823 F.3d 416
7th Cir.2016Background
- Altom Transport (Illinois corp.) hired independent owner-operator Michael Stampley under a lease for trucking services; Altom terminated the contract and Stampley sued alleging violations of 49 C.F.R. § 376.12, breach of contract, and unjust enrichment seeking payment owed under the lease.
- Altom held an ACE Express management liability policy from Westchester (8/3/2013–8/3/2014) and tendered defense and indemnity; Westchester denied coverage and Altom defended itself.
- Stampley made settlement demands within policy limits; Altom forwarded them to Westchester, which did not respond.
- Altom sued Westchester in state court for a declaratory judgment, asserting a duty to defend and § 155 bad-faith claims; Westchester removed to federal court and moved to dismiss under Rule 12(b)(6).
- Westchester relied on two policy exclusions: an unpaid-wages/employment-related exclusion and a contractual-breach exclusion (claims “arising out of” breach of contract).
- The district court granted Westchester’s motion; the Seventh Circuit affirmed, dismissed Stampley as a dispensable nondiverse party, and held the contract-exclusion bars coverage.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the insurer had a duty to defend Altom against Stampley’s suit | Stampley’s claims could arise independently of the lease (e.g., regulatory violation) and thus fall within coverage | Policy excludes claims arising out of contracts; Stampley’s suit is based on the lease and therefore excluded | Held: No duty to defend; claims arise from the lease and fall within the contract exclusion |
| Whether the unpaid-wages/employment-related exclusion applies | Stampley alleged unpaid compensation and misclassification so the unpaid-wages exclusion might apply (Altom argued claims not solely contractual) | Westchester argued claims are employment/compensation-related and fall within that exclusion | Held: Court did not reach merits of this exclusion because contract exclusion independently bars coverage |
| Whether Westchester is estopped from denying coverage because it failed to defend or respond to settlement demands | Altom argued Westchester’s silence and failure to defend estops it from later asserting noncoverage | Westchester argued it did not breach any duty to defend and thus estoppel does not apply | Held: No estoppel — insurer did not breach a duty to defend because claims were excluded |
| Whether complete diversity existed and if Stampley (nondiverse) must be dismissed | Altom argued Stampley was dispensable and not required to be joined; removal should be sustained | Westchester contended jurisdiction existed; Stampley’s presence would defeat diversity | Held: Stampley dismissed as a dispensable nondiverse party under Newman-Green/Fed. R. Civ. P. 21; federal diversity jurisdiction preserved |
Key Cases Cited
- M.F.A. Mut. Ins. Co. v. Cheek, 363 N.E.2d 809 (Ill. 1977) (injured third party ordinarily required in insurer v. insured declaratory actions)
- Newman-Green, Inc. v. Alfonzo-Larrain, 490 U.S. 826 (1989) (dispensable nondiverse-party doctrine permitting dismissal to preserve jurisdiction)
- Hertz Corp. v. Friend, 559 U.S. 77 (2010) (principal-place-of-business test for corporate citizenship)
- Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487 (1941) (federal courts sitting in diversity apply forum state substantive law)
- Country Mut. Ins. Co. v. Olsak, 391 Ill. App. 3d 295 (2009) (duty to defend exists if underlying complaint potentially falls within coverage)
- Emp’rs Ins. of Wausau v. Ehlco Liquidating Trust, 708 N.E.2d 1122 (Ill. 1999) (estoppel against insurer applies only if insurer breached duty to defend)
- Nilsson v. NBD Bank of Illinois, 731 N.E.2d 774 (Ill. App. 1999) (expectation damages describe contract breach recovery)