Pekin Insurance Company v. Precision Dose , 2012 IL App (2d) 110195 ( 2012 )

ILLINOIS OFFICIAL REPORTS
Appellate Court
Pekin Insurance Co. v. Precision Dose, Inc., 2012 IL App (2d) 110195
Appellate Court PEKIN INSURANCE COMPANY, Plaintiff-Appellee, v. PRECISION
Caption DOSE, INC., FRANK DARNELL, JAMES KLEINHEINZ, ROBERT
KOOPMAN, WARREN SWANSON, JAMES ARTHUR, and DAVID
ZOELLNER, as Shareholders of Xactdose, Inc., Defendants-Appellants.
District & No. Second District
Docket No. 2-11-0195
Filed March 16, 2012
Rehearing denied May 31, 2012
Held Summary judgment was properly entered for plaintiff insurer on its
(Note: This syllabus complaint seeking a declaratory judgment that it had no duty to defend its
constitutes no part of insured under a commercial general liability policy in an underlying
the opinion of the court action for breach of fiduciary duty that resulted in economic losses to
but has been prepared plaintiffs, minority shareholders of a company, when defendants, as
by the Reporter of majority shareholders and directors of plaintiffs’ company, formed and
Decisions for the operated another company engaged in the same business, since plaintiff
convenience of the insurer lacked knowledge of true but unpleaded facts indicating that the
reader.)
claims were potentially covered, defendants breached the notice provision
of the policy by failing to timely present the insurer with facts concerning
the conduct at issue, if the amended underlying complaint had alleged
that the new company “assumed operations” of the old company’s
business rather than its factory, the claim might have been within the
advertising injury coverage, and the allegation that the new company
assumed operations of the old company’s factory was not an allegation
of wrongful conduct by defendants.
Decision Under Appeal from the Circuit Court of Winnebago County, No. 06-MR-514;
Review the Hon. Eugene G. Doherty, Judge, presiding.
Judgment Affirmed.
Counsel on Marc C. Gravino, Scott C. Sullivan, and Adam B.E. Lied, all of
Appeal WilliamsMcCarthy LLP, of Rockford, for appellants.
Robert Marc Chemers, Darryl L. Awick, and Richard M. Burgland, all of
Pretzel & Stouffer, Chtrd., of Chicago, for appellee.
Panel JUSTICE BURKE delivered the judgment of the court, with opinion.
Justices McLaren and Birkett concurred in the judgment and opinion.
OPINION
¶1 Pekin Insurance Company issued a commercial general liability (CGL) policy covering
Xactdose, Inc., a packager and distributor of single-dose units of liquid medication. While
serving as directors of Xactdose, Frank Darnell, James Kleinheinz, and Robert Koopman
(collectively, defendants) allegedly formed and operated another company, defendant
Precision Dose, Inc., which engaged in the same type of business. The policy was amended
to name Precision Dose as an insured. Warren Swanson, James Arthur, and David Zoellner
(collectively, plaintiffs) were the minority shareholders of Xactdose. Plaintiffs filed an
amended complaint against defendants, derivatively on behalf of Xactdose, for breach of
fiduciary duty.
¶2 Defendants tendered plaintiffs’ suit to Pekin for defense and indemnity. Pekin denied that
the policy covered any of the claims in the underlying suit, which eventually was dismissed.
Pekin filed a declaratory judgment action in this case, seeking a declaration that it had no
duty to defend. Pekin and defendants filed cross-motions for summary judgment, and Pekin
additionally moved to strike the affidavit of Koopman, the former president of Xactdose and
current president of Precision Dose. Pekin argued that the affidavit contained facts of which
Pekin was unaware when coverage was denied, and therefore the facts were not relevant to
whether the denial of coverage was proper.
¶3 The trial court struck the affidavit and granted Pekin summary judgment, and defendants
appeal. Defendants argue that the trial court erred in striking the affidavit and in determining
that Pekin did not owe defendants a duty to defend the underlying suit. First, we hold that,
even though “a circuit court may, under certain circumstances, look beyond the underlying
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complaint in order to determine an insurer’s duty to defend” (Pekin Insurance Co. v. Wilson,
237 Ill. 2d 446, 459 (2010)), the trial court did not err in striking Koopman’s affidavit on the
ground that Pekin was unaware of the contents of the affidavit, which arguably would have
shown that the claims asserted against defendants were potentially within the coverage of the
insurance policy (cf. Konstant Products, Inc. v. Liberty Mutual Fire Insurance Co., 401 Ill.
App. 3d 83, 87 (2010) (“an insurance carrier may not ignore unpleaded facts within its
knowledge, which it knows to be correct, and which, when taken together with the
complaint’s allegations, indicate that the claim asserted against the putative insured is
potentially within the coverage of the insurance policy” (internal quotation marks and
emphasis omitted)). Second, we hold that the allegations in the amended complaint were not
potentially within the policy’s coverage, and therefore Pekin is entitled to summary
judgment. We affirm.
¶4 FACTS
¶5 A. The Underlying Amended Complaint
¶6 On March 29, 2006, plaintiffs filed a complaint against Precision Dose and defendants.
The four-count complaint asserted claims for shareholder relief and an accounting (see 805
ILCS 5/12.56 (West 2010)), common-law fraud, breach of fiduciary duty, and successor-
corporation liability that resulted in economic losses to plaintiffs. On November 15, 2006,
plaintiffs filed an amended complaint alleging breach of fiduciary duty against defendants.
The amended complaint substituted Xactdose for Precision Dose as a defendant and did not
incorporate the original complaint by reference.
¶7 In their reply brief, defendants suggest that “since [this] is a case involving both an
original complaint and an amended complaint, the duty to defend issue is not necessarily an
‘all or nothing’ proposition.” Acknowledging the possibility that plaintiffs’ amendment of
the underlying complaint might have no bearing on Pekin’s duty to defend, defendants
speculate that perhaps “the original complaint that named Precision Dose triggered a duty
to defend for at least a period of time until the amended complaint was filed,” at which point
the change in the underlying claims might have extinguished Pekin’s duty to defend.
Defendants offer no analysis as to how changing the claims and naming Xactdose and
removing Precision Dose as a defendant in the underlying suit might have affected Pekin’s
duty to defend. In fact, the parties do not specify whether the insureds tendered the defense
to Pekin before plaintiffs amended their complaint.
¶8 The trial court concluded that Pekin owed no duty to defend the original complaint or the
amended complaint. We conclude that defendants have procedurally defaulted any argument
regarding whether Pekin owed a duty to defend the original complaint. See Ill. S. Ct. R.
341(h)(7) (eff. Sept. 1, 2006) (“Points not argued are waived ***.”); see also Foxcroft
Townhome Owners Ass’n v. Hoffman Rosner Corp., 96 Ill. 2d 150, 154 (1983) (where an
amendment is complete in itself and does not refer to or adopt the prior pleading, the earlier
pleading ceases to be part of the record for most purposes, being in effect abandoned and
withdrawn). Accordingly, we need address only the amended complaint, which alleged only
claims of breach of fiduciary duty against defendants and named Xactdose as a defendant.
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¶9 The three-count amended complaint alleged that defendants were majority shareholders
and served as three of the four directors of Xactdose. Plaintiffs were the minority
shareholders, with Arthur serving as the fourth director. Defendants allegedly “formed an
‘alliance’ and were essentially in control of the corporation.” On June 24, 2003, a special
Xactdose shareholders meeting was held to discuss Xactdose’s financial state and its future.
Zoellner was the only shareholder who was not present. At the time of the meeting,
Xactdose’s financial state had been significantly affected by the termination of its contract
with Alpharma Pharmaceuticals, a company in the business of developing, manufacturing,
and marketing generic liquid pharmaceuticals. The shareholders discussed Xactdose’s state
of insolvency, the lack of potential investors and profitable products, and the means by which
Xactdose should “wind down” its business and dissolve. Based on discussions at the
meeting, the shareholders who were present resolved four-to-one to wind up Xactdose’s
business, sell its assets to defendants for $1.4 million, and dissolve Xactdose.
¶ 10 Allegedly unknown to plaintiffs, on April 9, 2003, defendants incorporated Precision
Dose and became its majority shareholders, officers, and directors. The amended complaint
alleged that “Precision Dose began assuming operations of the Xactdose packaging factory”
and immediately began earning a profit by promoting Megestrol, a new generic liquid
medication. Upon information and belief, plaintiffs alleged that Precision Dose sold units of
Megestrol earning (1) a $1.8 million profit “in fiscal year 2003/2004,” (2) a $4.3 million
profit in 2005, and (3) a projected $10 million profit in 2006.
¶ 11 Besides the preceding allegations common to all counts, the amended complaint
contained three identical counts of breach of fiduciary duty directed against defendants. The
claims alleged that, at the June 24, 2003, meeting, defendants denied that there were any
potential products under development that could have any positive financial impact on
Xactdose or on the shareholders themselves. Specifically, defendants failed to mention
Megestrol. For several months before the meeting, defendants allegedly had been engaging
in discussions with multiple individuals about the future of the single-unit liquid medication
packaging industry and their own futures personally. Defendants discussed with Tom
Anderson, the former Alpharma president, the possibility of setting up a partnership with
ANI Pharmaceuticals so that Precision Dose and ANI could develop and market new unit-
dose products. Defendants also held discussions with PAR Labs regarding the development
of Megestrol, the potential future market for the product, and a future business partnership
between Precision Dose and PAR Labs. Defendants negotiated with ANI, PAR Labs, and
other pharmaceutical companies and laboratories for the express purpose of diverting
potential future business opportunities from Xactdose to Precision Dose. Defendants
allegedly never disclosed to plaintiffs that they were involved in discussions with these
companies or that there was a potential market for Megestrol or any other product.
¶ 12 Further, defendants allegedly had never accounted for the $1.4 million payment owed to
Xactdose or any of the other winding-up activities. Defendants had represented to plaintiffs
that they would apply the purchase price to Xactdose’s corporate debts, which defendants
had guaranteed personally. However, defendants allegedly created a windfall for themselves
by negotiating the debt downward, to perhaps as much as 80% off the original amount, and
retaining the remainder without disbursing the entire $1.4 million on behalf of Xactdose.
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¶ 13 The breach-of-fiduciary-duty counts alleged that, as officers, directors, and shareholders
of Xactdose, defendants owed Xactdose a duty of loyalty, good faith, and honesty. However,
by misrepresenting and withholding information vital to plaintiffs and by diverting corporate
opportunities for their own personal benefit, defendants breached their fiduciary duties to
Xactdose and its shareholders. Plaintiffs sought compensatory and punitive damages, a
constructive trust on any profits or income realized by defendants as a result of their
“wrongful conduct,” an accounting of the sale of assets and other winding-up activities, and
costs.
¶ 14 B. Declaratory Judgment Action
¶ 15 On January 29, 2007, Pekin filed an amended complaint for declaratory judgment, setting
forth the following facts. Pekin issued a CGL policy, No. 00CL85805, to Xactdose as the
named insured. The policy was amended on June 30, 2003, to name Precision Dose as the
named insured. Defendants qualified as insureds under the policy by virtue of their roles as
directors and shareholders of Xactdose. The policy was to be effective from February 27,
2003, through February 27, 2004, but it was cancelled on January 22, 2004. The policy
provided in relevant part as follows:
“Coverage B. Personal and Advertising Injury Liability
1. Insuring Agreement.
a. We will pay those sums that the insured becomes legally obligated to pay as
damages because of ‘personal injury’ or ‘advertising injury’ to which this insurance
applies. We will have the right and duty to defend any ‘suit’ seeking those damages.
We may at our discretion investigate any ‘occurrence’ or offense and settle any claim
or ‘suit’ that may result. But:
(1) The amount we will pay for damages is limited as described in Limits of
Insurance (Section III); and
(2) Our right and duty to defend end when we have used up the applicable
limit of insurance in the payment of judgments or settlements under Coverage A
or B or medical expenses under Coverage C.
No other obligation or liability to pay sums or perform acts or services is covered
unless explicitly provided for under Supplementary Payments–Coverages A and B.
b. This insurance applies to:
(1) ‘Personal injury’ caused by an offense arising out of your business,
excluding advertising, publishing, broadcasting, or telecasting done by you or for
you; and
(2) ‘Advertising injury’ caused by an offense committed in the course of
advertising your goods, products, or services;
but only if the offense was committed in the ‘coverage territory’ during the policy
period.”
¶ 16 The policy defines “advertising injury” and “personal injury” as follows:
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“Section V–Definitions
1. ‘Advertising injury’ means injury arising out of one or more of the following
offenses:
***
c. Misappropriation of advertising ideas or style of doing business; or
d. Infringement of copyright, title, or slogan.
***
13. ‘Personal injury’ means injury, other than ‘bodily injury’ arising out of one or
more of the following offenses;
***
c. The wrongful eviction from, wrongful entry into, or invasion of the right of
private occupancy of a room, dwelling, or premises that a person occupies by or on
behalf of its owner, landlord, or lessor.”
¶ 17 At some unspecified time after plaintiffs filed their action, defendants tendered their
defense to Pekin, which refused the tender. Pekin then filed this declaratory judgment action
seeking a declaration that it owed no duty to defend the underlying action.
¶ 18 Defendants filed an answer, affirmative defense, and counterclaim to Pekin’s amended
complaint for declaratory judgment. Defendants’ counterclaim alleged that Pekin had a duty
to defend against plaintiffs’ action because the underlying complaint alleged “personal
injury” or “advertising injury” that was covered under the policy.
¶ 19 Pekin and defendants filed cross-motions for summary judgment, focusing on whether
the allegations in the underlying complaint constituted “personal injury” or “advertising
injury” under the terms of the policy. Specifically, defendants argued that the allegation that
they “assumed operations” of Xactdose constituted covered offenses, including
misappropriation of advertising ideas or style of doing business and wrongful invasion into
the right of private occupancy of the factory. Defendants also asserted that the allegation of
misrepresenting and withholding information vital to plaintiffs constituted the covered
offense of infringement of copyright, title, or slogan.
¶ 20 In support of their motion for summary judgment, defendants relied on Koopman’s
affidavit for the proposition that Precision Dose used Xactdose’s advertising ideas and
capitalized on Xactdose’s goodwill. Koopman attested that Precision Dose assumed the
operations of Xactdose on or around June 24, 2003, and remained in the business of
packaging, marketing, advertising, and distributing single-unit doses of liquid medication.
In assuming those operations, Precision Dose took over Xactdose’s marketing and
advertising methods, manufacturing, general operations, and sales and distributions.
Koopman stated that, like Xactdose, Precision Dose targeted its marketing and advertising
toward pharmaceutical companies rather than the individual consumers of liquid medication.
To his affidavit Koopman attached advertising brochures distributed by Xactdose in March
2003 and Precision Dose in July 2003 to show their similarity. Koopman attested that
Precision Dose essentially made the Xactdose advertisement its own by removing any
reference to Xactdose and replacing it with Precision Dose, “essentially stepping into
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Xactdose’s shoes.” Koopman stated that the original brochure idea came from Xactdose,
which Precision Dose assumed as part of its purchase of Xactdose’s assets in 2003.
¶ 21 Pekin moved to strike Koopman’s affidavit on the grounds that the facts set forth therein
were in the possession only of defendants and that defendants failed to show that Pekin knew
of a similarity in the marketing and operations of Xactdose and Precision Dose when Pekin
denied coverage.
¶ 22 On February 3, 2011, the trial court struck Koopman’s affidavit, denied defendants
summary judgment, and granted Pekin summary judgment. In a nine-page, single-spaced
opinion, the court held that Pekin owed defendants no duty to defend the underlying suit.
This timely appeal followed.
¶ 23 ANALYSIS
¶ 24 A. Sufficiency of Defendants’ Statement of Facts
¶ 25 Initially, we address Pekin’s request that we ignore defendants’ statement of facts as
incomplete and fraught with misstatements. Illinois Supreme Court Rule 341(h)(6) (eff. July
1, 2008) requires that the statement of facts shall contain the facts necessary to an
understanding of the case, stated accurately and fairly, without argument or comment, and
with appropriate reference to the pages of the record. Considering that an insurer’s duty to
defend turns on the words used in an underlying complaint, we agree with Pekin that portions
of defendants’ statement of facts paraphrase the record inaccurately. However, with less
egregious violations such as those here, we simply disregard the offensive portions of the
statement of facts. See Ziller v. Rossi, 395 Ill. App. 3d 130, 138 (2009). We remind
defendants’ counsel that they are required to follow Rule 341(h)(6), and we admonish
counsel to comply with the supreme court rules in the future.
¶ 26 B. Standard of Review
¶ 27 Defendants appeal from the trial court’s decisions to strike Koopman’s affidavit and to
grant Pekin summary judgment on the issue of whether Pekin owed defendants a duty to
defend the shareholder suit. The purpose of summary judgment is not to try a question of fact
but, rather, to determine whether a genuine issue of material fact exists. Adams v. Northern
Illinois Gas Co., 211 Ill. 2d 32, 42-43 (2004). “When, as in this case, parties file cross-
motions for summary judgment, they concede the absence of a genuine issue of material fact
and invite the court to decide the questions presented as a matter of law.” Steadfast Insurance
Co. v. Caremark Rx, Inc., 359 Ill. App. 3d 749, 755 (2005).
¶ 28 Summary judgment is appropriate where the pleadings, affidavits, depositions, and
admissions on file, when viewed in the light most favorable to the nonmoving party, show
that there is no genuine issue of material fact and that the moving party is entitled to
judgment as a matter of law. 735 ILCS 5/2-1005(c) (West 2010); Klitzka v. Hellios, 348 Ill.
App. 3d 594, 597 (2004). The summary judgment procedure is to be encouraged as an aid
in the expeditious disposition of a lawsuit. Adams, 211 Ill. 2d at 43. However, summary
judgment is a drastic means of disposing of litigation and should not be granted unless the
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movant’s right to judgment is clear and free from doubt. Forsythe v. Clark USA, Inc., 224
Ill. 2d 274, 280 (2007).
¶ 29 In reviewing a grant of summary judgment, this court must construe the pleadings,
depositions, admissions, and affidavits strictly against the moving party and liberally in favor
of the nonmoving party. Williams v. Manchester, 228 Ill. 2d 404, 417 (2008). Where
reasonable persons could draw divergent inferences from the undisputed material facts or
where there is a dispute as to a material fact, summary judgment should be denied and the
issue decided by the trier of fact. Espinoza v. Elgin, Joliet & Eastern Ry. Co., 165 Ill. 2d 107,
114 (1995). If a party moving for summary judgment introduces facts that, if not
contradicted, would entitle him to judgment as a matter of law, the opposing party may not
rely on his pleadings alone to raise issues of material fact. Klitzka, 348 Ill. App. 3d at 597
(citing Hermes v. Fischer, 226 Ill. App. 3d 820, 824 (1992)). We review de novo an order
granting or denying summary judgment. See Millennium Park Joint Venture, LLC v.
Houlihan, 241 Ill. 2d 281, 309 (2010).
¶ 30 “In a declaratory judgment action such as that presented here, where the issue is whether
the insurer has a duty to defend, a court ordinarily looks first to the allegations in the
underlying complaint and compares those allegations to the relevant provisions of the
insurance policy.” Pekin Insurance Co. v. Wilson, 237 Ill. 2d 446, 455 (2010). If the facts
alleged in the underlying complaint fall within, or potentially within, the policy’s coverage,
the insurer’s duty to defend arises. Wilson, 237 Ill. 2d at 455.
¶ 31 A court’s primary objective in construing the language of an insurance policy is to
ascertain and give effect to the intentions of the parties as expressed in their agreement. If
the policy terms are clear and unambiguous, they must be given their plain and ordinary
meaning; but if the terms are susceptible to more than one meaning, they are considered
ambiguous and will be construed strictly against the insurer that drafted the policy. Wilson,
237 Ill. 2d at 455-56. Provisions that limit or exclude coverage will be interpreted liberally
in favor of the insured and against the insurer. A court must construe the policy as a whole
and take into account the type of insurance purchased, the nature of the risks involved, and
the overall purpose of the contract. Wilson, 237 Ill. 2d at 456. The insurer’s duty to defend
its insured is broader than its duty to indemnify (Wilson, 237 Ill. 2d at 456), and therefore the
insurer may be obligated to defend against causes of action and theories of recovery that are
not in fact covered by the policy and against allegations that are groundless, false, or
fraudulent (Uhlich Children’s Advantage Network v. National Union Fire Co. of Pittsburgh,
398 Ill. App. 3d 710, 716 (2010)).
¶ 32 C. Koopman’s Affidavit
¶ 33 Before granting Pekin summary judgment, the trial court struck Koopman’s affidavit, a
ruling that defendants claim was erroneous. The sufficiency of an affidavit in support of a
motion for summary judgment is determined under Illinois Supreme Court Rule 191(a) (eff.
July 1, 2002). Rule 191(a) provides that affidavits in support of or in opposition to a motion
for summary judgment must be made on the personal knowledge of the affiant and must not
consist of conclusions, but facts admissible in evidence, and must affirmatively show that
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the affiant could testify competently thereto. Ill. S. Ct. R. 191(a) (eff. July 1, 2002).
Ordinarily, the decision to strike a Rule 191 affidavit is within the sound discretion of the
trial court. American Service Insurance Co. v. China Ocean Shipping Co. (Americas), Inc.,
402 Ill. App. 3d 513, 524 (2010). However, in this case, the trial court struck the affidavit
on the ground that defendants had failed to timely inform Pekin of the affidavit’s contents,
and therefore Koopman’s assertions had no bearing on whether Pekin correctly denied
coverage when defendants tendered the defense. We agree with the parties that, in this
unusual procedural context, the court’s decision to strike the affidavit presents a question of
law that we review de novo.
¶ 34 Pekin does not seriously dispute that Koopman’s affidavit set forth facts that would
trigger a duty to defend the underlying suit. Specifically, Koopman attested that Precision
Dose derived its advertising materials from Xactdose’s brochure, which arguably was a
misappropriation of advertising ideas or style of doing business as well as infringement of
copyright, title, or slogan. However, we conclude that the trial court correctly struck
Koopman’s affidavit on the ground that Pekin was not aware of those facts when it declined
to defend the suit. While an earlier disclosure of the contents of the affidavit might have
triggered a duty to defend, it appears that defendants waited to notify Pekin of the details of
Koopman’s conduct until after the time for presenting a defense had passed. Defendants did
not disclose Koopman’s affidavit until the parties had filed cross-motions for summary
judgment in the declaratory judgment action.
¶ 35 1. “Eight Corners” Rule and Exceptions
¶ 36 Our supreme court has long held that an insurer’s duty to defend an action brought
against the insured is “ ‘determined solely by reference to the allegations of the complaint.’ ”
(Emphasis omitted.) Wilson, 237 Ill. 2d at 457-58 (quoting Zurich Insurance Co. v. Raymark
Industries, Inc., 118 Ill. 2d 23, 52 (1987)). Illinois adheres to an “eight corners” analysis
when determining a carrier’s duty to defend, where the court compares the four corners of
the underlying complaint with the four corners of the insurance policy to determine whether
facts alleged in the underlying complaint fall within or potentially within coverage. Konstant
Products, Inc. v. Liberty Mutual Fire Insurance Co., 401 Ill. App. 3d 83, 86 (2010).
¶ 37 However, the supreme court recently pointed out that this is only a “general rule” to
which there can be exceptions. Wilson, 237 Ill. 2d at 458. The court noted that, in American
Economy Insurance Co. v. Holabird & Root, 382 Ill. App. 3d 1017 (2008), the appellate
court considered the allegations of the complaint, the third-party complaint, and the relevant
language of the insurance policy in determining that the insurer owed a duty to defend.
Wilson, 237 Ill. 2d at 460. The supreme court quoted with approval the following from
Holabird & Root:
“ ‘[C]onsideration of a third-party complaint in determining a duty to defend is in line
with the general rule that a trial court may consider evidence beyond the underlying
complaint if in doing so the trial court does not determine an issue critical to the
underlying action [citation]. The trial court should be able to consider all the relevant
facts contained in the pleadings, including a third-party complaint, to determine whether
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there is a duty to defend. After all, the trial court need not wear judicial blinders and may
look beyond the complaint at other evidence appropriate to a motion for summary
judgment. [Citations.]’ (Emphasis added.)” (Internal quotation marks omitted.) Wilson,
237 Ill. 2d at 460-61 (quoting Holabird & Root, 382 Ill. App. 3d at 1031-32).
¶ 38 The Wilson court also quoted with approval Fidelity & Casualty Co. of New York v.
Envirodyne Engineers, Inc., 122 Ill. App. 3d 301, 304-05 (1983), in which the appellate court
affirmed a declaratory judgment in favor of an insurance company on the ground that the trial
court could look beyond the underlying complaint in determining the duty to defend. The
court in Envirodyne Engineers, Inc. stated the rationale for its holding as follows:
“[W]e find no support for Envirodyne’s contention that the court may not look beyond
the underlying complaint even in a declaratory proceeding where the duty to defend is
at issue. It is certainly true that the duty to defend flows in the first instance from the
allegations in the underlying complaint; this is the concern at the initial stage of the
proceedings when an insurance company encounters the primary decision of whether to
defend its insured. However, if an insurer opts to file a declaratory proceeding, we
believe that it may properly challenge the existence of such a duty by offering evidence
to prove that the insured’s actions fell within the limitations of one of the policy’s
exclusions. [Citations.] The only time such evidence should not be permitted is when it
tends to determine an issue crucial to the determination of the underlying lawsuit
[citations] ***. If a crucial issue will not be determined, we see no reason why the party
seeking a declaration of rights should not have the prerogative to present evidence that
is accorded generally to a party during a motion for summary judgment in a declaratory
proceeding. To require the trial court to look solely to the complaint in the underlying
action to determine coverage would make the declaratory proceeding little more than
a useless exercise possessing no attendant benefit and would greatly diminish a
declaratory action’s purpose of settling and fixing the rights of the parties.” (Emphasis
added.) Envirodyne Engineers, Inc., 122 Ill. App. 3d at 304-05.
¶ 39 Thus, on a motion for summary judgment in a declaratory judgment action, when
determining whether a duty to defend exists, the court is not limited to comparing the
insurance policy to the allegations of the complaint but may consider evidence usually
considered in ruling on a motion for summary judgment, so long as such evidence does not
tend to determine an issue critical to the determination of the underlying lawsuit. See Wilson,
237 Ill. 2d at 462.
¶ 40 2. True-But-Unpleaded-Facts Doctrine
¶ 41 Citing Wilson and cases like it, defendants argue that the trial court erroneously rejected
Koopman’s affidavit when determining whether Pekin owed a duty to defend. We disagree.
The trial court correctly observed that “it is important to note that the rule in [Wilson] not be
overstated; it is not a requirement to consider any material outside the underlying pleadings;
it simply permits it.” (Emphases in original.) Before Wilson was decided, the appellate court
had occasionally considered the more difficult question of which extraneous materials may
be considered and when. Nothing in Wilson suggests that these cases are no longer good law.
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¶ 42 In Shriver Insurance Agency v. Utica Mutual Insurance Co., 323 Ill. App. 3d 243, 251
(2001), Shriver Insurance Agency (Shriver) filed a declaratory judgment action against its
insurer, Utica Mutual Insurance Company (Utica), after Utica declined to defend Shriver in
an underlying lawsuit. Utica moved to dismiss Shriver’s complaint in light of a policy
exclusion, and, as in this case, the parties eventually filed opposing motions for summary
judgment. Shriver attached an affidavit from its president as well as his letter sent to Utica
informing it of the underlying action and the facts leading up to the lawsuit. The trial court
granted Shriver’s motion for summary judgment and found that Utica had a duty to defend
Shriver because the letter constituted true but unpleaded facts known to Utica. Shriver, 323
Ill. App. 3d at 246-47.
¶ 43 On appeal, the Shriver court reiterated the true-but-unpleaded-facts doctrine: “[a]n
insurer must defend only if the complaint alleges facts within or potentially within the
coverage of the policy, unless the insurer possesses knowledge of true but unpleaded facts
that, when taken together with the allegations in the complaint, indicate that the claim is
within or potentially within the policy coverage.” (Emphasis added.) Shriver, 323 Ill. App.
3d at 247. The court determined that the complaint in the underlying action alleged the type
of risk that Utica intended to exclude from coverage. Shriver, 323 Ill. App. 3d at 249.
Additionally, the court stated that it did not believe that the true-but-unpleaded-facts doctrine
“was meant to be applied to situations such as existed in this case, i.e., where the only
extraneous facts the insurer possessed were supplied by the insured. In such a situation the
insurer has no way of knowing whether the facts are true unless it conducts an independent
investigation.” Shriver, 323 Ill. App. 3d at 251. “Typically, in cases where the ‘true but
unpleaded facts’ doctrine has been applied to show that an insurer had the duty to defend, the
extraneous facts possessed by the insurer and known to be true were facts the insurer
discovered during its own investigation of the underlying action.” Shriver, 323 Ill. App. 3d
at 251. To illustrate that the source of “true but unpleaded facts” is often the insurer’s own
investigation, the Shriver court mentioned La Rotunda v. Royal Globe Insurance Co., 87 Ill.
App. 3d 446 (1980), and Associated Indemnity Co. v. Insurance Co. of North America, 68
Ill. App. 3d 807 (1979):
“In [La Rotunda], the court determined that Royal Globe had a duty to defend where
the results of its own investigation disclosed the true but unpleaded fact that all of the
land in question was not used as a junkyard or refuse dump. Therefore, smoke from the
land, which caused a driving accident on a neighboring road, might have come from the
vacant part of the land and not the junkyard, making the business exclusion in Royal
Globe’s policy inapplicable.
In [Associated Indemnity], the insurer, Insurance Company of North America (INA),
knew that unpleaded facts related to it by Associated Indemnity were true. INA possessed
a file containing documents produced in the underlying litigation that verified the truth
of Associated Indemnity’s facts. Also, INA knew the facts to be true because it was
defending another party in the underlying action.” Shriver, 323 Ill. App. 3d at 251-52
(citing La Rotunda, 87 Ill. App. 3d at 452, and Associated Indemnity, 68 Ill. App. 3d at
818-19).
¶ 44 Shriver teaches that unpleaded facts that the insured gives the insurer should be viewed
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with suspicion when determining the duty to defend, because the insurer has no way of
knowing whether the facts are true without conducting its own investigation or otherwise
verifying the information independently. In this case, the parties have not directed us to any
part of the record showing that Pekin investigated Koopman’s allegations or was made aware
of their truthfulness in some other way. In fact, the record suggests that Pekin denied
coverage without any awareness of the events contained in Koopman’s affidavit at all. The
Koopman affidavit was properly stricken because the extraneous facts contained therein were
supplied by defendants. See Shriver, 323 Ill. App. 3d at 251.
¶ 45 Moreover, the delay in defendants’ disclosure of the information in Koopman’s affidavit
provided even more reason for striking it. In Shriver, the insured’s president sent his letter
describing the material events while the insurer was contemplating its duty to defend, but it
appears in this case that defendants did not disclose the information about misappropriating
the advertising materials until the cross-motions for summary judgment had been filed. The
“eight corners” rule focuses on the complaint and the policy because the insurer must
determine whether it has an obligation to defend at the outset of the litigation. Travelers
Insurance Cos. v. Penda Corp., 974 F.2d 823, 827 (7th Cir. 1992). Where the insurer is
unaware of the purported “ ‘true but unpleaded fact,’ ” that fact may not be considered in
determining the duty to defend. Konstant Products, 401 Ill. App. 3d at 88. By delaying the
disclosure of additional facts bearing on Pekin’s duty to defend, defendants left Pekin
without knowledge of true but unpleaded facts that, when taken together with the allegations
in the complaint, indicated that the claims were potentially covered by the policy.
¶ 46 3. Clarification of Ambiguous Pleading
¶ 47 Defendants cite Millers Mutual Insurance Ass’n v. Ainsworth Seed Co., 194 Ill. App. 3d
888 (1989), for the propositions that (1) plaintiffs’ amended complaint was ambiguous and
(2) the trial court should have considered Koopman’s affidavit to clarify that ambiguity. In
Ainsworth Seed Co., the Appellate Court, Fourth District, on an appeal from a summary
declaratory judgment, considered whether an insurer’s duty to defend should be determined
entirely upon the terms of the insured’s policy and the underlying complaint or whether
extrinsic facts could be admitted, so long as those facts did not impact the issues in the
underlying action. Sophia Cross filed a personal injury action against Ainsworth Seed Co.
(ASC) and certain named employees for their negligent design, installation, and construction
of certain equipment that caused Cross’s injury. Millers Mutual Insurance Association
(Millers) issued a CGL policy to ASC and its employees. Millers filed a declaratory
judgment action seeking a declaration as to its obligations in the underlying action. Millers
asserted that certain hazard exclusions in the policy prevented coverage. The trial court
granted ASC summary judgment. Ainsworth Seed Co., 194 Ill. App. 3d at 889-90.
¶ 48 On appeal, to determine coverage, the reviewing court examined the allegations of the
underlying complaint and the insurance policy as well as the affidavit of R. Clayton
Ainsworth. In the affidavit, Ainsworth stated that the machine Cross was using was installed
by a different company also named Ainsworth Seed Company, that the present ASC was not
formed until three years later, and that the present ASC never owned or operated the machine
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that injured Cross. Focusing on the sections of the insurance policy relating to hazard
exclusions, the court concluded that Millers was not obligated to defend ASC and its
employees in the Cross action. Ainsworth Seed Co., 194 Ill. App. 3d at 893.
¶ 49 In Ainsworth Seed Co., the ambiguity in the “confused pleadings” needing clarification,
i.e., the mistaken identity of the manufacturer of the equipment causing the injury in the
underlying suit, was obvious and undisputed. Here, defendants have not explained what part
of the amended complaint was confused and needed clarification. The cases are easily
distinguished on the facts.
¶ 50 Here, Koopman’s affidavit was produced not to clarify a confused pleading but rather to
broaden the scope of the allegations in the amended complaint to trigger Pekin’s duty to
defend. We agree with Pekin and the trial court that Koopman’s affidavit was properly
stricken because the affidavit contained no “true but unpleaded facts” of which Pekin was
aware.
¶ 51 4. Notice Provision in Policy
¶ 52 We note that, in their reply brief, defendants suggest that Koopman’s affidavit should not
have been stricken because “there is seemingly no case law setting an arbitrary cutoff time
for an insured’s presentation to its insurer of facts supporting a duty to defend.” Even
assuming arguendo that this is true, defendants disregard the plain language of the policy
itself, which presented an alternative basis for striking Koopman’s affidavit. The undisputed
facts in this case show that defendants’ delay in presenting the information contained in
Koopman’s affidavit amounted to a breach of policy terms that explicitly set forth the
insureds’ duties in the event of an occurrence, offense, claim, or suit:
“a. You must see to it that we are notified as soon as practicable of an ‘occurrence’
or an offense which may result in a claim. To the extent possible, notice should include:
(1) How, when, and where the ‘occurrence’ or offense took place;
(2) The names and addresses of any injured persons and witnesses; and
(3) The nature and location of any injury or damage arising out of the
‘occurrence’ or offense.
b. If a claim is made or ‘suit’ is brought against any insured, you must:
(1) Immediately record the specifics of the claim or ‘suit’ and the date received;
and
(2) Notify us as soon as practicable.
You must see to it that we receive written notice of the claim or ‘suit’ as soon as
practicable.
c. You and any other involved insured must:
(1) Immediately send us copies of any demands, notices, summonses, or legal
papers received in connection with the claim or ‘suit’;
(2) Authorize us to obtain records and other information;
(3) Cooperate with us in the investigation, settlement, or defense of the claim or
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‘suit’; and
(4) Assist us, upon our request, in the enforcement of any right against any person
or organization which may be liable to the insured because of the injury or damage
to which this insurance may also apply.
d. No insureds will, except at their own cost, voluntarily make a payment, assume any
obligation, or incur any expense, other than for first aid, without our consent.”
¶ 53 In Country Mutual Insurance Co. v. Livorsi Marine, Inc., 222 Ill. 2d 303 (2006), the
supreme court reaffirmed that an insured’s breach of a policy’s notice provision “will defeat
the right of the insured party to recover under the policy.” Country Mutual, 222 Ill. 2d at 312;
see also West American Insurance Co. v. Yorkville National Bank, 238 Ill. 2d 177, 185
(2010). This result is grounded in the principle that notice clauses “impose valid prerequisites
to insurance coverage” (Country Mutual, 222 Ill. 2d at 311) and is rooted in the well-settled
principles that insurance contracts embody the agreement of the parties, that the terms of the
policy constitute the scope of the insurer’s liability, and that the insured must perform under
those terms as a condition precedent to recovery (Imperial Fire Insurance Co. of London v.
Coos County, 151 U.S. 452, 462 (1894)).
¶ 54 The notice provision at issue required defendants to “see to it that [Pekin is] notified as
soon as practicable of an ‘occurrence’ or an offense which may result in a claim” and notify
Pekin of “the nature and location of any injury or damage arising out of the ‘occurrence’ or
offense.” The policy further required defendants to cooperate with Pekin in the investigation,
settlement, or defense of the claims. Thus, the policy explicitly imposed on defendants a duty
to present Pekin with all available and relevant information regarding plaintiffs’ suit. One
could argue persuasively that such factual detail includes information bearing on whether
Pekin owed a duty to defend.
¶ 55 A policy provision requiring notice “as soon as practicable” means that notice must be
given “within a reasonable time.” (Internal quotation marks omitted.) Country Mutual, 222
Ill. 2d at 311. Whether notice has been given within a reasonable time depends on the facts
and circumstances of each case (Country Mutual, 222 Ill. 2d at 311-12), and the timeliness
of an insured’s notice to its insurer generally is a question of fact for the trier of fact
(Northbrook Property & Casualty Insurance Co. v. Applied Systems, Inc., 313 Ill. App. 3d
457, 465 (2000)). That said, because policy notice provisions impose valid prerequisites to
insurance coverage (Country Mutual, 222 Ill. 2d at 311), one could argue that, as a matter of
law, defendants breached the contract and thereby forfeited their right to a defense when they
waited until the summary judgment stage of Pekin’s declaratory judgment action before
notifying Pekin of details bearing on its duty to defend. Here, there is no dispute that, when
the complaint and amended complaint were filed in the underlying suit, defendants had all
the information contained in Koopman’s affidavit, yet they did not share it with Pekin. In
fact, in the affidavit, Koopman attested that he was “personally familiar with both
companies, and knowledgeable about each of their advertising and marketing practices.”
¶ 56 It is apparent that defendants breached the notice provision by failing to timely present
Pekin with the facts set forth in Koopman’s affidavit. Therefore, the trial court did not err in
striking the affidavit.
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¶ 57 D. Amended Complaint
¶ 58 Defendants contend that, even if Koopman’s affidavit is excluded, the amended
complaint triggered a duty to defend. Specifically, defendants cite the allegation that
“Precision Dose began assuming operations of the Xactdose packaging factory” and the
prayer for relief seeking “a constructive trust on any profits or income [defendants have]
received as a result of [their] wrongful conduct.” (Emphases added.) Defendants argue that
these allegations amounted to covered “advertising injuries” arising from (1)
“misappropriation of advertising ideas or style of doing business” and (2) “infringement of
copyright, title, or slogan.” Defendants also argue that the allegations amounted to covered
“personal injuries” arising from “the wrongful eviction from, wrongful entry into, or invasion
of the right of private occupancy of a room, dwelling, or premises that a person occupies by
or on behalf of its owner, landlord, or lessor.”
¶ 59 As discussed, in a declaratory judgment action such as that presented here, where the
issue is whether the insurer has a duty to defend, a court ordinarily looks first to the
allegations in the underlying complaint and compares those allegations to the relevant
provisions of the insurance policy. Wilson, 237 Ill. 2d at 455. If the facts alleged in the
underlying complaint fall within, or potentially within, the policy’s coverage, the insurer’s
duty to defend arises. Wilson, 237 Ill. 2d at 455.
¶ 60 The alleged conduct, rather than the manner in which the claim is labeled in the
underlying complaint, determines whether the insurer has a duty to defend. Pekin Insurance
Co. v. Roszak/ADC, LLC, 402 Ill. App. 3d 1055, 1059 (2010). However, it is “the actual
complaint, not some hypothetical version, that must be considered.” (Internal quotation
marks omitted.) Steadfast Insurance Co., 359 Ill. App. 3d at 761.
¶ 61 1. Misappropriation of Advertising Ideas or Style of Doing Business
¶ 62 Defendants argue that the allegation that “Precision Dose began assuming operations of
the Xactdose packaging factory” was a covered “advertising injury” arising from the
“misappropriation of advertising ideas or style of doing business.” Defendants contend that
taking over the factory qualified as a misappropriation of Xactdose’s “style of doing
business” in that defendants (1) continued to package the same kind of product (liquid
medication) in the same kind of packaging (single-dose units), (2) used a name similar to
Xactdose (Precision Dose), (3) earned a profit by promoting Megestrol, and (4) attempted
to negotiate contracts with Alpharma and some of Xactdose’s other former clients.
¶ 63 However, the policy characterized an “advertising injury” as being caused by an offense
committed in the course of advertising goods, products, or services. Even construing the
amended complaint broadly in favor of coverage, the allegation that Precision Dose assumed
operations of the factory encompassed only the manufacture of products and did not refer to
advertising in any way. Defendants incorrectly assert that the amended complaint alleged that
Precision Dose misappropriated Xactdose’s entire business, including advertising and the
style of doing business. The “assuming operations” allegation referred to only Xactdose’s
factory. Had the amended complaint alleged that Precision Dose assumed operations of
Xactdose, the business, the claim might have been within the policy’s advertising injury
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coverage and triggered Pekin’s duty to defend.
¶ 64 2. Infringement of Copyright, Title, or Slogan
¶ 65 Defendants alternatively argue that the allegation that “Precision Dose began assuming
operations of the Xactdose packaging factory” was a covered “advertising injury” arising
from the “infringement of copyright, title, or slogan.” The “infringement” argument and the
“misappropriation” argument are flawed for the same reason: even under the broadest
interpretation, assuming the operation of a factory does not create the reasonable inference
that defendants also took over Xactdose’s marketing or any type of advertising. We agree
with the trial court that the “assuming operations” allegation was not a covered advertising
injury arising from the infringement of copyright, title, or slogan.
¶ 66 3. Wrongful Invasion
¶ 67 Finally, defendants argue that the allegation that Precision Dose was “assuming
operations” of Xactdose’s factory was a covered “personal injury” arising from “[t]he
wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy
of a room, dwelling, or premises that a person occupies by or on behalf of its owner,
landlord, or lessor.”
¶ 68 The policy characterized “personal injury” as being caused by “an offense arising out of
your business, excluding advertising, publishing, broadcasting, or telecasting done by you
or for you.” Defendants argue that the assumption of operations of the factory itself was an
invasion of plaintiffs’ right to private occupancy of the factory. Pekin concedes that alleged
violations of the personal rights incidental to ownership of property, such as trespass,
nuisance, or other interference with possession, arguably fall within the definition of
wrongful entry or eviction or other invasion of the right of private occupancy. Pekin further
concedes that this personal injury is not limited to natural persons but extends to the actions
of corporate entities. See Supreme Laundry Service, L.L.C. v. Hartford Casualty Insurance
Co., 521 F.3d 743, 747-48 (7th Cir. 2008).
¶ 69 However, Pekin argued–and the trial court agreed–that Pekin owed no duty to defend a
personal-injury claim because the allegation of Precision Dose “assuming operations” of the
factory was not an allegation of any wrongful conduct on the part of any of the defendants.
The court concluded that neither the allegations common to all claims nor the allegations
directed against defendants in the three counts of breach of fiduciary duty characterized
“assuming operations” as wrongful. Pekin further argues on appeal that plaintiffs’ “request
for an accounting of the sale of Xactdose’s assets has nothing to do with Precision Dose or
its assumption of Xactdose’s operations.” We agree.
¶ 70 The amended complaint alleged that defendants breached their fiduciary duty to plaintiffs
by falsely painting a bleak financial picture of Xactdose and failing to inform plaintiffs of a
potential new source of business. Plaintiffs then alleged that defendants took over the
business operations, including the physical plant, but plaintiffs did not allege that the conduct
was wrongful.
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¶ 71 The “assuming operations” allegation lacked a nexus to plaintiffs’ prayers for relief,
which shows that the allegation was necessary only to state the chain of events. The amended
complaint sought compensatory damages, punitive damages, and the costs of litigation, none
of which were related to the parties’ relative rights regarding possession of the factory. The
other prayers for relief in the amended complaint sought a constructive trust and “an
immediate accounting of the $1.4 million sale of assets and all other Xactdose winding up
activities.” A court may impose a constructive trust to avoid unjust enrichment: when one
obtains money to which he is not entitled, under circumstances such that in equity and good
conscience he ought not retain it. Hensley Construction, LLC v. Pulte Home Corp., 399 Ill.
App. 3d 184, 193 (2010). A constructive trust is an equitable remedy that will be imposed
on proceeds of a breach of fiduciary duty. Baumgartner v. First Church of Christ, Scientist,
141 Ill. App. 3d 898, 908 (1986). Plaintiffs sought a constructive trust on any profits
wrongfully obtained by defendants after they assumed operation of the factory, but the prayer
for relief was devoid of any claim for possession of the factory. Even construing the amended
complaint broadly in favor of coverage, and regardless of whether defendants were within
their rights to assume operations of Xactdose’s factory after the sale, the amended complaint
contained no claim pertaining to wrongful entry into or eviction from the factory. We
conclude that assuming operations of the factory after withholding business information did
not qualify as the wrongful eviction from, wrongful entry into, or invasion of plaintiffs’ right
of private occupancy of the factory. Therefore, we affirm the summary judgment entered for
Pekin.
¶ 72 CONCLUSION
¶ 73 For the reasons stated, we affirm the summary judgment for Pekin entered in the circuit
court of Winnebago County.
¶ 74 Affirmed.
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