In the

United States Court of Appeals

For the Seventh Circuit

No. 12-1784

NATIONWIDE INSURANCE COMPANY,

Plaintiff-Appellee,

v.

CENTRAL LABORERS’ PENSION FUND, et al.,

Defendants-Appellants.

Appeal from the United States District Court 

for the Southern District of Illinois.

No. 11 CV 00618—J. Phil Gilbert, Judge.

ARGUED NOVEMBER 2, 2012—DECIDED JANUARY 11, 2013

Before MANION,WILLIAMS, and HAMILTON, Circuit Judges.

MANION, Circuit Judge. While employed at an accounting firm, Jeanne Hentz had a compact disc

belonging to the firm stolen from her personal vehicle

which was parked at her house. The compact disc contained confidential information belonging to some of

her employer’s clients. Those clients sued Hentz in

Illinois state court for credit monitoring and insurance

expenses incurred to mitigate potential misuse of the
2 No. 12-1784

stolen information. She tendered the defense of the state

action to her homeowner’s insurance company, Nationwide Insurance Co. Seeking a declaration that it had no

duty under Hentz’s insurance policy to defend or indemnify her, Nationwide filed suit in federal court against

Hentz and the clients seeking to hold her liable for the

security expenses. The district court granted summary

judgment in favor of Nationwide. The clients appeal.

We affirm.

I. Factual Background

Hentz is an accountant employed by Kevin W. Bragee,

CPA, LLC (the “Firm”). The Central Laborers’ Pension

Fund, Central Laborers’ Welfare Fund, and Central Laborers’ Annuity Fund (collectively, the “Funds”) hired the

Firm to perform accounting and auditing services. To

perform those services, the Firm possessed a compact

disc containing confidential and protected information,

including the names, birth dates, and Social Security

numbers of approximately 30,000 individual participants

and beneficiaries of the Funds. The Firm agreed in

writing to ensure that its employees and agents would

safeguard the information on the compact disc. Thus,

Hentz, who came into possession of the compact disc, had

a duty to safeguard the confidential information on

the disc as a condition of her employment.

At the end of a day at work, Hentz placed the

compact disc in a laptop, put the laptop in her personal

vehicle, and parked in the open at her residence. Unfortunately, the laptop containing the compact disc was
No. 12-1784 3

At oral argument, counsel for the Funds indicated that efforts 1

to recover their security expenses from the Firm are pending.

stolen from Hentz’s vehicle. In order to mitigate potential

misuse of the confidential information, the Funds

incurred nearly $200,000 in credit monitoring and insurance expenses. Seeking to recoup the cost of these

security efforts, the Funds brought a state action in

Illinois against Hentz alleging that she negligently

breached duties she owed to the Funds. Hentz tendered 1

the defense of the state action to Nationwide, which had

written her homeowner’s insurance policy (the “Policy”).

Believing that the Policy did not cover the theft of the

compact disc, Nationwide brought a federal diversity

action against Hentz and the Funds seeking a declaration that it had no duty to defend or indemnify Hentz.

Nationwide argued that Hentz’s claim was not covered

because the Policy does not cover “ ‘[p]roperty damage’

to property rented to, occupied or used by or in the care

of the ‘insured’.” Nationwide also relied upon language

in the Policy stating that it does not cover “ ‘property

damage’ arising out of or in connection with a ‘business’ conducted from an ‘insured location’ or engaged

in by an ‘insured’, whether or not the ‘business’ is owned

or operated by an ‘insured’ or employs an ‘insured’.” The

Policy provides that this latter exclusion “applies but is

not limited to an act or omission, regardless of its nature

or circumstances, involving a service or duty rendered,

promised, owed, or implied to be provided because of

the nature of the ‘business’.”
4 No. 12-1784

Nationwide and the Funds filed cross-motions for

summary judgment. The district court concluded that

the Policy’s “in care of” exclusion applied and, consequently, that Nationwide had no duty to defend Hentz

against the Funds’ state action or to indemnify her for

any resulting liability. Thus, the district court granted

Nationwide’s motion for summary judgment and

denied the Funds’ motion. The Funds appeal.

II. Discussion

The Funds contend that the district court erred in

finding that the Policy’s “in care of” exclusion applied.

The Funds argue further that the Policy’s “business”

exclusion—which the district court did not address—

does not apply either. The parties agree that the substantive law of Illinois governs this diversity action. “Under

Illinois law, the interpretation of an insurance policy is

a question of law that is properly decided by way of

summary judgment.” BASF AG v. Great Am. Assur. Co., 522

F.3d 813, 818-19 (7th Cir. 2008) (citing Crum & Forster

Managers Corp. v. Resolution Trust Corp., 620 N.E.2d 1073,

1077 (Ill. 1993)). Thus, we review the district court’s

decision de novo. BASF, 522 F.3d at 819. In determining

whether Nationwide has a duty to defend Hentz, we may

only consider the allegations in the state complaint in

concert with the provisions of the Policy. Id.; U.S. Fid. &

Guar. Co. v. Wilkin Insulation Co., 578 N.E.2d 926, 930

(Ill. 1991). We will find a duty to defend “[i]f the underlying complaint[] allege[s] facts within or potentially

within policy coverage . . . .” Wilkin, 578 N.E.2d at 930.
No. 12-1784 5

These two elements have been applied by Illinois courts 2

in cases interpreting “in care of” exceptions in business insurance policies rather than homeowner’s insurance policies.

We recognize that the second element, that the lost or stolen

property was “a necessary element of the work performed by

the insured,” fits well with a business policy but might be an

odd fit under a homeowner’s policy. In this case, however,

because both parties have assumed the element applies and

the element does not affect the outcome, we have also

assumed it applies.

If the relevant policy language is clear and unambiguous, it must be given its plain and ordinary meaning.

Id. But all “doubts and ambiguities must be resolved

in favor of the insured.” Id.

Under Illinois law, an “in care of” exclusion like the

one in the Policy applies only if two elements are met:

the property lost or stolen was (1) within the exclusive

possessory control of the insured at the time of loss; and

(2) a necessary element of the work performed by the

insured. See Stewart Warner Corp. v. Burns Int’l Sec. Servs.,

Inc., 527 F.2d 1025, 1029 (7th Cir. 1975); Bolanowski

v. McKinney, 581 N.E.2d 345, 348 (Ill. App. Ct. 1991)

(collecting cases).2

The state complaint alleged that Hentz, pursuant to

her employment at the Firm, came into possession of

the compact disc and had a duty to safeguard the confidential information that it contained. Hentz’s possession of the compact disc and duty to safeguard the confidential information amount to the “exercise [of] some

type of possessory control over the” compact disc. See
6 No. 12-1784

In Bolanowski, which is discussed extensively by the Funds, 3

the plaintiffs were musicians who kept their instruments at a

bar where they regularly performed. When a fire destroyed

the instruments, the musicians successfully sued the bar,

which then sought to recover the judgment amount from its

insurer. The insurer argued that the insurance policy’s “in

care of” exclusion applied. The Illinois appellate court held

that the insurance policy’s “in care of” exclusion did not

apply because there was no evidence that the “defendants

were accorded the right or duty to exercise some type of

possessory control over the [property].” 581 N.E.2d at 349.

Bolanowski does not apply here because the state complaint

clearly alleges that Hentz had a duty to safeguard the confidential information on the compact disc. See Liberty Mut. Ins.

Co. v. Zurich Ins. Co., 930 N.E.2d 573, 578 (Ill. App. Ct. 2010)

(“We find Bolanowski distinguishable because the defendants

there did not assume any duty to protect the plaintiffs’ property.”).

Bolanowski, 581 N.E.2d at 349; see also Liberty Mut. Ins. Co. 3

v. Zurich Ins. Co., 930 N.E.2d 573, 578 (Ill. App. Ct. 2010)

(“The passive duty of guarding the property gave [the

insured] care, custody or control of the property, even

without any direct contact with the stored goods.”). That

possessory control became exclusive, at least, when

Hentz placed the compact disc in her personal vehicle

that she parked at her residence. See Ins. Co. of N. Am. v.

Adkisson, 459 N.E.2d 310, 312 (Ill. App. Ct. 1984) (finding

exclusive possessory control over property when insured “closed the trailer door”); Liberty Mut. Ins. Co., 930

N.E.2d at 576-78 (holding hotel’s duty to safeguard guests’

property located in a wall safe within the guests’ hotel
No. 12-1784 7

The Funds contend that it is unclear whether Hentz’s posses- 4

sion was exclusive because the state complaint does not

address whether others had access to her vehicle. We do not

find this argument persuasive. The relevant inquiry is not

whether Hentz had exclusive access to the compact disc, but

whether Hentz had exclusive control over the compact disc at

the time of the theft. See Caisson Corp. v. Home Indem. Corp., 502

N.E.2d 1168, 1170 (Ill. App. Ct. 1986). Even if others had the

power, with or without Hentz’s permission, to access her

vehicle while it was parked at her residence, such access

would not amount to “the right or duty to exercise some type

of possessory control over the” compact disc. Bolanowski,

581 N.E.2d at 349; cf. Liberty Mut. Ins. Co., 930 N.E.2d at 577-78.

room establishes the exclusive-possessory-control

element). Thus, the compact disc was stolen while it 4

was within Hentz’s exclusive possessory control. See

Essex Ins. Co. v. Wright, 862 N.E.2d 1194, 1197 (Ill. App.

Ct. 2007) (“ ‘[I]f the insured has possessory control at

the time the property is damaged, the exclusion clause

will apply.’” (quoting Country Mut. Ins. Co. v. Waldman

Mercantile Co., 430 N.E.2d 606, 609 (Ill. App. Ct. 1981))).

In their reply brief, the Funds additionally argue that

the allegations in the state complaint failed to establish

whether the compact disc was a necessary element

of Hentz’s work. “[I]t is well established that arguments

raised for the first time in a reply brief are waived.”

Broaddus v. Shields, 665 F.3d 846, 860 (7th Cir. 2011). In

their opening brief, the Funds merely cite the twoelement test as the controlling legal standard. But nowhere in their opening brief do they argue that the
8 No. 12-1784

The Funds seek to excuse their failure to raise this argument

5

because “[i]t is the burden of the insurer to affirmatively

prove that an exclusion in an insurance policy applies.” United

Nat’l Ins. Co. v. Faure Bros. Corp., 949 N.E.2d 1185, 1191 (Ill.

App. Ct. 2011). This argument comes too late and lacks

merit. Although it is the duty of the insurer to prove that an

exclusion applies, on appeal the appellants must timely raise

all arguments that the district court erred in finding that an

insurer has met its burden.

state complaint does not establish that the compact disc

was a necessary element of Hentz’s work. Nor do

they claim that the district court’s ultimate disposition

was erroneous because the second element was not satisfied. The pertinent section of the Funds’ opening

brief analyzes only the first element, that is, whether

Hentz had exclusive possessory control over the

compact disc when it was stolen. Consequently, the

Funds waived their argument concerning the second

element.5

In any event, the Funds’ argument fails on the merits

because the allegations in the state complaint establish

that the compact disc was a necessary part of Hentz’s

work. The state complaint avers that Hentz, as an accountant at the Firm, possessed the compact disc and

had a duty to safeguard the confidential information

contained on it. The Model Code of Conduct of the National Association of State Boards of Accountancy says

that maintaining “confidentiality is vital to the proper

performance of [an accountant’s] professional activities.”

Nat’l Ass’n of State Bds. of Accountancy, Uniform
No. 12-1784 9

The Funds point out that the state complaint does not specifi- 6

cally allege that Hentz performed accounting work on behalf

of the Funds. We find this omission immaterial because

Hentz’s duty to safeguard confidential information extends to

all such information that comes into her possession as an

accountant at the Firm—not merely to confidential information that relates to client matters assigned to her.

The Funds argue that the exclusion is ambiguous because 7

it could be interpreted only to apply while Hentz is actively

(continued...)

Accountancy Act Model Rules, Art. 10, Principle VI (6th ed.

July 29, 2011) (“A licensee has an obligation to maintain

and respect the confidentiality of information obtained in

the performance of all professional activities.”); see also

Ill. Admin. Code tit. 68, § 1430.3010; Am. Inst. of Certified

Pub. Accountants, Code of Professional Conduct and Bylaws

1799, Rule 301 (June 1, 2011). Because the handling

and care of confidential information is vital to Hentz’s

work as an accountant, the compact disc containing

such information is a necessary, rather than incidental,

element of her ordinary employment activities. See

Stewart Warner Corp., 527 F.2d at 1030.

6

In addition to the application of the Policy’s “in care

of” exclusion, the Policy’s “business” exclusion also

precludes coverage in this case. As noted above, the

“business” exclusion does not cover “ ‘property damage’

arising out of or in connection with a ‘business’ . . . engaged in by an ‘insured’, whether or not the ‘business’ is

owned or operated by an ‘insured’ or employs an ‘insured’.” The exclusion “applies but is not limited to an 7
10 No. 12-1784

(...continued) 7

engaged in work activities. This alleged ambiguity does not

help the Funds because Hentz’s duty to safeguard clients’

confidential information in her possession does not evaporate

when she is not actively performing other accounting activities.

act or omission, regardless of its nature or circumstances,

involving a service or duty rendered, promised, owed,

or implied to be provided because of the nature of the

‘business’.” The Funds do not dispute that the Firm is a

“business” which employs Hentz, and that, according

to the state complaint, Hentz had a duty to safeguard

the confidential information on the compact disc because

she was an accountant employed by the Firm. Hentz’s

failure to safeguard the compact disc was an omission

amounting to a breach of that duty. Therefore, the

Policy’s “business” exclusion applies. See Allstate Ins. Co. v.

Mathis, 706 N.E.2d 893, 894 (Ill. App. Ct. 1999) (holding

that a “business” exclusion applied where the insured

failed to fulfill a duty directly correlated to providing daycare services).

Based on our resolution of these issues, we conclude

that Nationwide has no duty to defend Hentz against

the Funds’ state action. Accordingly, we decline to

address the other arguments advanced by the parties

relating to that question.

Finally, Nationwide’s duty to indemnify is only

triggered if Hentz is determined to be liable for damages in the underlying action. Bituminous Cas. Corp. v.

Fulkerson, 571 N.E.2d 256, 260 (Ill. App. Ct. 1991).
No. 12-1784 11

Because Nationwide owes no duty to defend her against

the Funds’ state action, Nationwide owes no duty to

indemnify her for liability stemming from that suit. Crum,

620 N.E.2d at 1081 (“Clearly, where there is no duty

to defend, there will be no duty to indemnify . . . .”).

III. Conclusion

Because we hold that the “in care of” exclusion and,

alternatively, the “business” exclusion from Hentz’s

insurance policy apply, Nationwide has no duty to

defend Hentz against the Funds’ state action. Consequently, Nationwide has no duty to indemnify Hentz

should that state action go against her. Therefore, the

district court’s judgment is AFFIRMED.

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