Markel Insurance Co. v. Energym Gymnastics, Inc. ( 2019 )

2019 IL App (1st) 190092-UNOTICE: This order was filed under Supreme Court Rule 23 and may not be cited as precedent
by any party except in the limited circumstances allowed under Rule 23(e)(1).
SECOND DIVISION
December 17, 2019
No. 1-19-0092
______________________________________________________________________________
IN THE
APPELLATE COURT OF ILLINOIS
FIRST DISTRICT
______________________________________________________________________________
MARKEL INSURANCE COMPANY, )
)
Plaintiff and Counterdefendant-Appellee, )
)
v. )
) Appeal from the
ENERGYM GYMNASTICS, INC., ANDREW A. ) Circuit Court of
MORREALE, JOSEPH R. HANNON, JANE DOE and ) Cook County
JOHN DOE, individually and on behalf of their minor )
child Joy Doe, JEFFREY DOE, individually and on behalf ) No. 17-CH-1948
of his minor child Jennifer Doe, JANE WHITE and JOHN )
WHITE, individually and on behalf of their minor child ) The Honorable
Joy White, and JANE SMITH and JOHN SMITH, ) Moshe Jacobius,
individually and on behalf of their minor child Joy Smith, ) Judge Presiding.
)
Defendants and Counterplaintiffs )
)
(Energym Gymnastics, Inc., and Andrew A. Morreale, )
Defendants and Counterplaintiffs-Appellants.) )
)
PRESIDING JUSTICE FITZGERALD SMITH delivered the judgment of the court.
Justices Pucinski and Coghlan concurred in the judgment.
ORDER
¶1 Held: Trial court properly granted declaratory judgment in favor of insurer that it owed no
duty to defend insureds against four underlying complaints alleging gymnastics instructor
committed acts of sexual assault against four minors. The fact that insurer sent letter
No. 1-19-0092
disclaiming coverage prior to reviewing any underlying complaint was not a breach of
duty estopping insurer from asserting policy defenses to coverage, where no complaint
potentially within coverage was ultimately filed.
¶2 The appellants, Energym Gymnastics, Inc. (Energym), and Andrew A. Morreale, appeal from
the trial court’s granting of the declaratory judgment sought by the appellee, Markel Insurance
Company (Markel), that Markel owed no duty to defend or indemnify Energym or Morreale under
a policy of commercial general liability insurance for the claims against them in four underlying
lawsuits alleging that Joseph R. Hannon, a gymnastics instructor working for Energym, had
committed acts of sexual assault against four minors. Energym and Morreale also appeal from the
trial court’s dismissal of their counterclaims and striking of their affirmative defenses as part of its
order granting declaratory judgment. For the reasons that follow, we affirm the judgment of the
trial court.
¶3 I. BACKGROUND
¶4 Energym is a gymnastics studio that provides gymnastics instruction to children. Morreale, a
gymnastics coach, is the owner of Energym. In 2016, four minors, identified in this case by the
pseudonyms Joy Doe, Jennifer Doe, Joy White, and Joy Smith, received gymnastics instruction at
Energym. Each of the four minors alleges that Hannon was one of their instructors there. On or
about December 7, 2016, Hannon was arrested and charged with criminal sexual assault arising
out of his conduct involving certain students of Energym who were minors. Energym thereafter
gave notice of Hannon’s arrest and the allegations against him to its commercial general liability
insurer, Markel. 1
1
Markel issued one commercial general liability policy to Energym for the policy period of August
9, 2015, to August 9, 2016, and a second policy for the policy period of August 9, 2016, to August 9, 2017.
There is no difference in the language of the provisions of these two policies involved in this appeal. Thus,
for the sake of simplicity, we refer to these simply as “the policy” in this decision.
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No. 1-19-0092
¶5 On January 20, 2017, Markel sent a letter to Energym and Morreale, stating that the policy
at issue did not provide coverage for claims arising out of sexual abuse or molestation. After setting
forth certain policy terms and exclusions, it stated that it was disclaiming coverage for the loss and
“will not be handling any claim that may arise out of any alleged sexual misconduct.” It further
stated, “We will not make any defense, expense or indemnity payments on your behalf.” It also
stated that Markel’s position was based on information then available to it and could be revised. It
acknowledged that suit had not then been filed and stated, “In the event you receive notice that a
suit has been filed, please forward the suit and any additional information to our attention as soon
as possible so that we can evaluate the specific allegations under the policy.”
¶6 At the time Markel sent this letter, it was unaware that an underlying complaint had already
been filed against Energym, Morreale, and Hannon by Jane Doe and John Doe, individually and
on behalf of their minor child, Joy Doe (Joy Doe complaint). The Joy Doe complaint alleged that
in 2016, Joy Doe had been enrolled in a class at Energym instructed by Hannon, and that “Hannon
sexually assaulted Joy during one or more sessions of the class while teaching as an instructor and
agent employed by Energym and Morreale.” After learning of this suit, Markel filed the instant
action on February 8, 2017, seeking a declaration that it owed no duty to defend or indemnify
Energym, Morreale, or Hannon for claims asserted in the Joy Doe complaint or any claim or suit
arising from Hannon’s alleged sexual abuse of minor students at Energym.
¶7 Among several bases raised by Markel’s complaint in support of its contention that it owed
no duty to defend was that coverage was excluded under an endorsement to the policy titled the
“Illinois sexual abuse or sexual molestation exclusion – youth related organizations” (youth related
organizations exclusion). This exclusion provided in pertinent part as follows:
“This insurance does not apply to ‘bodily injury’, ‘property damage’, ‘personal and
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advertising injury’ arising out of:
1. The actual or threatened sexual abuse or sexual molestation by anyone of
any person in the care, custody, or control of any insured; or
2. The negligent:
a. Employment;
b. Investigation;
c. Supervision;
d. Reporting the proper authorities, or failure to so report; or
e. Retention
of a person for whom any insured is or ever was legally responsible and whose conduct
would be excluded by paragraph 1. above.
This endorsement applies to risks involved with the recreational, physical or
educational care and development of children, including, but not limited to: amateur sports
organizations, dance and performing arts studios, youth and recreation facilities,
gymnastics clubs and studios, martial arts studios, schools, daycares, camp, churches, and
other similar risks with these exposures.”
¶8 On April 28, 2017, a second underlying complaint was filed against Energym, Morreale, and
Hannon. It was filed by Jeffrey Doe, individually and as guardian and next friend of Jennifer Doe,
a minor (Jennifer Doe complaint). It alleged that on and before November 25, 2016, Jennifer Doe
had participated in an open-gym program at Energym supervised by Hannon, in which Hannon
“proceeded to molest, fondle, touch and/or thrust the Plaintiff’s hips, buttocks and genitals with
his hands and groin” and “propositioned the Plaintiff to accompany him into a private room for
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No. 1-19-0092
further acts.” Following the filing of the Jennifer Doe complaint, Markel filed an amended
complaint for declaratory judgment in this case, seeking a declaration that it owed no duty to
defend or indemnify Energym, Morreale, or Hannon for claims asserted in the Joy Doe complaint,
the Jennifer Doe complaint, or any claim or suit arising from Hannon’s alleged sexual abuse of
minor students at Energym. It contended that, among other reasons, the youth related organizations
exclusion barred coverage for the claims.
¶9 Energym and Morreale filed an answer and affirmative defenses to Markel’s amended
complaint for declaratory judgment and a counterclaim for declaratory judgment and other relief.
Their first affirmative defense was that Markel breached its obligations under the insurance
contract when it “preemptively” disclaimed coverage through its letter of January 20, 2017, before
it had reviewed the factual allegations of any complaint against its insureds, and Markel should
therefore be precluded from seeking to enforce any provisions of a contract it had breached. Their
second affirmative defense incorporated the first and alleged that, as a consequence of its breach,
Markel had waived and forfeited any right to enforce provisions of the policy favorable to it.
¶ 10 In Count I of their counterclaim, they sought a declaratory judgment that Markel had an
obligation to defend them against the allegations of the Joy Doe and Jennifer Doe complaints.
Among the contentions raised for why the policy provided coverage for these claims was their
contention that the youth related organizations exclusion relied on by Markel was contradicted by
another exclusion, the “Illinois sexual abuse or sexual molestation exclusion” (sexual abuse or
molestation exclusion). That exclusion provided in pertinent part as follows:
“It is agreed this policy does not provide coverages for claims or suits seeking
damages, including defense of same, for any person who actively participates in the act of
sexual molestation or physical or mental abuse of any person.
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However, notwithstanding the foregoing, the insured shall be protected under the
terms of this policy as to any claim and/or allegation which may be covered by the policy
upon which suit may be brought against him, for any such alleged behavior by an insured
unless judgment or final adjudication adverse to the insured shall establish that such
behavior occurred as an essential element of the cause of action so adjudicated.”
Energym and Morreale contended in Count I that the last paragraph of the sexual abuse or
molestation exclusion above would be rendered illusory under Markel’s interpretation of the youth
related organizations exclusion. In Count II, they alleged that Markel’s “anticipatory repudiation
of its policy obligations” through its letter of January 20, 2017, was vexatious and unreasonable,
and they were therefore entitled to their attorney fees, costs, and a penalty under section 155 of the
Illinois Insurance Code (215 ILCS 5/155 (West 2016)).
¶ 11 Markel filed a motion to strike or dismiss the affirmative defenses pled by Energym and
Morreale to its amended complaint for declaratory judgment. It also filed a motion to dismiss their
counterclaims. The trial court granted Markel’s motions. It struck Count I of the counterclaim on
the basis that it was “unnecessarily duplicative” of the issue already before the court in the
amended complaint for declaratory judgment. It struck Count II on the basis that it failed to state
a claim for anticipatory repudiation, reasoning that the letter of January 20, 2017, was not a clear
manifestation by Markel of an intent not to perform its contractual obligations. It also struck their
first affirmative defense, construing it also to allege anticipatory repudiation and finding, for
similar reasons, that it failed to plead facts that Markel’s actions amounted to anticipatory
repudiation. Finally, it struck the second affirmative defense, finding that it failed to plead facts
that Markel had intentionally relinquished any right so as to establish waiver.
¶ 12 After that occurred, two additional underlying complaints were filed against Energym,
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Morreale, and Hannon. One was filed by Jane White and John White, individually and on behalf
of their minor child, Joy White (Joy White complaint). It alleged that Joy White attended a class
at Energym beginning in about February 2016, that she informed her mother “that Hannon had
touched her ‘down there’ while spotting her during gymnastics moves,” and that “Hannon
assaulted Joy during one or more sessions of the [t]umbling [c]lass while teaching as an instructor
and agent employed by Energym and Morreale.” The other complaint was filed by Jane Smith and
John Smith, individually and on behalf of their minor child, Joy Smith (Joy Smith complaint). It
alleged that Joy Smith had attended Energym’s open gym sessions from September 2016 to
November 2016, that she told her mother that Hannon “ had ‘stuck his finger up her butt’ and had
done the same to other children,” and that “Hannon assaulted Joy during one or more sessions of
the [c]lass while teaching as an instructor and agent employed by Energym and Morreale.”
¶ 13 Following the filing of these two additional underlying complaints, Markel filed the instant
second amended complaint for declaratory judgment, seeking a declaration that it owed no duty to
defend or indemnify Energym, Morreale, or Hannon for claims asserted in any of the four
underlying complaints, or any claim or suit arising from Hannon’s alleged sexual abuse of minor
students at Energym. Again, among the contentions it raised for why coverage was excluded was
the fact that the youth related organizations exclusion barred coverage for the claims.
¶ 14 Energym and Morreale filed an answer and affirmative defenses to Markel’s second amended
complaint for declaratory judgment and amended counterclaims for declaratory judgment and
other relief. For the stated purpose of preserving their right to seek appellate review, they repled
their previously-dismissed first and second affirmative defenses and Counts I and II of their
counterclaim. They also added third, fourth, and fifth affirmative defenses. Their third affirmative
defense was again that Markel had itself breached is policy obligations by disclaiming coverage
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in its letter of January 20, 2017, and it could not enforce a contract that it had breached. The fourth
affirmative defense was that, as a consequence of Markel’s breach, it had waived its right to
enforce the provisions of the policy. The fifth affirmative defense was that, as a consequence of
its breach, Markel forfeited any right to enforce the provisions of the policy. Count III of their
amended counterclaims again sought a declaratory judgment that Markel had an obligation to
defend Energym and Morreale against the allegations of the four underlying complaints. Count IV
again alleged that Markel had committed vexatious and unreasonable conduct through its
“anticipatory repudiation of its policy obligations” in the letter of January 20, 2017, and by
attempting to mislead the court as to the contents of its policy by failing to address the sexual abuse
or molestation exclusion.
¶ 15 Markel filed a motion to strike these affirmative defenses, dismiss the counterclaims, and for
a judgment on the pleadings in its favor on its second amended complaint. The trial court granted
this motion. It dismissed Counts I and II of the amended counterclaims of Energym and Morreale
on the same grounds as in the previous order. It also found that Count III of the amended
counterclaims should be dismissed for the same reasons it had dismissed Count I, and that Count
IV should be dismissed for the same reasons as Count II. It further found, with respect to Count
IV, that Markel was not misrepresenting the facts of the case to the court, but rather it simply did
not discuss a policy exclusion that it considered to be irrelevant. With respect to the new
affirmative defenses, the trial court struck the third affirmative defense for the same reasons that
it had struck the first affirmative defense, and it struck the fourth affirmative defense for the same
reason it had struck the second affirmative defense. It struck the fifth affirmative defense on the
grounds that Energym and Morreale had failed to allege a forfeiture, as they agreed that Markel
had not failed to make the timely assertion of a known right.
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¶ 16 The trial court also granted judgment on the pleadings in favor of Markel on the second
amended complaint. It went through in detail all of the factual allegations and theories of liability
asserted against Energym and Morreale in the four underlying complaints, and it concluded that
all the claims therein were excluded from coverage by the youth related organizations exclusion.
In doing so, it rejected the argument that the youth related organizations exclusion contradicted
and rendered illusory the coverage preserved under the sexual abuse or molestation exclusion or
that it was void as against public policy. It thus granted the declaratory judgment that Markel owes
no duty to defend or indemnify against the claims alleged in the four underlying lawsuits.
¶ 17 Energym and Morreale then filed a timely notice of appeal.
¶ 18 II. ANALYSIS
¶ 19 This appeal comes before the court on the trial court’s granting of a motion for judgment on
the pleadings, a motion to dismiss counterclaims, and a motion to strike affirmative defenses.
These are all motions for relief under section 2-615 of the Code of Civil Procedure (735 ILCS 5/2-
615 (West 2018)), which we review de novo. Bennett v. Chicago Title & Trust Co., 404 Ill. App.
3d 1088, 1094 (2010). A motion to strike or dismiss an affirmative defense or counterclaim admits
all well-pleaded facts and attacks only the legal sufficiency of the pleading. Jordan v. Knafel, 355
Ill. App. 3d 534, 539 (2005); International Insurance Co. v. Sargent & Lundy, 242 Ill. App. 3d
614, 630 (1993). A motion for judgment on the pleadings is properly granted if the pleadings
disclose no genuine issue of material fact and that the movant is entitled to judgment as a matter
of law. Pekin Insurance Co. v. Wilson, 237 Ill. 2d 446, 455 (2010).
¶ 20 We choose to address first the argument by Energym and Morreale on appeal that the trial
court erred in dismissing Counts I and III of their amended counterclaims. In both of these counts,
Energym and Morreale sought a declaratory judgment that Markel had an obligation to defend
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them against the allegations of the underlying complaints. The trial court dismissed both counts
on the basis that the declaratory judgment sought in them was the “mirror image” of the declaratory
judgment sought by Markel in its second amended complaint. It found that the amended
counterclaims and the second amended complaint involved the same underlying lawsuits and
insurance policies, with the former seeking a declaration that coverage existed and the latter
seeking a declaration that coverage did not exist. It thus concluded that Counts I and III of the
amended counterclaims were “unnecessarily duplicative” of the issues already placed before the
court by the second amended complaint.
¶ 21 On appeal, Enegym and Morreale argue that the trial court erred in dismissing Counts I and
III of the amended counterclaims, because “[their] view of the actual controversy differed from
Markel’s in a number of important respects.” They point out that, in particular, the counterclaims
contend that both the sexual abuse or molestation exclusion and the youth related organizations
exclusion must be considered, whereas the second amended complaint relies only on the youth
related organizations exclusion.
¶ 22 Where a purported counterclaim for declaratory judgment does not state a cause of action
independent of that raised in the complaint or request affirmative relief other than a judicial
declaration that the plaintiff is not entitled to the relief sought in the complaint, is not a true
counterclaim and should be stricken. Carmichael v. Union Pacific R.R. Co., 2019 IL 123853, ¶¶
31, 36; see also 735 ILCS 5/2-608(c) (West 2018) (“Every counterclaim *** shall be complete in
itself”). “A counterclaim that requests no affirmative relief and only seeks to defeat the plaintiff’s
claims is really an affirmative defense, not a counterclaim.” Carmichael, 2019 IL 123853, ¶ 29.
Also, it has long been the law that where the answer to a complaint for declaratory judgment meets
and controverts the issues raised by the complaint, no counterclaim is required for the court to
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declare the rights of the parties, regardless of which party may prevail. Johnson v. Town of the City
of Evanston, 39 Ill. App. 3d 419, 423 (1976) (citing Burgard v. Mascoutah Lumber Co., 6 Ill. App.
2d 210, 218-19 (1955)); see also West Bend Mutual Insurance Co. v. Mulligan Masonry Co., 337
Ill. App. 3d 698, 702 (2003).
¶ 23 Here, it is evident that Counts I and III of the amended counterclaims by Energym and
Morreale stated no independent cause of action against Markel that was different from the one
already placed at issue by Markel’s second amended complaint. 2 For this reason, they were legally
insufficient as counterclaims. The fact that they relied on a different provision of the same policy
than the provision on which the second amended complaint relied does not change this. Neither
count of the counterclaim requested any specific affirmative relief from the trial court other than a
declaration that Markel had an obligation to defend them against the allegations of the underlying
lawsuits, which was simply another way of praying that Markel be denied the declaratory judgment
that it had requested in its second amended complaint. Further, Energym and Morreale have not
identified any way in which the striking of their counterclaims prejudiced their ability to present
the merits of their argument or prevented the trial court from fully resolving the issues of the case.
For these reasons, we hold that the trial court committed no error in dismissing Counts I and III of
the amended counterclaims.
¶ 24 The remaining arguments raised by Energym and Morreale are largely interrelated.
Principally, they urge this court to avoid reaching the question of whether the youth related
organizations exclusion or any other policy provision excludes coverage for the underlying claims.
They contend instead that we should view this case as one in which Markel should be estopped
2
We agree with the trial court’s assessment that, for purposes of this analysis, no substantive
difference exists between Count I and Count III of the amended counterclaims.
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from asserting any policy defenses to coverage, or should be found to have waived or forfeited its
right to rely on them, because it is in material breach of the policy. They argue that Markel
breached the policy simply by sending its letter of January 20, 2017, because it disclaimed
coverage before it had reviewed the allegations of any underlying complaint against them. More
specifically, they argue that a liability insurer may not make an “absolute coverage decision”
before it is in possession of or has reviewed the factual allegations of an underlying complaint
against its insured. This argument forms the underlying premise of the five affirmative defenses
raised by Energym and Morreale to the second amended complaint. It is also an underlying factual
basis of Counts II and IV of their amended counterclaims. All of these were stricken or dismissed
by the trial court. Energym and Morreale argue that it erred in doing so.
¶ 25 The argument by Energym and Morreale that Markel breached its policy obligations by
disclaiming coverage prior to reviewing an underlying complaint is based on the principle that an
insurer’s duty to defend is generally determined by comparing the allegations of an underlying
complaint against the insured to the language of the insurance policy. American Service Insurance
Co. v. China Ocean Shipping Co. (Americas), Inc., 402 Ill. App. 3d 513, 521 (2010). If the facts
alleged in an underlying complaint fall even potentially within the policy’s coverage, then the
insurer is obligated to defend its insured, even if the allegations are groundless, false, or fraudulent.
Id. Under the estoppel doctrine of insurance law, an insurer that breaches its duty to defend will
be estopped from raising policy defenses to coverage. Employers Insurance of Wausau v. Ehlco
Liquidating Trust, 186 Ill. 2d 127, 147-48 (1999). Under this doctrine, an insurer taking the
position that a claim for which an insured seeks coverage is not covered by the policy “may not
simply refuse to defend the insured,” but rather it must either: (1) defend the suit under a
reservation of rights, or (2) seek a declaratory judgment that there is no coverage. Id. at 150. “If
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the insurer fails to take either of these steps and is later found to have wrongfully denied coverage,
the insurer is estopped from raising policy defenses to coverage.” (Emphasis added.) Id. at 150-
51. “The estoppel doctrine applies only where an insurer has breached its duty to defend.” Id. at
151. Thus, a court must inquire first whether the insurer had a duty to defend and whether it
breached that duty. Id. “Application of the estoppel doctrine is not appropriate if the insurer had
no duty to defend, or if the insurer’s duty to defend was not properly triggered,” including in
circumstances “where, when the policy and the complaint are compared, there clearly was no
coverage or potential for coverage.” Id.¶ 26 We find guidance for our analysis of the argument posed by Energym and Morreale in Pope
v. Economy Fire & Casualty Co., 335 Ill. App. 3d 41, 45 (2002), where this court considered
whether the doctrine of estoppel should bar an insurer from raising policy defenses to coverage
based on the insurer’s sending to its insured a letter disclaiming coverage before the insured was
actually served with a compliant in an underlying lawsuit. In that case, the insured had forwarded
to her insurer an attorney’s lien letter she had received, informing her that the child of one of the
tenants to whom she rented an apartment had a claim against her “for injuries from ‘lead poisoning
contracted on the premises.’ ” Id. at 43-44. The insurer responded to her in a letter that it was “
‘unable to indemnify [her] nor provide a defense for [her] in this matter’ because the injury to
plaintiff was due to the ‘alleged exposure to lead paint,’ ” which was excluded from coverage
under the policy. Id. at 44. The insured was not served with a lawsuit until 26 days after the date
on which the insurer sent its letter. Id.¶ 27 In the ensuing action for declaratory judgment by the plaintiff (as assignee of the insured),
the plaintiff contended that the insurer’s denial of coverage to the insured before she was served
with the complaint in the underlying action was an anticipatory breach of the insurer’s duty to
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defend under the insurance contract. Id. at 45. In analyzing this argument, the court considered the
nature of the insurer’s contractual duty to defend, noting that the policy did not impose “a definite
duty to perform some act in the future,” but rather the duty imposed was “contingent upon the facts
alleged in an underlying complaint if and when a complaint is filed by a third party to the insurance
contract.” Id. at 46. It thus determined that its analysis required the consideration of three issues:
(1) whether there was a repudiation of the contract; (2) whether the conditions of the contract could
be fulfilled had the contract not been allegedly repudiated; and (3) whether damages resulted from
the alleged repudiation. Id.¶ 28 The court found that the first consideration was arguably satisfied based on the insurer’s
unequivocal statement in its letter that it would not defend its insured before having an opportunity
to determine whether there was a complaint alleging facts potentially within the scope of coverage.
Id. at 47. The court found that the second consideration, whether the conditions of the contract
could have been fulfilled if the contract had not been allegedly repudiated, meant in the context of
insurance coverage that it must be shown that the potential for coverage existed if the contract had
not been repudiated. Id. at 48. The court found that this inquiry necessarily involves comparing
the allegations of the complaint to the language of the policy to determine whether there was indeed
a potential for coverage. Id. The court found that when it compared the allegations of the filed
complaint to the language of the policy, the allegations were insufficient as a matter of law to have
created the potential for coverage. Id. at 48-49. For this reason, the court found that the plaintiff
could not maintain an action for anticipatory breach. Id. at 49. It therefore rejected the plaintiff’s
argument that the insurer should be estopped from raising policy defenses. Id. at 51. It noted that
estoppel is only applied if the insurer is later found to have wrongfully denied coverage under the
policy. Id. (citing Ehlco, 186 Ill. 2d at 150-51). It thus recognized that, “by not defending under a
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reservation of rights or filing a declaratory judgment action Economy risked being found in breach
of its duty to defend,” but because “Economy’s duty was never triggered, it cannot be stopped
from raising coverage defenses.” Id. at 51-52.
¶ 29 Based on this court’s analysis in Pope, we reject the argument by Energym and Morreale that
Markel can be found to have breached its obligations under the policy solely on the basis that it
sent the letter of January 20, 2017, disclaiming coverage before it had any underlying complaint
to review. They have cited no authority that this act alone amounts to a breach, regardless of
whether Markel actually had a duty to defend the underlying lawsuits that were ultimately filed.
Instead, to determine whether the doctrine of estoppel can apply, we must consider whether the
conditions of the contract could have been fulfilled absent Markel’s letter. This means we must
determine whether the potential for coverage existed if Markel had not sent its letter, and this
requires us to compare the allegations of the underlying complaints that were ultimately filed to
the language of the policy to determine whether the a duty to defend existed. See id. at 48; see also
Ehlco, 186 Ill. 2d at 151.
¶ 30 In construing the language of the policy at issue, we are guided by familiar principles:
“ ‘A court’s primary objective in construing the language of the policy is to ascertain
and give effect to the intentions of the parties as expressed in their agreement. [Citation.]
If the terms of the policy are clear and unambiguous, they must be given their plain and
ordinary meaning. [Citation.] Conversely, if the terms of the policy are susceptible to more
than one meaning, they are considered ambiguous and will be construed strictly against the
insurer who drafted the policy. [Citation.] In addition, provisions that limit or exclude
coverage will be interpreted liberally in favor of the insured and against the insurer.
[Citation.] A court must construe the policy as a whole and take into account the type of
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insurance purchased, the nature of the risks involved, and the overall purpose of the
contract. [Citation.]’ ” Wilson, 237 Ill. 2d at 455-46 (quoting American States Insurance
Co. v. Koloms, 177 Ill. 2d 473, 479 (1997)).
The threshold for pleading a duty to defend is low, with any doubt regarding such duty being
resolved in favor of the insured. American Economy Insurance Co. v. Holabird & Root, 382 Ill.
App. 3d 1017, 1023 (2008).
¶ 31 In this case, the trial court accepted Markel’s argument that the youth related organizations
exclusion excluded coverage for Energym and Morreale against all claims alleged against them in
the four underlying complaints. The youth related organizations exclusion, which is set forth in its
entirety above (supra ¶ 7), provides in pertinent part that:
“This insurance does not apply to ‘bodily injury’ *** arising out of:
1. The actual or threatened sexual abuse or sexual molestation by anyone of
any person in the care, custody, or control of any insured; or
2. The negligent:
a. Employment;
b. Investigation;
c. Supervision;
d. Reporting the proper authorities, or failure to so report; or
e. Retention
of a person for whom any insured is or ever was legally responsible and whose conduct
would be excluded by paragraph 1. above.”
It further provides that it applies to risks involved with the recreational, physical, or educational
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care and development of children, including “gymnastics clubs and studios.”
¶ 32 When comparing the language of the youth related organizations exclusion to the factual
allegations of the underlying complaints, it is evident that all of the claims in them are alleging
that the respective minor plaintiff suffered bodily injury arising out of the “actual or threatened
sexual abuse or sexual molestation by anyone [Hannon] of any person [the respective minor] in
the care, custody, or control of any insured [Energym].” The Joy Doe complaint contains the
allegation that Joy Doe suffered injuries arising out of the fact that “Hannon sexually assaulted
Joy during one or more sessions of the class while teaching as an instructor and agent employed
by Energym and Morreale.” 3 The Jennifer Doe complaint alleges that Jennifer Doe suffered injures
arising out of the fact that, during the time Hannon was working as an instructor on the premises
of Energym, “Hannon proceeded to molest, fondle, touch and/or thrust the Plaintiff’s hips,
buttocks and genitals with his hands and groin” and “propositioned the Plaintiff to accompany him
into a private room for further acts.” The Joy White complaint alleged that Joy White informed
her mother “that Hannon had touched her ‘down there’ while spotting her during gymnastics
moves,” and that Joy White suffered injuries arising out of the fact that “Hannon assaulted Joy
during one or more sessions of the [t]umbling [c]lass while teaching as an instructor and agent
employed by Energym and Morreale.” Finally, the Joy Smith complaint alleged that Joy Smith
told her mother that Hannon “ had ‘stuck his finger up her butt’ ” and that Joy Smith suffered
injuries arising out of the fact that “Hannon assaulted Joy during one or more sessions of the [c]lass
3
An amended complaint was later filed which removed the word “sexually” from this sentence and
other references to Joy suffering “sexual” assault. It continued to include the allegation that Joy White told
her mother that she “did not like the way one of the instructors touched her without consent during [c]lass
instruction,” referring to Hannon, and it alleged that “Hannon assaulted Joy during one or more sessions of
the [c]lass while teaching as an instructor and agent employed by Energym and Morreale.” Energym and
Morreale do not argue on appeal that this amendment to the Joy White complaint has any bearing on this
court’s analysis of the duty to defend.
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No. 1-19-0092
while teaching as an instructor and agent employed by Energym and Morreale.” We find that each
of these underlying complaints is alleging bodily injury for which coverage is excluded by the first
paragraph of the youth related organization exclusion.
¶ 33 Further, although each of the underlying complaints pleads multiple theories of liability
against Energym and Morreale, we find that each of these theories is alleging that the respective
minor plaintiff suffered bodily injury arising out of the “actual or threatened sexual abuse or sexual
molestation by anyone [Hannon] of any person [the respective minor] in the care, custody, or
control of any insured [Energym].” Each of the underlying complaints includes a count against
Energym and Morreale titled to the effect of “negligent failure to protect a minor from attack.” In
each complaint, the respective plaintiffs allege in this count that Energym and Morreale knew that
Hannon would have contact with their children in his job as instructor and, despite their actual or
constructive knowledge of Hannon’s criminal background, they failed to exercise reasonable care
to control Hannon and prevent him from harming others. They allege that the failure of Energym
and Morreale to exercise reasonable care to control Hannon was a proximate cause of the injuries
suffered by the respective minor. However, the injuries alleged all arise out of the actual or
threatened sexual abuse or molestation by Hannon of the respective minor while in the care,
custody, or control of Energym. For this reason, the claims are excluded from coverage under the
first paragraph of the youth related organizations exclusion.
¶ 34 The same is also true for all other counts in each of the underlying complaints. The complaints
contain counts alleging negligent hiring and retention of Hannon. The gist of the factual allegations
in these counts is that Energym and Morreale negligently failed to conduct a criminal background
check on Hannon either before or after employing him to teach and have physical contact with
children, and they negligently continued to employ him when a criminal background check would
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No. 1-19-0092
have disclosed that his criminal background and status of being on probation made him unfit for
such employment. They allege that this negligence placed Hannon in a position where he could
and did injure children, and the failure of Energym and Morreale to exercise reasonable care and
caution in the hiring and investigation of Hannon was a proximate cause of the assault of and
injuries to the respective minor.
¶ 35 The counts for negligent supervision allege that Energym and Morreale had a duty to
supervise Hannon, that they failed to do so or did so negligently, including by failing to employ
any procedures to determine whether Hannon was competent and fit for his job. The Joy Doe, Joy
White, and Joy Smith complaints also specifically allege that they failed to supervise Hannon by
failing to conduct a criminal background check either before or after he was hired and by
continuing to employ him when a background check would have disclosed he was unfit for the
position. All complaints allege that this negligence proximately caused the respective minor’s
injuries.
¶ 36 The Joy Doe and Jennifer Doe complaints both contain counts alleging that Energym and
Morreale are liable under a theory of respondeat superior for battery and negligent infliction of
emotional distress by Hannon of the respective minors. Although the counts against Hannon are
not involved in this appeal, all the complaints contain counts alleging that Hannon’s actions against
the respective minors constitute a battery and the negligent infliction of emotional distress. The
Joy Doe and Jennifer Doe complaints also seek to hold Energym and Morreale liable for these
torts based on the agency or employment relationship between Hannon and Energym and
Morreale.
¶ 37 The Jennifer Doe, Joy White, Joy Smith, and amended Joy Doe complaints each contain a
count alleging premises liability against Energym and Morreale. (The Jennifer Doe complaint does
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No. 1-19-0092
not name Morreale as a defendant in the count alleging premises liability.) With minor variation
in verbiage, each of these three complaints alleges in its count for premises liability that “as a direct
and proximate result of Energym’s negligent and careless hiring and/or employment of Hannon,
Energym created a dangerous condition for the children under its care.” Each alleges that “[b]y
advertising and guaranteeing a safe space for children, Energym voluntarily undertook the duty to
protect its patrons, including the Plaintiff, from harm caused by its own employees, including
Hannon.” And each alleges that the respective minor was caused to suffer injuries and emotional
distress “as a direct and proximate result of the dangerous condition.”
¶ 38 Finally, the Jennifer Doe, Joy White, Joy Smith, and amended Joy Doe complaints contain a
count alleging violations of the Consumer Fraud and Deceptive Business Practices Act (815 ILCS
505/1 et seq. (West 2016)) (Consumer Fraud Act). (The Joy White, Joy Smith, and amended Joy
Doe complaints bring this count against both Energym and Morreale, while the Jennifer Doe
complaint brings it only against Energym.) These counts alleged that Energym or Morreale had
violated the Consumer Fraud Act by failing to inform parents or customers that Energym had not
conducted criminal background checks on its instructors, including Hannon, or that it had hired a
convicted felon (Hannon). The Joy White and Joy Smith complaints also allege that the Consumer
Fraud Act was violated by Energym’s failure to disclose that it failed to carry adequate insurance
coverage for the acts of its employees. The counts alleged that as a result of the concealment of
the material facts alleged, the respective minors were enrolled as students with Energym and were
caused to suffer injuries and emotional distress.
¶ 39 With respect to each theory of legal liability against Energym and Morreale discussed above,
the injuries alleged all arise out of the actual or threatened sexual abuse or molestation by Hannon
of the respective minor, while the minor was a student and Hannon was an instructor at Energym.
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No. 1-19-0092
Thus, regardless of the legal theory pled, the claim in each count is that the minor suffered bodily
injury arising out of the “actual or threatened sexual abuse or sexual molestation by anyone
[Hannon] of any person [the respective minor] in the care, custody, or control of any insured
[Energym].” Thus, the first paragraph of the youth related organizations exclusion applies to
exclude coverage for all claims of the underlying complaints.
¶ 40 Energym and Morreale argue that paragraph 1 of the youth related organization exclusion
does not apply to exclude coverage in this case, because it only excludes injuries arising out of
sexual abuse or molestation by anyone of any person “in the care, custody, or control of any
insured,” and Hannon was not an insured under the policy. They state that, because Hannon “could
not have had offensive physical contact with [his victims] any other way,” each of them “was
necessarily in the care, custody, or control of Joseph Hannon,” i.e., a non-insured. Thus, they
characterize the underlying claims as being for “molestation by [a] non-insured employee[ ],” which
they contend is not clearly excluded under the policy.
¶ 41 We reject this argument by Energym and Morreale. Their argument ignores the fact that
paragraph 1 of the exclusion refers to injuries arising out of the sexual abuse or molestation “by
anyone of any person in the care, custody, or control of any insured.” (Emphases added.) The
exclusion applies to injuries arising out of sexual abuse or molestation “by anyone,” not only by
an insured. Thus, the exclusion applies to alleged sexual abuse or molestation by Hannon, even if
he is a “non-insured employee[ ].” Further, the exclusion applies to the sexual abuse or molestation
of any person in the care, custody, or control of “any insured,” which would include Energym.
Here, the minors were in the care, custody, or control of Energym when they were at the Energym
studio taking gymnastics classes or participating in the open gym. We do not interpret the argument
of Energym or Morreale to seriously dispute the notion that the minors could simultaneously be in
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No. 1-19-0092
the care, custody, or control of Energym, even it could also be said that at the same time they were
in the care, custody, or control of Hannon as an instructor. Thus, as discussed above, we find that
paragraph 1 of the youth related organizations exclusion excludes coverage, because all counts of
the underlying complaints allege bodily injury arising out of the actual or threatened sexual abuse
or molestation “by anyone [Hannon] of any person [the respective minors] in the care, custody, or
control of any insured [Energym].”
¶ 42 Based on our conclusion that coverage is excluded for all counts of the underlying complaints
under paragraph 1 of the youth related organizations exclusion, we need not address the argument
by Energym and Morreale that paragraph 2 of the youth related organizations exclusion is
inapplicable in this case as a basis for excluding coverage.
¶ 43 Energym and Morreale also argue that, if no claim of sexual misconduct committed by any
person can ever be covered by the policy based on the youth related organizations exclusion, then
the coverage afforded by the second paragraph of the sexual abuse or molestation exclusion is
rendered illusory. As set forth above (supra ¶ 10), that exclusion provides:
“It is agreed this policy does not provide coverages for claims or suits seeking
damages, including defense of same, for any person who actively participates in the act of
sexual molestation or physical or mental abuse of any person.
However, notwithstanding the foregoing, the insured shall be protected under the
terms of this policy as to any claim and/or allegation which may be covered by the policy
upon which suit may be brought against him, for any such alleged behavior by an insured
unless judgment or final adjudication adverse to the insured shall establish that such
behavior occurred as an essential element of the cause of action so adjudicated.”
Energym and Markel argue that the second paragraph of this exclusion provides that they shall be
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No. 1-19-0092
“protected” (i.e., defended) in the event that suits such as the underlying lawsuits in this case are
filed against them. They argue that applying the youth related organizations exclusion renders the
second paragraph of the sexual abuse or molestation exclusion as surplusage and effectively reads
it out of the policy, and that to give it effect requires the conclusion that Markel has a duty to
defend Energym and Morreale.
¶ 44 We find that both exclusions can be given effect. First, we reject the premise of Energym and
Morreale that giving effect to the youth related organizations exclusion means that “no claim of
sexual misconduct, no matter by whom committed, can ever be covered by the policy.” Rather,
the youth related organization exclusion excludes coverage for claims involving sexual abuse or
molestation “of any person in the care, custody, or control of any insured.” It further specifically
indicates that it applies to risks involved in the recreational, physical, or educational care and
development of children, including, among other things, gymnastics clubs and studios. Thus, if a
complaint were filed against Energym or Morreale alleging that one of their employees had
committed sexual abuse or molestation of a person who had never been in their care, custody, or
control for any reason associated the recreational, physical, or educational care and development
of children, then the youth related organizations exclusion would not apply. 4 In such a case, the
provisions of the sexual abuse or molestation exclusion could be given effect as coverage would
not be excluded by the youth organizations exclusion. Thus, the provisions of the sexual abuse or
molestation exclusion are not rendered illusory or surplusage based on the existence of the youth
4
Say, for example, they were sued by an adult alleging that she had come to the Energym premises
to repair some broken equipment when she was sexually assaulted by an Energym employee. The plaintiff
in that case would not be a “person in the care, custody, or control of any insured,” nor would the risk
involved be one associated with the recreational, physical, or educational care or development of children.
Thus, there are situations in which an insured could be sued for injuries arising out of sexual abuse or
molestation for which coverage would not be excluded by the youth related organizations exclusion.
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No. 1-19-0092
related organizations exclusion.
¶ 45 However, in any case where the sexual abuse or molestation exclusion applies, there is an
exception to that exclusion in the second paragraph. The exception provides that, notwithstanding
the exclusion, “the insured shall be protected under the terms of this policy as to any claim and/or
allegation which may be covered by the policy upon which suit may be brought against him.”
(Emphasis added.) Under its plain language, the protection contemplated by the exception applies
only to claims or allegations “which may be covered by the policy.” If a claim or allegation is not
“covered by the policy” because a different exclusion applies to exclude coverage under the policy,
then the protection contemplated by the exception to the exclusion would not apply. See Western
Casualty & Surety Co. v. Brochu, 105 Ill. 2d 486, 498 (1985) (the fact that one exclusion contains
an exception preserving coverage granted under the insuring provision does not prevent coverage
from being limited by a different exclusion).
¶ 46 As this case demonstrates, some claims will not be covered by the policy because the youth
related organizations exclusion excludes coverage; in such cases, the exception to the sexual abuse
or molestation exclusion would not apply because the claim is not otherwise “covered by the
policy.” But as discussed above, there could be claims involving sexual abuse or molestation for
which the youth related organizations exclusion does not exclude coverage; in such cases, the
youth related organizations exclusion would not prevent the exception to the sexual abuse or
molestation exclusion from applying by excluding the claim from being “covered by the policy.”
As the exception can be applied in appropriate cases, it is not rendered illusory or surplusage by
the youth organization exclusion. Here, assuming arguendo that the sexual abuse or molestation
exclusion applies, Energym and Morreale would not be “protected” under the exception to it
because the youth related organizations exclusion prevents these claims from being “covered by
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No. 1-19-0092
the policy.” Therefore, we reject the arguments of Energym and Morreale that the exception to the
sexual abuse or molestation exclusion requires Markel to defend them in this case.
¶ 47 Energym and Morreale argue that if Markel’s interpretation of the youth related organizations
exclusion is plausible, this could should find that the exclusion is ambiguous and construe it against
Markel as its drafter. However, a provision of an insurance policy is not rendered ambiguous
merely because the parties disagree as to its meaning. Founders Insurance Co. v. Munoz, 237 Ill.
2d 424, 433 (2010). Beyond this brief statement, Energym and Morreale do nothing to articulate
or develop any argument as to why this exclusion is ambiguous. It is well-established that an
appellant forfeits a point by failing to argue it. Susman v. North Star Trust Co., 2015 IL App (1st)
142789, ¶ 45; Ill. S. Ct. R. 341(h)(7) (eff. May 25, 2018) (appellant’s argument “shall contain the
contentions of the appellant and the reasons therefor”). We find therefore that Energym and
Morreale have forfeited their argument that the youth related organizations exclusion is
ambiguous.
¶ 48 Energym and Morreale next make an argument grounded in public policy concerning the
exclusions at issue. Although it is somewhat unclear, we do not interpret their argument to be that
the youth related organizations exclusion or the sexual abuse or molestation exclusion should be
invalidated as against public policy. 5 Rather, they argue that, “[e]ven if the public policy of the
State of Illinois does not completely prohibit molestation exclusions of the kind that Markel
5
The closest they get to arguing that either exclusion should be invalidated as against public policy
is one sentence in which they state, “To the extent that this court may not agree that the two Markel sexual
molestation exclusions must be read together to compel Markel to provide a defense for Energym and
Morreale, we submit that this court may need to consider the possibility that these exclusions are so contrary
to the public policy of this state that they must be invalidated.” If Energym and Morreale intended by this
to argue that the exclusions should be invalidated as in violation of public policy, we would find this
argument far insufficient to satisfy their “heavy burden of demonstrating a violation of public policy.”
Country Preferred Insurance Co. v. Whitehead, 2012 IL 113365, ¶ 28.
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No. 1-19-0092
inserted in its [c]ommercial [g]eneral [l]iability policies, this court must construe those exclusions
in light of the public policies of this state, especially those that favor the protection of children.”
They cite a number of cases recognizing that the protection of children, and in particular the
protection of children from sex offenders, is an important public policy of this state. See, e.g., Doe
v. Coe, 2019 IL 123521, ¶ 62; Jane Doe-3 v. McLean County Unit District No. 5 Board of
Directors, 2012 IL 112479, ¶¶ 36-37. They also cite cases recognizing the public policy
consideration that liability insurance policies are not merely private contracts, but instead they
operate to protect victims of injury who are third parties to the contract and should therefore be
liberally interpreted in favor of coverage. See, e.g., State Security Insurance Co. v. Burgos, 145
Ill. 2d 423, 438 (1991); M.F.A. Mutual Insurance Co. v. Cheek, 66 Ill. 2d 492, 498 (1977); Country
Mutual Insurance Co. v. Hagan, 298 Ill. App. 3d 495, 506 (1998). They state that they are asking
“for this court to keep in mind the compelling public policy in favor of protecting children, and
particularly in protecting children from abuse, to accord that public policy the ‘fundamental’
priority to which it is entitled, and to evaluate the Markel molestation exclusions in light that public
policy.” They argue that “these public policies strongly argue in favor of a construction of the
Markel molestation exclusions that, by compelling Markel to defend Energym and Morreale, at
least keeps open the possibility that Hannon’s victims might receive the recompense that they may
be entitled to under law.”
¶ 49 Cases involving the sexual abuse or molestation of minors by those in a position of authority
naturally tug at the sympathies of the court and the court’s desire to protect children. However, our
sympathies about the possibility that insurance will be unavailable to compensate the minor
victims of Hannon’s alleged misconduct cannot overcome the plain language of the youth related
organizations exclusion that excludes coverage for the claims at issue. Although we certainly
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No. 1-19-0092
recognize and agree that the protection of minors from sexual offenders is an important public
policy, we also agree with the trial court’s assessment that enforcement of the youth related
organizations exclusion actually promotes this public policy. The exclusion “encourages insureds
to carefully screen and monitor their employees since the insureds are aware they will not receive
insurance coverage if they employ an individual who commits acts that fall within the behavior
outlined in the Youth Related [Organizations] Exclusion.” Similarly, enforcement of the exclusion
protects minors by ensuring that those responsible for the sexual abuse or molestation of minors
cannot escape having to compensate minors financially for the harm they cause. In other words,
enforcement of the exclusion ensures that “economic liability *** be placed with the same
precision as moral liability is placed—squarely on the shoulders of the abuser.” Western States
Insurance Co. v. Bobo, 268 Ill. App. 3d 513, 521 (1994).
¶ 50 For these reasons, we hold that the youth related organizations exclusion excludes insurance
coverage for Energym and Morreale for all claims against them in the four underlying complaints
involved in this case. Based on this, we further hold that Markel did not have a duty to defend
them against those underlying complaints.
¶ 51 Therefore, returning to the question of whether Markel’s sending of the letter disclaiming
coverage on January 20, 2017, prior to reviewing an underlying complaint was a breach of its duty
to its insureds, we find that the condition that potentially could have arisen to cause this letter to
amount to a breach—i.e., the filing of an underlying complaint against the insureds that potentially
fell within the coverage of the policy—ultimately did not in fact occur. Pope, 335 Ill. App. 3d at
48. Thus, as no duty to defend ever existed, any refusal by Markel to defend could not have been
a breach of that duty, and application of the doctrine of estoppel is not appropriate. Ehlco, 186 Ill.
2d at 151; Pope, 335 Ill. App. 3d at 51-52.
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No. 1-19-0092
¶ 52 Because we find as a matter of law that Markel did not breach its obligations under the
insurance policy by sending its letter of January 20, 2017, we affirm the trial court’s striking of
the five affirmative defenses asserted by Energym and Morreale to the second amended complaint.
We further affirm the trial court’s granting of judgment on the pleadings in favor of Markel and
its declaratory judgment that Markel owes no duty to defend or indemnify Energym or Morreale
for claims alleged in the four underlying suits at issue.
¶ 53 Finally, based on our conclusion that Markel has no liability under the policy at issue, we
affirm the trial court’s dismissal of Counts II and IV of the amended counterclaims of Energym
and Morreale, in which they sought as part of their taxable costs in the action their attorney fees,
costs, and a penalty under section 155 of the Illinois Insurance Code (215 ILCS 5/155 (West
2016)). Where, as here, no coverage is owed under the policy, there can be no finding that the
insurer acted vexatiously or unreasonably in denying the claim. Rhone v. First American Title
Insurance Co., 401 Ill. App. 3d 802, 815 (2010); Martin v. Illinois Farmers Insurance, 318 Ill.
App. 3d 751, 764 (2000) (insurer “cannot be liable for section 155 relief where no benefits are
owed”).
¶ 54 III. CONCLUSION
¶ 55 For the foregoing reasons, the judgment of the trial court is affirmed.
¶ 56 Affirmed.
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