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General Ins. Co. of Am. v. Clark Mall Corp.

644 F.3d 375 (7th Cir. 2011)

Words & Phrases

Declaratory Judgment: Procedure


Final ruling on the duty to defend was not a “final judgment” for purposes of appeal if there are pending counterclaims that are “substantively intertwined” with the appealed claims.

Fact Summary

In General Insurance Co. of America v. Clark Mall Corp., 644 F.3d 375 (7th Cir. 2011), the Seventh Circuit held that a final ruling on the duty to defend in the insurer’s declaratory judgment was not a “final judgment” for purposes of appeal if there are pending counterclaims that are “substantively intertwined” with the appealed claims.

General Insurance Company (“GIC”) issued a commercial general liability policy to Discount Mega Mall, which excluded from coverage “‘property damage’ to . . . property in the care, custody, or control of the insured.”  Id. at 377.  When a major fire occurred at the mall, a number of tenants sued Discount Mall, alleging that its negligence caused the resulting losses.  Discount Mall tendered the defense to GIC, which denied the tender and filed a declaratory judgment action seeking judicial determination that it had no duty to defend or indemnify under the policy.

In the declaratory judgment action, GIC claimed that the fire losses and resulting lawsuits were subject to the above-referenced exclusion because the fire occurred at night after the mall had closed and because Discount Mall’s employees had locked the building, thereby restricting the tenants’ access.

In response to GIC’s declaratory judgment action, Discount Mall and the other defendants filed their answer and asserted five counterclaims seeking: (1) declaratory judgment that GIC owed defense and indemnity obligations; (2) damages for breach of contract for failure to indemnify; (3) damages pursuant to Illinois statutory law for “vexatious and unreasonable” refusal to defend and indemnify; (4) damages for violation of the Illinois Consumer Fraud and Deceptive Business Practices Act; and (5) damages for common law fraud.  After the parties consented to adjudicate the case before a magistrate judge, Discount Mall and other defendants in GIC’s declaratory judgment action moved for judgment on the pleadings relating to GIC’s duty to defend.

As part of his rulings, the magistrate judge held that GIC had failed to introduce evidence establishing the applicability of the exclusion, and held that GIC had a duty to defend Discount Mall.  GIC moved to reconsider the magistrate judge’s ruling that it was required to produce evidence in support of its exclusionary defenses at the pleading stage.  The motion to reconsider was denied.  Pursuant to GIC’s requested, the court entered its ruling as a final judgment pursuant to Fed. R. Civ. P. 54(b) so GIC could take an immediate appeal.

On appeal, the Seventh Circuit sua sponte considered whether the court had appellate jurisdiction.  Specifically, the panel considered whether the magistrate judge needed to address the issue of GIC’s duty to defend in connection with any of the counterclaims which were still pending in the district court.  Citing to Horn v. Transcon Lines, Inc., 898 F.2d 589, 593-95 (7th Cir. 1990), the court explained that if the duty to defend issue was implicated in any of the remaining counterclaims, then the court’s order that GIC had a duty to defend Discount Mall was subject to revision and was not truly final for purposes of appeal under Fed. R. Civ. P. 54(b) and 28 U.S.C. §1291.

In closing, the panel acknowledged that insurance coverage disputes are often distinct enough to satisfy the final judgment rule and permit immediate review under Fed. R. Civ. P. 54(b) and 28 U.S.C. §1291; however, that was not the case here.  Rather, GIC’s declaratory judgment complaint spawned multiple pending counterclaims that were “substantively intertwined” with the duty to defend issue.  Accordingly, the Seventh Circuit concluded that the final judgment approved by the magistrate judge on the duty to defend ruling was entered in error, and the appeal was dismissed for want of appellate jurisdiction.