Court: Court of Appeals for the Seventh Circuit; August 21, 2006; Federal Appellate Court
The case involves Grey Direct, Inc. (plaintiff-appellant) seeking to recover nearly $1 million from Erie Insurance Exchange (defendant-appellee) for losses incurred due to a printing error made by Unicomm Direct, a company related to Grey's subcontractor CommDirect. Grey argues that the insurance coverage acquired by Unicomm should cover the loss, while Erie contends that Unicomm did not have the relevant coverage at the time of the error and thus owes no duty to defend or indemnify.
The error occurred on September 11, 2003, when Unicomm mistakenly mailed two travel certificates to approximately 6,000 United Airlines customers, leading Grey to indemnify United for the loss. Following this, Grey initially sued CommDirect but later switched to suing Unicomm after discovering it was the entity responsible for the mistake, resulting in a default judgment against Unicomm.
Unicomm had obtained a business owners' policy from Erie in August 2003, which did not include a Printers Errors and Omissions provision. This coverage was added on October 23 or 24, 2003, after Grey requested it; however, it is disputed when this amendment became effective. The district court ruled in favor of Erie, granting summary judgment based on the argument that Unicomm did not have coverage for the loss at the time it occurred, a conclusion upheld by the Seventh Circuit Court of Appeals upon de novo review.
Unicomm sent a complaint regarding Grey's lawsuit against CommDirect to Erie on January 2, 2004, seeking coverage under its policy. The complaint explicitly named only CommDirect as the defendant. Erie denied coverage on January 21, 2004, stating the lawsuit did not involve covered injuries and noted that some damages occurred before policy inception. Unicomm later claimed, on February 23, 2004, that a Printers Errors and Omissions endorsement covered the loss, but Erie denied receipt of this letter and maintained its denial of defense or indemnity obligations. There was no record of Erie being notified of a subsequent suit by Grey against Unicomm until after a default judgment was entered.
Grey, as Unicomm's assignee, filed suit against Erie for breach of duty to defend and indemnify. The district court ruled in favor of Erie, citing the "known loss" doctrine, as Unicomm was aware of the error when it obtained the coverage. Grey appeals, arguing that Erie should be estopped from using the "known loss" doctrine, that the doctrine does not apply to a policy issued after the loss, and that Erie cannot raise defenses not previously mentioned. Erie countered that the policy did not cover Printers Errors and Omissions until after the loss occurred, thus it had no duty to defend. The litigation seems to stem from an error in how Erie manages its policy documentation, as it lacks hard copies and stores documents electronically, requiring a processor to verify endorsement details when requested.
Erie's processor, Rebecca Murzynski, overlooked an endorsement to the Unicomm policy effective October 15, 2003, resulting in a January 2004 copy that incorrectly suggested Printers Errors and Omissions coverage was in place from the policy's inception in August 2003. Grey argues that this January copy should govern the policy's terms, despite evidence indicating that the Errors and Omissions provision was purchased only after a printing error on September 11, 2003, and that no retroactive coverage was intended. The record shows that Lipuma acquired the coverage in response to the known error and that no requests for changes in January 2004 were made by either Erie or Lipuma. The erroneous January copy does not modify the contract terms. Furthermore, Illinois law states that insurers are not obligated to cover known losses, and the September 11 loss was recognized prior to the endorsement. Even if the January copy were considered to modify the policy, it would only cover unknown losses, not the September error, unless there was clear intent to cover the known loss. Grey's claim that the January document reflects such intent is dismissed as implausible, given that the known loss was valued at $967,720, while Unicomm paid only $54 for the endorsement.
The doctrine of mistake allows for a contract to be voidable if one party's mistake regarding a basic assumption materially affects the agreed exchange and the party does not bear the risk of the mistake. In this case, Erie believed the endorsement date for the Unicomm policy was October 15, 2003, but due to a mistake, one version indicated coverage existed before a relevant loss on September 11, 2003. This mistake materially affected the performance exchange. Erie should not bear the loss as it was not aware of the mistake's relevant facts, and enforcing the erroneous version would be unconscionable. Unicomm had prior knowledge that it lacked the coverage before receiving the incorrect policy version.
The court noted that an insurer cannot be estopped from arguing it has no duty to defend if such a duty never existed, as established in previous case law. Here, there was no coverage when comparing the policy with the complaint. Additionally, Erie's arguments regarding its lack of duty to defend Grey's suit against CommDirect and Unicomm were not waived. The record shows Erie claimed CommDirect was never insured, and there was no evidence that it received notice of the Unicomm suit before being alerted to the default judgment. The separate nature of the suits indicates that they were not a single litigation that Erie failed to manage.
Erie did not waive its known loss defense or other defenses, as evidenced by a letter dated January 21, 2004, which stated that Erie reserved the right to assert other grounds for disclaiming coverage during its investigation. Grey argues that Erie’s knowledge of a printing error by that date negates its defense, but Erie's understanding of the error evolved over time. Under Illinois law, the burden of proving waiver lies with the claimant, who must show that the insurer's actions were inconsistent with an intention to rely on policy provisions, requiring clear and unequivocal evidence. Grey's evidence failed to meet this standard. The district court correctly determined that Erie had no duty to defend Unicomm concerning the error from September 11, 2003, as the erroneous policy representation did not indicate an intention to provide coverage for the known loss. The district court's judgment is affirmed.
