Illinois School District Agenc v. Pacific Insurance Company Limi ( 2009 )

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 08-1776 & 08-2193
ILLINOIS S CHOOL D ISTRICT A GENCY,
an intergovernmental cooperative,
Plaintiff-Appellant,
v.
P ACIFIC INSURANCE C OMPANY L IMITED,
a Connecticut corporation,
Defendant-Appellee.
Appeals from the United States District Court
for the Central District of Illinois.
No. 3:02-cv-03173-JES-CHE—Jeanne E. Scott, Judge.
A RGUED F EBRUARY 11, 2009—D ECIDED JUNE 29, 2009
Before B AUER, R IPPLE and W OOD , Circuit Judges.
R IPPLE, Circuit Judge. The Illinois School District Agency
(“Agency”) brought this action against Pacific Insurance
Company, Ltd. (“Pacific”), alleging that Pacific had
breached its insurance contract with Agency. The district
court granted partial summary judgment to Agency and
partial summary judgment to Pacific. The court then held
2 Nos. 08-1776 & 08-2193
a bench trial on the remaining issues and entered judg-
ment in favor of Agency in the amount of $98,638.66.
Agency appealed the court’s partial grant of summary
judgment to Pacific.
On that first appeal, we vacated the partial grant of
summary judgment to Pacific and remanded the case to
the district court for trial on Agency’s newly revived
claim. See Ill. Sch. Dist. Agency v. Pac. Ins. Co., Ltd., 471
F.3d 714 (7th Cir. 2006). On remand, the district court
concluded that Pacific was liable for damages on that
claim. The court went on, however, to issue a series of post-
trial rulings, which resulted in no recovery by Agency
on the new claim and revoked the $98,638.66 award to
Agency from the first trial.
Agency then filed this appeal. For the reasons set forth
in this opinion, we reverse the judgment of the district
court and remand the case for further proceedings.
I
BACKGROUND
A.
Agency is a cooperative that was formed by school
districts in Illinois to provide insurance for those dis-
tricts. In 1994, East Moline School District, one of Agency’s
members, was sued by a student and his family after
the student brought mercury home from school. East
Moline had a general liability insurance policy issued by
Agency and therefore filed a claim under that policy for
Nos. 08-1776 & 08-2193 3
coverage of its costs and attorney’s fees in defending
the mercury lawsuit. Agency’s third-party administrator,
the Martin Boyer Company, determined that the policy
covered East Moline’s claim. Agency therefore began
paying for East Moline’s defense and continued to do
so for the next two years. In 1996, Agency retained a
new third-party administrator. The new administrator
determined that East Moline’s claim actually was not
covered by the general liability policy. Based on that
determination, Agency stopped paying East Moline’s
defense costs.
East Moline ultimately settled the mercury suit. It then
sued Agency to recover the defense costs it had incurred
after Agency stopped paying. In that suit, East Moline
advanced three claims: 1) that Agency’s refusal to pay
the claim violated Section 155 of the Illinois Insurance
Code, which requires insurers to act in good faith (the
“Section 155 claim”); 2) that Agency had waived its right
to assert a defense under the general liability policy (the
“waiver claim”); and 3) that Agency was estopped from
denying that it was obliged to pay for East Moline’s
defense (the “estoppel claim”). Agency prevailed on all
of the claims.
B.
Agency then filed an action in Illinois state court
against Martin Boyer, its former third-party administrator.
In that action, Agency advanced a number of claims
related to Boyer’s determination that the general liability
policy required Agency to pay East Moline’s costs in
defending the mercury lawsuit.
4 Nos. 08-1776 & 08-2193
Agency had an “errors and omissions” (“E&O”) insur-
ance policy issued by Pacific. Agency filed a claim under
this E&O policy for reimbursement of the costs and attor-
ney’s fees it had incurred in defending the suit for
defense costs by East Moline. Pacific denied Agency’s
claim. Agency then brought this action in the United States
District Court for the Central District of Illinois; it
sought reimbursement for its costs in defending the
East Moline suit as well as for its costs and fees in its
suit against Martin Boyer. After discovery, Agency and
Pacific each filed a motion for summary judgment. The
district court granted partial summary judgment to
Agency; it concluded that the E&O policy required
Pacific to reimburse Agency for its expenses in defending
against East Moline’s Section 155 claim. The court con-
cluded, however, that the insurance policy did not cover
East Moline’s waiver and estoppel claims, and it granted
summary judgment for Pacific on those claims. With
Agency’s consent, the district court granted summary
judgment in favor of Pacific on the claims related to
the Martin Boyer lawsuit.
The district court then held a bench trial to determine
Agency’s damages on the Section 155 claim. The court
found that Agency spent $98,638.66 defending against
that claim. The court entered judgment against Pacific
in that amount.
C.
Agency then filed its first appeal to this court. In that
appeal, Agency sought review of the district court’s grant
Nos. 08-1776 & 08-2193 5
of summary judgment against it on the estoppel claim.
Pacific did not file any appeal. On Agency’s appeal, we
reversed the grant of summary judgment for Pacific on
the estoppel claim. See Ill. Sch. Dist. Agency v. Pac. Ins. Co.,
Ltd., 471 F.3d 714 (7th Cir. 2006). We noted that, under
Illinois law, there were two kinds of estoppel that East
Moline could have raised against Agency: equitable
estoppel and contractual estoppel. We interpreted the
E&O policy to require Pacific to reimburse Agency for
its costs in defending against an equitable estoppel
claim but not against a contractual estoppel claim. Because
it was unclear from the record whether East Moline’s
estoppel claim had been equitable or contractual, we
vacated the grant of summary judgment on that claim
and remanded the case to the district court for further
proceedings.
On remand, the district court held a second bench trial
to determine the nature of East Moline’s estoppel claim.
The court concluded that East Moline had raised both
equitable and contractual estoppel claims and that, accord-
ing to our decision on Agency’s first appeal, Agency
was entitled to reimbursement of the funds it had spent
defending against the equitable estoppel claim. The
court did not make a finding as to the amount of
damages at that time.
Meanwhile, Agency’s suit against Martin Boyer was
proceeding in state court. That suit ended with a judg-
ment in Agency’s favor in the amount of $564,000 plus
interest. In late 2007—after the district court had ruled
against Pacific on the estoppel claim in Agency’s suit, but
6 Nos. 08-1776 & 08-2193
before the district court had determined damages—Martin
Boyer paid Agency $756,480 to satisfy the judgment.
Pacific then filed a motion for summary judgment.
Pacific argued that the judgment recovered by Agency
from Martin Boyer fully compensated Agency for its
costs in defending the East Moline suit. In its view,
because both the Martin Boyer suit and the Pacific suit
sought damages for the same loss—i.e., Agency’s costs
and fees in defending the East Moline suit—Agency now
had been made whole and therefore could not prove
any damages in its suit against Pacific. Because
damages are an essential element of a claim for breach
of contract, Pacific argued that it was entitled to sum-
mary judgment.
The district court agreed that the Martin Boyer judg-
ment fully compensated Agency for the costs and fees
it had incurred in defending against East Moline’s
claims and that Agency therefore could not prove any
damages in its suit against Pacific. Accordingly, it
granted Pacific’s motion for summary judgment. Agency
filed a notice of appeal on March 19, 2008.
On April 10, 2008, the district court entered a “Second
Amended Judgment” that reiterated the $98,638.66
award to Agency on the Section 155 claim and awarded
$1,931.63 in costs to Pacific on the estoppel claim. Pacific
then filed a Rule 60 motion to “correct” the Second
Amended Judgment, in which it argued that the award
to Agency on the Section 155 claim should have been
omitted from that judgment because “[t]he November 1,
2004 judgment had been previously vacated/superceded
Nos. 08-1776 & 08-2193 7
by the Seventh Circuit Court of Appeals and this court’s
opinion [on February 19, 2008] granting summary judg-
ment.” R.149 at 2. Without waiting for Agency’s response,
the court granted the motion and issued an “Amended
Judgment” on April 24, 2008. That judgment granted
summary judgment only to Pacific; it omitted any
mention of summary judgment in Agency’s favor on the
Section 155 claim, and it also omitted mention of the
$98,638.66 award to Agency. Agency appealed from
that judgment as well; Agency’s two appeals have been
consolidated.
II
DISCUSSION
We review de novo the district court’s grant of summary
judgment. Grieveson v. Anderson, 538 F.3d 763, 767 (7th
Cir. 2008). “As a federal court sitting in diversity, we
apply state substantive law and federal procedural law.”
Camp v. TNT Logistics Corp., 553 F.3d 502, 505 (7th Cir.
2009) (citation omitted). The parties agree that the ap-
plicable state law in this case is the law of the State of
Illinois.
Agency raises two issues in this consolidated appeal.
First, it submits that the district court erred in granting
summary judgment to Pacific on the estoppel claim.
Second, it argues that the district court erred in omitting
the $98,638.66 award on the Section 155 claim from its
final order of judgment in the case. We shall consider
these issues.
8 Nos. 08-1776 & 08-2193
A. Agency’s Estoppel Claim
Agency first challenges the district court’s grant of
summary judgment for Pacific on the estoppel claim.
Agency submits that its collection of the judgment from
Martin Boyer did not preclude a recovery against Pacific.
Pacific, on the other hand, submits that the grant of
summary judgment was proper because the Martin
Boyer recovery fully compensated Agency for the losses
it seeks to recover in this case.
In Illinois, “[i]t is well settled that an injured plaintiff
may receive only one full compensation for his or her
injuries.” Thornton v. Garcini, 888 N.E.2d 1217, 1223 (Ill.
App. Ct. 2008) (citation omitted). In short, a plaintiff
is not entitled to recover twice for the same injury. See
Eberle v. Brenner, 505 N.E.2d 691, 693 (Ill. App. Ct. 1987)
(“An injured person is entitled to one full compensation
for his injuries, and a double recovery for the same
injury is against public policy.” (citation omitted)). To
prevent double recovery by plaintiffs, defendants are
entitled to a reduction in damages—sometimes called a
“setoff”—to offset any amounts that the plaintiff already
has collected from other sources in compensation for
the same injury. See id.The parties do not dispute this basic principle, but they
disagree over its application to this case. Agency submits
that the rule against double recovery does not apply here
because its recovery from Martin Boyer compensated it
for “injuries of a different nature than those Agency
incurred as a result of Pacific’s conduct.” Appellant’s
Br. 17. Pacific, on the other hand, contends that the
Nos. 08-1776 & 08-2193 9
Martin Boyer recovery includes compensation for the
same injury for which Agency seeks to recover in this
action.
The determination of whether two awards compensate
the same injury “is a matter within the sound discretion of
the trial court.” Thornton, 888 N.E.2d at 1223. The district
court concluded that the Martin Boyer judgment compen-
sated Agency for the same injury it alleged in its action
against Pacific. See Ill. Sch. Dist. Agency v. Pac. Ins. Co.,
Ltd., No. 02-3173, 2008 WL 474359, at *2 (C.D. Ill. Feb. 19,
2008). We cannot conclude that the district court abused
its discretion in reaching this conclusion; in fact, Agency
concedes in its reply brief that it sought compensation
from Martin Boyer for “fees and costs to defend the East
Moline Action.” Reply Br. 2. These are the same fees and
costs it seeks to collect from Pacific in this action. Agency
points out that it also advanced several other claims
against Martin Boyer, and that “because the jury’s
verdict in the Martin Boyer Action was a general verdict[,]
there is no way to determine how much of the $564,000
awarded to Agency the jury intended to compensate
Agency for any one of the four categories of damages
Agency alleged.” Id. at 3. This situation does not preclude
application of the rule against double recovery, however;
it simply means that, on remand, the district court
will have to make a finding as to how much of the
$564,000 award should be attributed to Agency’s costs in
defending the relevant claims in the East Moline action. At
that time, Agency will be able to present evidence to
support its argument that some or all of that judgment
10 Nos. 08-1776 & 08-2193
should be apportioned to its other claims against Martin
Boyer.1
Agency also takes issue with the district court’s refusal,
in applying the setoff, to take into account the costs and
attorney’s fees that Agency incurred in prosecuting its
action against Martin Boyer. In its view, any double
recovery should not be measured by its gross recovery
from Martin Boyer but rather by its net recovery after
subtracting its costs and attorney’s fees in that action. The
district court rejected Agency’s argument and declined to
subtract Agency’s fees and costs from its recovery. The
court noted that “[n]o contractual provision and no
statute authorized the Agency to recover its attorney
fees from Pacific for bringing an action against Martin
Boyer.” Ill. Sch. Dist. Agency, 2008 WL 474359, at *2. Thus,
the court concluded that, “[u]nder Illinois law, the Agency
is responsible for the costs that it incurred in the two
lawsuits.” Id. The court also based its decision on the
fact that Agency had consented to summary judgment
1
Agency contends that the burden should fall on Pacific “to
establish that Agency is attempting to recover more than one
recovery for the specific losses it has alleged against Pacific.”
Reply Br. 3. The Supreme Court of Illinois has held, however,
“that where a plaintiff recovers for several injuries in a
previous lawsuit and fails to apportion damages accordingly,”
the burden shifts to the plaintiff to prove that some or all of
the earlier judgment is not subject to setoff. Pasquale v.
Speed Prods. Eng’g, 654 N.E.2d 1365, 1382 (Ill. 1995) (citing
Patton v. Carbondale Clinic, S.C., 641 N.E.2d 427, 433 (Ill. 1994)).
Nos. 08-1776 & 08-2193 11
on its earlier claim against Pacific for costs and fees
incurred in the prosecution of the Martin Boyer suit.
Having already made that concession, the court held,
“Agency cannot now attempt to impose those costs on
Pacific.” Id. at 4.
Agency submits that the district court erred when it
failed to take its costs and attorney’s fees into account
when considering whether a judgment against Pacific
would result in a double recovery. We agree.
Although there is very little case law directly on point,
we believe that the principles underlying the law of
remedies militate in favor of Agency’s position. “The
purpose of compensatory damages is to make the
plaintiff whole.” Douglass v. Hustler Magazine, Inc., 769
F.2d 1128, 1146 (7th Cir. 1985). The law aims to put an
injured plaintiff in the same financial position that it
would have been in if the defendant had not breached
its duty. In this case, Pacific had a duty to cover
Agency’s costs in defending the suit filed against it by
East Moline. If Pacific had performed that duty, then
Agency’s successful defense of that suit would have
resulted in no out-of-pocket cost to Agency in defending
against East Moline’s section 155 and equitable estoppel
claims. Agency will be made whole for Pacific’s breach,
then, when it is compensated fully for its expenditures
in defending those claims. In short, at the end of the
day, Agency will be made whole when its resources are
the same as they would have been if Pacific had not
breached.
If Agency had never sued Martin Boyer, the extent of
Pacific’s liability would have been clear: Pacific would
12 Nos. 08-1776 & 08-2193
have been liable for every penny that Agency spent
defending against the covered claims in the East Moline
suit. The same would have been true if Agency had
sued Martin Boyer and lost. The make-whole principle
and the rule against double recovery both focus on the
plaintiff’s position, not the defendant’s. From Agency’s
perspective, the funds it recovered from Martin Boyer
offset the losses it suffered in defending the East Moline
suit only to the extent that those funds exceed the cost of
obtaining the recovery.
Although, as we noted earlier, there is little case law
directly on point, the United States District Court for
the Northern District of Illinois has reached the same
conclusion in an analogous case. In Matsushita Electric
Corp. of America v. The Home Indemnity Co., 907 F. Supp.
1193 (N.D. Ill. 1995), plaintiff Matsushita brought an
action against Home, its insurance carrier, alleging that
Home had breached an insurance contract by failing to
pay for Matsushita’s defense in a personal injury suit.
Matsushita won on the merits and was awarded money
damages against Home. Home sought a reduction in
damages for amounts that had been paid toward the
defense by other insurers with which Matsushita also
had policies. One of those policies, which was issued by
a company called Tokio Marine, had an unusual
premium structure whereby Matsushita was not required
to pay the premium until the end of the policy term, and
the amount of the premium was determined in part by
the dollar amount of any claims that Tokio Marine had
paid out over the course of the policy term. Home’s
refusal to pay prompted Matsushita to file larger claim
Nos. 08-1776 & 08-2193 13
against the Tokio Marine policy than it otherwise would
have, which had the effect of increasing the policy pre-
mium that Matsushita later was required to pay. The
court held that for purposes of determining an offset in
the judgment against Home, the increase in the Tokio
Marine policy premium should be subtracted from the
amount Matsushita received from Tokio Marine. Home
was entitled to an offset for the net amount that
Matsushita collected from Tokio Marine, not the gross
amount. Otherwise, the court recognized, Matsushita
would not be made whole, because the increase in the
premium was a cost to Matsushita that was caused by
Home’s breach of contract.
The district court in this case distinguished Matsushita by
noting that Home’s breach resulted in a larger portion of
the litigation expenses being paid by Tokio Marine, which
in turn increased the retrospective premium that
Matsushita was required to pay on the Tokio Marine
policy. The court concluded that this fact made
Matsushita inapposite because Pacific’s breach in this
case “did not increase the Agency’s contractual obliga-
tions to any other party.” Ill. Sch. Dist. Agency, 2008 WL
474359, at *3. We cannot accept this distinction. Although
the increase in defense payments from Tokio Marine
increased Matsushita’s premiums, nothing in the
Matsushita opinion indicates that Matsushita was con-
tractually required to ask Tokio Marine for an increase in
defense payments. Matsushita presumably could have
avoided the additional premiums by paying some of
its own litigation costs; instead, it chose to exercise its
right to file a larger claim with Tokio Marine, as it was
14 Nos. 08-1776 & 08-2193
legally entitled to do. Likewise, Agency could have
avoided attorney’s fees and costs by forgoing its right to
sue Martin Boyer; instead, it chose to pursue that action,
as it had the legal right to do. The relevant issue in
Matsushita, as in this case, was not whether the plaintiff
could have avoided incurring costs in its protection of
its rights; rather, the issue was what effect those costs
had on the plaintiff’s net recovery from sources other
than the defendant.
We also cannot accept the district court’s other reasons
for declining to deduct Agency’s fees and costs from the
Martin Boyer recovery. The court was certainly correct
in observing that Illinois law does not authorize Agency
to collect its costs and fees in the Martin Boyer action
from Pacific. Indeed, Agency concedes this point, which
is why it agreed to summary judgment on its claim
against Pacific for those costs. That concession is not,
however, relevant to the question presented here. The
district court had to decide simply whether reducing
Pacific’s liability by Agency’s net recovery in Martin
Boyer, rather than the gross, violated the rule against
double recovery by putting Agency in a better position
than it would have been in if Pacific had not breached
the insurance contract. The answer to that question is no.
The focus of the district court should have been on
what part of the Martin Boyer recovery was fairly attribut-
able to the same damage it now seeks to recover from
Pacific.
Our approach to the rule against double recovery
works no injustice to Pacific. Agency had no obligation to
Nos. 08-1776 & 08-2193 15
sue Martin Boyer. If Agency had not done so—or if it
had done so and lost—then Pacific unquestionably would
have had to bear the full cost of its contractual breach.
Agency’s pursuit of Martin Boyer, therefore, could only
benefit Pacific. If Agency pursued Martin Boyer and lost,
Agency would bear the costs of that suit entirely on its
own; it would have no recourse against Pacific for
those costs. If Agency won—as it did—then Pacific’s
liability for its own breach of contract potentially would
be reduced under the rule against double recovery.
Under no circumstances would Agency’s decision to sue
Martin Boyer cause any harm to Pacific. Consequently, the
district court’s approach actually might redound to the
detriment of defendants in Pacific’s position because it
would provide a powerful disincentive to plaintiffs to
explore additional avenues of recovery.2
Accordingly, we conclude that the district court’s grant
of summary judgment to Pacific must be vacated, and
the case remanded to the district court for a new determi-
nation of damages on the estoppel claim. First, the court
should make a finding as to the amount of damages
2
Nor does this approach run afoul of the “American rule,”
which provides that a prevailing party generally cannot recover
its attorney’s fees from the losing party. That rule is not impli-
cated here, because Agency is not asking Pacific to pay its
attorney’s fees, either in this action or in the Martin Boyer
action. Rather, Agency simply asserts that its costs and fees
in the Martin Boyer suit should be taken into account in the
calculation of how much it actually recovered in that suit.
For the reasons just discussed, we agree.
16 Nos. 08-1776 & 08-2193
Agency suffered as a result of Pacific’s refusal to pay
for Agency’s defense of that claim. Then, the court should
determine whether, and to what extent, Pacific’s net
recovery from Martin Boyer already has compensated
Agency for those damages.3 ,4
B. The Section 155 Claim
Agency also submits that the district court should not
have granted Pacific’s Rule 60 motion to “correct” its April
10, 2008 order by issuing a new order that omitted
the $98,638.66 judgment in Agency’s favor on the
Section 155 claim. We agree with Agency that the district
court should not have vacated that award.
Pacific submitted in its Rule 60 motion that our decision
on Agency’s first appeal “vacated/superceded” the
Section 155 judgment. We cannot accept that submission.
Our decision in the first appeal did not upset that judg-
3
Agency claims that its costs and fees in the Martin Boyer
action actually exceeded the $564,000 it recovered, and that,
therefore, there is no net recovery to be applied as an offset
in this case. This is a question of fact, however, and should
be addressed in the first instance by the district court on
remand.
4
As we have mentioned above, this last step will require the
district court to make a finding as to how much of the Martin
Boyer verdict is attributable to the injury at issue in this
case, and how much is attributable to the other claims that
Pacific asserted against Martin Boyer. See supra note 1 and
accompanying text.
Nos. 08-1776 & 08-2193 17
ment; indeed, Pacific did not file an appeal or cross-
appeal challenging it. As far back as Morley Co. v.
Maryland Casualty Co., 300 U.S. 185, 191 (1937), the
Supreme Court has made it clear that an appellee who
has not filed a cross-appeal may only defend the judg-
ment being challenged by the appellant. The appellee
may not, in the absence of a cross-appeal, “attack the
decree with a view either to enlarging his own rights
thereunder or of lessening the rights of his adversary,
whether what he seeks is to correct an error or to sup-
plement the decree with respect to a matter not dealt
with below.” Id. (citation omitted). Neither party chal-
lenged the district court’s entry of judgment in Agency’s
favor on the Section 155 claim; hence, Pacific could not
enlarge its own rights or lessen Pacific’s rights as to that
judgment. Our opinion in the first appeal recognized
this limitation, and we stated explicitly that our decision
on that appeal did not upset the Section 155 judgment:
“Because Pacific has not filed a cross-appeal, the judg-
ment against it and in favor of Agency on the [Section 155]
bad faith claim cannot be reduced due to the Supreme
Court’s admonition in Morley.” Ill. Sch. Dist. Agency,
471 F.3d at 723.
Thus, the district court erred in failing to include the
$98,638.66 award to Agency in its final judgment in this
case. On remand, the district court must reinstate this
award. The court then may consider a motion by Pacific,
if it chooses to make one, to modify this damage award
to avoid double recovery in light of the Martin Boyer
judgment. As we already have explained, any reduction
in the award should take into account only Agency’s
net recovery in the Martin Boyer action.
18 Nos. 08-1776 & 08-2193
Conclusion
For the reasons set forth above, we reverse the judg-
ment of the district court and remand the case for
further proceedings consistent with this opinion.
R EVERSED AND R EMANDED WITH INSTRUCTIONS
6-29-09