Mutual Service Casualty Insurance Company v. Country Life Insurance Company, Country Mutual Insurance Company and Country Casualty Insurance Company

Citations: 859 F.2d 548; 1988 U.S. App. LEXIS 14011; 1988 WL 106943Docket: 88-1115

Court: Court of Appeals for the Seventh Circuit; October 12, 1988; Federal Appellate Court

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Country Life Insurance Company, Country Mutual Insurance Company, and Country Casualty Insurance Company (collectively, Country Companies) appealed a district court's partial summary judgment favoring Mutual Service Casualty Insurance Company (MSI). MSI sought a declaration regarding its obligations under a general liability and umbrella insurance policy it issued to Country Companies. The district court ruled that MSI was not obligated to defend or indemnify Country Companies against a class action lawsuit alleging intentional torts, which sought over $20 million in damages, as these torts fell outside the policies' coverage.

The underlying lawsuit, filed by Joseph Slimack and other former agents, claimed that Country Companies engaged in a scheme to deprive them of due compensation under agency contracts and retaliated against them for objecting. The complaint detailed two counts: Count I involved the withholding of commissions to cover policyholder premium delinquencies, while Count II alleged that accounts procured by the former agents were transferred to new agents. The agents also claimed emotional distress from these actions and sought unspecified compensatory and substantial punitive damages.

MSI's policies defined coverage as applicable only to losses caused by an "occurrence," defined as an accident resulting in bodily injury or property damage that was neither expected nor intended by the insured. Although MSI accepted the defense for Country Companies shortly after the lawsuit was initiated, it explicitly reserved the right to contest coverage later. MSI funded the defense until 1986, allowing Country Companies to engage independent legal counsel while retaining the option to withdraw from the defense as needed. The appellate court affirmed the lower court's decision, aligning with the findings regarding the lack of coverage for intentional torts.

In April 1985, MSI initiated a declaratory judgment action in federal district court, seeking a ruling that the agents failed to allege sufficient facts for a claim of mental anguish or emotional distress, implying that the agents’ complaint did not fall under the insurance policy. Chief Judge Foreman noted that MSI was not contesting the applicability of the facts to the policy but rather the sufficiency of those facts to support a claim. He determined that addressing this issue would effectively resolve a fundamental question in the underlying suit, which should be decided by the state court.

Following an amended complaint on November 19, 1986, MSI sought partial summary judgment on March 20, 1987, asserting it had no duty to defend the Slimack action. On December 14, 1987, the district court concluded that the underlying litigation did not involve the necessary "occurrence" since it was based solely on intentional torts, and that MSI’s prior agreement to pay defense costs did not prevent it from withdrawing its defense.

This appeal arose from the partial summary judgment's grant, with jurisdiction established under Rule 54(b) of the Federal Rules of Civil Procedure. Country Companies challenged the existence of diversity jurisdiction, arguing that MSI’s amended complaint lacked crucial jurisdictional allegations. Although the district judge did not notice the deficiency before the decision, Country Companies was permitted to raise the jurisdiction issue on appeal. MSI indicated its principal place of business was Minnesota and sought to amend its complaint to clarify its status as a Minnesota mutual insurance company, acknowledging prior "inartful pleading." The appellate court noted that under 28 U.S.C. Sec. 1653, such defective jurisdictional allegations could be amended even post-judgment, thus granting MSI's request to assert its Minnesota corporation status.

Country Companies argues that MSI qualifies as an unincorporated association with the citizenship of its members, including at least one Illinois citizen, thus negating diversity jurisdiction. This argument references the Second Circuit's ruling in Baer v. United Services Automobile Ass'n, which determined that the classification of a 'reciprocal insurance association' as a corporation for diversity purposes depends on state law. The court concluded in Baer that the defendant was an unincorporated association based on Texas statutes, which maintain a distinction between such associations and corporations despite similar regulatory oversight. 

Country Companies attempts to draw parallels between Minnesota's and Texas's legal frameworks but neglects Minnesota laws indicating that mutual insurance companies are incorporated. Consequently, MSI is recognized as a corporation under Minnesota law, confirming the existence of diversity jurisdiction. 

The inquiry then shifts to whether MSI has a duty to defend Country Companies in the Slimack litigation, which was initially resolved through a motion for partial summary judgment, placing the onus on MSI to prove no genuine material fact issues existed. Significant deference is afforded to the district judge's interpretation of Illinois law, which governs this case. 

On appeal, Country Companies contends that MSI has an unequivocal duty to defend in the Slimack litigation. The focus will also be on whether any genuine issues of material fact exist regarding MSI's right to initiate a declaratory action and whether this right was overridden by a subsequent agreement or MSI's actions in covering defense costs for Country Companies.

Under Illinois law, an insurer may be estopped from claiming noncoverage if it defends an action for the insured, provided this defense causes prejudice to the insured. This principle is highlighted in *Maryland Casualty Co. v. Peppers*, where the Illinois Supreme Court established that the insurer's actions can lead the insured to rely solely on their defense efforts. The Seventh Circuit's interpretation in *Northwestern Nat'l Ins. Co. v. Corley* reinforced the need to show prejudice for estoppel to apply. However, in this case, the insurer MSI's prior reservation of rights negates the requirement for such a demonstration. The Illinois Appellate Court in *Tapp v. Wrightsman-Musso Ins. Agency* ruled that reserving rights prevents estoppel, especially when the insurer seeks declaratory judgment. The court noted that MSI's payment of some defense costs does not preclude it from pursuing declaratory relief, as insurers can seek such judgments without breaching their duty to defend. The subsequent examination of the Slimack complaint is necessary to determine MSI's duty to defend Country Companies, which arises only if the complaint's allegations fall within the insurance policy's coverage. If claims are outside of policy coverage or explicitly excluded, the insurer is not obligated to defend. Thus, the inquiry focuses on whether Slimack's allegations fit the coverage terms.

Insurance policies in question cover liability for occurrences defined as accidents resulting in bodily injury or property damage that are neither expected nor intended by the insured. Intentional torts, such as assault, are generally excluded from coverage based on similar policy language. In this case, Slimack's complaint alleged that Country Companies knowingly engaged in wrongful conduct against agents, leading to their termination or forced resignation and the reassignment of their accounts. These claims are based on intentional misconduct, which falls outside the coverage of both general liability and umbrella policies that only address unintentional torts.

The district court found that the complaint did not support a theory of recklessness due to the policy's use of the term "expected." It emphasized that damages could be reasonably anticipated even if not intentionally inflicted. The court ruled that since the complaint did not include a negligence claim, the agents were limited to pursuing an intentional tort at trial. Had they alleged both intentional acts and negligence, the insurer would have had a duty to defend, but as it stands, the insurer is entitled to a declaratory judgment indicating no duty to defend against non-covered intentional torts.

Moreover, Country Companies' claim of a conflict of interest with MSI did not hinder the district court's ability to declare the rights of the parties involved. The court affirmed the grant of partial summary judgment, confirming that the Slimack complaint did not allege a covered loss.