Market Street Bancshares, Inco v. Federal Insurance Company ( 2020 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 18-3395
MARKET STREET BANCSHARES, INC., parent organization of Peo-
ples National Bank, N.A., a/k/a Peoples National Bank of
McLeansboro,
Plaintiff/Counterclaim Defendant-Appellant,
v.
FEDERAL INSURANCE CO., d/b/a Chubb Group of Insurance
Companies,
Defendant/Counterclaim Plaintiff-Appellee.
____________________
Appeal from the United States District Court for the
Southern District of Illinois.
No. 3:17-cv-36-NJR-SCW — Nancy J. Rosenstengel, Chief Judge.
____________________
ARGUED DECEMBER 10, 2019 — DECIDED JUNE 19, 2020
____________________
Before KANNE, SYKES, and BARRETT, Circuit Judges.
KANNE, Circuit Judge. This is an insurance-coverage dis-
pute between a bank and its insurer. In 2014, the two entered
an agreement: in exchange for an insurance premium, the in-
surer, Federal Insurance Company, would defend and indem-
nify the bank, Peoples National Bank, against “claims” made
2 No. 18-3395
by third parties during the policy period, which ran from
April 15, 2014, to April 15, 2017. When they entered this agree-
ment, the bank had been embroiled in an ongoing lawsuit for
about a decade. During the damages phase of that lawsuit, in
2016, the plaintiffs in the case argued that the bank owed cer-
tain damages, and the bank called upon Federal Insurance to
defend against the argument and to cover the bank’s corre-
sponding losses. Federal Insurance refused, explaining in part
that the damages argument was not a “claim” under the pol-
icy.
The bank then sued Federal Insurance in Illinois state
court, seeking to recover losses (including defense costs) from
the underlying damages argument. Federal Insurance re-
moved the action to federal court and filed a counterclaim for
declaratory relief. Both parties moved for summary judgment
on the counterclaim, and the district court granted judgment
in the insurer’s favor.
We affirm because the damages argument in the underly-
ing lawsuit is not a “claim” under the parties’ insurance pol-
icy.
I. BACKGROUND
Peoples National Bank1 became entrenched in litigation
after a business deal collapsed, triggering obligations that the
bank failed to fulfill. The business deal had to do with a cor-
poration that Terry and Robert Newman formed in 1996 to
operate various Taco John’s restaurant franchises. The New-
mans obtained financing for their operations through
1Market Street Bancshares, Inc. wholly owns Peoples National Bank,
N.A. For simplicity’s sake, we refer to both the parent company and its
subsidiary as “Peoples” or “the bank.”
No. 18-3395 3
Peoples, and in 1998 the Newmans entered a lease agreement
for a property in Anna, Illinois, where they would operate one
of the restaurants.
In 2001, the Newmans agreed to sell their corporation to
Amigos Food Service, LLC. The sale involved various agree-
ments by the Newmans, Amigos, and Peoples. One agree-
ment provided that Amigos would secure a $150,000 letter of
credit naming the Newmans and Peoples as beneficiaries. An-
other agreement—between the Newmans and Peoples—pro-
vided that $81,000 of the letter-of-credit proceeds would be
retained to assure rent payments on the property in Anna, Il-
linois.
Ultimately, Amigos defaulted on its obligations. Rent on
the Anna property went unpaid. And the landlords de-
manded the unpaid rent from the Newmans, who turned to
Peoples for the $81,000 letter-of-credit proceeds set aside for
this purpose. But the money wasn’t available. Peoples had al-
located it to satisfy other debts Amigos had accumulated. As
a result, the Newmans failed to pay the overdue rent, the
landlords sued the Newmans for it in Illinois state court, and
the Newmans filed a third-party complaint against Peoples in
2003. The Newmans alleged that Peoples had breached its
contract with them by failing to reserve $81,000 of the letter-
of-credit proceeds to satisfy the Newmans’ lease obligations.
The following year, the Newmans added counts for conver-
sion and breach of fiduciary duty.
About nine years passed before the Illinois trial court en-
tered judgment on the Newmans’ contract claim; the court de-
termined that Peoples was liable for breaching its agreement
concerning the letter-of-credit proceeds. About two years
4 No. 18-3395
after that, in 2015, the court granted summary judgment to the
Newmans on their other two counts.
Between those judgments, in 2014, Peoples entered an
agreement with Federal Insurance for professional liability in-
surance. The agreement was for a claims-made policy under
which Federal Insurance would defend and indemnify Peo-
ples against “Loss on account of any Claim first made against
[Peoples] during the Policy Period.” The policy period
spanned three years, April 15, 2014, to April 15, 2017.
In 2016, the Newmans’ case went to a bench trial on dam-
ages for the conversion and breach-of-fiduciary-duty counts.
The Newmans argued for and presented evidence of damages
based on the so-called “Pledge Agreement”—one of the
agreements entered in connection with the Newmans’ sale of
the corporation. Basically, the Newmans argued that the bank
was required, under the Pledge Agreement, to timely notify
the Newmans of Amigos’s default and that the bank’s failure
to do so caused certain damages. This was problematic be-
cause the Newmans hadn’t addressed the Pledge Agreement
in their complaint, or otherwise, during the liability phase of
litigation. Nevertheless, the trial court permitted the damages
evidence over the bank’s objection. The Newmans later sub-
mitted a written closing argument for the Pledge Agreement
damages, and the trial court awarded those damages along-
side others.
While that damages issue was pending, Peoples gave Fed-
eral Insurance information about the Newmans’ lawsuit and
contended that the Newmans’ damages argument based on
the Pledge Agreement was a “claim” made during the policy
period, triggering Federal Insurance’s duty to defend and in-
demnify Peoples against it.
No. 18-3395 5
Federal Insurance disagreed. It explained that the dam-
ages argument was not a “claim” under the policy; and even
if it were, it fell outside the covered period, because it would
have been considered “first made” when the Newmans com-
menced the lawsuit in 2003, well outside the policy period.
Seeking to recover its loss from the damages argument,
Peoples sued Federal Insurance in Illinois state court. Federal
Insurance removed the action to the federal district court,
filed a counterclaim for declaratory relief, and moved for
summary judgment, which the district court granted.
Before Peoples appealed that decision to us, the Appellate
Court of Illinois vacated the underlying damages award in the
Newmans’ case. Stevens v. Newman, 2019 IL App (5th)
170134-U. The state appellate court concluded that the award
stemming from the Pledge Agreement could not stand on the
facts alleged and proved during the lawsuit’s liability phase.
So, the court remanded for a new damages trial.
At that point, turning back to the federal indemnity law-
suit, Peoples appealed the summary-judgment decision in
Federal Insurance’s favor. The bank maintains that the New-
mans’ damages assertion based on the Pledge Agreement is a
“claim,” under the insurance policy, that gave rise to Federal
Insurance’s duty to defend and indemnify. Because the Ap-
pellate Court of Illinois vacated the underlying damages
award, Peoples no longer seeks to recover loss from the ini-
tially awarded damages, themselves; Peoples seeks only to re-
cover loss from defending against the Newmans’ argument.
II. ANALYSIS
With the relevant facts undisputed, the parties’ disagree-
ment boils down to whether Federal Insurance had a duty,
6 No. 18-3395
under the insurance policy, to defend and indemnify Peoples
against the Newmans’ damages argument based on the
Pledge Agreement. This is a question of law, which we review
de novo. See Private Bank & Trust Co. v. Progressive Cas. Ins. Co.,
409 F.3d 814, 816 (7th Cir. 2005). The parties agree that Illinois
law governs. 2
The insurance policy provides that Federal Insurance has
a “duty to defend any Claim covered by” the policy and must
pay Peoples for “loss,” including “defense costs,” on account
of a covered “claim.” Illinois law recognizes that the insurer’s
duty to defend arises when “the facts alleged in the underly-
ing complaint fall within, or potentially within, the policy’s
coverage provisions.” Crum & Forster Managers Corp. v. Reso-
lution Trust Corp., 620 N.E.2d 1073, 1079 (Ill. 1993). Stated dif-
ferently, when “the insurer has no potential obligation to in-
demnify it has no duty to defend.” Zurich Ins. Co. v. Raymark
Indus., Inc., 514 N.E.2d 150, 163 (Ill. 1987).
2 When this diversity action was removed to the federal district court,
the amount in controversy included the more than $16 million judgment
in the underlying case. See 28 U.S.C. §§ 1441, 1446. Although that judg-
ment has since been vacated, the diminution in possible recovery does not
revoke federal jurisdiction, because “jurisdiction is determined as of the
instant of removal.” In re Shell Oil Co., 970 F.2d 355, 356 (7th Cir. 1992) (per
curiam); see Back Doctors Ltd. v. Metro. Prop. & Cas. Ins. Co., 637 F.3d 827,
830 (7th Cir. 2011). The jurisdictional amount-in-controversy requirement
was satisfied at that critical time (as was the diversity requirement), so
jurisdiction is secure regardless whether the amount in controversy re-
mains above the $75,000 statutory threshold. See 28 U.S.C. § 1332; St. Paul
Mercury Indem. Co. v. Red Cab Co., 303 U.S. 283, 293 (1938) (“[E]vents oc-
curring subsequent to removal which reduce the amount recoverable …
do not oust the district court’s jurisdiction once it has attached.”).
No. 18-3395 7
So, the critical question is: On its face, did the Newmans’
damages assertion—advanced about thirteen years into the
lawsuit—potentially bring it within the policy’s coverage?
This inquiry takes us to the policy’s terms, which we compare
to the Newmans’ damages argument. Cf. Outboard Marine
Corp. v. Liberty Mut. Ins. Co., 607 N.E.2d 1204, 1220 (Ill. 1992).
Under Illinois law, we give the terms of an unambiguous
insurance policy their plain and ordinary meaning, reading
the policy as a whole and considering “the type of insurance
purchased, the nature of the risks involved, and the overall
purpose of the contract.” State Farm Mut. Auto. Ins. Co. v. Vil-
licana, 692 N.E.2d 1196, 1199 (Ill. 1998); see U.S. Fire Ins. Co. v.
Schnackenberg, 429 N.E.2d 1203, 1205 (Ill. 1981). If a provision
is susceptible to only one reasonable reading, no ambiguity
exists, and it must be applied as written. Bruder v. Country
Mut. Ins. Co., 620 N.E.2d 355, 362–63 (Ill. 1993).
The type of insurance purchased here is a claims-made,
professional-liability policy. It provides that Federal Insur-
ance “shall pay, on behalf of [Peoples], Loss on account of any
Claim first made against [Peoples] during the Policy Period
or, if exercised, during the Extended Reporting Period, for a
Wrongful Act while performing Professional Services, includ-
ing failure to perform Professional Services.” In a claims-
made policy like this one, the pertinent risk is that an injured
third party will assert a claim against the insured during the
policy period. See Cent. Ill. Pub. Serv. Co. v. Am. Empire Surplus
Lines Ins. Co., 642 N.E.2d 723, 726 (Ill. App. Ct. 1994). This con-
trasts with the risk involved in an occurrence policy—the risk
that an injurious act or omission will occur during the policy
period. See id.
8 No. 18-3395
The difference between these risks highlights the purpose
of a claims-made policy: to “allow the insurance company to
easily identify its risk,” which in turn may offer insureds
more-available and less-expensive policies. Cont’l Cas. Co. v.
Coregis Ins. Co., 738 N.E.2d 509, 518 (Ill. App. Ct. 2000) (quot-
ing Gen. Ins. Co. of Am. v. Robert B. McManus, Inc., 650 N.E.2d
1080, 1083 (Ill. App. Ct. 1995)); see Cent. Ill. Pub. Serv. Co., 642
N.E.2d at 727 (quoting Pac. Emp’rs Ins. Co. v. Superior Court,
270 Cal. Rptr. 779, 785 (Cal. Ct. App. 1990)). Take an occur-
rence policy: because the policy protects against the risk of an
injurious act or omission occurring during the covered pe-
riod, the insurer’s risk exposure extends beyond the policy’s
expiration; claims for covered occurrences may be asserted af-
ter the policy period ends. Now look at a claims-made policy:
because the policy protects against the risk of an injured party
bringing a claim against the insured during the covered pe-
riod, the insurer’s risk exposure is clearer; claims brought out-
side the policy period are not covered.
With these considerations in mind, we evaluate whether
the Newmans’ damages argument was a “claim” that poten-
tially fell within the policy’s coverage. If it was not a “claim”
at all, then Federal Insurance had no duty to defend against
it. Cf. U.S. Fid. & Guar. Co. v. Wilkin Insulation Co., 578 N.E.2d
926, 932 (Ill. 1991) (explaining that, under occurrence-based
policy, insurer would have no duty to defend if the alleged
loss did not result from an “occurrence,” and examining the
policy definition of “occurrence” to determine whether a duty
to defend arose).
The policy defines “Claim” as the following:
a. a written demand for monetary or non-monetary relief,
including injunctive relief;
No. 18-3395 9
b. a civil proceeding commenced by the service of a com-
plaint or similar pleading;
c. an arbitration proceeding commenced by the submis-
sion of a statement of claim or similar document; or
d. a criminal proceeding commenced by the return of an
indictment,
by or on behalf of a Customer or by any party, against [Peo-
ples] for a Wrongful Act, including any appeal therefrom.
Except as may otherwise be provided in … [other parts of
the policy], a Claim will be deemed to have first been made
when such Claim is commenced as set forth in this defini-
tion (or, in the case of a written demand for monetary or
non-monetary relief, when such demand is first received by
[Peoples]).
Peoples contends that the Newmans’ written closing argu-
ment in 2016 for damages based on the Pledge Agreement was
“a written demand for monetary or non-monetary relief”
made during the policy period, giving rise to Federal Insur-
ance’s duty to defend.
Peoples does not contest that the Newmans’ 2003 com-
plaint, which commenced the underlying lawsuit, initiated a
“claim” under the second part of the definition—“a civil pro-
ceeding commenced by the service of a complaint … includ-
ing any appeal therefrom.” Nor can Peoples contest that the
Newmans’ closing argument in the damages phase of that
lawsuit was part of the civil action begun in 2003. Instead,
Peoples maintains that because the Newmans’ damages argu-
ment was not based on the facts and legal theories presented
in the Newmans’ operative complaint, the damages argument
was a “claim” in itself.
We conclude that under the policy, a “claim” taking the
form of “a civil proceeding commenced by the service of a
10 No. 18-3395
complaint” spans the entire civil action, not just the legal the-
ories and factual allegations in the complaint that commenced
the action. And because the Newmans’ damages argument
was part of the civil action begun by the 2003 complaint, the
damages argument is not itself a “claim.” We reach this con-
clusion based on the plain meaning of the policy’s terms, read
in context and in light of the policy’s purpose.
The policy defines “claim,” in critical part, as “a written
demand for monetary or non-monetary relief, including in-
junctive relief” or “a civil proceeding commenced by the ser-
vice of a complaint or similar pleading,” including “any ap-
peal therefrom.” Even though the conjunction “or” appears
between the definition’s third and fourth listed elements—not
the first and the second—that conjunction connects each of
the list’s members. See, e.g., Encino Motorcars, LLC v. Navarro,
138 S. Ct. 1134, 1141–42 (2018) (recognizing that the conjunc-
tion “or” connects each of the terms in the list “automobiles,
trucks, or farm implements”).
The ordinary meaning of “a civil proceeding” in this con-
text is the whole civil action brought by the third party against
the insured. And for each part of the policy definition to have
meaning, “a civil proceeding commenced by the service of a
complaint or similar pleading” must be excluded from “a
written demand for monetary or non-monetary relief.”
Start with the term “civil proceeding commenced by the
service of a complaint or similar pleading.” Although “pro-
ceeding” in other contexts could mean something narrower
than an entire civil action—a judicial hearing, for example—
the surrounding text and underlying purpose of the claims-
made policy dictate the broader use of the term here. For one
thing, the definition states that the proceeding commences by
No. 18-3395 11
the service of a complaint or similar pleading; and under rules
of civil procedure, a complaint commences an action as a
whole, not just part of one. See 735 ILCS 5/2-201(a) (“Every
action, unless otherwise expressly provided by statute, shall
be commenced by the filing of a complaint.”); Fed. R. Civ. P. 3
(“A civil action is commenced by filing a complaint with the
court.”).3 Reinforcing this broad meaning, the definition
states that “proceeding” includes “any appeal therefrom.”
The purpose of a claims-made policy also reinforces this
meaning. Considering that a claims-made policy is geared to-
ward easy identification of the insurer’s risk exposure, read-
ing a “civil proceeding” as spanning less than the complete
civil action opens the door to a single action between two par-
ties encompassing multiple “claims,” which would defeat the
purpose of making the insurer’s risk exposure easy to iden-
tify.
So, the term “civil proceeding” spans the entire civil action
begun by a third-party complaint against the insured. This
means that the Newmans’ underlying lawsuit against Peo-
ples—including the damages phase—comprised a claim com-
menced by the 2003 complaint.
The bank points to the Appellate Court of Illinois’s deci-
sion vacating the damages award as confirmation that the
Newmans’ Pledge Agreement damages argument constituted
a new “claim.” It is true that the Newmans’ damages argu-
ment went beyond the scope of the legal theories and facts
advanced in the operative complaint, resulting in a damages
3 The policy’s indication that “service” rather than “filing” com-
mences the proceeding does not change our analysis. A complaint that is
filed and served commences an action as a whole.
12 No. 18-3395
award that didn’t comport with due process. See Stevens, 2019
IL App (5th) 170134-U, ¶¶ 47–56. But the question here is not
where the causes of action in a lawsuit begin and end; it is
whether the damages argument is a “claim” under the insur-
ance policy. Put differently, the policy’s terms—rather than
the plaintiffs’ causes of action—dictate the scope of a “claim.”
Returning to the policy’s terms, for the Newmans’ dam-
ages argument to be a “claim” commenced when Peoples re-
ceived the Newmans’ written closing argument, the policy
term “a written demand for monetary or non-monetary relief,
including injunctive relief” must include assertions made
within another “claim”: a civil proceeding commenced by the
service of a complaint. This cannot be. Under that reading, the
policy allows claims incepted within a claim, which not only
contravenes the policy’s text, read altogether, but also sub-
verts the policy’s purpose.
The bank’s reading contravenes the policy’s text by ren-
dering the second part of the “claim” definition superfluous.
Under the reading the bank urges, “a written demand for
monetary or non-monetary relief, including injunctive relief”
would engulf “a civil proceeding commenced by the service
of a complaint or similar pleading”—because a served com-
plaint would always be “a written demand for monetary or
non-monetary relief.” In other words, the “civil proceeding”
part of the definition would be meaningless and superfluous.
Yet, Illinois law commands that “[a]ll the provisions of the in-
surance contract, rather than an isolated part, should be read
together to interpret it,” Schnackenberg, 429 N.E.2d at 1205,
and “meaning and effect must be given to every part of the
contract including all its terms and provisions, so no part is
rendered meaningless or surplusage unless absolutely
No. 18-3395 13
necessary,” Coles-Moultrie Elec. Co-op. v. City of Sullivan, 709
N.E.2d 249, 253 (Ill. App. Ct. 1999) (citing Martindell v. Lake
Shore Nat’l Bank, 154 N.E.2d 683, 689 (Ill. 1958)).
Here, the meaninglessness and surplusage of “a civil pro-
ceeding commenced by the service of a complaint or similar
pleading” is not absolutely necessary. Rather, this term com-
fortably holds independent meaning by excluding all other
would-be claims: if a complaint commences a civil proceeding
against the insured, no other claim may form within that
claim. The same exclusivity applies to the first part of the def-
inition: if a written demand for monetary or non-monetary re-
lief commences a claim, then no other claim may form within
it. Cf. FCC v. Pacifica Found., 438 U.S. 726, 739–40 (1978); People
v. Phagan, 130 N.E.3d 396, 416 (Ill. App. Ct. 2019) (recognizing
that ordinary principles of grammar suggest that, when items
are separated by a semicolon, this ordinarily means the items
should be read “disjunctively, that is, only one could apply at
a time” (citing People v. Jackson, 105 N.E.3d 996, 1012 (Ill. App.
Ct. 2018)).
The purpose underlying the claims-made policy likewise
indicates that each type of “claim” excludes the others. Just as
giving “proceeding” a narrow meaning would muddy the in-
surer’s risk exposure, so too would the scenario of overlap-
ping claims. If an argument in the damages phase of a lawsuit
could be both part of a “claim” begun by a complaint and it-
self a “claim,” the insurer’s risk exposure would be signifi-
cantly more difficult to calculate. For example, the insurer
could not know that all of a civil-proceeding “claim” begun
before the covered policy period would fall outside the policy
coverage; new “claims” could continue to turn up years after
the filing of the initial complaint. Thus, the bank’s reading
14 No. 18-3395
conflicts with the policy’s purpose as well as the terms’ plain
meaning, rendering the bank’s reading unreasonable.
We therefore enforce the only reasonable reading of
“claim” as defined by the policy: when an assertion is made
within a civil-proceeding “claim,” that assertion cannot itself
be a “claim.” The Newmans’ Pledge Agreement argument is
such an assertion. It was made within the “claim” commenced
in 2003 and therefore is not itself a “claim,” making it clearly
fall outside the policy’s coverage. For this reason, Federal In-
surance had no duty to defend against the damages argu-
ment. And with “no potential obligation to indemnify” Peo-
ples against the argument, Federal Insurance is entitled to
judgment as a matter of law. Zurich, 514 N.E.2d at 163. The
district court thus properly granted summary judgment to
Federal Insurance.
The parties present alternate arguments supposing the
Pledge Agreement assertion were a “claim.” Because the as-
sertion is not a “claim,” we need not address those arguments.
AFFIRMED.