Title Industry Assurance Co., R.R.G. v. First American Title Insurance Co.
2017 U.S. App. LEXIS 6092
7th Cir.2017Background
- Chicago Abstract Title Agency (insured) purchased an errors-and-omissions policy from Title Industry Assurance Co., R.R.G. (TIAC) effective July 24, 2008; policy covered wrongful acts in professional services and excluded claims for dishonest/fraudulent/intentional acts and for defalcation/commingling/failure to pay funds.
- In late 2008 several plaintiffs (First American, 1st Funding, Coastal Funding) sued Chicago Abstract alleging irregular "flip" transactions, misappropriation/commingling of escrow funds, breach of fiduciary duty and conversion; pleadings were factually sparse because suits were filed urgently while the facts were uncertain.
- Chicago Abstract tendered defense and indemnity to TIAC in February 2009; TIAC denied coverage in July–August 2009 citing exclusions (a) (fraud/dishonesty) and (j) (defalcation/commingling/failure to pay) and did not defend or seek a reservation of rights or timely declaratory relief.
- Litigation in state court proceeded without TIAC; defaults and settlements occurred over time; in 2014 Coastal filed an amended complaint and TIAC belatedly appointed counsel and filed this federal declaratory-judgment action asserting policy defenses (including a prior-knowledge defense raised late).
- The district court granted summary judgment to the claimants, holding TIAC breached its duty to defend and therefore is estopped from asserting policy defenses; the Seventh Circuit affirmed on the ground TIAC unjustifiably refused to defend and estoppel applies.
Issues
| Issue | TIAC's Argument | Claimants' Argument | Held |
|---|---|---|---|
| Whether TIAC had a duty to defend based on the tendered complaints | Complaints alleged fraud/defalcation/exclusions therefore TIAC could decline to defend | Complaints were vague and alleged theories (negligence, breach, conversion) that could fall within coverage; insurer must defend unless exclusion clearly applies | Held: TIAC breached duty to defend; complaints did not plainly remove potential coverage so duty to defend arose |
| Whether insurer may rely on prior-knowledge (application) defense despite not raising it in denial letters | Prior-knowledge bars coverage if insured knew of wrongful acts pre-policy; TIAC raised it in federal suit | Claimants: TIAC waived/mended the hold by long delay and caused prejudice; TIAC never relied on it in 2009 denial | Held: TIAC’s late assertion is unjustified and unnecessary to decide; prior-knowledge defense fails on the merits because no evidence insured knew of wrongful acts as of policy inception |
| Whether exclusions for fraud/defalcation/commingling (a & j) justified immediate denial | Exclusions apply because later facts showed fraud/defalcation and commingling caused losses | Exclusions were not necessarily implicated by the four-corners of the pleadings; conversion need not show criminal intent; vague allegations don’t defeat duty to defend | Held: Exclusions (a) and (j) did not clearly preclude coverage on the face of the underlying complaints; TIAC could not decline to defend on that basis |
| Whether allegations of mixed excluded and non-excluded conduct permit TIAC to avoid defense unless non-excluded conduct is "wholly independent" | Where excluded and non-excluded causes mix, insurer need only defend if non-excluded cause is wholly independent | Claimants: Illinois law requires defense if any pleaded theory potentially within coverage; mixed allegations here did not establish a wholly independent excluded cause | Held: "Wholly independent" rule (Northbrook) inapplicable here; because primary cause was unknown and complaints pleaded potentially covered theories, TIAC had to defend |
Key Cases Cited
- Johnson v. City of Shelby, 574 U.S. -, 135 S. Ct. 346, 190 L. Ed. 2d 309 (2014) (federal notice-pleading does not require pleading specific legal theories)
- Ehlco Liquidating Trust v. Employers Ins. of Wausau, 186 Ill. 2d 127 (1999) (insurer must defend unless complaint clearly excludes coverage; insurer may defend under reservation or seek declaratory relief)
- Pekin Ins. Co. v. Wilson, 237 Ill. 2d 446 (2010) (timely declaratory action allows consideration of extrinsic evidence beyond the four corners)
- Northbrook Property & Cas. Co. v. Transportation Joint Agreement, 194 Ill. 2d 96 (2000) (vehicle-exclusion context where excluded cause was the gravamen; "wholly independent" analysis applied narrowly)
- Santa’s Best Craft, LLC v. St. Paul Fire & Marine Ins. Co., 611 F.3d 339 (7th Cir. 2010) (insurer must defend if any pleaded theory is potentially within coverage)
- CE Design Ltd. v. King Supply Co., 791 F.3d 722 (7th Cir. 2015) (policyholders buy peace of mind; duty to defend protects insureds’ expectations)