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American Safety Cas. Insurance Co. v. City of Waukegan

776 F. Supp. 2d 670 (N.D. Ill. 2011)

Words & Phrases

Declaratory Judgment: Timing

Trial Judge



Insurer estopped because it failed to timely file declaratory judgment.

Fact Summary

The American Safety Casualty Insurance Company court held an insurer estopped from asserting coverage defenses when it failed to file a declaratory judgment action before the underlying case was resolved (or even before the trial in that matter became imminent) and, indeed, failed to notify its insured that it was denying coverage until weeks before trial of the underlying claims.  The insurer received notice of the claim 27 months before it denied coverage, and did not file a declaratory judgment action until 10 months after judgment was entered in the underlying action. 

The underlying plaintiff in American Safety was convicted of aggravated criminal sexual assault and home invasion and was later exonerated through DNA testing.  The underlying incident allegedly occurred in September 1989, and the plaintiff was arrested on September 21, 1989 and convicted on February 28, 1990.   After his release, he failed to meet the deadline to register as a sex offender and was arrested and held for one day. On January 28, 2001, Immigration and Naturalization Services arrested him and initiated deportation proceedings based on his sexual assault conviction.  He was held in INS custody for one month – from January 28, 2001 until February 28, 2001.  He then obtained post-conviction DNA testing on August 10, 2001, and on April 26, 2002, the Circuit Court for the Nineteenth Judicial Circuit for Lake County, Illinois reversed his conviction. 

Thereafter, on April 23, 2004, he sued the arresting officer, the City of Waukegan and others, asserting federal claims for false arrest and false imprisonment, violation of the Due Process Clause through malicious prosecution pursuant to Section 1982; conspiracy pursuant to Section 1983; state law malicious prosecution; state law intentional infliction of emotional distress; respondeat superior; and indemnification.  The claims against the City of Waukegan were dismissed based on the City’s representations that it would indemnify the officer for any compensatory damages and attorneys’ fees entered against him.  On October 17, 2006, the jury returned a verdict for the plaintiff in the amount of $9,063,000, and the district court entered an order finding that the City of Waukegan would be “held liable as indemnitor for all sums that Hendley [the officer] is obligated to pay,” and that the City would be “jointly and severally liable … as to all such sums…”  The City paid $11,397,195.39 and incurred an additional $1,079,296.90 in its own fees in defending the officer. 

American Safety issued two Comprehensive Law Enforcement Liability Policies to Waukegan with policy periods of November 1, 2000 to November 1, 2001 and November 1, 2001 to November 1, 2002.   The policies required American Safety to pay all sums in excess of the $100,000 “Self Insured Retention” that any “Insured” became legally obligated to pay as damages because of “Bodily Injury” or “Property Damage” caused by an “Occurrence,” or “Advertising Injury,” or “Personal Injury” caused by an offense to which the coverage applied.  The policies also required American Safety to pay all sums in excess of the SIR that any “Insured” became legally obligated to pay as damages because of “Bodily Injury” or “Property Damage” caused by an “Occurrence” in the course of a “Law Enforcement Activity” …  The policies excluded from coverage damages an “Insured” was “obligated to pay by reason of the assumption of liability under a contract or agreement,” but did not exclude from coverage “liability for damages assumed in a contract or agreement that is an “Insured Contract” provided “Bodily Injury,” “Property Damage,” “Personal Injury” and/or “Advertising Injury” occur subsequent to the execution of the contract or agreement.” The policies defined “Insured” to include the City of Waukegan and any employees, and defined “Law Enforcement Activity” as “all operations of [the City’s] police force…” Finally, the policies defined “Personal Injury” to include “(a) False arrest, detention or imprisonment; (b) Malicious prosecution; … (g) Violation of the Federal Civil Rights Act of 1871 or 42 U.S.C. 1983 and similar laws.” 

As a precaution, the City provided notice of the claim to American Safety in July 2004, and thereafter provided regular status reports to the claims handler assigned to the claim.   In response to an inquiry from the excess insurer regarding American Safety’s coverage position, the claims handler answered, “wrongful acts are covered under the primary policy.”  American Safety did not deny coverage over the ensuing two years, including when the file was transferred to another claims handler.  In June, 2006, nearly two years after receiving notice of the claim, American Safety suggested to the City of Waukegan for the first time that the claim might not be covered.  Id. According to American Safety, based on the dates of imprisonment (1990-1993), “it did not ‘appear’ that the claim would be covered.”  Id.  Finally, on September 26, 2006, one week before the trial and 27 months after the City tendered the claim, American Safety denied coverage, claiming that the date of loss was not within the policy period.  American Safety never appeared at the underlying trial for Waukegan or defended under a reservation of rights. 

In determining whether American Safety breached its duty to defend, the court first considered whether the allegations in the underlying complaint triggered coverage.  The court held that the underlying plaintiff’s Section 1983 false arrest and false imprisonment claims accrued before the policy periods (in 1989 and 1990).  For insurance coverage purposes, such a claim accrues when the underlying plaintiff “is held pursuant to warrant or other judicially issued process.” (quoting National Casualty Co. v. McFatridge, 604 F.3d 335, 344 (7th Cir. 2010).  However, claims challenging the validity of a conviction (including claims for unconstitutional conviction, imprisonment and denial of due process) “do not accrue until an individual proves that his conviction has been reversed on direct appeal or called into question by a federal court’s issuance of a writ of habeas corpus.”  Id. (quoting McFatridge, 604 F.3d at 344) (internal quotations omitted).  Moreover, a malicious prosecution claim accrues when the prior criminal proceedings are terminated.  (quoting McFatridge, 604 F.3d at 344).  Accordingly, the court held that the underlying plaintiff’s Section 1983 claim for violation of due process through malicious prosecution did not accrue until he was exonerated – on April 26, 2002.  Similarly, the court held that the state law malicious prosecution claim did not accrue until the underlying conviction was invalidated in April 2002, because invalidation of conviction is an essential element of the claim.  Thus, because the underlying complaint alleged at least two causes of action that accrued within the policy period, the claim triggered the American Safety policy thereby obligating American Safety to defend its insured, and American Safety breached its duty to defend. 

Because American Safety did not defend under a reservation of rights or seek a declaratory judgment that it owed no duty to defend or indemnify, American Safety was estopped from asserting any coverage defenses including the voluntary payments exception.    While American Safety admittedly filed a declaratory judgment action, the court held the action untimely because it was not brought before the resolution of the underlying case or before trial was imminent, nor was it filed within a reasonable time of American Safety’s receipt of  notification of the claim.  (citing Santa’s Best Craft LLC v. St. Paul Fire & Marine Ins. Co., 611 F.3d 339, 349 (7th Cir. 2010) and Employers Ins. Of Wausau v. Ehlco Liquidating Trust, 186 Ill.2d 127, 237 Ill. Dec. 82, 708 N.E.2d at 1138 (Ill. 1999)).  The court also rejected the insurer’s argument that it was not required to file its declaratory judgment action until after the insured exhausted its SIR, noting that the SIR language did not prevent the insurer’s policy obligations – including the duty to defend – from attaching until the SIR was exhausted. 

The court noted that, even assuming the law regarding when a claim for malicious prosecution accrues was unsettled at the time it received notice (which, according to American Safety, excused its delay), American Safety did not act in a timely manner. 

American Safety's actions were inconsistent with an insurer asserting a bona fide dispute on an unsettled question of law.  American Safety’s claims handler testified that one of the primary rights of an insured is to know if there is no coverage under a given policy.  American Safety did not suggest to Waukegan that coverage depended on an open question of law for over two years.  If this was truly a ‘bona fide’ dispute, American Safety should have raised it sooner than two years via a declaratory judgment action.  … [American Safety] waited over ten months [after judgment was entered in the underlying case] to file the instant suit to sort out that coverage.