Commonwealth Insurance v. Stone Container Corp.

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 02-2061
COMMONWEALTH INSURANCE COMPANY;
HARTFORD FIRE INSURANCE COMPANY;
NAVIGATORS INSURANCE COMPANY; EMPLOYERS
INSURANCE COMPANY OF WAUSAU; and NEW YORK
MARINE AND GENERAL INSURANCE COMPANY,
Plaintiffs,
v.
STONE CONTAINER CORPORATION,
Defendant-Counterclaim
Plaintiff-Appellant,
v.
AON RISK SERVICES, INC. OF ILLINOIS
and AON RISK SERVICES, INC. OF MARYLAND,
Counterclaim
Defendants-Appellees.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 99 C 8471—Charles P. Kocoras, Chief Judge.
____________
ARGUED JANUARY 9, 2003—DECIDED MARCH 19, 2003
____________
2 No. 02-2061
Before RIPPLE, ROVNER, and EVANS, Circuit Judges.
EVANS, Circuit Judge. Before us today is but a small part
of a much larger dispute over insurance coverage for an
$80 million explosion at a Florida pulp and paper plant.
The issue is whether the statute of limitations bars the
claims against an insurance broker.
Stone Container Corporation is a pulp and paper com-
pany with a plant in Panama City, Florida. Aon Risk Ser-
vices is an insurance broker. In 1994 Aon procured insur-
ance policies for Stone from several providers. It obtained
a binder for a “boiler and machinery” policy from Hart-
ford Steam Boiler Insurance Company and binders for
“all risk” insurance from several carriers.
In April 1994 a horrendous explosion occurred at the
Panama City plant. The blast killed three employees, in-
jured others, and caused extensive property damage.
The losses were estimated to exceed $80 million. The next
month, Hartford notified Stone that it was denying cov-
erage. The all-risk insurers waited until November to
deny coverage. Everyone agrees that by November 15,
1994, Stone knew that its insurers were refusing to cov-
er the loss.
In February 1995 the all-risk insurers filed the first
lawsuit: an action seeking a declaratory judgment that
their policies did not provide coverage. This suit was
dismissed without prejudice so that Stone could pursue
an action solely against Hartford under the boiler and
machinery policy. At the same time, Stone and the all-
risk insurers (but not Aon) signed agreements tolling
the statute of limitations until the suit against Hartford
was resolved. Stone won against Hartford in the district
court but lost when the case came to us on appeal. Stone
Container Corp. v. Hartford Steam Boiler Inspection and
Ins. Co., 165 F.3d 1157 (7th Cir. 1999).
No. 02-2061 3
The decision on appeal that Hartford’s policy did not cov-
er the loss prompted the all-risk insurers to reinstate
their declaratory judgment action. Stone answered and,
in January 2000, for the first time asserted third-party
claims against Aon. The claims were for breach of con-
tract, negligence, and breach of fiduciary duty for fail-
ing to obtain adequate insurance coverage for Stone. Aon
moved for summary judgment in the district court, ar-
guing that the claims were time-barred. The district
judge agreed and Stone has appealed.
The issue is one of Illinois law. Until January 1996,
the applicable statute of limitations was 735 ILCS 5/13-
205, which allows a plaintiff 5 years to bring a suit that
is not otherwise subject to a specific limitations period.
But in January 1996, a 2-year statute of limitations took
effect for suits against insurance brokers. 735 ILCS 5/13-
214.4.
The new statute of limitations presents a question we
will soon discuss, but our primary task is to determine
when Stone’s cause of action against Aon accrues as that
term is used in considering statute of limitations ques-
tions. Stone argues that the cause of action does not ac-
crue until the underlying action regarding coverage is
resolved. Only then might Stone be without coverage.
Without an adverse outcome, Stone claims it has suf-
fered no damage from Aon’s alleged negligence. Aon, on
the other hand, argues that Stone knew by November 15,
1994, that its insurers were not going to cover the loss.
Also by that time, Stone had, in fact, begun to suffer
damage in the form of attorney fees and other costs.
The district court based its decision that the claims
were time-barred on an Illinois Court of Appeals case—
Broadnax v. Morrow, 762 N.E.2d 1152 (Ill. App. 2002).
Directly on point, Broadnax was a case brought by an
insured against his insurance agents. The court decided
4 No. 02-2061
that the statute of limitations accrued when the insur-
ance company denied the claim. It said, “[W]aiting for a
final judicial determination of [the insurer’s] responsibil-
ity in the breach of contract matter and then waiting
nearly two years, almost the entire limitations period,
before pursuing a negligence action against the defen-
dants is not a reasonable application of the discovery
rule in this case.” At 1158. A dissenter thought that par-
ties should not be compelled to file anticipatory claims
which might turn out to be unnecessary if the court
ruled that coverage existed. For this proposition, the dis-
sent relied on Guzman v. C.R. Epperson Construction, Inc.,
752 N.E.2d 1069 (2001), a case which Stone, not surpris-
ingly, relies on here. Stone argues that Guzman and a
number of cases involving malpractice claims indicate
that Broadnax is outside the general body of Illinois law
and is therefore wrongly decided.
What we have, then, is that the highest state court
in Illinois, the Illinois Supreme Court, has not decided
the precise issue before us, but an intermediate appel-
late court has. We are required to apply state law as the
highest court of the state interprets it. But in the absence
of guiding authority from the state’s highest court, we
give “great weight to the holdings of the state’s intermedi-
ate appellate courts and ought to deviate from those
holdings only when there are persuasive indications
that the highest court of the state would decide the case
differently from the decision of the intermediate appel-
late court.” Allstate Ins. Co. v. Menards, Inc., 285 F.3d
630, 637 (7th Cir. 2002) (Ripple, J.).
So as we see it, we must follow Broadnax unless there
are clear, and persuasive, reasons not to do so. Upon
our review, we find no clear and persuasive reasons why
the Illinois Supreme Court would not decide the issue
presented here in a manner inconsistent with Broadnax.
No. 02-2061 5
First of all, Broadnax is not the anomaly Stone would
have us believe it is. Indiana Insurance Company v.
Machon & Machon, Inc., 753 N.E.2d 442 (Ill. App. 2001),
another Illinois Appellate Court decision, concerns the
accrual of a claim by an insurance company against its
own agent. What had happened was that Indiana In-
surance had issued a policy with “actual cash value”
coverage; the agent, however, had written a letter to the
insured stating that the coverage was for “replacement
cost.” After a fire occurred in a building the insured
owned, Indiana Insurance sued the agent, saying that, as
a result of the agent’s conduct, it had paid replacement
cost and so was damaged by an amount of money equal
to the difference between replacement and actual cost of
the building. The issue for the court was when the cause
of action against the agent accrued. The court noted that
in cases of torts arising out of contracts, the cause of ac-
tion ordinarily begins to run when the duty is breached,
not when the damages are sustained. But, the company
argued, it could not have known of the breach until the
loss occurred and its damages were specifically calculable.
The court agreed that the company may not have known
of the breach until after the loss occurred but found
that it “knew of the loss long before it actually paid the
claim . . . , at the least on the date the insured filed a
claim.” At 446. Indiana Insurance is, of course, an appel-
late court case and so does no more than Broadnax to tell
us how the Illinois Supreme Court would rule. But it
does indicate to us that Broadnax is not standing alone
as an aberration.
Guzman, on the other hand, is an Illinois Supreme
Court case, and so could help us resolve the issue of
what that court would do in our situation. But it does
not carry the day for Stone. Guzman is an indemnity
case. It involved a homeowner’s breach of contract ac-
tion against a general contractor. The general contractor
6 No. 02-2061
filed third-party complaints against subcontractors for im-
plied indemnity. The issue was whether the third-party
complaint was time-barred, which turned on when the
cause of action accrued. The court found that “the cause
of action for an implied contract of indemnity does not
accrue until the defendant has a judgment entered against
him or until he settles the claim made against him.” The
court based its conclusion on the statute of limitations
for claims for contribution and indemnity. We are not
convinced that the Illinois Supreme Court would apply
the reasoning of Guzman to claims against insurance
agents. Claims for indemnity are specifically dependent
on the underlying claim in a way in which claims against
agents are not.
Neither are we convinced that cases involving profes-
sional malpractice claims compel us to disregard Broad-
nax. First of all, except for one, the cases relied on are
from Illinois appellate courts and federal district courts
and, for that reason shed no more light than does Broadnax
on how the Illinois Supreme Court would rule on a case
against an insurance broker. On top of that, the one Illi-
nois Supreme Court malpractice case on which Stone
primarily relies does not support its position. Jackson
Jordan, Inc. v. Leydig, Voit & Mayer, 633 N.E.2d 627 (Ill.
1994), involved advice given by attorneys as to whether
certain machines Jackson Jordan intended to build would
infringe any existing patents. The attorneys said they
wouldn’t when, in fact, it turned out that they very well
might. The question was when the cause of action against
the attorneys accrued. The question was left neatly unre-
solved when the court found a separate basis for decision.
But the court recognized at least three possible accrual
dates: the date on which the patent holder sued another
company; the date of a letter from the patent holder to
Jackson Jordan threatening to sue for infringement; or
the date the appeals court rendered its first ruling ad-
No. 02-2061 7
verse to Jackson Jordan. No preference was expressed for
any of these dates, making it very hard for us to con-
clude that the case undermines the Broadnax holding.
As an aside, we might add that it is not a foregone
conclusion that the same analysis that is applied to legal
malpractice claims would be applied to claims against
insurance brokers. The issue as to who is a professional
and who is not for purposes of statutes of limitations on
malpractice claims has caught the attention of several
courts. The Court of Appeals of New York in Chase Scien-
tific Research, Inc. v. NIA Group, Inc., 749 N.E.2d 161(2001), has recently determined that insurance agents
are not professionals for purposes of the New York mal-
practice statute of limitations as have courts in Florida
(Pierce v. AALL Ins. Inc., 531 So.2d 84 (1988)) and Ken-
tucky (Plaza Bottle Shop, Inc. v. Torstrick Ins. Agency, Inc.,
712 S.W.2d 349 (Ky. App. 1986)). Other courts have
found otherwise. See Flemens v. Harris, 915 S.W.2d 685(Ark. 1996), and Burns v. Connecticut Mut. Life Ins. Co.,
743 A.2d 566 (RI 2000).
And as long as we are sampling the law of other states,
we note that nothing in Broadnax is outside the norm of
what other jurisdictions have concluded—if, in fact, we
could possibly say there is a norm. On this issue, the
states are—so to speak—all over the map. The Supreme
Court of Arkansas says that the statute of limitations on
a claim against an insurance agent begins to run at the
time the negligent act occurs. Flemens. A court of appeals
in Nebraska considered a suit against an agent for his
failure to renew a liability policy issued to an allegedly
negligent driver’s employer and concluded that the stat-
ute began to run on an oral contract upon the breach of
that contract. Motor Club Ins. Ass’n v. Fillman, 568
N.W.2d 259 (Neb. App. 1997). A Maryland court con-
cluded that the statute began to run on the day that the
insureds learned the insurer would not defend them.
8 No. 02-2061
American Home Assurance Co. v. Osbourn, 422 A.2d 8 (Md.
Ct. Spec. App. 1980). The Texas Supreme Court has said:
Today we are asked to decide whether, in a suit by
an insured against its agent for negligent breach of
the agent’s duty to obtain insurance, the injury-prod-
ucing event was the denial of coverage by the insur-
ance company, or the final resolution of the coverage
dispute by the courts. We hold that Kenneco sus-
tained injury when coverage was denied and, therefore,
limitations commenced on that date because all facts
required for a cause of action existed at that time.
Johnson & Higgins of Texas, Inc. v. Kenneco Energy, Inc.,
962 S.W.2d 507, 514 (Tex. 1998). An appeals court in
Massachusetts found that because damage is a prerequi-
site to a negligence suit, a negligence claim against a
broker accrued when the insured suffered an unprotected
loss but that a claim for breach of contract against the
broker accrued at the time the broker failed to procure the
requested insurance. International Mobiles Corp. v. Car-
roon & Black/Fairfield & Ellis, Inc., 560 N.E.2d 122(Mass. App. 1990). On the other hand, some courts are
more in line with what Stone urges here. The Florida
court says the cause of action accrues when the proceed-
ing against the insurer becomes final. Blumberg v. USAA
Cas. Ins. Co., 790 So.2d 1061 (Fla. 2001). And courts of
appeals in Ohio and Missouri say that a claim against
an agent begins to run when the insurer obtains a de-
claratory judgment that it was not obligated to provide
coverage. Kosa v. Frederick, 737 N.E.2d 1071 (Ohio App.
2000); Wallace v. Helbig, 963 S.W.2d 360 (Mo. App. 1998).
In short, there is far from a clear pattern in state court
decisions; therefore, there is no indication that Broadnax
is out of step.
But to return to Illinois, where our journey started, there
simply is no very clear indication of what the Illinois
No. 02-2061 9
Supreme Court might decide. However, that court has
thoroughly discussed the Illinois discovery rules in Her-
mitage Corp. v. Contractors Adjustment Co., 651 N.E.2d
1132 (Ill. 1995). Hermitage was a suit against the prepar-
er of what turned out to be a defective mechanic’s lien.
The issue was when the cause of action on the lien accrued.
Ordinarily, the court said, for contract claims and torts
arising out of contractual relationships, the cause of ac-
tion accrues at the time of the breach of the contract.
But because the rule sometimes produces harsh results,
the Illinois discovery rule, when it is applied, delays
the commencement of the statute of limitations until “the
plaintiff knows or reasonably should know that he has
been injured and that his injury was wrongfully caused.”
At 1135. The cause of action on the lien did not accrue
when the lien was prepared because Illinois lien law is
technical and complex and the plaintiffs would have had
no reason to know at that time that they were injured.
The issue came down to whether the accrual date was
the date on which a circuit court reduced the mechanics
lien, as the defendants had argued, or whether it was
when the plaintiffs’ motion for reconsideration was de-
nied. Plaintiffs argued that until the motion was denied
they could not be sure they were injured. It is an argument
similar to the one Stone makes here and, in Hermitage,
the argument failed. The court determined that the plain-
tiffs were on notice that an injury may have occurred
when their lien was reduced; there was, apparently, no
need to await a final decision from the courts. Though
reasonable people could disagree about what Hermitage
means to the present case, we conclude that it could
very well mean that Stone had notice that it had a cause
of action against Aon when the insurers denied coverage.
Hermitage does not provide us with certainty about
what the Illinois Supreme Court would do, but neither
does it undermine Broadnax. Ours, then, is a case in which
it is proper for us to defer to the Illinois Appellate Court.
10 No. 02-2061
When we do that, we must concur with the district court’s
finding that the cause of action accrued on November 15,
1994.
Stone also argues that the statute of limitations should
be tolled during the time between its earlier victory in
the district court and the time that decision was re-
versed here 4 years ago in Stone v. Hartford. But given
our previous discussion, we cannot see any basis for tolling
the statute.
Finally, we will look briefly at the new statute of lim-
itations. Given the accrual date of November 15, 1994—
when Stone knew coverage was at issue—under the old
statute, Stone had until November 15, 1999, to file suit.
However, in January 1996 the new 2-year statute of lim-
itations took effect. It seems to be undisputed that because
the old statute of limitations had not yet expired, the
new statute governs the present case so long as Stone
still had a reasonable time in which to file before the
new statute ran out. See Guzman. We find that Stone had
a reasonable time in which to file before the expiration
of the 2-year statute ran, and in any case the 4 years it
waited before filing is far outside any reasonable time
period. The judgment of the district court is AFFIRMED.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—3-19-03