St. Paul Fire Marine v. Village Franklin ( 2008 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 06-2924
ST. PAUL FIRE AND MARINE INSURANCE COMPANY,
Plaintiff-Appellee,
v.
VILLAGE OF FRANKLIN PARK,
Defendant-Appellant.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 04 C 8287—David H. Coar, Judge.
____________
ARGUED JANUARY 25, 2008— DECIDED APRIL 23, 2008
____________
Before BAUER, WOOD, and EVANS, Circuit Judges.
EVANS, Circuit Judge. In this suit for a declaratory
judgment, St. Paul Fire and Marine Insurance Company
contends that it had no duty to defend its insured, the
Village of Franklin Park, Illinois, against a suit by
firefighters claiming that the Village had, for decades,
shortchanged their pension fund. The district court
granted summary judgment for St. Paul, holding that the
firefighters’ suit alleged intentional conduct rather than a
“negligent act, error, or omission” that would be covered
by the insurance policy.
2 No. 06-2924
This case, over which the district court had diversity
jurisdiction, is governed by Illinois law. So we begin by
noting that under that law, every Illinois municipality
must establish and administer a pension fund for its
firefighters. 40 ILL. COMP. STAT. 5/4-101. In 1999 two
firefighters in Franklin Park began to complain that the
Village had violated Illinois law by underfunding their
pension fund for the previous (and this is not a misprint)
thirty years. According to the firefighters, they attempted
several times to put the question of possible legal action on
the agenda of the fund’s board of directors but were
thwarted by Franklin Park. In 2000 the board made a
written demand that the Village pay $4 million to the fund
out of an alleged $14 million surplus collected from a
municipal utility user tax. A few months later, Franklin
Park paid about $130,000 into the fund. The firefighters
were not satisfied, though, and in January 2002 they
sued the Village in the Circuit Court of Cook County on
behalf of themselves and other beneficiaries of the fund.
After the firefighters’ attempts to get the alleged
underfunding on the board’s agenda and their written
demand for more funding, but before they filed their state
court lawsuit, Franklin Park purchased general liability
insurance from St. Paul.1 The policy covered claims arising
from administering employee-benefit plans, including
the firefighters’ pension fund. The policy included a duty
to defend against some claims, and when the firefighters
sued, Franklin Park demanded that St. Paul defend it in
the suit. But St. Paul quickly denied coverage, citing three
1
There were actually two policies (one for February 1, 2001,
through February 1, 2002, and the second for February 1, 2002,
through February 1, 2003), but we can ignore that detail.
No. 06-2924 3
exclusions in the policy. The Village disputed St. Paul’s
denial of coverage in October 2002, and in July 2004
St. Paul alleged additional grounds for its denial of cover-
age. Franklin Park said nothing more, and in December
2004, nearly three years after the underlying litigation
began, St. Paul filed this suit in federal court for a de-
claratory judgment that it had no duty to defend the
Village against the claim being asserted by the firefighters.
Franklin Park counterclaimed under the insurance con-
tract for breach of the duty to defend and under § 155 of
the Illinois Insurance Code for engaging in vexatious and
unreasonable conduct. 215 ILL. COMP. STAT. 5/155.
The two lawsuits were resolved nearly contemporane-
ously. On February 21, 2006, the Circuit Court of Cook
County held that Franklin Park had made payments
into the fund in violation of Illinois law but had only
deprived the fund of about $42,000, which it ordered the
Village to pay into the fund. It also ordered the Village to
make future payments in a manner consistent with Illinois
law. Although that victory, at least from a monetary
standpoint, was rather modest, the Village was even less
successful in the coverage litigation. On March 31, 2006,
the district court granted summary judgment for St. Paul.
It held that St. Paul did not have a duty to defend because,
as the court understood the underlying lawsuit, the
firefighters alleged that the Village intentionally under-
funded the pension fund, but St. Paul was only obligated
to defend against claims of negligence.
As part of its holding, the district court explained that
St. Paul’s delay in filing did not estop it from asserting
policy defenses because trial in the underlying litiga-
tion was “still some time away.” Apparently, no one had
told the district court that the state case had been resolved.
4 No. 06-2924
Franklin Park moved for reconsideration under Federal
Rule of Civil Procedure 59(e), seeking to excuse its failure
to notify the court of the state decision by, among other
arguments, labeling the decision as “newly-discovered
evidence.” The district court described the Village’s
arguments as “absurd” and denied the motion.
On appeal, Franklin Park challenges the grant of sum-
mary judgment as well as the denial of the Rule 59(e)
motion. Under Illinois law, the construction of an insurance
policy is a question of law, so our review is de novo. Sokol
& Co. v. Atlantic Mut. Ins. Co., 430 F.3d 417, 420 (7th Cir.
2005). As usual, we may affirm the district court’s judg-
ment on any grounds found in the record. Valentine v.
City of Chi., 452 F.3d 670, 681 (7th Cir. 2006).
Franklin Park contends, first, that the underlying litiga-
tion was within the scope of its policy and, second, that
St. Paul should have been estopped from asserting any
policy defenses because it waited too long to seek a declar-
atory judgment. We need not consider the Village’s sec-
ond argument because Illinois’s estoppel doctrine “applies
only where an insurer has breached its duty to defend.”
Employers Ins. of Wausau v. EHLCO Liquidating Trust, 708
N.E.2d 1122, 1135 (Ill. 1999). If the insurer had no duty to
defend—if, for example, “there clearly was no coverage
or potential for coverage”—then it matters not at all that
the company waited to assert a policy defense. Id. So
we begin, and as it turns out we will end, by asking
whether St. Paul had a duty to defend against the
firefighters’ suit.
To determine whether an insurer owes a duty to de-
fend, we compare the allegations in the underlying com-
plaints with the coverage provisions of the insurance
policy. Guillen v. Potomac Ins. Co. of Ill., 785 N.E.2d 1, 7 (Ill.
No. 06-2924 5
2003). The duty to defend is only triggered if the facts
alleged in the complaint fall within, or at least potentially
within, the scope of the policy. Id.The policy here promises that St. Paul will “have the
right and duty to defend any protected person against a
claim or suit for loss covered by this agreement.” Among
other arguments (and several of them are good ones),
St. Paul contends that the firefighters’ lawsuit was not a
claim or suit for a “loss” under the policy. In coverage
litigation involving a similar allegation of underfunding
a pension, the Illinois Appellate Court defined “loss” as
“ ’the act or fact of losing: failure to keep posses-
sion: DEPRIVATION.’ ” Local 705 Int’l Bhd. of Teamsters
Health & Welfare Fund v. Five Star Managers, L.L.C., 735
N.E.2d 679, 683 (Ill. App. Ct. 2000) (quoting WEBSTER’S
THIRD NEW INTERNATIONAL DICTIONARY 1338 (1993)). It
went on to hold that a settlement paid to remedy the
failure to make required contributions to a pension was
not “loss” because the money paid in the settlement was
money the insured had no “right to possess in the first
place.” Id. This reasoning applies to whatever amount
Franklin Park may have been required to pay in the
firefighters’ lawsuit because the firefighters only
sought payment into their pension fund of money they
believed the Village had illegally put to other uses or never
collected in the first place. As we have held, “loss” does not
“include the restoration of an ill-gotten gain.” Level 3
Comm., Inc. v. Fed. Ins. Co., 272 F.3d 908, 910 (7th Cir. 2001).
In response, Franklin Park contends that the firefighters
alleged conduct beyond the wrongful retention of funds.
But we fail to see why the other allegations—things like
using the wrong funding formula, not enrolling an actuary,
failing to levy sufficient taxes, and misusing the money
6 No. 06-2924
that should have gone to the fund—are substantially
different from wrongful retention. Whatever caused the
alleged underfunding, the remedy would be for Franklin
Park to contribute money that it was legally required to
contribute all along. Even if the outcome of the firefighters’
suit required the Village to move amounts earmarked for
other uses or collect more taxes, the Village would not
suffer a “loss” under the policy because it would still only
be paying an amount offset by a benefit it had already
received—either having the use of extra tax money or
having the ability to collect fewer taxes. See Level 3, 272
F.3d at 911. Were the rule otherwise, Franklin Park could
avoid its pension fund obligations entirely by levying
no taxes and making no contributions. It would be absurd
to think that in such a situation, the effect of a court finally
requiring the Village to make the contributions would be
a covered “loss” that St. Paul was required to cover.
Since we agree with the district court’s resolution on the
duty to defend, we need not address Franklin Park’s
arguments regarding its Rule 59(e) motion or its request
for sanctions under Illinois law. Accordingly, the judg-
ment of the district court is AFFIRMED.
USCA-02-C-0072—4-23-08