UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

INSURANCE COMPANY OF )

THE STATE OF PENNSYLVANIA, )

) No. 12 C 04713

Plaintiff, )

)

v. )

) Judge Edmond E. Chang

OCÉ-USA HOLDINGS, INC., )

)

Defendant. )

MEMORANDUM OPINION AND ORDER

Plaintiff Insurance Company of the State of Pennsylvania (ISOP) filed this

lawsuit against Océ-USA Holdings, Inc., seeking a declaration that it has no duty to

defend or indemnify its insured, Océ, against a lawsuit filed in the U.S. District Court

for the Northern District of Illinois encaptioned Krase v. Océ-USA Holdings, Inc., No.

11 C 7659 (Underlying Lawsuit).1

 The Underlying Lawsuit arises from Océ’s alleged

failure to uphold its duties and obligations as an employee welfare benefit plan sponsor

and administrator under the Employee Retirement Security Act of 1974 (ERISA), 29

U.S.C. § 1001 et seq. Following the Court’s March 26, 2013 Memorandum Opinion and

1

This Court has subject matter jurisdiction under 28 U.S.C. § 1332. Specifically,

Plaintiff ISOP is a citizen of Pennsylvania and New York because it is incorporated in

Pennsylvania and has its principal place of business in New York. R. 43, Second Am. Compl.

¶ 2. Defendant Océ is a citizen of Delaware and Illinois because it is incorporated in Delaware

and has its principal place of business in Illinois. Id. ¶ 3. The amount in controversy

requirement is satisfied because the potential cost of both defending and indemnifying Océ in

the Underlying Lawsuit exceeds $75,000, which is not a “legally impossible” amount given the

fact that Krase seeks $226,000 in life insurance benefits in the Underlying Lawsuit. Back

Doctors Ltd. v. Metro. Prop. & Cas. Ins. Co., 637 F.3d 827, 830 (7th Cir. 2011); see also Second

Am. Compl. ¶ 17.

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Order (March 26 Opinion), see R. 35, ISOP filed a Second Amended Complaint, which

Océ now moves to dismiss for failure to state a claim pursuant to Federal Rule of Civil

Procedure 12(b)(6). See R. 43, Second Am. Compl.; R. 44, Def.’s Mot. Dismiss. For the

reasons below, Océ’s motion is denied.

I. Background

The Court assumes the parties’ familiarity with the allegations in the

Underlying Lawsuit, which were set out in the Court’s March 26 Opinion. See R. 35 at

3-4. In this case, ISOP originally alleged that it had no duty to indemnify or defend Océ

under the ERISA Exclusion contained in Océ’s commercial general liability policy’s

Employee Benefits Liability Insurance Endorsement. R. 9, First Am. Compl. ¶¶ 24-32.

Specifically, ISOP alleged that the ERISA Exclusion excludes coverage for the

Underlying Lawsuit because Krase’s claims against Océ (brought pursuant to ERISA)

arise solely from Océ’s alleged violations of its fiduciary duties. Id. ¶¶ 28-29. ISOP then

moved for judgment on the pleadings. R. 13. In the Court’s March 26 Opinion, the

Court denied ISOP’s motion and held that (1) Krase’s recovery-of-benefits claim stems

from his spouse’s contractual rights under her life insurance policy and does not trigger

the ERISA Exclusion (which only excludes breach-of-fiduciary-duty claims); and (2)

alternatively, the Exclusion policy language is ambiguous and must be construed in

Océ’s favor. See March 26 Opinion at 6-14. 

After the Court issued the March 26 Opinion, ISOP filed a Second Amended

Complaint, alleging that it has no duty to defend or indemnify Océ against both the

Underlying Lawsuit and a new cross-claim filed against Océ by Life Insurance

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Company of North America (LINA) in the Underlying Lawsuit. See Second Am. Compl.

¶¶ 4, 18-19, 34; see also id. at 8-10. This time, ISOP newly alleges that the definition

of “wrongful act” in the policy’s Employee Benefits Liability Insurance Endorsement

excludes coverage. See id. ¶¶ 30-32. ISOP also again claims that the policy’s ERISA

Exclusion excludes coverage, but puts a different spin on this argument. ISOP alleges

that Krase eventually dropped his recovery-of-benefits claim in the Underlying

Lawsuit and the ERISA Exclusion now excludes his remaining fiduciary-duty claim

from coverage. See id. ¶¶ 37-42. In response, Océ moves to dismiss ISOP’s Second

Amended Complaint for failure to state a claim upon which relief can be granted. R.

44.

II. Standard of Review

Under Federal Rule of Civil Procedure 8(a)(2), a complaint generally need only

include “a short and plain statement of the claim showing that the pleader is entitled

to relief.” Fed. R. Civ. P. 8(a)(2). This short and plain statement must “give the

defendant fair notice of what . . . the claim is and the grounds upon which it rests.” Bell

Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (alteration in original) (internal

quotation marks and citation omitted). The Seventh Circuit has explained that this

rule “reflects a liberal notice pleading regime, which is intended to ‘focus litigation on

the merits of a claim’ rather than on technicalities that might keep plaintiffs out of

court.” Brooks v. Ross, 578 F.3d 574, 580 (7th Cir. 2009) (quoting Swierkiewicz v.

Sorema N.A., 534 U.S. 506, 514 (2002)). 

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“A motion under Rule 12(b)(6) challenges the sufficiency of the complaint to state

a claim upon which relief may be granted.” Hallinan v. Fraternal Order of Police of

Chicago Lodge No. 7, 570 F.3d 811, 820 (7th Cir. 2009). “[A] complaint must contain

sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible

on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at

570). These allegations “must be enough to raise a right to relief above the speculative

level.” Twombly, 550 U.S. at 555. The allegations that are entitled to the assumption

of truth are those that are factual, rather than mere legal conclusions. Iqbal, 556 U.S.

at 678-79. 

III. Analysis

In Count One of its Second Amended Complaint, ISOP alleges that the

Employee Benefits Liability Insurance Endorsement in Océ’s insurance policy limits

coverage to damages caused by any “wrongful act” of the insured, which is defined in

the policy as “any actual or alleged negligent act, error or omission in the

‘administration’ of the Employee Benefits Plan.” See R. 43-4, Pl.’s Exh. D, Employee

Benefits Liability Insurance Endorsement ¶¶ A.1.a, G.6. And the Underlying Lawsuit,

the allegation goes, brings a recovery-of-benefits claim that does not allege an

underlying “negligent act, error or omission,” so the Underlying Lawsuit is excluded

from coverage. See Second Am. Compl. ¶ 32. In Count Two, ISOP essentially alleges

that even if the recovery-of-benefits claim is based on a “negligent act, error or

omission,” external evidence shows that Krase dropped that claim in the Underlying

Lawsuit, leaving only the breach-of-fiduciary-duty claim that is not covered under the

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policy’s ERISA Exclusion. See id. ¶¶ 37-42. Thus, if Océ’s motion to dismiss is denied

as to Count One, that count alone is sufficient to support a judgment in favor of ISOP

if ISOP succeeds in an undoubtedly imminent motion for judgment on the pleadings.

If Count One remains, Océ would find it difficult to overcome the policy’s definition of

“wrongful act” without conceding that there is no longer a recovery-of-benefits claim

in the Underlying Lawsuit. But that concession itself also concedes that the only

remaining claim in the Underlying Lawsuit is Krase’s breach-of-fiduciary-duty claim,

which this Court already held is excluded from coverage. Thus, the outcome of this case

essentially turns on the outcome of Océ’s motion as to Count One. 

A. Count One: “Wrongful Act”

In Count One, ISOP for the first time asserts that Krase’s recovery-of-benefits

claim in the Underlying Lawsuit is not based on a “negligent act, error or omission”

and is thus excluded from coverage.2

 Second Am. Compl. ¶¶ 30-32. In support of this

argument, ISOP cites to Benefit Systems & Services, Inc. v. Travelers Casualty &

Surety Co. of America, 2009 WL 1106948 (N.D. Ill. Apr. 22, 2009). Benefit Systems is

of course not binding, but it in turn does apply a binding Seventh Circuit case. See id.

2

The Court notes that ISOP had at least three previous chances to assert the “wrongful

act” theory contained in Count One: in its original Complaint, in its First Amended Complaint,

and in its motion for judgment on the pleadings. But it did not, and now gets the benefit of

filing what is essentially a motion to reconsider the March 26 Opinion without needing to clear

the high bar that all motions to reconsider must meet. Océ, however, only hinted at a forfeiture

or waiver argument in the introduction to its motion to dismiss, see R. 44, Def.’s Mot. Dismiss

at 2, and never developed that argument at all during this entire round of briefing. What’s

more, Océ did not oppose ISOP’s filing of its Second Amended Complaint on waiver or forfeiture

grounds (or on any grounds). See R. 42. Because Océ never made the argument, the Court will

consider ISOP’s “wrongful act” theory now despite what might arguably be its belated assertion

in this litigation.

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at *6 (citing Baylor Heating & Air Conditioning, Inc. v. Federated Mut. Ins. Co., 987

F.2d 415 (7th Cir. 1993)). In Baylor Heating, which neither party expressly discusses

here, an employer (Baylor) stopped contributing to an employee pension fund based on

the advice of the employer’s counsel. 987 F.3d at 416. After the pension fund won a

judgment against Baylor for the amount of the discontinued contributions, Baylor sued

its insurer for coverage. As in this case, the insurance policy at issue in Baylor Heating

covered only damages arising from “a negligent act, error or omission.” Id. at 417.

Baylor argued that the damages Baylor owed to the fund arose out of the negligent

administration of Baylor’s employee benefits plan. Id. On appeal, the Seventh Circuit

held that Baylor’s failure to make contributions to the pension fund was not a

“negligent act, error or omission,” so the insurer was not obligated to indemnify Baylor.

Id. at 420. In so holding, the Seventh Circuit reasoned that Baylor’s “liability to the

pension fund is contractual.” Id. at 419. Although Baylor argued that it genuinely

believed (on advice of counsel) that it had no contractual obligation to contribute, the

Seventh Circuit rejected this argument: 

[T]hese beliefs do not change the contractual nature of the obligation. . . . Under

Baylor’s logic, any default arising from a mistaken assumption regarding one’s

contractual liability could be transformed into an insured event. Indeed,

refusing to pay a debt in reliance upon erroneous advice of counsel would

convert a contractual debt into damage arising from a negligent omission. We

dare not imagine the creative legal theories treading just short of malpractice

and frivolity that could seek to transform contract obligations into insured

events. 

Id. at 419-20. Accordingly, the Seventh Circuit drew a bright line between duties

imposed by contract and duties imposed by a common-law duty of care: “There is a

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well-recognized line of demarcation between negligent acts and breaches of contract.”

Id. at 420.

Under Baylor Heating—which, to repeat, applied the same policy language as

in this case—Count One plausibly alleges that Krase’s recovery-of-benefits claim in the

Underlying Lawsuit is excluded from coverage. In the Underlying Lawsuit, Krase

alleged that Océ denied his claim for his deceased spouse’s life insurance benefits; he

appealed several times but Océ denied his appeal at each turn. R. 43-1, Pl.’s Exh. A

¶¶ 18-20. He therefore brought the Underlying Lawsuit pursuant to ERISA, alleging

that he “is entitled to at least the terminal illness benefit under the Policy.” Id. ¶ 21.

At bottom, this is a claim that Océ refused to honor the terms of a group life insurance

policy, which obligated Océ to pay Krase benefits. That is a breach-of-contract claim

that arises out of Krase’s group life insurance policy with Océ, not out of a common-law

duty of care.3 See Krolnik v. Prudential Ins. Co. of Am., 570 F.3d 841, 843 (7th Cir.

2009) (“The [Supreme] Court repeatedly wrote that litigation under ERISA by plan

participants seeking benefits should be conducted just like contract litigation, for the

3

Even the possible counterexample that the court of appeals mentioned in Baylor

Heating—and it is just that, a possible counterexample—illustrates the difference between a

duty to uphold the terms of a contract and a common-law duty to take reasonable care. See 987

F.2d at 120 n.8 (“If, for example, Baylor had negligently failed to enroll an employee in the

pension plan and was subsequently sued by that employee for his pension benefits, there might

be an argument that Baylor had suffered damage resulting from negligence.”). A negligence

action against an employer who negligently fails to enroll the employee would presumably be

based on that employer’s breach of a common-law duty of care and would seek damages for that

negligence, while a breach-of-contract suit against an employer who wrongfully denies life

insurance benefits would be based on that employer’s breach of the life insurance policy and

would seek the amount of the withheld benefits. The two suits are different because the sources

of the duties are different.

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plan and any insurance policy are contracts.” (citing Firestone Tire & Rubber Co. v.

Bruch, 489 U.S. 101, 112-13 (1989))). And under Baylor Heating, an intentional breach

of contract is not a negligent act that triggers coverage. See 987 F.2d at 419-20.

Océ asserts that Krase’s recovery-of-benefits claim does allege a wrongful act,

pointing to Krase’s allegations that Océ negligently failed to provide Krase’s spouse

with the required notice before denying Krase life insurance benefits. See R. 51, Def.’s

Reply at 6; see also Pl.’s Exh. A ¶¶ 13, 19. Océ overstates the role those allegations play

in Krase’s claim. In his claim, Krase alleges that Océ’s intentional decision to deny him

benefits is wrong because he never received the required notices. But the reason why

Krase believes Océ erred does not change the fact that he still claims that Océ denied

him benefits that his life insurance policy promised would be paid. At their heart, those

allegations are contractual in nature. Another way to think about it is that Océ’s

failure to provide him the required notice, as alleged in the Underlying Lawsuit, is not

an independent cause of action. Indeed, had Océ paid Krase benefits despite not

providing his spouse notice, Krase would not have brought his recovery-of-benefits

claim in the first place. And even if Océ’s duty to provide notice was an independent

source of liability, that duty still arises out of the life insurance policy it issued—a

contract—and not out of a common-law duty of care. See, e.g., Pl.’s Exh. A ¶ 17

(“Because Sandra Hansen-Krase was never personally informed of her conversion

rights or the terminal illness benefit under the Policy, as required by its terms, she did

not submit an application to either convert the Policy or to apply to receive terminal

illness benefits.” (emphasis added)); id. ¶ 19 (“Donald Krase . . . informed Océ that

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neither he nor Sandra Hansen-Krase had ever received notice of her conversion rights

under the Policy.” (emphasis added)). Krase’s allegations that Océ failed to provide the

required notice does not change the conclusion that the Underlying Lawsuit ultimately

seeks life insurance benefits resulting from Océ’s breach of contract.

Just v. Accu-Turn, Inc., 2012 WL 1067106 (E.D. Wis. Mar. 28, 2012), which Océ

relies on in its reply, see Def.’s Reply at 5-6, actually highlights the importance of the

source of the duty owed by an employer to a benefits claimant. In Just, the benefits

claimant sued his former employer alleging that the employer failed to provide him the

required notice and refused to accept his insurance premium. Id. at *1. After the

employer’s insurer intervened to seek a declaration that there was no duty to defend,

the district court held in favor of the insurer because an ERISA exclusion applied. Id.

It is true that Just did reason that a failure to provide the required notice was a

negligent act that triggered an initial grant of coverage under the same “negligent act,

error or omission” language as in this case. See id. at *4. But in Just, unlike in this

case, the claims alleging that the employer failed to provide the required notice were

based on breaches of statutory duties (a violation of COBRA and a violation of

Department of Labor regulations), not contractual duties. See id. Thus, unlike in this

case, those statutes did give rise to independent causes of action against the employer

for failing to provide the required notice. Id. In fact, the failure-to-notify claims were

entirely separate counts of the complaint rather than simply factual allegations

supporting a recovery-of-benefits claim. See id. Just therefore does not support the

principle that Krase’s allegations that Océ failed to satisfy its contractual duty to

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provide notice are sufficient, standing alone, to allege a negligent act and trigger

ISOP’s duty to indemnify or defend. Nor does Just provide a reason why Baylor

Heating does not control.

Accordingly, Océ’s motion to dismiss Count One is denied as to the Underlying

Lawsuit filed by Krase. And because the parties agree that the LINA cross-claim rises

and falls with the Underlying Lawsuit,4 see, e.g., Def.’s Mot. Dismiss at 4 (“LINA’s

cross-claim seeks indemnification from Océ for the same claim for benefits.”), Océ’s

motion to dismiss Count One is also denied as to the LINA cross-claim.

B. Count Two: ERISA Exclusion

Although Océ’s motion to dismiss is denied as to Count One, and Count One

alone is sufficient to support a judgment in ISOP’s favor if it prevails on a motion for

judgment on the pleadings as to that count (as discussed above), it is worth touching

on Count Two for the sake of completeness. In Count Two of the Second Amended

Complaint, ISOP alleges that extrinsic evidence shows that the only live claim in the

Underlying Lawsuit is a breach-of-fiduciary-duty claim because Krase withdrew his

recovery-of-benefits claim. See Second Am. Compl. ¶¶ 37-42. Specifically, the Second

Amended Complaint points to Océ’s brief in support of its motion to dismiss the LINA

cross-claim where Océ argued that Krase dropped his recovery-of-benefits claim. See

id. ¶ 22. And according to Count Two, ISOP has no duty to indemnify or defend Océ

4

Although Océ might have argued that ISOP has a separate duty to indemnify or defend

Océ against the LINA cross-claim, perhaps under the group life insurance policy that LINA

underwrote or some other provision of the ISOP commercial general liability policy, Océ did

not make that argument. 

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because the policy’s ERISA Exclusion excludes the remaining breach-of-fiduciary duty

claims, as this Court previously held in its March 26 Opinion. 

Generally, under Illinois law,5

 the Court must compare the allegations of the

underlying complaint against the insured to the insurance policy. Lapham-Hickey Steel

Corp. v. Prot. Mut. Ins. Co., 655 N.E.2d 842, 847 (Ill. 1995) (citation omitted). But that

does not mean the Court is restricted to the four corners of the underlying complaint.

Rather, “under certain circumstances, [a court may] look beyond the underlying

complaint in order to determine an insurer’s duty to defend.” Pekin Ins. Co. v. Wilson,

930 N.E.2d 1011, 1019 (Ill. 2010). One of those circumstances is if the extrinsic

evidence does not resolve any issue critical to the underlying lawsuit. Id. at 1023

(citations omitted). The type of extrinsic evidence that the Court may consider,

however, is limited by the case’s procedural posture. Compare id. at 1021-24 (reviewing

pleadings—the answer and counterclaim in the underlying lawsuit—in affirming a

reversal of a grant of judgment on the pleadings), with Fid. & Cas. Co. of N.Y. v.

Envirodyne Eng’rs, Inc., 461 N.E.2d 471, 472, 473-74 (Ill. App. Ct. 1983) (reviewing a

contract and a deposition in affirming a grant of summary judgment). Because this

case is currently at the motion-to-dismiss stage (and will undoubtedly progress to the

motion-for-judgment-on-the-pleadings stage soon), under Pekin, the only extrinsic

5

The Court must apply state substantive law in diversity cases. Erie R.R. Co. v.

Tompkins, 304 U.S. 64, 78 (1938). Here, the ISOP policy is silent as to which state’s law

governs, but because both parties assume that Illinois law governs this coverage dispute, the

Court will join in that assumption. Gould v. Artisoft, Inc., 1 F.3d 544, 549 n.7 (7th Cir. 1993).

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evidence that this Court may review now is the parties’ pleadings in the underlying

lawsuit.6

The extrinsic evidence that ISOP asks the Court to consider is this argument in

Océ’s brief filed in support of its motion to dismiss the LINA cross-claim: “Plaintiffs,

through a request to admit response, specifically admitted that it never asserted a

§502(a)(1)(B) [recovery-of-benefits] claim against Océ, but instead only sought relief for

breach of fiduciary duty against Océ pursuant to §502(a)(3).” Second Am. Compl. ¶ 22.

Although briefs are not pleadings (and thus cannot be considered now), Entrust Mgmt.

Co. v. Gold, 1986 WL 5668, at *1 n.1 (N.D. Ill. May 1, 1986), the Océ brief refers to

Krase’s response to a request to admit, where Krase allegedly withdrew his recoveryof-benefits claim. Interestingly, Illinois law suggests that a voluntary dismissal of an

entire complaint does not necessarily discharge an insurer’s duty to defend. See Pekin

Ins. Co. v. Pulte Home Corp., 800 N.E.2d 466, 471-72 (Ill. App. Ct. 2003) (interpreting

identical policy language to Pl.’s Exh. D, Employee Benefits Liability Insurance

Endorsement ¶ A.1.a). So that leaves open at least two questions that neither party

has addressed: (1) whether withdrawing a claim in a response to a request to admit,

under Illinois law, is the equivalent of withdrawing a claim by way of a voluntary

dismissal of a complaint or even a filing of an amended complaint (which is a pleading);

6

As in federal court, a motion for judgment on the pleadings in Illinois state court is

limited to the pleadings. Compare N. Ind. Gun & Outdoor Shows, Inc. v. City of South Bend,

163 F.3d 449, 452 (7th Cir. 1998) (“As the title of the rule implies, Rule 12(c) permits a

judgment based on the pleadings alone.” (citations omitted)), with Pekin, 930 N.E.2d at 1016

(“A motion for judgment on the pleadings is . . . limited to the pleadings.” (citation omitted)). 

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and (2) if so, whether withdrawing a single claim is different from voluntarily

dismissing an entire complaint such that it could discharge an insurer’s duty to defend.

(Either way, ISOP may still have a duty to defend Océ for the litigation that occurred

before Krase filed his response to the request to admit.) But given the Court’s decision

on Océ’s motion to dismiss as to Count One, and the likelihood that ISOP will be filing

a new motion for judgment on the pleadings based on that count, the Court will leave

these questions open. 

IV. Conclusion

For the reasons discussed above, Océ’s motion to dismiss is denied. The next

status hearing remains scheduled for November 13, 2013, at 9:30 a.m.

ENTERED:

 s/Edmond E. Chang 

Honorable Edmond E. Chang

United States District Judge

DATE: November 7, 2013

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