Essex Ins. Co. v. Blue Moon Lofts Condo. Ass'n

927 F.3d 1007

ESSEX INSURANCE COMPANY, Plaintiff-Appellee,

v.BLUE MOON LOFTS CONDOMINIUM ASSOCIATION and The Structural Shop, Ltd., Defendants-Appellants.

Nos. 18-3443 & 18-3530

United States Court of Appeals, Seventh Circuit.

Argued April 16, 2019

Decided June 27, 2019

Rehearing Denied July 30, 2019

Janet R. Davis, Jonathan R. Walton, Attorneys, COZEN O'CONNOR, Chicago, IL, for Plaintiff - Appellee.

Scott A. Kogen, Attorney, LAW OFFICES OF SCOTT A. KOGEN & ASSOCIATES, P.C., Chicago, IL, for Defendant - Appellant BLUE MOON LOFTS CONDOMINIUM ASSOCIATION.

Nicholas R. Mitchell, Attorney, KOVITZ SHIFRIN NESBIT, Mundelein, IL, for Defendant - Appellant THE STRUCTURAL SHOP, LTD.,

Before Easterbrook, Kanne, and Scudder, Circuit Judges.

Scudder, Circuit Judge.

An Illinois state court entered a $ 1,356,435 judgment against The Structural Shop in 2009, and now TSS wants its insurer, Essex Insurance Company, to pay for it. The terms of TSS’s insurance policy do not cover this claim, however. The policy covers only claims first made against TSS between May 2012 and May 2013, and the lawsuit giving rise to the Illinois court’s judgment was filed against TSS in 2002. Recognizing this reality, TSS has resorted to the common law doctrine of estoppel. Illinois law estops Essex from denying coverage only if the insurer misled TSS into believing it would cover the judgment, TSS reasonably relied on Essex’s misleading statement or act, and TSS suffered prejudice. The district court determined that TSS suffered no prejudice and declined to apply estoppel. The district court also rejected TSS’s alternative theories of recovery. Seeing no error in the district court’s rulings, we affirm.

I

A

In 2002 the Blue Moon Lofts Condominium Association filed a complaint against TSS in an Illinois state court seeking damages arising out of TSS’s allegedly defective design and construction of a building. The lawsuit began as it should have—with Blue Moon, through a process server, providing notice of the action to TSS’s registered agent, Thomas Donohoe, on November 7, 2002. TSS never responded to the notice or appeared in the state court action to defend itself, leading in May 2003 to the state court declaring the company in default.

Years later, in 2009, the state court entered a default judgment and set the damages amount at $ 1,356,435, tacking on costs too.

Essex knew nothing of the state court litigation that transpired between 2002 and 2009. For good reason: Essex did not insure TSS during that period and entered the picture many years later when it sold TSS an insurance policy for claims "first made" against TSS from May 2012 to May 2013. The policy defined "first made" to mean the time when TSS received either a "written demand for money damages" or "the service of suit or institution of arbitration proceedings against the Insured."

The parties agree that Blue Moon’s 2002 claim arose outside the policy period. But universal agreement on this point is only a recent development. In the years leading to this dispute, both TSS and Essex labored under the mistaken belief that Blue Moon failed back in 2002 to serve TSS with notice of the lawsuit. Against that mistaken understanding, Blue Moon and TSS further believed that Blue Moon first made a claim under the policy in 2012, when it approached TSS to collect on the default judgment—timing that would have brought Blue Moon’s claim within the terms of the May 2012 to May 2013 policy.

This confusion set the stage for this dispute. The upshot of TSS’s position is that, based on Essex’s conduct during 2012 and beyond while helping TSS defend against Blue Moon’s claim, principles of fairness and equity demand holding Essex liable for satisfying the default judgment entered against TSS by the Illinois court. So we need to look closer at Essex’s conduct during this period.

B

TSS first became aware of the default judgment in August 2012, when Blue Moon contacted Douglas Palandech, an attorney and TSS’s registered agent, seeking to collect. TSS expressed surprise at the development, believing the company never received notice of Blue Moon’s lawsuit. Proving as much became important, for Blue Moon’s failure to provide notice back in 2002 would have supplied sufficient grounds to vacate the default judgment, and—even more critically for TSS—meant that Blue Moon had first made its claim against TSS in August 2012 and thus inside the policy’s May 2012 to May 2013 coverage period.

TSS retained Palandech as outside counsel to defend the company against Blue Moon’s claim and attempts to collect the default judgment. Palandech’s first order of business was asking Blue Moon to supply proof of service. For a time, these requests went unanswered. Palandech’s review of the state court’s docket also uncovered no record of service.

Ken Veach, TSS’s principal, reached a similar dead end. His search of company records revealed no indication of any lawsuit by Blue Moon. Veach also contacted TSS’s insurance broker, Melissa Roberts, and she too stated that she had no record of Blue Moon’s 2002 complaint against TSS.

With all leads coming up empty, TSS concluded—incorrectly as it would turn out—that the company had not received notice of the 2002 lawsuit. This conclusion led TSS, with Palandech’s assistance, to petition in the state court to vacate the default judgment. TSS supported its petition with two affidavits, one from Veach swearing that Thomas Donohoe had never acted as TSS’s registered agent, and another from Palandech explaining that his due diligence found no proof of service. The court granted the motion and vacated the default judgment.

It was then—after the Illinois court vacated the default judgment—that TSS informed Essex of these developments and Blue Moon’s claim. Essex reacted by accepting TSS’s account that Blue Moon had brought its claim to the company’s attention for the first time in August 2012. Of course, later events would prove this false. But Essex, not yet aware that Blue Moon properly served TSS in 2002, considered the dispute to fit within the terms of the policy covering claims first made against TSS between May 2012 and May 2013. This meant that Essex had a duty to defend TSS against Blue Moon’s claim.

Essex acted on its duty to defend by hiring a claims servicing company by the name of Markel to coordinate and participate on behalf of Essex in TSS’s defense. Markel then charted a passive course, leaving TSS’s outside counsel, Palandech, to call the litigation shots and otherwise lead TSS’s defense efforts. Markel, in short, mostly sat on the sidelines as Palandech managed the defense and made strategic recommendations to TSS.

The first inkling that something was wrong came in February 2013. It was then that Blue Moon’s counsel provided Palandech an invoice from Tri-County Investigations, the special process server Blue Moon hired to serve TSS in 2002. The invoice showed that Blue Moon had paid Tri-County $ 60 for serving TSS on November 7, 2002.

This development did little to change Palandech’s perspective on the matter, though. For example, in an email to TSS (with a copy to Markel), one of Palandech’s colleagues expressed the view that the unverified invoice was a flimsy basis on which to conclude service occurred. A month later, in March 2013, Palandech learned that Blue Moon remained in the process of trying to learn whether service of process in fact had occurred. Blue Moon indicated that, if the answer turned out to be yes, the Illinois state court may well revisit its prior order vacating the default judgment. Another attorney at Palandech’s law firm so informed TSS and Markel.

Part and parcel of his view that Blue Moon had never properly served TSS in 2002, Palandech advised TSS to reject Blue Moon’s May 2014 offer to settle the dispute for $ 25,000 and instead to file a motion to dismiss Blue Moon’s complaint. Ken Veach agreed, stating in an e-mail that he was adamantly opposed to any settlement. Markel’s representative also agreed with Palandech’s advice.

Everything changed for TSS on July 29, 2014, when Blue Moon’s counsel sent Palandech a copy of the special process server’s affidavit—clear evidence that Blue Moon had in fact served notice of the lawsuit on Thomas Donohoe in 2002. Blue Moon’s counsel added that records from the Illinois Secretary of State showed that Donohoe was TSS’s registered agent in 2002.

Bad then went to worse for TSS. In August 2014, Blue Moon filed a motion to reinstate the default judgment, and, in November 2014, the court granted the motion. Palandech advised TSS to petition for relief from the judgment. TSS agreed and followed Palandech’s recommendation, but to no avail, as the state court denied the company’s petition on March 5, 2015. Several days later Veach advised Palandech that TSS had retained a bankruptcy attorney to advise the company of its options for satisfying the default judgment.

Essex reacted to these developments in two ways. First, on March 26, 2015, Essex sent TSS a reservation of rights. The letter informed TSS that Essex would continue to defend the company through the appeal of the state court’s order denying relief from the final judgment while adding that Essex was denying coverage because the events showed that Blue Moon first made its claim in 2002 and thus well before the period covered by TSS’s policy. Second, Essex decided to become more active in managing TSS’s defense. It did so by hiring a new law firm to handle TSS’s pending appeal.

Essex’s decision to become more active proved futile. TSS mooted the decision by taking matters entirely into its own hands and—without any involvement by Essex—settling with Blue Moon. The settlement required TSS not only to pay Blue Moon $ 550,000, but also to assign Blue Moon any rights of indemnification from Essex.

The case then entered federal court. In March 2015, Essex brought this action seeking a declaratory judgment that it had no obligation to indemnify Blue Moon (now the assignee of TSS) for the...