Nationwide Insurance v. Central Laborers' Pension Fund

In the
United States Court of Appeals
For the Seventh Circuit
No. 12-1784
N ATIONWIDE INSURANCE C OMPANY,
Plaintiff-Appellee,
v.
C ENTRAL L ABORERS’ P ENSION F UND, et al.,
Defendants-Appellants.
Appeal from the United States District Court
for the Southern District of Illinois.
No. 11 CV 00618—J. Phil Gilbert, Judge.
A RGUED N OVEMBER 2, 2012—D ECIDED JANUARY 11, 2013
Before M ANION, W ILLIAMS, and H AMILTON, Circuit Judges.
M ANION, Circuit Judge. While employed at an ac-
counting firm, Jeanne Hentz had a compact disc
belonging to the firm stolen from her personal vehicle
which was parked at her house. The compact disc con-
tained confidential information belonging to some of
her employer’s clients. Those clients sued Hentz in
Illinois state court for credit monitoring and insurance
expenses incurred to mitigate potential misuse of the
2 No. 12-1784
stolen information. She tendered the defense of the state
action to her homeowner’s insurance company, Nation-
wide Insurance Co. Seeking a declaration that it had no
duty under Hentz’s insurance policy to defend or indem-
nify her, Nationwide filed suit in federal court against
Hentz and the clients seeking to hold her liable for the
security expenses. The district court granted summary
judgment in favor of Nationwide. The clients appeal.
We affirm.
I. Factual Background
Hentz is an accountant employed by Kevin W. Bragee,
CPA, LLC (the “Firm”). The Central Laborers’ Pension
Fund, Central Laborers’ Welfare Fund, and Central Labor-
ers’ Annuity Fund (collectively, the “Funds”) hired the
Firm to perform accounting and auditing services. To
perform those services, the Firm possessed a compact
disc containing confidential and protected information,
including the names, birth dates, and Social Security
numbers of approximately 30,000 individual participants
and beneficiaries of the Funds. The Firm agreed in
writing to ensure that its employees and agents would
safeguard the information on the compact disc. Thus,
Hentz, who came into possession of the compact disc, had
a duty to safeguard the confidential information on
the disc as a condition of her employment.
At the end of a day at work, Hentz placed the
compact disc in a laptop, put the laptop in her personal
vehicle, and parked in the open at her residence. Unfor-
tunately, the laptop containing the compact disc was
No. 12-1784 3
stolen from Hentz’s vehicle. In order to mitigate potential
misuse of the confidential information, the Funds
incurred nearly $200,000 in credit monitoring and insur-
ance expenses. Seeking to recoup the cost of these
security efforts, the Funds brought a state action in
Illinois against Hentz alleging that she negligently
breached duties she owed to the Funds.1 Hentz tendered
the defense of the state action to Nationwide, which had
written her homeowner’s insurance policy (the “Policy”).
Believing that the Policy did not cover the theft of the
compact disc, Nationwide brought a federal diversity
action against Hentz and the Funds seeking a declara-
tion that it had no duty to defend or indemnify Hentz.
Nationwide argued that Hentz’s claim was not covered
because the Policy does not cover “ ‘[p]roperty damage’
to property rented to, occupied or used by or in the care
of the ‘insured’.” Nationwide also relied upon language
in the Policy stating that it does not cover “ ‘property
damage’ arising out of or in connection with a ‘busi-
ness’ conducted from an ‘insured location’ or engaged
in by an ‘insured’, whether or not the ‘business’ is owned
or operated by an ‘insured’ or employs an ‘insured’.” The
Policy provides that this latter exclusion “applies but is
not limited to an act or omission, regardless of its nature
or circumstances, involving a service or duty rendered,
promised, owed, or implied to be provided because of
the nature of the ‘business’.”
1
At oral argument, counsel for the Funds indicated that efforts
to recover their security expenses from the Firm are pending.
4 No. 12-1784
Nationwide and the Funds filed cross-motions for
summary judgment. The district court concluded that
the Policy’s “in care of” exclusion applied and, conse-
quently, that Nationwide had no duty to defend Hentz
against the Funds’ state action or to indemnify her for
any resulting liability. Thus, the district court granted
Nationwide’s motion for summary judgment and
denied the Funds’ motion. The Funds appeal.
II. Discussion
The Funds contend that the district court erred in
finding that the Policy’s “in care of” exclusion applied.
The Funds argue further that the Policy’s “business”
exclusion—which the district court did not address—
does not apply either. The parties agree that the substan-
tive law of Illinois governs this diversity action. “Under
Illinois law, the interpretation of an insurance policy is
a question of law that is properly decided by way of
summary judgment.” BASF AG v. Great Am. Assur. Co., 522
F.3d 813, 818-19 (7th Cir. 2008) (citing Crum & Forster
Managers Corp. v. Resolution Trust Corp., 620 N.E.2d 1073,
1077 (Ill. 1993)). Thus, we review the district court’s
decision de novo. BASF, 522 F.3d at 819. In determining
whether Nationwide has a duty to defend Hentz, we may
only consider the allegations in the state complaint in
concert with the provisions of the Policy. Id.; U.S. Fid. &
Guar. Co. v. Wilkin Insulation Co., 578 N.E.2d 926, 930
(Ill. 1991). We will find a duty to defend “[i]f the under-
lying complaint[] allege[s] facts within or potentially
within policy coverage . . . .” Wilkin, 578 N.E.2d at 930.
No. 12-1784 5
If the relevant policy language is clear and unam-
biguous, it must be given its plain and ordinary meaning.
Id. But all “doubts and ambiguities must be resolved
in favor of the insured.” Id.
Under Illinois law, an “in care of” exclusion like the
one in the Policy applies only if two elements are met:
the property lost or stolen was (1) within the exclusive
possessory control of the insured at the time of loss; and
(2) a necessary element of the work performed by the
insured. See Stewart Warner Corp. v. Burns Int’l Sec. Servs.,
Inc., 527 F.2d 1025, 1029 (7th Cir. 1975); Bolanowski
v. McKinney, 581 N.E.2d 345, 348 (Ill. App. Ct. 1991)
(collecting cases).2
The state complaint alleged that Hentz, pursuant to
her employment at the Firm, came into possession of
the compact disc and had a duty to safeguard the con-
fidential information that it contained. Hentz’s posses-
sion of the compact disc and duty to safeguard the con-
fidential information amount to the “exercise [of] some
type of possessory control over the” compact disc. See
2
These two elements have been applied by Illinois courts
in cases interpreting “in care of” exceptions in business insur-
ance policies rather than homeowner’s insurance policies.
We recognize that the second element, that the lost or stolen
property was “a necessary element of the work performed by
the insured,” fits well with a business policy but might be an
odd fit under a homeowner’s policy. In this case, however,
because both parties have assumed the element applies and
the element does not affect the outcome, we have also
assumed it applies.
6 No. 12-1784
Bolanowski, 581 N.E.2d at 349;3 see also Liberty Mut. Ins. Co.
v. Zurich Ins. Co., 930 N.E.2d 573, 578 (Ill. App. Ct. 2010)
(“The passive duty of guarding the property gave [the
insured] care, custody or control of the property, even
without any direct contact with the stored goods.”). That
possessory control became exclusive, at least, when
Hentz placed the compact disc in her personal vehicle
that she parked at her residence. See Ins. Co. of N. Am. v.
Adkisson, 459 N.E.2d 310, 312 (Ill. App. Ct. 1984) (finding
exclusive possessory control over property when in-
sured “closed the trailer door”); Liberty Mut. Ins. Co., 930
N.E.2d at 576-78 (holding hotel’s duty to safeguard guests’
property located in a wall safe within the guests’ hotel
3
In Bolanowski, which is discussed extensively by the Funds,
the plaintiffs were musicians who kept their instruments at a
bar where they regularly performed. When a fire destroyed
the instruments, the musicians successfully sued the bar,
which then sought to recover the judgment amount from its
insurer. The insurer argued that the insurance policy’s “in
care of” exclusion applied. The Illinois appellate court held
that the insurance policy’s “in care of” exclusion did not
apply because there was no evidence that the “defendants
were accorded the right or duty to exercise some type of
possessory control over the [property].” 581 N.E.2d at 349.
Bolanowski does not apply here because the state complaint
clearly alleges that Hentz had a duty to safeguard the con-
fidential information on the compact disc. See Liberty Mut. Ins.
Co. v. Zurich Ins. Co., 930 N.E.2d 573, 578 (Ill. App. Ct. 2010)
(“We find Bolanowski distinguishable because the defendants
there did not assume any duty to protect the plaintiffs’ prop-
erty.”).
No. 12-1784 7
room establishes the exclusive-possessory-control
element).4 Thus, the compact disc was stolen while it
was within Hentz’s exclusive possessory control. See
Essex Ins. Co. v. Wright, 862 N.E.2d 1194, 1197 (Ill. App.
Ct. 2007) (“ ‘[I]f the insured has possessory control at
the time the property is damaged, the exclusion clause
will apply.’” (quoting Country Mut. Ins. Co. v. Waldman
Mercantile Co., 430 N.E.2d 606, 609 (Ill. App. Ct. 1981))).
In their reply brief, the Funds additionally argue that
the allegations in the state complaint failed to establish
whether the compact disc was a necessary element
of Hentz’s work. “[I]t is well established that arguments
raised for the first time in a reply brief are waived.”
Broaddus v. Shields, 665 F.3d 846, 860 (7th Cir. 2011). In
their opening brief, the Funds merely cite the two-
element test as the controlling legal standard. But no-
where in their opening brief do they argue that the
4
The Funds contend that it is unclear whether Hentz’s posses-
sion was exclusive because the state complaint does not
address whether others had access to her vehicle. We do not
find this argument persuasive. The relevant inquiry is not
whether Hentz had exclusive access to the compact disc, but
whether Hentz had exclusive control over the compact disc at
the time of the theft. See Caisson Corp. v. Home Indem. Corp., 502
N.E.2d 1168, 1170 (Ill. App. Ct. 1986). Even if others had the
power, with or without Hentz’s permission, to access her
vehicle while it was parked at her residence, such access
would not amount to “the right or duty to exercise some type
of possessory control over the” compact disc. Bolanowski,
581 N.E.2d at 349; cf. Liberty Mut. Ins. Co., 930 N.E.2d at 577-78.
8 No. 12-1784
state complaint does not establish that the compact disc
was a necessary element of Hentz’s work. Nor do
they claim that the district court’s ultimate disposition
was erroneous because the second element was not satis-
fied. The pertinent section of the Funds’ opening
brief analyzes only the first element, that is, whether
Hentz had exclusive possessory control over the
compact disc when it was stolen. Consequently, the
Funds waived their argument concerning the second
element.5
In any event, the Funds’ argument fails on the merits
because the allegations in the state complaint establish
that the compact disc was a necessary part of Hentz’s
work. The state complaint avers that Hentz, as an ac-
countant at the Firm, possessed the compact disc and
had a duty to safeguard the confidential information
contained on it. The Model Code of Conduct of the Na-
tional Association of State Boards of Accountancy says
that maintaining “confidentiality is vital to the proper
performance of [an accountant’s] professional activities.”
Nat’l Ass’n of State Bds. of Accountancy, Uniform
5
The Funds seek to excuse their failure to raise this argument
because “[i]t is the burden of the insurer to affirmatively
prove that an exclusion in an insurance policy applies.” United
Nat’l Ins. Co. v. Faure Bros. Corp., 949 N.E.2d 1185, 1191 (Ill.
App. Ct. 2011). This argument comes too late and lacks
merit. Although it is the duty of the insurer to prove that an
exclusion applies, on appeal the appellants must timely raise
all arguments that the district court erred in finding that an
insurer has met its burden.
No. 12-1784 9
Accountancy Act Model Rules, Art. 10, Principle VI (6th ed.
July 29, 2011) (“A licensee has an obligation to maintain
and respect the confidentiality of information obtained in
the performance of all professional activities.”); see also
Ill. Admin. Code tit. 68, § 1430.3010; Am. Inst. of Certified
Pub. Accountants, Code of Professional Conduct and Bylaws
1799, Rule 301 (June 1, 2011). Because the handling
and care of confidential information is vital to Hentz’s
work as an accountant, the compact disc containing
such information is a necessary, rather than incidental,
element of her ordinary employment activities. See
Stewart Warner Corp., 527 F.2d at 1030.6
In addition to the application of the Policy’s “in care
of” exclusion, the Policy’s “business” exclusion also
precludes coverage in this case. As noted above, the
“business” exclusion does not cover “ ‘property damage’
arising out of or in connection with a ‘business’ . . . en-
gaged in by an ‘insured’, whether or not the ‘business’ is
owned or operated by an ‘insured’ or employs an ‘in-
sured’.” 7 The exclusion “applies but is not limited to an
6
The Funds point out that the state complaint does not specifi-
cally allege that Hentz performed accounting work on behalf
of the Funds. We find this omission immaterial because
Hentz’s duty to safeguard confidential information extends to
all such information that comes into her possession as an
accountant at the Firm—not merely to confidential informa-
tion that relates to client matters assigned to her.
7
The Funds argue that the exclusion is ambiguous because
it could be interpreted only to apply while Hentz is actively
(continued...)
10 No. 12-1784
act or omission, regardless of its nature or circumstances,
involving a service or duty rendered, promised, owed,
or implied to be provided because of the nature of the
‘business’.” The Funds do not dispute that the Firm is a
“business” which employs Hentz, and that, according
to the state complaint, Hentz had a duty to safeguard
the confidential information on the compact disc because
she was an accountant employed by the Firm. Hentz’s
failure to safeguard the compact disc was an omission
amounting to a breach of that duty. Therefore, the
Policy’s “business” exclusion applies. See Allstate Ins. Co. v.
Mathis, 706 N.E.2d 893, 894 (Ill. App. Ct. 1999) (holding
that a “business” exclusion applied where the insured
failed to fulfill a duty directly correlated to providing day-
care services).
Based on our resolution of these issues, we conclude
that Nationwide has no duty to defend Hentz against
the Funds’ state action. Accordingly, we decline to
address the other arguments advanced by the parties
relating to that question.
Finally, Nationwide’s duty to indemnify is only
triggered if Hentz is determined to be liable for dam-
ages in the underlying action. Bituminous Cas. Corp. v.
Fulkerson, 571 N.E.2d 256, 260 (Ill. App. Ct. 1991).
7
(...continued)
engaged in work activities. This alleged ambiguity does not
help the Funds because Hentz’s duty to safeguard clients’
confidential information in her possession does not evaporate
when she is not actively performing other accounting activities.
No. 12-1784 11
Because Nationwide owes no duty to defend her against
the Funds’ state action, Nationwide owes no duty to
indemnify her for liability stemming from that suit. Crum,
620 N.E.2d at 1081 (“Clearly, where there is no duty
to defend, there will be no duty to indemnify . . . .”).
III. Conclusion
Because we hold that the “in care of” exclusion and,
alternatively, the “business” exclusion from Hentz’s
insurance policy apply, Nationwide has no duty to
defend Hentz against the Funds’ state action. Conse-
quently, Nationwide has no duty to indemnify Hentz
should that state action go against her. Therefore, the
district court’s judgment is A FFIRMED.
1-11-13