collect certain taxes and fees) would be approximately $12 million. (Id. ¶ 56.) Moreover, this amount would be subject to trebling under the IFCA, leading to a potential exposure of around $36 million, an amount that could potentially bankrupt Call One. (Id. ¶¶ 56, 62.)

Given the risk of exposure, as well as the fact that the cost of defending the IFCA lawsuit would exceed Call One's coverage limits, Call One entered settlement negotiations with the OAG. (Id. ¶ 62.) Although Call One attempted to engage Berkley in those discussions, Berkley steadfastly insisted that it owed neither a duty to defend nor a duty to contribute to any settlement amount. (Id. ¶¶ 63–68.) Call One ultimately entered into a settlement agreement with the OAG without Berkley's participation. (Id. ¶ 69.) Under the terms of the settlement, Call One agreed to pay $2.5 million to the State. (Id. ) In settling, however, Call One did not admit to any of the wrongdoing alleged against it. (Compl., Ex. 3, Settlement Agreement at 1, Dkt. No. 1-3.) Moreover, the settlement agreement provides no breakdown as to how the payment amount was calculated; instead, the settlement agreement states only that "Defendant will pay, subject to the terms of this Agreement, the total sum of $2,500,000 (the ‘Settlement Amount’) to the State." (Id. § 2.1.)

II. Applicable Policy Provisions

The Berkley Policy provides corporate indemnification coverage for Call One. Specifically, the Berkley Policy states:

This Policy shall pay on behalf of the Insured Entity all Loss up to the Limit of Liability applicable to this coverage section arising from any Claim first made against the Insured Entity during the Policy Period and reported to the Insurer in accordance with section VII of the Common Policy Terms and Conditions Section of this Policy, for any actual or alleged Wrongful Act.

(Compl., Ex. 1, Berkley Policy at 39, Dkt. No. 1-1.) The parties do not dispute that Call One is an Insured Entity. "Wrongful Act" is defined in the Berkley Policy as "any actual or alleged breach of duty, neglect, error, misstatement, misleading statement, omission, or act" by Call One. (Id. at 41.) "Loss" is defined to include "Damages" and "Costs of Defense." (Id. at 39.) "Damages" is defined to exclude:

a. taxes, civil or criminal fines, sanctions or penalties imposed by law ... e. disgorgement or restitution payment by or on behalf of any Insured, including disgorgement or restitution of amounts retained, obtained, or acquired by an insured and any settlement payment arising from any actual or alleged amount that an Insured improperly retained, obtained, or acquired; or f. matters which are uninsurable under the law pursuant to which this Policy is construed.

(Id. at 41.)

The Policy also provides that Berkley will cover "Costs of Defense," defined as the "necessary fees, costs and expenses ... resulting solely from the investigation, adjustment, defense and appeal of a covered Claim against the Insureds." (Id. )

III. Current Litigation

Shortly after funding the $2.5 million settlement, Call One filed the present lawsuit. Call One alleges that Berkley both breached its duty to defend (by failing to provide independent counsel and cover the costs of defense beyond those associated with the OAG Subpoena) and its duty to indemnify (by denying Call One's request for contribution of the remaining limits of coverage towards the settlement). Call One also asserts a claim pursuant to Section 155 of the Illinois Insurance Code, 215 ILCS 5/155, for a statutory penalty and attorney's fees on the basis that Berkley behaved unreasonably and vexatiously in denying coverage for Call One's claims. Berkley now moves to dismiss the complaint in its entirety.

DISCUSSION

To survive a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6),...