American Safety Casualty Insurance v. City of Waukegan
2012 U.S. App. LEXIS 5496
7th Cir.2012Background
- Dominguez was exonerated by DNA in 2002 after a 1989 arrest and 1990 conviction for home invasion and sexual assault.
- Waukegan's police misconduct led to a federal §1983 wrongful-conviction/false-arrest context; state malicious-prosecution and federal concealment claims were tried.
- Various insurers denied defense/indemnity; Scottsdale (1989–1990) and American Safety (2002) issued primary policies with excess policies elsewhere.
- American Safety filed a 2007 diversity action against the City (Waukegan) seeking declaratory judgment on coverage; the City counterclaimed for attorney fees and penalties under 215 ILCS 5/155.
- The district court held American Safety must indemnify Waukegan for the Hendley verdict and reimburse defense costs; this court affirmed in part and vacated/modified in others.
- The Seventh Circuit addressed whether exoneration, not the wrongful conduct, marks the occurrence for policy purposes and the propriety of late-notice estoppel and defense obligations.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| What constitutes the 'occurrence' under the policy for malicious-prosecution/§1983 claims? | McFatridge governs by exoneration as occurrence. | Occurrence is the tort as defined by policy language, i.e., exoneration in 2002. | Exoneration marks the occurrence; policy language controls that occurrence occurs when the tort's final element (exoneration) happens. |
| Should McFatridge be overruled or certified to Illinois Supreme Court? | McFatridge misstates Illinois law and should be overruled/certified. | McFatridge reflects Illinois law and should stand; only Illinois Supreme Court could overrule. | Declined to certify; left McFatridge intact, applying Illinois law as read by the court. |
| Did Scottsdale's late notice and lack of defense waive coverage or establish estoppel under Illinois law? | Ehlco estoppel and late-notice doctrines apply to bar Scottsdale from denying coverage. | Insurer had limited time to act; late notice does not automatically estop if reasonable action wasn’t possible. | Scottsdale not estopped; no obligation to defend after judgment; Ehlco-like estoppel not triggered given timing and actions. |
| Is the duty to defend triggered at the outset or only after deductible payments under American Safety's policy? | Duty to defend begins only after insured pays the deductible. | Defense duty begins immediately; deductible relates to indemnity, not the defense obligation. | Duty to defend exists from inception; deductible does not extinguish or postpone the defense obligation. |
Key Cases Cited
- McFatridge v. National Casualty Co., 604 F.3d 335 (7th Cir. 2010) (controls: exoneration marks the occurrence for coverage)
- Cult Awareness Network v. Church of Scientology International, 177 Ill.2d 267 (Ill. 1997) (favorable termination element under Illinois law)
- Wallace v. Kato, 549 U.S. 384 (U.S. 2007) (wrongful-arrest claims accrue at arrest; wrongful-conviction claims accrue after exoneration)
- Heck v. Humphrey, 512 U.S. 477 (U.S. 1994) (constitutional claims accrue only after invalidation of conviction)
- Waste Management, Inc. v. International Surplus Lines Insurance Co., 144 Ill.2d 178 (Ill. 1991) (estoppel and defense duties when insurer delays)
- Ehlco v. Employers Insurance of Wausau, 186 Ill.2d 127 (Ill. 1999) (estoppel for late notice requires active defense or declaratory relief)
- Kingsport Development, LLC v. State Auto. Mutual Ins. Co., 364 Ill.App.3d 946 (Ill. App. 2006) (reasonable time to decide and act in coverage disputes)
- Wallace v. Kato, 549 U.S. 384 (U.S. 2007) (wrongful-arrest vs. wrongful-conviction timing distinctions)