National Casualty Company v. Forge Industrial Staffing Inco ( 2009 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 08-3110
N ATIONAL C ASUALTY C OMPANY,
Plaintiff-Appellee,
v.
F ORGE INDUSTRIAL S TAFFING
INCORPORATED ,
Defendant-Appellant.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 06 CV 3745—James F. Holderman, Chief Judge.
A RGUED F EBRUARY 10, 2009—D ECIDED JUNE 3, 2009
Before C UDAHY, W ILLIAMS, and T INDER, Circuit Judges.
W ILLIAMS, Circuit Judge. Fearful that its insurer, National
Casualty Corporation (“NCC”), would surreptitiously
control its defense in a way that would preclude coverage
under the insurance policy, Forge declined to accept
insurer-appointed counsel to defend it against claims
brought before the Equal Opportunity Employment
2 No. 08-3110
Commission (“EEOC”). The parties then filed cross-claims
for declaratory judgment seeking to resolve whether an
actual conflict of interest existed requiring NCC to reim-
burse Forge for the costs of retaining independent counsel
to defend against these EEOC charges.
Because we find that the EEOC charges do not contain
mutually exclusive claims (one of which would be covered
under the policy and one of which would not), and we fail
to detect any other evidence that NCC would provide a less
than vigorous defense on behalf of Forge, we find that
under Illinois law, appointment of conflict counsel was not
required. Therefore, we affirm the district court’s judgment.
I. BACKGROUND
This suit arises out of a dispute regarding the burden of
bearing the defense costs of an insured’s privately retained
counsel in an action before the EEOC. NCC issued an
insurance policy to Forge Industrial Staffing, Inc. Forge is
a staffing company that places temporary, and occasionally
permanent, employees at companies throughout the
United States. Among other things, the policy insured
Forge against any legal damages stemming from inten-
tional acts, including intentionally discriminating against
any of its employees. The parties do not dispute any of the
following facts.
During February and April 2006, four of Forge’s former
employees filed anti-discrimination charges with the
EEOC. The gist of their complaints was that Forge fired
them: (1) due to their race and/or gender; and/or (2) in
No. 08-3110 3
retaliation for complaining about Forge’s staffing practices,
which allegedly included honoring its clients’ requests not
to staff employees that were African-American, Hispanic,
and/or female.
As a result of these charges, NCC agreed to defend Forge
under the Employment Practices Liability Part of the
insurance contract and assigned NCC’s own counsel to do
so. At the same time, NCC reserved the right to later deny
coverage based on any of the exclusions in the policy. Most
notably, the policy did not provide coverage for “punitive
damage awards” or for any claim arising out of Forge’s
“willful failure . . . to comply with any law . . . or regula-
tions relating to employment practices.” The policy defined
“willful” as “acting with intentional or reckless disregard
for such employment-related laws, orders or regulations.”
After receiving this reservation-of-rights letter, Forge
requested that NCC provide independent counsel for Forge
because a purported conflict of interest existed as a result
of NCC’s reservation of rights. Specifically, Forge asserted
that whether the policy would indemnify Forge for its
alleged conduct depended on how the EEOC charges were
defended with respect to the issues of punitive damages
and Forge’s knowledge of the applicable anti-discrimina-
tion laws. When NCC refused to provide independent
counsel, Forge hired its own counsel. Subsequently, NCC
filed this declaratory judgment action to resolve the
conflict of interest issue as well as a dispute regarding the
appropriate deductible under the policy. Forge cross-filed,
requesting that the district court order NCC to cover
Forge’s defense costs. The district court found that no
4 No. 08-3110
actual conflict existed and determined that Forge had to
bear the costs of retaining its own counsel. The district
court also found that only the Employment Practices
Liability Part of the policy applied, requiring Forge to
pay a $25,000 deductible to NCC. Forge now appeals.
II. ANALYSIS
A. Conflict of Interest Determination
In Illinois, an insurer has a broad duty to defend its
insured in any action where the allegations in the complaint
are even potentially within the scope of the policy’s cover-
age. Guillen v. Potomac Ins. Co. of Ill., 785 N.E.2d 1, 7 (Ill.
2003); Am. Family Mut. Ins. Co. v. W. H. McNaughton Builders,
Inc., 843 N.E.2d 492, 497 (Ill. App. Ct. 2006). Along with an
insurer’s obligation to defend its insured comes its right to
control and direct the defense. Am. Family, 843 N.E.2d at
498. Policy dictates that an insurer has this right so that it
“may protect its financial interest in the litigation’s outcome
and minimize unwarranted liability claims.” Stoneridge Dev.
Co. v. Essex Ins. Co., 888 N.E.2d 633, 644 (Ill. App. Ct. 2008);
see also Clemmons v. Travelers Insurance Co., 430 N.E.2d
1104, 1108 (Ill. 1981). Insurer-appointed counsel has an
ethical obligation to both the insurer and the insured.
Stoneridge, 888 N.E.2d at 644; Am. Family, 843 N.E.2d at 498.
However, in reality this counsel may have a closer relation-
ship with the insurer and a greater desire to protect the
insurer’s interests. Ill. Masonic Med. Ctr. v. Turegum Ins.
Co., 522 N.E.2d 611, 613 (Ill. App. Ct. 1988). This is of no
import when the interests of the insurer and its insured are
No. 08-3110 5
aligned, but when they diverge, a conflict of interest arises.
Am. Family, 843 N.E.2d at 498.
If there is an actual conflict of interest between the
insurer and insured, the insured has the right to obtain
independent counsel at the insurer’s expense. See id.; Md.
Cas. Co. v. Peppers, 355 N.E.2d 24, 31 (Ill. 1976). An actual,
not merely potential, conflict is required to trigger the
insured’s right to conflict counsel. See, e.g., Murphy v. Urso,
430 N.E.2d 1079, 1083-84 (Ill. 1981); Am. Country Ins. Co. v.
Williams, 791 N.E.2d 1268, 1276 (Ill. App. Ct. 2003). An
actual conflict does not arise merely because the insurer
has an interest in negating coverage as to every count of
the underlying complaint. See, e.g., Tews Funeral Home, Inc.
v. Ohio Cas. Ins. Co., 832 F.2d 1037, 1047 (7th Cir. 1987);
Turegum, 522 N.E.2d at 613-14. Conversely, it is not
dispositive that insurer and insured have a shared interest
in a finding of no liability; in that case, “the question
becomes whether the insurer’s interest would be equally
protected by a finding that would not be in the interest of
the insured.” Am. Family, 843 N.E.2d at 499; Murphy, 430
N.E.2d at 1083-84.
In order to determine if a conflict exists, the court “must
compare the allegations of the underlying complaint
against the insured to the terms of the insurance policy at
issue.” Am. Family, 843 N.E.2d at 498. If, after comparing
the complaint against the insured to the insurance policy,
“it appears that factual issues will be resolved in the
underlying suit that would allow insurer-retained counsel
to ‘lay the groundwork’ for a later denial of coverage, then
there is a conflict between the interests of the insurer and
those of the insured.” Id. (citations omitted).
6 No. 08-3110
Illinois courts have held that conflict counsel must be
appointed when the underlying complaint contains two
mutually exclusive theories of liability, one which the
policy covers and one which the policy excludes. See, e.g.,
Maniekis v. St. Paul Ins. Co. of Ill., 655 F.2d 818, 825 (7th
Cir. 1981) (collecting Illinois cases). This situation
typically arises when the insurance policy covers negligent
but not intentional conduct. Id. In this instance, the
insurer would have the incentive to lay the groundwork
during discovery to show that the insured acted inten-
tionally, removing the possibility of coverage. See Am.
Family, 843 N.E.2d at 498 (“[I]f, in the underlying suit,
insurer-retained counsel would have the opportunity to
shift facts in a way that takes the case outside the scope of
policy coverage, then the insured is not required to defend
the underlying suit with insurer-retained counsel.”). More
generally, courts have found that conflict counsel should
be appointed whenever the insurer’s “interests would be
furthered by providing a less than vigorous defense to
those allegations.” Turegum, 522 N.E.2d at 613-14; see
also Am. Country, 791 N.E.2d at 1276.
B. The Mere Possibility that Punitive Damages Might
Be Sought in Future Litigation Does Not Create an
Actual Conflict of Interest
Forge asserts, relying on Nandorf, Inc. v. CNA Insurance
Cos., 479 N.E.2d 988 (Ill. App. Ct. 1985), that the possibility
that the EEOC charges could result in lawsuits in which the
plaintiffs might request punitive damages that dwarf the
No. 08-3110 7
possible compensatory damages creates an actual conflict
of interest mandating the appointment of conflict counsel.
In Nandorf, each underlying plaintiff requested $5,000
in compensatory damages and $100,000 in punitive dam-
ages. Id. at 990. As here, the policy in question did not
cover punitive damage awards. See id. The court reasoned
that an insurer may not have an incentive to provide a
“vigorous defense” to its insured when the amount of
punitive damages sought greatly outweighs the amount of
compensatory damages sought. Id. at 992. Essentially, the
court believed that the insurer (and by extension insurer-
appointed counsel) might find it more economically
efficient to put on a less than vigorous defense and pay the
$5,000, rather than spending excess legal fees to put on a
full defense. Id. Such conduct would leave the insured
unfairly exposed for $100,000 in punitive damages.
Although the court cautioned that its finding was not
“meant to imply that an insured is entitled to independent
counsel whenever punitive damages are sought in the
underlying action,” it found that “under the peculiar facts
and circumstances of this litigation,” the great disparity
between the punitive and compensatory damages possible
in the underlying litigation created an actual conflict
warranting the appointment of conflict counsel. Id. at
993-94; see also Ill. Mun. League Risk Mgmt. Ass’n v. Siebert,
585 N.E.2d 1130, 1138 (Ill. App. Ct. 1992) (finding that
where insurer “could benefit from presentation of defense
in manner justifying punitive damages award” and insured
faced “grave economic consequences” as a result, appoint-
ment of conflict counsel was warranted).
8 No. 08-3110
As the district court correctly found, this case does not
present “peculiar facts” analogous to Nandorf requiring the
appointment of independent counsel. Punitive damages
may not be sought in an EEOC proceeding. See West v.
Gibson, 527 U.S. 212, 217-18 (1999). Further, there was no
evidence that the underlying plaintiffs would seek punitive
damages if and when they actually filed suit. Moreover,
even if they filed suit, there is no evidence that the punitive
damages requested would be so disproportionate to the
compensatory damages requested such that a Nandorf
conflict would ensue. Therefore, the specter of punitive
damages in this case is merely speculative and does not
create an “actual” conflict. See Littlefield v. McGuffey, 979
F.2d 101, 108 (7th Cir. 1992). To find otherwise would
violate the principles underlying Nandorf by immediately
mandating the appointment of conflict counsel in every
case in which punitive damages potentially might be
requested. Not until punitive damages are actually re-
quested (or an actual conflict appears on the face of the
complaint as discussed infra at 9-15), and upon a determi-
nation that the nature of the damages creates a conflict (i.e.,
when the conflict changes from speculative to actual),
should a court order the appointment of independent
counsel. See Shelter Mut. Ins. Co. v. Bailey, 513 N.E.2d 490,
496 (Ill. App. Ct. 1987).
In addition, unlike in Siebert, there is no evidence that
Forge and NCC’s interests are not aligned on the issue of
punitive damages. In the event that the EEOC charges
evolve into lawsuits, both punitive and compensatory
damages would be tied to the same underlying conduct,
namely Forge’s alleged discrimination against its employ-
No. 08-3110 9
ees. Thus, in defending Forge’s actions generally, NCC
would necessarily be protecting Forge’s interests with
respect to both compensatory and punitive damages. See
Vill. of Lombard v. Intergovernmental Risk Mgmt. Agency, 681
N.E.2d 88, 95 (Ill. App. Ct. 1997) (“the compensatory and
punitive damages sought in the underlying suit arise out
of the same factual occurrence” and did not present a
actual conflict). The mere potential for massive punitive
damages requests in future litigation does not give rise to
an actual conflict warranting the appointment of independ-
ent counsel.
C. Independent Counsel Need Not Be Appointed
Because Mutually Exclusive Theories of Liability
Do Not Appear on the Face of the EEOC Charges
It is undisputed that the policy provides Forge liability
coverage for intentional acts, including intentional torts
such as intentionally discriminating against one of its
employees. As noted above, however, the policy does not
cover Forge if it “willfully failed” to adhere to anti-discrim-
ination laws. If a jury was to find that Forge both intention-
ally discriminated against its employees and did so in
willful violation of anti-discrimination laws, Forge’s
conduct would fall within the policy’s “willful” exception,
and NCC would not have to indemnify Forge. Forge argues
that appointment of independent counsel at the inception
of the EEOC charges was necessary because NCC’s counsel
would have the incentive and ability to shift the facts such
that it appeared that Forge willfully violated the law,
removing the action from the policy’s coverage. As the
10 No. 08-3110
district court aptly noted, whether NCC-appointed coun-
sel’s ability to frame facts before the Commission creates
an actual conflict triggering the need for conflict counsel
presents “a difficult question” under the facts of this case.
After the district court determined that NCC had a duty
to defend Forge in the EEOC proceedings, it stated that if
an actual conflict existed at the EEOC level, conflict
counsel must be appointed.1 The district court then found
that no actual conflict existed because: (1) the EEOC
charges did not specifically accuse Forge of “willfully
violating any law”; and (2) in any event, “intentional
claims” and any “willfully violating the law claims” would
not be mutually exclusive—by generally defending Forge
against discrimination charges, the district court found that
the NCC-supplied defense would encompass both “inten-
tional claims” and “willful claims.”
On appeal, building on the district court’s rationale, NCC
first argues that there is no conflict between the intentional
conduct alleged in the EEOC charges and the “willfulness”
exception in the policy. NCC claims that in defending
Forge against a claim for intentional discrimination, it will
necessarily be defending Forge against allegations that
Forge willfully violated anti-discrimination laws.
Although correct, this argument does not dispositively
settle the question of whether conflict counsel must be
1
Although not disputed on appeal, we note that due to the
adversarial nature of the EEOC process, the conflict counsel
doctrine is equally applicable to EEOC charges/proceedings as
it is to a formal lawsuit.
No. 08-3110 11
appointed for the EEOC proceedings. At trial before a
district court, it is certainly true that if counsel proves that
Forge did not intentionally discriminate against its employ-
ees then it necessarily proves that Forge did not willfully
violate the law, which would negate any tension with the
policy’s exceptions.2 Further, any attempt to shift the focus
to Forge’s knowledge of the applicable anti-discrimination
laws during trial would be plain to see, rendering counsel’s
violation of his ethical duty apparent. That said, an exami-
nation of the manner in which counsel would defend this
action at trial is not the complete, nor even the most
pertinent, inquiry. Rather, Illinois law counsels us to
examine whether insurer-appointed counsel could feasibly
“flesh out” certain facts during investigation, discovery, or
trial that would remove the action from the policy’s
coverage. See Am. Family, 843 N.E.2d at 500-01; Turegum,
522 N.E.2d at 622; Murphy, 430 N.E.2d at 1083-84.
During its defense of the charges in the EEOC proceed-
ing, it is certainly possible for NCC-appointed counsel to
subtly elicit facts tending to show that Forge had knowl-
edge of the applicable anti-discrimination laws, which
would negate NCC’s obligation to insure Forge in the event
that Forge is found liable for discrimination. That said, the
danger this presents to Forge is quite minimal given that
2
NCC’s contention that defending against intentional discrimi-
nation will always be the same as defending against a willful
violation of the law is without merit. If that was the case, then
the willfulness exclusion in the policy would serve no purpose.
12 No. 08-3110
this information is highly likely to be discovered anyway.
As an employment placement company, one would assume
that Forge has strong knowledge of employment laws and,
as such, the underlying plaintiffs or the Commission itself
will likely inquire about Forge’s knowledge of those laws
during the EEOC process. Or, if NCC decided to initiate a
separate action against Forge claiming that the policy did
not apply, NCC would certainly inquire about Forge’s
knowledge of the law during discovery. Therefore, NCC-
appointed counsel’s ability to solicit this information
during his defense of the EEOC charges is of little import.
In any event, given that there are no allegations present
in the EEOC charges that Forge willfully violated the law,
this case presents neither mutually exclusive theories of
liability nor factual allegations which when resolved would
preclude coverage. In fact, only one theory is pre-
sented—Forge committed an intentional tort by intention-
ally discriminating against its employees based on race
and gender. So, the requirements for appointment of
independent counsel under Illinois law have not been met.
A similar situation arose in Shelter Mutual Insurance Co. v.
Bailey, 513 N.E.2d 490 (Ill. App. Ct. 1987). In Shelter Mutual,
an insured asked the court to order the appointment of
conflict counsel in a case where the insured was charged
with negligence and the policy excluded coverage for
intentional acts. Id. at 496-97. The insured argued that
insurer-appointed counsel could elicit facts tending to show
that the insured acted intentionally, thus negating coverage.
Id. The court found that no actual conflict of interest existed
because only one theory of liability, negligence, was alleged
No. 08-3110 13
on the face of the complaint. Id. at 496-97 (“Plaintiff was not
confronted with alternative theories of recovery and,
therefore, could not shift the liability from one theory, such
as negligence, which would have been covered, to another
theory, such as battery or intentional conduct, for which
there was no coverage.”). Finding that there was nothing on
the face of the complaint indicating that insurer-appointed
counsel would give less than a vigorous defense, the court
denied the insured’s request for independent counsel. Id.The court noted, however, that if the underlying plaintiff
was to file an amended complaint featuring an intentional
tort, an actual conflict might ensue requiring the appoint-
ment of conflict counsel. Id.The court’s decision was wise because, as it noted, a
contrary ruling would require the appointment of inde-
pendent counsel any time a complaint could foreseeably be
amended to assert a non-covered theory. Id. Such a rule
would extend the requirement for appointment of inde-
pendent counsel to any situation that presents merely a
potential conflict, which is clearly antithetical to what
Illinois law dictates.
Simply put, if no fact issues appear on the face of the
underlying complaint that can be conclusively resolved in
such a way that insurance coverage is necessarily pre-
cluded under the policy, then appointment of independent
counsel is not warranted. Id.; Am. Family, 843 N.E.2d at 498.
In this case, the EEOC charges do not contain any specific
fact issues that could conclusively be resolved such as to
preclude coverage under the policy. The EEOC charges do
not contain any claims that Forge willfully violated the law
14 No. 08-3110
nor do they contain any fact allegations regarding Forge’s
knowledge of anti-discrimination laws. As such, an actual
conflict is not present that requires the appointment of
conflict counsel. Forge seems to argue that NCC-appointed
counsel’s ability to inquire into Forge’s knowledge of the
applicable laws puts it at some sort of advantage. This is
not the case. In the cases in which Illinois courts have
required the appointment of independent counsel, there
have been crucial facts alleged on the face of the complaint
which, if proven true, completely and irreparably took the
matter out of the scope of the insurance policy’s coverage.
See, e.g., Am. Family, 843 N.E.2d at 498; Turegum, 522 N.E.2d
at 613-14; Murphy, 430 N.E.2d at 1082-83.
If, in this case, there was an allegation in the EEOC
charges that Forge willfully violated the law in the process
of discriminating against its employees, the fact that
Forge’s knowledge of the law may be unearthed as part of
the EEOC grievance process may warrant the appointment
of conflict counsel because it is conceivable that a finding
on this issue could be reached that dispositively deter-
mines that the policy does not indemnify Forge. Without
such an allegation present on the face of the complaint,
however, any theory that may shift the facts in such a
manner as to foreclose coverage is entirely speculative and
presents, at most, a potential (and not actual) conflict.
Moreover, the fact that NCC can use information garnered
in the course of this EEOC proceeding in a parallel pro-
ceeding alleging non-coverage is irrelevant because the
same information could be obtained through the normal
discovery process in the parallel suit. Id. at 496 (“A conflict
No. 08-3110 15
cannot be inferred merely because an insurance company
is asserting noncoverage in a separate suit. The test is
whether or not there are conflicting interests based upon
the allegations found in the complaint.”). In this case,
only in the event that these EEOC charges are amended
to include allegations of willfulness, or evolve into
actual lawsuits whose complaints contain allegations
regarding Forge’s willfulness, will an actual conflict arise.
Until that time, the appointment of conflict counsel is not
warranted under Illinois law.
D. Only the Employment Practices Liability Part of the
Insurance Policy is Applicable
NCC provided insurance coverage under the Employ-
ment Practices Liability Part of the insurance policy, which
carried a $25,000 deductible. Forge claims that the Profes-
sional Liability Coverage Part also applied, which only
carried a $5,000 deductible. As the district court correctly
found, the Professional Liability coverage does not apply
because “Exclusion 13” in the Professional Liability Part
exempts from coverage any claims alleging “wrongful
termination,” “actual discrimination,” or “retaliatory
treatment.”
In its opening brief, Forge makes no attempt to refute the
district court’s finding. In its reply brief, Forge argues,
without citation or support, that this exclusion was only
meant to apply to the employees Forge placed at outside
companies and not its in-house employees. A plain reading
of Exclusion 13 fails to support this premise. So, Forge
16 No. 08-3110
must pay the $25,000 deductible applicable under the
Employment Practices Liability Part.
III. CONCLUSION
For the foregoing reasons, the judgment of the district
court is A FFIRMED.
6-3-09