reasons why the tire policy did not apply for provide coverage for the conduct that action the dishonesty exclusion applied exclusion from the felt cation applied the insured had knowledge of the ponzi scheme and criminal acts fire to inception of the policy and the insured misrepresented its answers on the after for the coliseum despite those four findings the court declined to enforce any of those policy provisions and principally for two reasons which  address the first was the court suggested that there were what it characterized as other theories or alternative proximate causes for the injuries that were complained of and the court was wrong with respect to that in at least three respects one the court got the substantive illinois law wrong with respect to that to the court failed to apply all the relevant provisions of the insurance policy and third the court simply got the facts wrong on the on the record that was before the court with respect to the substance of illinois law the illinois supreme court's decision in northbrook and this court's decision and waterless both provide that when a claim involves both excluded causes of action as this d your honor and it's important to note that in for example coastal fundings complaint they allege two causes of action one misappropriation and the second conversion the courts sad to say alleged breach of  actually i'd like to pursue your original decision to deny a defense because it seems to me under illinois law that's really the pivotal issue here the because i understand you offered a defense in tw fourteen on at least one of these cases but i think we need to go back to the two thousand and nine letters by mr is it could time denying coverage that's correct or are they didn't seem to address the question of the duty to defend it all the letters the decline coverage with respect to both the french and the euro and without without it and i mean look i totally i think i totally understand your point that you may well have good policy defenses to indemnification if they're still available to you and that's why i'd like to focus on your decision to deny coverage in two thousand and two to deny a defense in two thousand and nine is i don't understand how you could determine on the face of the complaints alone that there was not even any potential for a covered claim here well i think you can do that your honor by reviewing the complaint check and it is of course clear that the exclusions idea should apply to duty to defend industry standards and negligence with respect to the escrows there's a lot of other stuff that i certainly understand there are allegations that you can say to one of that's what's proved there out there is no coverage we don't know a duty to defend it all but there are a lot of other allegations as well so how do you determine from the face of that complaint we're off the hook from a duty to defend your honor because the allegations you're referring to didn't appear in those complaints in two thousand and nine those are allegations that first started appearing in the third amended complaint that their fourth attempt and the negligent supervision claim first appeared in the fourth amended complaint which was filed in two thousand and fourteen if you look at coastal funding initial complaint your honor it uses the words intent was plainly present here given what occurred and given the subsequent guilty plea of mr roscoe oliver so so in two thousand and nine all you have a lead with least you have a cl the coastline could prevail simply by showing a mistaken exercise of control over its money right your honor that's in the context of the complaint in which they specifically allege that the monies were intentionally of course they allege a lot they they allege the waterfront right from strict liability and negligence up to fraud exercise control over somebody's property mistakenly thinking it's your own you've committed conversion well and it's just kind of looseness and if you have your honor do you fall within the scope of exclusion jay which deals with the failure to insureds own the company the insurers are approximately one eleven hundred title insurance agents who operate title insurance businesses and they expect coverage in the event that they make errors they don't expect coverage in the maintain records from your honor with respect to the failure to properly maintain records and failure to account that's what falls within the scope of the northbrook decisions which require that there be except for compensable injury as a result of those failures this was a ponzi scheme and any ponzi scheme in addition to the theft of the funds is going to require some mishandling of the documents for the records with respect to the transactions that that's a point that the eighth circuit expression recognized in the bethel decision there is no injury to either first american or coastal as a result of any of these alleged documentation errors the injury to that arises out of the fact that the funds were stolen let me let me try to get this a different way council in as of into the february two thousand and nine tender how could you guys tell whether mr roscoe was a do for  as of the time of the tender your honor i think we could not tell for sure whether he was what we didn't know it was a bat several million dollars at least legibly in excess of two million dollars had been paid to chicago  funds had gone missing right but ok but surely it makes a difference under your errors and omissions policy whether that was intentional criminal wrongdoing by the insured or negligent fall right that's true your honor with retrospect we i'd suggest that when the claims that are asserted and the documentation that's provided to the insurer six the funds have been misappropriated and the insured has already met with the f b i with respect to this problem that suggestive of something other than negligence suggestive absolutely but i don't understand how you decide  in the summer of two thousand and nine there can't possibly be any covered loss here well i think when we compare the allegations of those two complaints to the to the terms of the policy there is no potential for  that we rely on is wrong that says if your coverage decision is his correct and you're not in breach of duty to defend the stop of those in the plot of the question is whether you breached to duty to defend and that goes back to the questions i've been asking you about how you determine coverage for those complaints as stated and i think what demonstrates that your honor is the subsequent conduct of the claims they tender we decline coverage they amend twice the amended complaints aren't even ach and then is there an obligation on the part of the insured to keep appealing to you or i don't think there's an obligation to continue to appeal to us your honor but if they think that the new complaint brings them within the scope of coverage then when they should tender it to us and it's important to note here your honor that the insured never objected in any way to our coverage determination and this isn't to an insurance company dealing with the homeowner this is an insurance company dealing with the question services for all but not only was represented by counsel but had to receive a report to it and neither one of them objected in any way in the course of discussions with them that are reflected in the one of the two coverage letters or in response to the to these positions in fact when the third amended complaint was received by us it was received by asked directly from the claimants we have had no further communication from the insurance with respect to this and we the insurance presumably are out of this ready yes they are your honor it is a practical matter this case is between you and the underlying claims rate is your honor but so why should we draw many inferences from the actions of the insurers who had bigger problems on their that's something that those that the district court overlooked when when we engage in discussions with our insured and come to a conclusion that there isn't any ridge we talk with them we write  them we ask them express we in both of our letters to contact us if there's any additional information they'd like us to consider we think that there is there's no dispute and that's among the reasons why there would been no reason or expectation that anyone declaratory judgment action to in two thousand and nine we weren't aware in fact we were never aware until after the fourth amended complaint was filed that there was any suggestion that there might be coverage under the policy and if you look at the  complaint says they stole our money the second complaint says they stole our money they don't even bother to send the us the third one says they stole our money than bother to send us an eros who gets charged criminally at which point the claimant presumably takes a look at that and supervision claim but negligent supervision claim was an assertive until two thousand and fourteen and it was asserted in two thousand and fourteen plainly in an effort to get around the targets positions for the provisions of the policy that we've been relying on so if that had the simple fact of the matter is is the two thousand and fourteen complaint which attempts to include negligence allegations is filed subsequent to the charging and the guilty plea of the individual who was involved there wasn't any negligent the other issue i'd like to address is the courts the district courts declamation to enforce policies prior knowledge and application misrepresentation provisions each of which the court found sufficient to avoid coverage here if they were  applied was that provision flagged as a reason for declining coverage or defense in the letters it wasn't in the initial letters your honor but you have to bear in mind the time frame on no we we have to apply illinois law and as i understand illinois law any theory of non coverage that is not asserted in the letter sent to the person seeking defense who coverage is forfeit your honor it has to be a theory known or reasonably they say if you don't assert it in those communications then it's for you say ok there should be some exception where a federal court we can't make exceptions to state rules we can apply state rules so if there is a basis in the state decisions for this exception that's fun that's why i'm asking you where should we look in the state decisions for this exception you're asserting i don't don't know your honor how quickly i submit it we've got a problem under neary then  can't change state law i don't think it's an exception your honor i think when an insurer reviews the terms of a complaint against its policy it has to deal with what's in the dock  morning your honour's please the court i represent wednesday but once again i represent coastal funding on this appeal the district court in this case correctly determined that the underlying complaints triggered the insurers duty to defend that the insurer breached to defend because it took no action either to defend the insured under reservation of rights or to timely seek a declaratory judgment action for five years from the date of the tender of the underlying complaints and the district court properly determined that as a result of that breach of the duty to defend thai act is now a stop from asserting non non coverage because these determinations were correct this court should affirm the district court's ruling now the duty to defend analysis is governed by familiar and straightforward legal principles of illinois law number one the duty is determined based on what is alleged in the underlying complaints not what is ultimately proved the insurer cannot simply refuse to defend sit back and wait to see what is ultimately proved and if what's alternately proved shows that there is no coverage then escape any consequences of having failed to defend number two if the conduct alleged against the insurer in the underlying complaints states a claim or a potential claim within coverage then the duty to defend is triggered regardless of the label placed on their conduct by the pleader three refusal to defend is unjustifiable unless it is clear and without doubt from the face of the underlying complaints that the facts alleged do not potentially fall within coverage as this court held in cincinnati insurance company vs eastern atlantic insurance company allegations of excluded conduct do not take the claim out of the policy if those allegations are not essential to a potentially covered claim and as this court recently held in the artisan and truckers has with the company case it doesn't matter if some theories of recovery in the complaint against some defendants are excluded because the plaintiffs may recover under multiple theories of recovery against different defendants and if any of them are potentially within coverage then the duty to defend is triggered and the insurer fail who fails to defend does so at its peril now in this case the underlying complaints from the very beginning alleged facts they had stated claims that were potentially within coverage they are the first funding complaint remember these were all file around the same time and they all arise out of the same circumstances of what was occurring at that chicago abstract title each and see in fact the coverage letters sent to the insured described them as similar complaints or related complaints the first funding complaint which was one of the lenders similarly situated to coastal funding did not contain a single allegation of excluded conduct it alleged claims for breach of contract relating to escrow transactions breach of fiduciary duty related to the failure to safeguard escrow funds and negligence and negligently accounting for escrow funds that were entrusted to it negligently closing or failing to close real estate transactions for which the funds were deposited negligent y maintaining its escrow account and negligently dispersing funds contrary to the escrow instructions none of those claims requires proof of any excluded conduct similarly first american alleged in its very first complaint that chicago abstract neglected to supervise or oversee the title when escrow activities of its agents employees and representative fourteen of its complaint in paragraph twenty three first american allege that the chicago abstract failed to properly account for escrow funds that they wrongfully held themselves out to the public as an agent the first american with regard to the disbursement of escrow funds it also alleged breach of contract relating to escrow funds including causing escrow shortages it had to be clear from the face of these complaints that there were no potential recovered claims in order for the insurer to justifiably refused to defend any what do you make of exclusion  which seems awfully broad speirs to hear but it but the exclusion is framed in terms of the claim the the language of exclusion jay says that this policy does not apply to any claim based upon or directly or indirectly iraq arising out of or relating in any way to any default cation co mingling or failure to policy related to ask rol agents and closing agents and so one of the things that's alleged in the underlying complaints is that closing in escrow agents as a regular part of their activities have to pay off pay third parties from escrow funds liens and incumbrances before the title to the property is transferred and th praise has to be interpreted strictly in accordance with its terms it cannot be expanded under illinois law and exclusion cannot be expanded by interpretating it in a way that expands the coverage of distinct well it's certainly reasonable to read the failure to pay as referring to the escrow agent's failure to pay third parties to i have no doubt it applies to them because because it's not clear and unambiguous that that's what it does that's in it in distinction to the battle case the battle case also involves a title insurance agent but the policy exclusion in that case the customer funds exclusion which is the equivalent of excuse losing j expressly encompassed quote loss misuse shoreditch improper use and failure to segregate or safeguard there it is crystal clear that any loss or shortage or misuse or failure to safeguard is excluded but the teac policy does not go so far all it excludes is the failure to pay fox and that's not the same as a failure to segregate or failure to safeguard the claims in the underlying complaints allege that they dispersed once they did pay false contrary to the escrow instructions that's not a claim that's based on the failure to pay it's a claim based on the fact that they did pay but they did it negligently or without requiring that the conditions for the escrow were satisfied and so there are multiple claims that are alleged outside of the failure to pay well i'm focusing in particular on the complaint here because that seems to pose its own kind of problem for us when we're in federal court a rule about pleadings seems like it would be a federal procedural i think that what's at issue here is the unfairness of raising an argument i get that completely but the question it's the flip but the principle of illinois law we don't want a law does not control the content of pleadings in federal court it controls the consequences of omitting things from coverage letters to clients but i don't see how illinois required to be in the initial cleaving i think this goes to the failure to act you need the prior knowledge defense in the district court cited the enders and versus donahue and a few other seven there are a bunch of problems in the district courts treatment of that the district court said that he's granting judgment to your client in part because the complaint feels to plead law i'm interested in what federal rule or doctrine you think requires a complaint deplete  honor i was not focusing on that part of the you are now the issue is i don't have i don't have a an authority that says that they are required no that is not good didn't cite anything that he contradicted the supreme court of the united states which nine to nothing when they had nine justices they said complaints don't have to plead law so the question for you is what do we do with a district court decision that seems to be on ambiguously premised on a clearly incorrect statement of federal pleading law well the district court also states that they that the complaints to the complaints plead multiple insurer loses this to clear retore judgment or because your complaint doesn't plead law and it can't first introduce these legal theories at summary judgment well the supreme court has held other ones so we have my question which is what do we do when the district court's decision is based quite explicitly on an obviously incorrect proposition of federal pleading law well the review of this court is due no your honor in looking at the record and going back to illinois law and the basic principles which are not disputed here is that the analysis pertains to the underlying actions in the complaints filed in state court and looking at those pleadings to see if there were underlying actions in the cause of action that are covered potentially covered there which is why breached its duty to defend and how the district court came to that conclusion and that is what is that issue here  district court's decision in that in that regard and so looking at the underlying complaints it's been lost i wish that there are a multitude of claims that are pleaded and which fall outside of excluded conduct and are potentially covered w from the courts as fast as you can write it and it's a little thin on theory which is in essence why i have trouble understanding how one could decide so definitively early on that nothing could possibly  from your perspective first americans original complete what's the what's the best theory or set of theories for cover the the failure of cata chicago abstract to perform in accordance with the agency agreement which included as your honor highlighted the failure to keep accurate files the failure to keep accurate accounting  the failure to or the improper issuance of title insurance policies again it of of actions and conduct that the they took her didn't take in fulfilling their obligations as a title agent of the first american and in fact as your honor to your point the fact that the complaint is a little bit thin does give cause of concern as to why t f did not out of an abundance of caution defense and as counsel said that you know relying focused arabs are focusing mostly on the fourth the many complain of coastal funding and this negligent supervision cause of action first american pleads negligent supervision in its opening complaint in the fall of two thousand and eight and in the last deny coverage for the queen's asserted that cause of action so so to stand here today and say that they may have out of an abundance of caution under took the defense wants to focus on the the duty to indemnify and just look over its duty to defend here and i think as your honor pointed out the duty to indemnify may very well not have come into  play once we got to trial or once matters were proven but the duty to defend is much broader and the complaint is broad and there are certainly allegations of conduct which would fall within the scope of their duty to defend in these these underlying litigation a good amount of reliance on that letter in furthering its justification for not offending but that letter in addition or like the complaint the first american file does not strictly relate to any conduct in which funds were misappropriated or commingled it skips over at least two points raised in that letter which highlight that documents were not recorded and one other i'm sorry in that closing transactions when the seller was not vested with title creating title issues which is of utmost importance to first american because it is issuing policies ensuring title and after cata is not clearing title in the sell first that opens up a whole other avenue of loss to first american and far outside the scope of any misappropriation of funds if anything that letter should have caused them to revisit first americans complain and say the l certainly could be outside the scope of any kind of misappropriation would or that they did not do what do you make of the fact that the insurer denied coverage and then had just radio silence for years from insureds catarrh obviously so i can't speak to their what was going on in their heads but the circumstances certainly month themselves to cause them to check out their business was being shut down first american had a perceiver a point it was  that guess so what we're talking about here is just between your corn soup sure is correct your honor but but in any event while that does maybe raise an eyebrow the reality is that it was t x obligation to either defend under reservation of rights or bring its declaratory judgment action the fact that it it put its faith in radio them brings us to the the third prong under eco that they face the risk of their in action and that's where we're at today and so i don't take much of that really because i think that  had the burden to follow through on its obligations as the insurer and bring the declaratory judgment action that it would read five years to bring in hopes that maybe nobody would say a thing  that the negligence was in furtherance of any alleged or perceived fraud and in battle there were specific allegations in that regard here we do not have that my time is up and i ask that you your honor both first american and coastal funding focused on the negligent supervision issues and in response to an earlier question i acknowledge that out of an abundance of caution i might have sought to defend that point but to be clear we don't think that the negligent supervision allegations are sufficient to trigger coverage here under north rock which expression we rejected a triggering of coverage based on negligent supervision allegations or under this court's decision a nautilus with respect to the alternative theories that are being mentioned here refusing to apply the exclusions in the context of those alternative theories reads out the portion of the exclusions that the appears in a bold text all caps as the district court