Abstract & Title v. Chicago Insur Co ( 2007 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 06-2588
ABSTRACT & TITLE GUARANTY COMPANY, INCORPORATED,
Plaintiff-Appellant,
v.
CHICAGO INSURANCE COMPANY,
Defendant-Appellee.
____________
Appeal from the United States District Court
for the Southern District of Indiana, Indianapolis Division
No. 05 C 188—John Daniel Tinder, Judge.
____________
ARGUED JANUARY 19, 2007—DECIDED JUNE 5, 2007
____________
Before RIPPLE, KANNE, and SYKES, Circuit Judges.
KANNE, Circuit Judge. This diversity case comes to us
after entry of summary judgment in favor of the defendant.
The plaintiff appeals. For the reasons set forth below, we
affirm.
I. BACKGROUND
Abstract & Title Guaranty (ATG) provided services in
connection with real estate transactions. It obtained an
errors and omissions policy from Chicago Insurance
Company (CIC) covering the period from November 2001
2 No. 06-2588
to December 2002. ATG fell in with a company called
Royal Haven Builders and its principal Eric Tauer. This
turned out to be a tremendously bad business decision. It
appears that as Royal Haven began a long decline into
bankruptcy, fraud, and check kiting,1 an employee of ATG
had started slipping funds intended for third parties under
the table directly to Royal Haven. That same employee
also failed to look after other interests of parties to
whom ATG owed contractual and fiduciary duties in these
complex real estate development deals. Not surprisingly,
some of those who had been defrauded by Royal Haven and
the complicit ATG employee took notice when millions of
dollars worth of deals went sour.
In September 2002, ATG first notified CIC about “an
incident(s)” that had been brought to their attention
within the last few weeks. The initial dialog between ATG
and CIC was predictable. There was some discussion of
whether the “incident(s)” would count as a single claim or
multiple claims. CIC conducted some investigation of the
coverage, the facts of the case, and policy exclusions. But
it was not long before ATG was indicating that there
might be hundreds of claims forthcoming. Over the next
few months, CIC apparently began to sense that claimants
were circling ATG much like stick-wielding children
around a piñata. By the spring of 2003, there were nearly
one hundred claims pending against ATG, totaling over
$15 million. And then the lawsuits started.
In April 2003, as ATG started getting served with legal
complaints, CIC came to the realization that the value of
1
Although not directly relevant to this insurance dispute, we
note that Tauer was recently sentenced to a substantial prison
term for his role in various criminal aspects related to this
mess. United States v. Tauer, No. IP05-CR-0028-01 (S.D. Ind.
Apr. 18, 2007).
No. 06-2588 3
the eventual claims against ATG was going to dwarf CIC’s
potential maximum liability. So CIC filed an interpleader
action in the federal district court and deposited with the
court an amount equal to its limit of coverage. Chicago Ins.
Co. v. Abstract & Title Guar., Inc., No. 1:03-CV-0590 (S.D.
Ind.). As ATG was facing looming deadlines in the various
state court causes of action, CIC advised ATG to hire
counsel of their choosing and seek payment of those legal
fees out of the interpleaded policy limits. Eventually the
district court disbursed the deposited funds to the various
claimants in accordance with a settlement agreement. As
part of that settlement agreement, ATG received $120,500
(the largest share of any claimant). The remainder was
divvied up among seven other claimants.
ATG then brought the present action in state court
against CIC, alleging that CIC had breached its insurance
contract by interpleading the coverage limits and by not
defending ATG in court. ATG also alleged that CIC had
failed to deal in good faith. CIC removed the case to the
federal district court. The parties brought cross-motions
for summary judgment, and on May 12, 2006, the district
court entered summary judgment in favor of CIC. This
appeal followed.
II. ANALYSIS
We review an entry of summary judgment de novo.
Omega Healthcare Investors, Inc. v. Res-Care, Inc., 475
F.3d 853, 857 (7th Cir. 2007). We view all facts and draw
all inferences in the light most favorable to the non-moving
party. Id. Summary judgment is appropriate where the
evidence before the court indicates that there are no
genuine issues of material fact and the moving party is
entitled to judgment as a matter of law. Id.The relevant terms of the insurance policy that are now
at the heart of this dispute can be summarized as follows.
4 No. 06-2588
The policy set a $500,000 limit of liability, both in the
aggregate and for each individual claim. The policy stated
that claim expenses are included within the limits of
liability. Claim expenses are defined in the contract to
include:
Fees charged by (an) attorney(s) designated by [CIC]
and all other fees, costs, and expenses resulting from
the investigation, adjustment, defense, and appeal of
a Claim, suit or proceeding arising in connection
therewith, if incurred by [CIC], or by [ATG] with
written consent of [CIC] Policy ¶ VII.
Finally, CIC also had a contractual “right and duty to
defend” any suit against ATG, and the contract provided
that CIC “at its option, shall select and assign defense
counsel.” Policy ¶ I. But CIC did not have a duty “to de-
fend or continue to defend after the applicable limit of
[CIC’s] liability [had] been exhausted by the payments of
judgments, settlements, Damages or Claim Expenses, as
applicable.” Id.ATG argues that CIC breached its contract in two
ways: by paying the money to the court in the inter-
pleader action and by not defending the claims. This is a
question of state law, and when the highest court in the
state has not spoken we must attempt to predict how we
believe that court would decide. State Farm Mut. Auto Ins.
Co. v. Pate, 275 F.3d 666, 669 (7th Cir. 2001). We look to
decisions of intermediate appellate courts in the state
for persuasive guidance in that endeavor. Id. The parties
have not identified for us, nor is the court able to locate,
controlling Indiana Supreme Court precedent on this
question.
However, while this case was pending the Indiana Court
of Appeals decided a similar question in Mahan v. Am.
Standard Ins. Co., 862 N.E.2d 669 (Ind. Ct. App. 2007). In
Mahan, an automobile insurer faced a situation where
No. 06-2588 5
the number and value of potential claims against the
insured might have exceeded the insurer’s total liability.
Id. at 674. The policy included a clause that shifted the
burden to defend or settle onto the insurer, but the
contract also included a clause that disavowed any duty
to defend after the limits of liability had been paid. Id.
at 671. As the claims started to loom, the insurer initiated
an interpleader action and deposited with the court the
total sum of its liability under the policy. Id. at 671-72.
The court eventually divided the funds amongst the
injured parties. Id. at 672. The insured counter-claimed
against the insurer alleging breach of contractual duties
to defend and bad faith. Id. at 672-73.
On nearly identical facts to this case, the Indiana Court
of Appeals held in Mahan that there was no breach of
contract for interpleading and failing to defend. Id. at 676-
77. This appears to resolve the question of whether
Indiana law allows the use of interpleader as a method of
paying the policy limits. But the court rested its “failure to
defend” decision on additional grounds that are not present
here: in Mahan, the insurer interpleaded before the first
lawsuit was filed against the insured. Id. In this case, ATG
had already been served a complaint before CIC filed the
interpleader. Id. The question before us is whether this
difference should lead us to a result that is contrary to
Mahan. On the basis of the language of the contract, we
conclude that it should not.
In Indiana, when an insurance contract “is clear and
unambiguous, the language therein must be given its plain
meaning. On the other hand, where there is ambiguity,
insurance policies are to be construed strictly against the
insurer and the policy language is viewed from the stand-
point of the insured.” Beam v. Wausau Ins. Co., 765 N.E.2d
524, 528 (Ind. 2002) (citing Bosecker v. Westfield Ins. Co.,
724 N.E.2d 241, 244 (Ind. 2000); Am. States Ins. v. Kiger,
6 No. 06-2588
662 N.E.2d 945, 947 (Ind. 1996); Allstate Ins. Co. v. Boles,
481 N.E.2d 1096, 1101 (Ind. 1985) (internal quotations
omitted)).
This all comes down to the question of whether the
deposit of the funds with the court constitutes a payment
of claim expenses. If it is, then CIC has exhausted its
obligations under the contract. ATG indicates in its
reply brief that perhaps CIC owed more than $500,000.
Appellant’s Reply Br. at 7-8. This argument was not
raised below, nor was it raised in ATG’s initial brief.
Arguments that first appear in a reply brief are deemed
forfeited. Carter v. Tenant Co., 383 F.3d 673, 679 (7th Cir.
2004). The definition of a claim expense is expansive
in this contract. We repeat the relevant part: “all other
fees, costs, and expenses resulting from the investigation,
adjustment, defense, and appeal of a Claim, suit or
proceeding arising in connection therewith, if incurred
by [CIC].” CIC deposited the sum total of its financial
obligations into the court’s coffers for the purpose of
satisfying the claims that were piling up against ATG.
There can be few actions that would fall more plainly
within the meaning of “costs [or] expenses resulting from
the . . . adjustment . . . of a claim . . . incurred by CIC.” We
see nothing ambiguous about this language, despite the
parties’ best efforts at obfuscation. Having paid its limit
in claims expenses, the contract between the parties
clearly instructs that CIC was under no obligation to
defend or to continue to defend ATG. Indeed, the con-
tract even goes so far as to allow CIC, if already actively
defending ATG, to throw up their hands and not “continue”
any longer. In light of such strong language, we would be
hard pressed to read this contract to require CIC to both
defend the suits and pay to its full limits.
The appellant cites to a handful of cases from other
jurisdictions that have held insurers on the hook to de-
fend their insured parties above and beyond interpleading
No. 06-2588 7
the policy limits. Appellant’s Br. at 15-16. We recognize
that there is significant disparity among jurisdictions
in resolving this question, and that questions of policy
might lead a state to require insurers to defend above
and beyond interpleading. See, e.g., J. Kraut, Liability
Insurer’s Duty to Defend Action against an Insured After
Insurer’s Full Performance of its Payment Obligations
under Policy, 27 A.L.R.3d 1057. As CIC notes, many of the
cases cited by ATG involved contracts, unlike this contract,
that did not specifically allow the insurer to terminate
defense upon full payment. Appellee’s Br. at 18-19.
Although the citation to those cases from other jurisdic-
tions is informative, the cases lose much of their persua-
sive power in light of the recent holding in Mahan
where the Indiana Court of Appeals did allow an insurer
to walk away after interpleading. We have nothing be-
fore us to indicate that this decision by the Indiana Court
of Appeals is not an accurate prediction of how the Indi-
ana Supreme Court would hold on this question of law.
In summary, a jurisdiction might choose to have a law
that prevents an insurer from interpleading the policy
limit. Such a law might require that insurers pay claims
one at a time in the order that they are filed, or perhaps
find some other way to prioritize the claims. Some juris-
dictions have chosen such a rule of law, but the Indiana
Court of Appeals in Mahan indicates that Indiana is not
one of them. Furthermore, a company might choose to
buy an insurance policy that requires the insurer to de-
fend even after the policy limits are met, or to prioritize
legal fees so that they are paid before other claim expenses
and damages. ATG did not choose to buy such a policy,
but instead asks the courts to write that requirement
into its contract after the fact. We decline to do so. In
light of these facts, we agree that summary judgment
in favor of CIC was proper on the question of breach of
contract.
8 No. 06-2588
ATG also argues that CIC has breached its duty of good
faith throughout these proceedings. The good faith require-
ment under Indiana law prevents an insurer from “(1)
making an unfounded refusal to pay policy proceeds; (2)
causing an unfounded delay in making payment; (3)
deceiving the insured; and (4) exercising any unfair
advantage to pressure an insured into a settlement of his
claim.” Erie Ins. Co. v. Hickman, 622 N.E.2d 515, 519 (Ind.
1993). We find ourselves, once again, instructed by the
recent decision in Mahan. On nearly identical facts, the
court held that the insurer did not breach its duty of
good faith because the insurer had a rational reason for
filing the interpleader. A finding of bad faith “requires
evidence of a state of mind reflecting dishonest purpose,
moral obliquity, furtive design, or ill will.” Mahan, 862
N.E.2d at 677 (citing Colley v. Ind. Farmers Mut. Ins.
Group, 691 N.E.2d 1259, 1261 (Ind. Ct. App. 1998)). There,
like here, “after investigating the facts and circumstances
surrounding the accident, [the insurer] determined that
[the insured] was [liable], and . . . most likely would be
subject to multiple claims, the total of which would
meet, if not exceed, the limits of the policy . . . . [The
insurer] did not breach its duty of good faith. ” Mahan, 862
N.E.2d at 677. We see no evidence that leads us to a
contrary conclusion in this case.
III. CONCLUSION
For the forgoing reasons, we AFFIRM the decision of the
district court granting summary judgment in favor of
Chicago Insurance Company.
No. 06-2588 9
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—6-5-07