State Auto Prop. & Cas. Ins. Co. v. Distinctive Foods, LLC

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2024 IL App (1st) 221396-U

STATE AUTO PROPERTY & CASUALTY INSURANCE COMPANY, Plaintiff-Appellee, v. DISTINCTIVE FOODS, LLC, A DELAWARE LIMITED LIABILITY COMPANY, and RYKRISP, LLC, A MINNESOTA LIMITED LIABILITY COMPANY, Defendants.

Distinctive Foods, LLC, Appellant.

No. 1-22-1396

Court of Appeals of Illinois, First District, Fifth Division

March 22, 2024

This order was filed under Supreme Court Rule 23 and is not precedent except in the limited circumstances allowed under Rule 23(e)(1).

Appeal from the Circuit Court of Cook County. No. 19 CH 00099 Honorable Alison C. Conlon, Judge Presiding.

LYLE JUSTICE delivered the judgment of the court. Presiding Justice Mitchell and Justice Navarro concurred in the judgment.

ORDER

LYLE JUSTICE.

¶ 1 Held: We affirm the judgment of the circuit court finding that the plaintiff insurance company did not have a duty to defend the defendant insured where the claims in the underlying plaintiff's complaint did not fall within the coverage provided by the insurance policies.

¶ 2 This appeal concerns whether Plaintiff-Appellee, State Auto Property &Casualty Insurance Company (State Auto) owed Defendant-Appellant, Distinctive Foods, LLC (Distinctive) a duty to defend or indemnify it in an underlying lawsuit. In the underlying litigation, RyKrisp, LLC (RyKrisp), a manufacturer of crackers, brought suit against Distinctive alleging claims of detinue, conversion, replevin, tortious interference with a contract, and tortious interference with a business expectancy after Distinctive wrongfully seized and withheld RyKrisp's cracker-manufacturing equipment and interfered with RyKrisp's contractual, business relationship with a third party (the Underlying Litigation). At the time of the events alleged in the Underlying Litigation, Distinctive had two insurance policies with State Auto: A Businessowners Liability Insurance Policy (the BOP Policy) and a Commercial Umbrella Liability Insurance Policy (the Umbrella Policy).

¶ 3 State Auto brought the declaratory judgment action at bar seeking a declaration that it did not have a duty to defend or indemnify Distinctive in the Underlying Litigation under either policy. The circuit court ultimately granted State Auto's motion for summary judgment finding that it had no duty to defend Distinctive under either policy, in part because Distinctive's CEO acted intentionally with the knowledge that his actions would cause harm to RyKrisp.

¶ 4 On appeal, Distinctive contends that the circuit court erred when it refused to consider facts outside of State Auto's complaint in determining whether it had a duty to defend. Distinctive further asserts that the court erred in finding that the policies did not provide coverage for the claims for detinue, conversion, and tortious interference. Distinctive also maintains that the court erroneously found that one of the exclusions in the policy applied to bar coverage. Finally Distinctive contends that it was entitled to attorney fees and sanctions where State Auto acted vexatiously and unreasonably in denying the claim for coverage. For the reasons that follow, we affirm the judgment of the circuit court.

¶ 5 I. BACKGROUND

¶ 6 A. The Underlying Litigation

¶ 7 In its complaint against Distinctive, RyKrisp alleged that Distinctive had unlawfully seized and was wrongfully detaining its manufacturing equipment, which prevented it from selling its product. RyKrisp purchased cracker manufacturing equipment and entered into a business relationship with Distinctive under which Distinctive agreed to manufacture the crackers for RyKrisp at a manufacturing facility. RyKrisp alleged that it became concerned about Distinctive's ability to manufacture RyKrisp brand crackers efficiently and cost-effectively and therefore RyKrisp moved all of its equipment from the manufacturing facility to its warehouse. Distinctive personnel, at the direction of its Chief Executive Officer, Joshua Harris entered the RyKrisp warehouse, seized the equipment, and transported it back to the manufacturing facility. Distinctive then changed the locks to the manufacturing facility, preventing RyKrisp from entering the facility and retrieving the equipment. RyKrisp demanded that Distinctive return the equipment, but Distinctive refused.

¶ 8 RyKrisp contracted with another cracker manufacturer, iBake Foods, LLC (iBake), to manufacture RyKrisp brand crackers at the iBake facility. After an order of replevin was issued in its suit against Distinctive, RyKrisp's equipment was shipped to the iBake manufacturing facility. After learning of the agreement between RyKrisp and iBake, Mr. Harris contacted iBake and told them to not manufacture RyKrisp brand crackers "without justification and out of spite for RyKrisp." During the conversation, Mr. Harris "deliberately disparaged RyKrisp and/or RyKrisp personnel." Mr. Harris, through his attorneys, then issued a cease and desist letter to iBake advising iBake that RyKrisp and Distinctive entered into a confidentiality agreement and instructing iBake to not use any of Distinctive's proprietary information in connection with the services it was providing to RyKrisp. As a result of the cease and desist letter and the conversation, iBake terminated its agreement with RyKrisp. RyKrisp alleged that Mr. Harris acted "out of malice" in contacting iBake and causing the cease and desist letter to be sent. Based on this factual background, RyKrisp raised counts of detinue, conversion, replevin, tortious interference with contract, and tortious interference with business expectancy.

¶ 9 Distinctive filed an answer, affirmative defenses, and a counterclaim to RyKrisp's complaint in which it alleged, inter alia, that it was entitled to retain possession of RyKrisp's equipment because it had a possessory lien for certain improvements and repairs it made to the equipment.

¶ 10 B. The Insurance Policies

¶ 11 In April 2018, Distinctive tendered RyKrisp's complaint to State Auto and requested a defense and indemnity under the policies. As relevant here, the BOP Policy provided coverage for bodily injury and property damage under "Coverage A Bodily Injury and Property Damages Liability" (Coverage A) as follows:

" 1. Insuring Agreement

a. We will pay those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies. We will have the right and duty to defend the insured against any 'suit' seeking those damages. However, we will have no duty to defend the insured against any 'suit' seeking damages for 'bodily injury' or 'property damage' to which this insurance does not apply. We may, at our discretion, investigate any 'occurrence' and settle any claim or 'suit' that may result.

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b. This insurance applies to 'bodily injury' and 'property damage' only if:

(1) The 'bodily injury' or 'property damage' is caused by an 'occurrence' that takes places in the 'coverage territory.' "

The BOP policy defined an "Occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." The policy further defined "Property damage" as:

"a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or

b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the 'occurrence' that caused it."

¶ 12 The BOP Policy further provided coverage for personal and advertising injury under "Coverage B Personal and Advertising Injury Liability" (Coverage B) as follows:

" 1. Insuring Agreement

a. We will pay those sums that the insured becomes legally obligated to pay as damages because of 'personal and advertising injury' to which this insurance applies. We will have the right and duty to defend the insured against any 'suit' seeking those damages. However, we will have no duty to defend the insured against any 'suit' seeking damages for 'personal and advertising injury' to which this insurance does not apply. We may, at our discretion, investigate any offense and settle any claim or 'suit' that may result.

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b. This insurance applies to 'personal and advertising injury' caused by an offense arising out of your business but only if the offense was committed in the 'coverage territory' during the policy period."

The BOP policy defined "personal and advertising injury" to include "consequential 'bodily injury' arising out of **** [o]ral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person's or organization's goods, products, or services."

¶ 13 Coverage B also provided for a number of exclusions that will preclude coverage. As relevant here:

"This insurance does not apply to:

a. Knowing Violation Of Rights Of Another

'Personal and advertising injury' caused by or at the direction of an insured with the knowledge that the act would violate the rights of another and would inflict 'personal and advertising injury.'

b. Material Published With Knowledge Of Falsity

'Personal and advertising injury' arising out of oral or written publication of material, if done by or at the direction of the insured with knowledge of its falsity."

The Umbrella Policy contained substantially similar provisions and terms. For the sake of efficiency, references to Coverage A and Coverage B will refer to that coverage under both policies. The BOP Policy and Umbrella Policy will collectively be referred to as the "policies."

¶ 14 C. State Auto Denies Coverage

¶ 15 In a letter dated May 23, 2018, a State Auto representative advised that although...