application, signed two months carlicr, was incorrect in stating that (here was no change in the
composition of the trustees. The document did not expressly state that there had been a change in
the composition of the trustees. Rather, that fact could have been discerned by comparing the
April 29, 1999 document with another document already tendered to QBE - the Trust’s 1998 Annual
Statement, which listed the trustecs as of that time. Comparing the two documents reveals that
Mr. Fifer was listed as a trustee on the 1998 Annual Statement, but not on the April 29, 1999 Board
Resolution. We think that the question of whether the April 29, 1999 resolution was sufficient to
provide reasonable notice that there was a change in trustees, a change that rendered the answer to
Question 4(a) incorrect (or too obscure to provide reasonable nolice) is a question of fact to be
resolved at trial rather than on summary judgment. See generally, Rexroad v. City of Springfield,
No. 94374, 2003 WT. 21983300, 207 IIL. 2d 33, (TI, Aug. 21, 2003) (whether certain facts
constitute “adequate notice” is a question of fact); Kel-Keef Enterprises, Inc. v. Quality Components
Corp., 738 N.E. 2d 524, 539 (1* Dist, 2000) (reasonable time to give notice is a question of fact).

There are also fact questions concerning the materiality of a change in the composition of
trustees to QBE’s renewal decision. At the threshold, there is conflicting testimony by Mr. Gaizutis
concerning the significance of Mr. Fifer’s departure from Earth Care’s Board of Trustees (Compare

Dels

56.1 Add’l Facts {| 107-08 and PJ.’s Reply to Def.’ 56.1(b)(3) St. 4] 107-08). To the extent
that QBE argues that the departure of both Messrs. Fifer and Abbick as trustees would have been
material, even if the departure of only Mr. Fifer would not, there still remains a genuine dispute as
to the reason for Mr. Abbick’s departure — that is, whether it was a retirement (which would not have
to be disclosed) or was for other reasons (which would have to be disclosed). And, there is evidence

that arguably contradicts QBE’s cvidence concerning the significance of the change in trustees to the

19



“healthy” (PL.’s 56. 1(a)(3) St. 4] 72, Tab 37, at 157-60; Defs.’ 56.1(b)(3) Resp. 472). Ms. Johnson
of Fackler had contact with Trust members after the asscssment letters were sent out, and the
responses she was getting from members she spoke with conccrning the assessment were negalive,
with some members cxpressing outrage conceming the assessment (PI.’s 56.1(a)(3) St. § 73).
Messrs. Kengott and Caizutis testified that had they known that the Trust members’ responses were
disappointing, unhealthy or not positive, or that personal meetings had not taken place where full
payment or payment schedules were obtained, then they would not have made the representations
that were made to QBE on this issue (PI.’s 56.1(a)(3) St. | 76-77).

The renewal policy at issue, identilicd as Policy No. SUA81110 (“the Policy”), had effective
dates from June 15, 1999 to June 15, 2000 (PI.’s 56.1(a)(3) St. 9] 85 (citing Sec. Am. Compl., Ex,
A, Tab 1). The Policy provided $1 million in coverage for Earth Care’s trustees. The term
“Application” is defined to mean:

(1) The application for this policy, a copy of which is attached hereto.

(2) The application(s), including any material submitted therewith, for all previous
policies issued by underwriters providing continuous coverage until the inception
date of the Policy together with any material submitted with the application for this
Policy, all of which shall be retained on file and deemed attached hereto as if
physically attached hereto.

(PI.’s 56.1(a)(3) St. | 86). The Policy SUA81110 specifically excludes from coverage

“Any Claim made against the Directors and Officers:

so (1) by or on behalf of the Company or any Affiliate;

(3) by any security holder of the Company whether directly or derivatively,

except where such security holder bringing such claim is acting totally
independent or, and totally without the solicitation of, or assistance of, or

13



is disputed testimony about whether this last line would have becn material to QBE’s assumption
of the risk, This evidence raises a question as to the truc level of significance QBE attracted to the
slate of progress in the Trust collecting the special premium assessment.

The Court finds that genuine issues of material fact exist on this question that preclude
summary judgment.”

Iv.

We now lum lo the parties’ cross-molions for summary judgment on Count III, which deal
with the question of whether the insured v. insured exclusion in the Policy applics to the Liquidator’s
claims against the Trustees in the underlying lawsuit, We will begin with the additional undisputed
facts material to those motions.

A.

The Policy contained an insured vs. insured exclusion, which in relevant part reads as
follows:

Il. EXCLUSIONS

Underwriters shall not be liable to make any payment for any Loss in connection wilh
any Claim made against the Direclors and Officers:

ae

F. (1) by or on behalf of the Company or any Affiliates;

7QBE understandably makes much of the fact that other members of Fackler had opinions about the “health”
of the trust members’ response to the special premium assessment different than those expressed by Mr. Monteau (QBE
Mem. at 6). However, it was Mr. Montcau who was responsible for the information provided to Mr. Kengott (PL.’s
56.1(a)(3) St. 4] 65). What other members of Fackler knew or believed at the time the information was provided to
Kengott may be relevant to the credibility of Mr. Monteau’s stated belief at the time, as well as its rcasonableness. But,
credibility questions must be resolved al trial and not on summary judgment.

23



but must use the evidentiary tools outlined above to identify the material facts that show there is a
genuine issue for trial. /d. at 324; Lnsolia, 216 F.3d at 598.
I.
We begin the analysis by reviewing the historical facts that the parties do not dispute.
A.

QBE is a foreign corporation and a citizen of the United Kingdom (P1.’s Rule 56.1(a)(3) St.
4.1). Illinois Workers’ Compensation Trust Earth Care (“Earth Care” or “the Trust’) was a sclf-
insured workers’ compensation poo! authorized to transact business in the State of Illinois (/d. 4 2).
Pursuant to a stale court order dated October 26, 1999, Nathaniel S. Shapo, then the Director of
Insurance of the State of Illinois, was appointed the Liquidator of Earth Care (d. 3-4) —a position
to which, as explained above (see note 1, supra), J. Anthony Clark has succeeded. Oliver l'ifer was
a Trustee of Earth Care and at all relevant times is a cilizen of Illinois (dd, 5). Charles A. Abbick,
Jy. was a Trustee of Earth Care and at all relevant times was a citizen of Kansas (/d. 4 6). Jacqui
Bradley was also a Trustee of Earth Care and at all relevant times was a citizen of Ilinois (Jd, 7).

During the time periods relevant to this litigation, Stateside Underwriting Agency (“SUA”)
acted as QBE’s agent for the underwriting of D&O policies in the United States, such as the one
purchased by Earth Care. Atall relevant times, SUA’s offices were located in Chicagp, Illinois (PL.’s
56.1(a)(3) St. 4 8). At all relevant times, Chad Gaizutis was a Vice President at SUA and the
manager of its Underwriting Department (/d. 9). David Kengott is an insurance broker employed
by Professional Liability Brokers & Consultants (“PLB&C”), which acted as an agent for Earth Care

to obtain D&O insurance for the Trust (Ze. 4] 12).



setting no longer may do so. Again, QBE was concerned about that risk, QBE could have
addressed it by issuing a policy that expressly excludes claims brought by a trustee, receiver or
liquidator. The Court declines to give QBE, by litigation, what it failed to obtain by contract.
CONCLUSION

For the rcasons stated above and consistent with the minute order entered on September 30,
2003, the Court denies plaintiff's motion for summary judgment on Counts J and TI (doc. # 87-2),
denies the plaintiff's motion for summary judgment on Count II] (doc. #87-1), and grants the
defendants’ motion for partial summary judgment on Count LI (doc. # 86)."!

ENTER:

V.0Q,z |

SIDNEY I. SCHENKIER
United States Magistrate Judge

Dated: October 23, 2003

"This order extends to defendant Bradley, who did not expressly join in the defendants’ motion for partial
summary judgment,

34



renewal decision. The parties do not dispute that Mr. Gaizutis, QBE’s insurance representative at
SUA, “cannot identify by name one company where SUA received an application on behalf of QBE
where a change in the Board of Directors was disclosed” (Defs.’ 56.1 Add’] Facts { 112). Nor can
“[Mr.] Gaizulis ... remember if SUA was ever involved in a situation where a change in a board of
directors ever le| |d to the declination of a renewal of a policy” (/d. 113). For these reasons, the
materiality of the changes in trustees lo QBE’s renewal decision cannot be resolved on summary
judgment.
B.

QBE argues that the documents that Earth Care submitted with respect to the special
premium assessment also contained material misrepresentations (QBE Mem, at 5-6). For example,
the Board of Trustce’s resolution approving the special premium assessment purportedly was signed
by Mr. Binstock. But, Mr. Binstock cannot recall whether he ever signed the Resolution (Defs.’
56.1(b)(3) Add’! Facts 4] 127), and, in any event, he should not have signed it because he was not a
‘Trustee (P1.’s 56.1(a)(3) St. 4] 59). ‘There is no dispute that, al the time the renewal application for
the Policy was pending, QBE had expressed concern regarding the Trust’s financial condition

because the ‘Trust was operating on a negative surplus. The Board Resolution contained a special

°We are aware that while [linois expresses a strong preference for sending materiality questions to the jury,
there are cases in which materiality can be resolved on summary judgment. For example, in 7/G, the Seventh Circuit
affirmed and yranted summary judgment rescinding an crrors and omission (“E&Q”) policy issued by TIG to Reliable,
a Utle insurance and escrow issuing agent, In applying for E&O coverage, Reliable was asked 10 list every claim or suit
that had been filed against it in the past ten years, and failed to list the entry of a permanent injunction enjoining from
“preparing Deeds or other Jegal documents relating to the transfer of real estate ... and that. . . Reliable Research,
Inc. ... cease and desist the unlawful practice of law,” In finding that the materiality of that misstatement could be
determined on summary judgment, the Seventh Circuit observed that “[a]ll undisclosed claims are not equal,” and that
it “borders on the surreal to think that the nondisclosure was immaterial.” 334 F.3d at 637. The Seventh Circuit endorsed
the reasoning of the district court that “a court order permanently enjoining a tide company from the unauthorized
practice of law would be a ‘red flag’ to any reasonably careful and intelligent underwriter of Title Escrow Professional
Liability Insurance.” fd, On the record submilted on summary judgment here, the same cannot be said for a change in
the identity of trustees,



asserts that “numerous courts have held that the . .. Exclusion docs not apply to claims asserted by
a liquidator, receiver or the bankruptcy trustce of an insolvent institulion” (/.).

For its part, QBE argues that the claims by the Liquidator against Mr. Abbick, Mr. Fifer and
Ms. Bradley in the underlying lawsuit are brought by the Liquidator standing in the shoes of the
Trust, and thus are barred by both the plain language and the underlying purpose of the insured v.
insured exclusion. The plain language of the exclusion states that QBE will not cover losses in
comnection with claims directly by the Trust (/.¢., “by the Company”) against the Trustees, or losses
in conncction with claims by a third parly against the Trustees on behalf of the Trust (i.¢., “on behalf”
ofthe Company”). The purpose underlying the exclusion is to prevent collusion, “such as suits in
which a corporation sues its officers and directors in an effort to recoup the conscquenccs of their
business mistakes... , thus turning liability insurance into business-loss insurance . . . .” Level 3
Communications, Inc. v. Federal Insurance Co., 168 F.3d 956, 958 (7" Cir. 1999). QBE contends
that in this case, as in Level 3, (he Liquidator’s claims against the ‘Trustees in the underlying lawsuit
“are all in the nature of business mistakes which would not be covered claims if made by Earth Care
itself, and should therefore not be covered simply because they have become vested with the
Liquidator by operation of law” (QBL Mem. at 13).

QBE further argues that the Liquidator cannot escape the insured v. insured exclusion simply
because he procecds in his own name as the “Liquidator,” rather than in the name of the Trust itself.
Even if the Liquidator purports lo proceed “on behalf of the Trust’s creditors, members and policy
holders, as provided by 215 ILCS 5/193(3)" that is, on behalf of the Trust participants — any
recovery still goes to the Trust and is used by the Liquidator, pursuant to his statutory authorily, to

satisfy the obligations of the Trust as a whole (QBE Mem, at 14-15). In this way, QBE argues, any

26



In particular, QBE points to the statements in the facsimile of the Trust members’ responses to the
special premium assessment was “healthy,” and that the Trust had conducted personal meetings with
members at which full payment or payment schedules had been obtained (QBE Mem. at 6).

However, there are genuine disputes of material fact as to whether the information in the
facsimile was matcrial to QBE’s decision to renew. The facsimile from Mr. Kengott to Mr. Gaizulis
stated:

In response to your question rcgarding the contributions, the insured has had a

healthy response lo their call letters. During the last week, they have had personal

meelings with various individual accounts and have succeeded in receiving full

payments and/or premium payment schedules, In summation, this is a work in

process.
(Pl.s’ Rule 56.1(a)(3) St, Tab 29), There is testimony that QBE relied on the statement that the
‘Trust members’ responses to the special premium assessment were “healthy” in deciding to renew
the Policy. For example, after receiving the Board Resolution authorizing the special premium
assessment, among other things, Mr. Gaizutis recommended a smaller premium increase than first
proposed to QBE (PI.’s 56.1(a)(3) St. | 56-57), and QBE agrced to change the Trust’s renewal
premium from $15,000 to $7500 (dd. 4] 62).

On the other hand, the parties agree that QBE did not ask Earth Care the amounts collected
on the special premium assessment as of June 1999 (Defs.’ 56.1 Add’! Facts 4] 130); nor did it ask
Earth Care to indicate the specific percentage of the assessment collected in June 1999 (/d. 131).
There is also evidence that the June 28, 1999 facsimile is not in QBE’s underwriting file in London,
even though QBE has slated that all documents relied on for renewal are in that file (fc. 4] 128-29).

And, the June 29, 1999 facsimile from Mr. Gaizutis to Mr. Cullum (PI.’s Rule 56,1(a)(3) St., Tab

30) lefi oul Mr, Kengott’s statement that the collection process was “a work in process,” and there

22



insured party an ongoing “obligation imposcd by law to notify the insurer of any changed condition
materially affecting the risk during the pendency of the application for insurance.” Carroll v.
Preferred Risk Ins, Co., 215 N.F.2d 801, 802 (IIL. 1996).

‘The defendants argue that the answer to Question 4(a) was always “technically truc” (Defs.”
Mem. at 6), because the question asks about a Board of Directors, not a Board of Trustees (Defs.’
56.1(b)(3) Resp. 442). And, since Earth Care never had a Board of Directors, the correct answer
to this question was always “No” (/d.). Alternatively, assuming that the word Directors can be read
lo include Trustees, the defendants claim that Question 4(a) docs not require identification of
‘Trustees who retire, and Mr. Abbick’s resignation could be considered a retirement (fd.). In addition,
the defendants argue that QBE was on notice of Mr. Fifer’s departure before the Policy issued
because it received the April 29, 1999 Board Resolution, which revealed that Mr. Fifer was no longer
on the Board of Trustees as of that time (/d.). The defendants argue that, at a minimum, this
document triggered QBE’s obligation to investigate because it provided “reasonable notice” of the
change in the answer to Question 4(a) (Defs.’ Mem. at 6); see also, New England Mutual Life Ins.
Co, v. Bank of Illinois, 994 F. Supp. 970, 982 (N.D. Ill. 1998) (an insurer’s duty to investigate is
triggered when it has reasonable notice that an insurance application contains false answers).
Finally, defendants contend that any change in the answer to Question A(a) would not have been
material to QBF’s decision to renew the Policy, because there is no evidence that QBE considered
the fact that the Board of Trustees had not changed to be significant to its decision to renew (Defs.’
56.1(b)(3) Resp, {| 80-81).

The Court finds that the renewal application contained a statement that was no longer correct

by the time the Policy issued because, by thal time, there had been a change in the Board of Trustees.

17



E.

On or about March 31, 1999, Mr. Gaizutis reecived the Trust’s statutory annual statements
from Mr. Kengott, which showed a negative surplus. Mr. Gaizutis informed Mr. Kengott that he
would also need a narrative report from Earth Care on its plans for funding future operations and
building a positive surplus (PI.’s 56.1(a)(3) St. | 47). On or about April 1, 1999, Mr. Kengott
advised I’ackler that QBE was concemed about Earth Care’s ongoing losses, and required an
explanation of the Trust’s ongoing financial viability (/d. 4] 48).

On or about April 17, 1999, Mr. Link of Packler advised Mr. Kengott that Earth Care
members would be billed additional premium to climinate the surplus deficit (PL.’s 56.1(a)(3) St.
49), On or about April 19, 1999, Mr, Kengott provided Mr. Gaizutis with the Trust’s amended
annual statement which showed a negative surplus of $1.2 million, and advised Mr. Gaizutis of the
‘Trust's plans to bill members additional premium to eliminale that negative surplus (Zd. 50). The
minutes of the Larth Care Board of Trustees’ meeting of April 29, 1999 state that the board passed
a resolution approving a special premium assessment for members insured in the 1994 and 1997
policy years (/d. | 51).

On or about June 11, 1999, Mr. Kengott sent Mr. Gaizutis the Trust’s audited financial
statements for 1998, and requested QBL’s renewal terms (PI.’s $6.1(a)(3) St. | 52). On or about
June 14, 1999, Mr. Gaizutis sent the audited financials and the renewal application to QBE. At that
time, Mr. Gaizutis noted that the Trust had lost approximately $1.5 million in 1998, and that it
planned to assess its members additional premium. Mr. Gaizutis recommended that QBE triple the
premium il would charge Earth Care and double Earth Care’s deductible, in part becausc of the

Trust’s poor financial condition (/d. | 53). QBE agreed with the renewal terms suggested in Mr.



company, and thus would give (he company a wind{all by allowing coverage for a claim that would
have been excluded prior to liquidation. We do not consider that argument persuasive here.
First, QBE has not attempted to show that the Counts I, IT and VT of the underlying suit fail
to state viable claims of both the participants and the Trust. So long as the participants’ claims are
no less viable than those of the Trust, there is no expansion of coverage because the exclusion would
not have applied to participants’ claims in a pre-liquidation setting. That is particularly so here,
where the damages sought by the Liquidator in the underlying lawsuit are the same for claims of
breach to the Trust and the participants. And, to the extent there was a difference, that could be
addressed through an allocation of damages rather than barring any coverage for participant claims.
During oral argument on the motion for summary judgment, QBE argued that only those
claims that a participant actually filed prior to the date of the liquidation order should be carved out
from the exclusion, Thus, QBE would make dispositive to the applicability of the exclusion the
timing of when a participant’s claim was first asserted: if asserted by the Liquidator prior to the
liquidation order, it would not fall within the insured v. insured exclusion; if asserted by the
Liquidator only afler the liquidation order (because by that time the participant no longer could assert
the claim), it would be barred. We find no textual support either in the code or in the insured v.
insured exclusion for making the question of coverage turn on whether the participant’s claim was
asserted before or after the liquidation order. To the contrary, we believe that QBE’s contention
would give the insurer a windfall that it did not bargain for in negotiating the exclusion, by
expanding the scope of the exclusion to embrace participant claims thal, prior to a liquidation order,
clearly would not have been excluded. To the extent that an insurer wishes to contract for an

exclusion that would extend to any claim brought by a liquidator, whether belonging to a trust or to

32



that interpretation to be a plausible one, becausc it focuses entirely on Section 5/193(1), which states
that the Liquidator is authorized deal with the property, business, or affairs of the trust “in his name
as director, or, if the Court shall so order, in the name of the company,” without accounting for
Section 5/193(3), which states that the Liquidator also may bring an action against directors or
officers of a company, or against any other person with respect to that person’s dealing with the
company, “on behalf of the creditors, members, policyholders or sharcholders of the company.”
Thus, Section 5/193(3) makes clear that, even if the Liquidator is considered to “stand in the shoes”
of the Trust, under Section 5/193(1) the Liquidator does so with enhanced rights that, pre-liquidation,
the Trust did not have — specifically, the right to bring claims that, in a pre-liquidation selling, would
belong exclusively to persons or entities other than the Trust.

In this case, the complexity that arises is that the claims that the Liquidator asserts against
the ‘Trustees in Counts I, TT and V1 of the underlying lawsuit are of a dual nature. The Liquidator
asserts that the conduct of the Trustees challenged in those counts violated their duties to the Trust:
those claims could have been asserted by the Trust prior to liquidation, and if the Trust had asserted
them, then those claims would have been barred from coverage under the insured v. insured
exclusion. However, the Liquidator alleges that the same conduct challenged in those counts also
violated the Trustees’ duties to the participants of the Trust. The participants are separate and
distinct from the Trust. See, eg., Bellis v. United States, 417 U.S. 85, 93, 97-99 (1974) (collective
entity is legally distinct from its individual partners); United States v. Crum, Nos. 00 C 446, 00 C
447, 2001 WL 616642 (N.D. Ind., Apri! 17, 2001) (a ust is a separate legal entity from its
participants). Prior to liquidation, the participants could have asserted those claims of breach against

the Trustees, and those claims would not have been barred from coverage by the insured v. insured

29



was correct on the day that the application was dated, l'ebruary 18, 1999 (Defs.’ 56.1 Add’) Facts
| 104)"
c.

On or about February 22, 1999, Fackler sent Kengott the completed renewal application for
the renewal of Earth Care’s D&O coverage [rom QBE (PI.’s. 56.1(a)(3) St. | 26). Kengott sent the
renewal application to SUA on or about February 24, 1999 (/d, 131). SUA provided preliminary
underwriting on D&O insurance policies issued by QBE (/d. | 23). After the renewal application
was sent to SUA, the parties agreed to extend the original policy to June 15, 1999 to allow Earth
Care to provide QBE with Earth Care's audited financial statements (/d. | 38).

The underwriting process included gathering relevant information, providing commentary
on the applicant, and offering recommendations for the terms and conditions to be offered (PI.’s
56.4(a)(3) St. | 23). SUA ultimately issued the policies for QBE, after communications with QBE’s
London Broker, Coleman & Cullum, Ltd. (/d.), which will be described below. QBE relicd on SUA
to analyze the applicants for coverage and submit those which would be appropriate for QBF’s
consideration. QBF expected SUA to perform a scrcening function and use its own underwriting
judgment when submitting applications for QBL's consideration. The final decision on whether to

accept a D& O risk would be made by QBE (/d. § 25, 24).

Ud. 100), SUA received a request to amend the 1998 policy to amend the definition of director to include a trustee
(ayain, the surnmary judgment papers do not disclose who did so). Although SUA agreed to the request, the change was
never made (/¢. 4] 102)

4A “yes” answer to the question of whether there has been a change in the Board of Directors would not have
automatically lead to the declination of an application of a policy of insurance. A “yes” answer would have led SUA
to ask more questions (/d. | 105); the reason for a change in the Board of Directors was important to SUA (fd. §] 106).

6



E.C. Fackler, Inc. was the third-party Administrator of Earth Care. Fackler’s offices were
located in Chicago, and its responsibilitics included providing all accounting, underwriting and
claims’ handling functions for Earth Care. One of Fackler's duties as third-party administrator of
Earth Care was to obtain D&O insurance coverage for the Trust and its ‘Trustees (Pl.’s 56.1(a)(3) St.
410). Carl Link was in charge of the Accounting Department at Fackler (/d. | 16), and Torquka
Johnson was its Claims Manager (/d. | 18). David Monteau was the Marketing and Underwriting
Manager at Fackler, and was the Fackler employee having primary responsibility for obtaining D&O
Insurance for the Trust and Trustees (/d. 4] 17, 19).

In April 1998, Earth Care obtained a D&O policy from Executive Risk (“ER”), pursuant to
an application filed on March 19, 1996 (see App. {1 to PI.’s Rule 56.1(a)(3) St, Tab 33, at 57-60;
Defs.’ 56,1 Add’l. Facts 94), In that same month, QBE took over the policy from ER (PL.'s Rule
56.1(a)(3) St., Tab 33, at 60-61). Thus, the application used to obtain the policy taken over by QBE
in April 1998 was on an BR, and not a QBE, form (Defs.’ 56.1 Add’l, Facts 4 93).

B,

{n carly 1999, a Fackler employee (whose identity has not been disclosed in the summary
judgment papers) filled out an application on a QBE [orm to renew the Trust’s D&O policy (Pl.’s
56.1(a)(3) St. 927). Mr. Abbick signed the renewal application. without first reading it on or about
February 18, 1999 (/d., ] 28). Question 4(a) of the renewal application asked “Have there been any
changes in the Board of Directors or Senior Management of the Applicant within the past ycar for

reasons other than death or retirement.” The question was answered “No” (/d. 29). That answer

‘Both the 1998 application and the 1999 renewal application were designed to be used by for-profit corporations
and not for trusts (Defs.' 56.1 Add’l Facts { 98). Thus, Question 4(a) was the phrase “Board of Directors” instead of
“Trustees” (/. | 103). The 1999 renewal application was never amended to use language morc directly suited to a trust

5



We reject the defendants’ argument that Question 4(a) was inapplicable to the Trust’s rencwal
application, because it asked for changes to “directors” and not “trustees.” That argument is
inconsistent with the fact that the answer QBE gave on the renewal application for Question 4(a) did
not say that the question was inapplicable to a trust and thus need not be answered, but rather was
an unqualified “no” .. showing that the Trust understood that the question applied to it, even (hough
its organizational form utilized “trustees” rather than “directors.” While there may be a factual
dispute conceming whether Mr. Abbick’s departure nccd not have been disclosed because he retired
(Defs.’ 56.1 Add’ Facts 4 110), or should have been disclosed because he departed duc to a
disagreement with Fackler over the handling of excess insurance for the Trust (PI.s’ 56.1(a)(3) SL
4/41; Def.’ 56.1(b)(3) Resp. 4] 41), there is no dispute that Mr. Fifer left for rcasons other than death
or retirement and that his departure should have been reported.

Moreover, we lind that the applicant (Earth Care) could nol have had a reasonable knowledge
and belief that the answer lo Question 4(a) on the renewal application remained correct after
Mr. Fifer left his position as a Trustee of Earth Care. Because there is no contention that the
misrepresentation was intentional, the remaining issue is whether Mr. Fifer’s departure as a trustee
was not disclosed, and if'so, whether that rendered the original answer to Question 4(a) a material
misrepresentation. On both of these questions, we find that there are gcnuine disputes of material
fact that preclude summary judgment.

There is no dispute that QBE (through its authorized agent, Mr. Gaizutis) was provided with
a Board resolution passed at the April 29, 1999 meeting, and signed by the persons whom Earth Care
listed as trustees, and that this resolution did not list Mr. Fifer as a ustee. The question is whether

that document constituted reasonable notice that the answer to Question 4(a) in the renewal

18



renewal application that required the reporting of any material changes in the information contained
in the application (Zé. ] 32).

Mr. Monteau was the Fackler employee who had the responsibility to advise QBE of any
changes to the information contained in the Renewal Application (P1.’s 56.1(a)(3) St. || 43). Two
of Earth Care’s Trustees (Messrs. Fifer and Abbick) left and/or resigned from the Trust after
February 18, 1999. Mr. Fifer resigned from Earth Cure Board of Trustees “some time between
February 18, 1999 and April 1, 1999,” because his company was no longer purchasing workers”
compensation coverage from Earth Care (PI.’s 56.1(a)(3) St. 4 39; Defs.’ 56.1 Add’! Facts 4 107).
Mr. Abbick, on the other hand, testified that he announced his decision to leave the Board of
Trustees on April 29, 1999 and tendered a written resignation to the Board on July 19, 1999, because
he only wanted to spend five years as a Trustee (PI.’s 56.1(a)(3) St. | 40; Dets.’ 56.1 Add’! Facts 4]
110). Mr. Abbick considered his departure a “retirement” (7d). But, he also indicated in an
interrogatory answer that onc of the reasons for his resignation was a disagecement with Fackler over
the handling of excess insurance for the Trust (App. I to Pl.’s Rule 56.1(a)(3) St., Tab 11, Int. Ans.
1).

Mr. Monteau did not disclose these changes to QBE (Pl.’s 56.15(a)(3) St. { 43). However,
Mr. Gaizutis cannot identify by name one company where SUA received an application on behalf
of QBE where a change in the Board of Directors was disclosed (Defs.’ 56.1 Add’1 Facts 4112). Mr.

Gaizutis also cannot remember if SUA was ever involved in a silualion where a change in the

membership of a board of directors ever led to the declination of a renewal of a policy (/d. 4 113).



(3) By any security holder of the Company, whether directly or
derivatively except where such security holder bringing such Claim
is acting totally independently or, and totally without the solicitation
of, or assistance of, or participation of, or intervention of, any of the
Directors and Officers, or the Company or any Affiliate.
(Defs.” Count TIT Rule 56.1(a)(3) St., 4 8).
On or about October 21, 1999, the Director of the Tlinois Department of Insurance, then
Mr. Shapo, was affirmed as the Rehabilitator of the ‘Trust, by order entered in the Circuit Court of
Cook County, Illinois (Defs.’ Count IIT 49). On or about October 26, 2000, an order of liquidation
was entered by the Circuit Court of Cook County, and Mr. Shapo (now succeeded by Mr. Clark)
became Liquidator of the Trust (Defs.’ Count HI 410). Pursuant to 215 ILCS 5/191 of the Illinois
Insurance Code (“the Code”), the Director “is authorized to both sue and defend on behalf of the
‘Trust in his name as Liquidator of the Trust, or in the name of the Trust.”
On November 30, 2000, the Liquidator filed a six-count complaint in the Circuit Court of
Cook County, Minois against, among others, the former trustees of Earth Care in an action captioned
Nathaniel S. Shapo, Director of Insurance of the State of Ilinots, as Liquidator of Mlinois Earth
Care Workers’ Compensation Trust v. Charles A. Abbick, et al., No. 00 CH 17226 (the “underlying
lawsuit”) (Defs.’ Count UI St. 11). The complaint states that the Liquidator brought the underlying
suit in his capacity as “Liquidator of the Illinois Earth Care Trust on behalf of the Trust’s creditors,
members and policyholders... ,” under 215 LLCS 5/193(3) (Sec. Am Compl, Ex. C., 4] 1). The
defendants named in the underlying suit were five former trustees (Mr. Abbick, Mr. Fifer, Ms.
Bradlcy, J. Mark Harrison, and Michael Hillyer; Fackler, the Trust’s third-party administrator; and

Illinois Zephyr, Inc. (an insurance agent retained by Fackler 1o act as the “exclusive marketer” of the

Trust) (Sec. Am. Compl. Ex. C, 4{[ 4-6).

24



‘Minute Order Form (06/97)

United States District Court, Northern District of Mlinois

Name of Assigned Judge Sidney I Schenkier Sitting Judge if Other
or Magistrate Judge . than Assigned Judge
CASE NUMBER 01 C 508 DATE 10/23/2003
CASE QBE Intl. Ins, Ltd vs. Clark, et al.
TITLE
[In the following box (a) indicate the party filing the motion, c.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
MOTION: of the motion being presented]

DOCKET ENTRY;

(1) a Filed motion of [ use listing in “Motion” box above.]
(2) a Brief in support of motion duc
(3) o Answer brief to motion due___. Reply to answer brief due
(4) o Ruling/Hearing on _—ssetfor at
(5) a Status hearing set for 11/12/2003 at 9:00 A.M..
{6) a) Pretrial conference[held/continued to] [set for/re-set for] on set for ca
(7) a ‘frial[set for/re-set for] on _ at
(8) o [Bench/Jury trial] [Hearing] held/continued to. at
(9) Oo This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to}
DERCP4(m) OLocalRule 41.1 COFRCP41(a)(1) Cl FRCP41(a)(2).
ao =f [Other docket entry] Enter Memorandum Opinion and Order, For the reasons stated in the
Memorandum Opinion and Order and consistent with the minute order entered on September 30, 2003,
the Court denics plaintiff's motion for summary judgment on Counts | and II (doc. #87-2), denies the
plaintiff's motion for summary judgment on Count II ( doc. #87-1), and grants the defendants’ motion
for partial summary judgment on Count Ill (doc. #86).
qi) @ (For further detail see order attached to the original minute order. ]
No notices required, advised in open court.
No nolives required, vunher of ies
V | Notices mailed by judge's staff. OCT 24 2003

Notified counsel by telephone.
Docketing to mail notices:

Mait AO 450 form. ATG ihre

Copy to judge/magistrate judge.

sly dockets

courtroom
deputy’s

initials

Date/time received in
central Clerk’s Office

reniling deputy initials



Mr. Abbick asked him to be, because he was not qualified to hold the position (.e., he was not an
owner, director or employce of a Trust participant) (Pl.’s 56.1(a)(3) St. § 59).
r

Following receipt of Mr. Gaizutis’ report to Mr. Cullum, QBE directed that the premium
charged for the renewal be set at $7,500 (an increase from the previous $5,000 premium), with a
deductible of $25,000 (reflecting an increase from $5,000). QBE also asked to be informed about
the Trust members response to the special premium assessment (PI.’s 56.1(a)(3) St. § 62). On or
about June 15, 1999, Mr. Gaizutis sent QBE’s proposed renewal terms to Mr. Kengolt, and requested
an update on the Trust members’ response to the special! premium assessment (/d. §] 63). On or about
June 16, 1999, Mr. Kengott advised Fackler of the renewal proposal, and that QBE requested an
update on the special premium assessment as a condition of the renewal (/d. § 64).

On or about June 28, 1999, Mr, Kengott provided Earth Care’s response to QBF’s request
for an update on the special premium assessment. The information Mr. Kengott provided in his June
28, 1999 facsimile to Mr. Gaizutis came from Mr. Monteau of Fackler (PI.’s 56.1(a)(3) St. 4 65).
in his facsimile, Mr. Kengott advised Mr. Gaizutis that Earth Care had received a “healthy” response
to the special premiuin assessment letters, and that the Trust had conducted “personal meetings with
various individual accounts and have succceded in receiving full payments and/or premium payment
schedules” (/d. {[ 66). ‘The facsimile from Mr. Kengott to Mr. Gaizutis stated that the efforts to
collect the special premium assessment “is a work in process” (PI.’s Rule $6.1(a)(3) St., Tab 29).

On or about June 29, 1999, Mr. Gaizutis advised Mr. Cullum by facsimile of the Trust’s
response to QBE’s request for information regarding the special premium assessment, quoting

directly from portions of Mr. Kengott’s June 28, 1999 facsimile (P1.’s 56.1(a)(3) St. | 67).

11



Gaizutis’ Junc 14, 1999 facsimile, and asked Mr. Gaizutis to find out why the Trust had lost so much
money (dd, 4 54).

On or about June 14, 1999, Messrs. Gaizutis, Kengott and Monteau participated in a
telephone conference call. At that time, Mr. Monteau provided an explanation for Earth Care’s
financial difficultics, as well as Earth Care’s plans to raise additional funds by way of the special
premium assessment of Trust members. At that time, Mr. Gaizutis was provided with a copy of the
board resolution approving the special premium assessment, and a sample Ictter to onc of the Trust
members relating to the assessment (P1.’s 56.1(a)(3) St. 455). Based upon the information supplied
by Mr. Monteau during the conference call, and (he receipt of the board resolution and sample lettcr
relating to the special premium assessment, Mr. Gaizutis recommended less of a premium increase
for the Trust’s renewal of coverage (/d. 4] 56)2

Mr, Gaizutis’ amended recommendation regarding the premium to charge for the renewal
of the D&O policy is referenced in Mr, Gaizutis’ report to QBE’s London broker, Mr. Cullum, dated
June 14, 1999 (PL.’s 56.1(a)(3) St. | 57). This report also referred to the special premium
assessment, and provided QBE with a copy of the board resolution and sample letter which had been
provided to Mr. Gaizutis (/d.). The resolution purports to bear the signature of Leonard Binstock
(td, 1.58), who has testified (hat the signature looks like his, but that he does not recall signing the

document (Defs,’ 56.1(b)(3) Add'l Facts ] 127), Mr. Binstock was not a Trustee, even though

SQBE increased Earth Care’s premium from $5,000 on the 1998 policy to $7,500 on the 1999 policy. The
deductible on the policy was inercased from $5,000 to $25,000 (Defs.” 56.1 Add’l Facts | 120). The $7,500 premium
was less than the $15,000 premium that Mr. Gaizutis originally had recommended for renewal of the coverage (PI.’s
56. 1(a)(3) St, J 53).

10



principles of Mlinois law that exclusion clauscs must be narrowly construcd. See, e.g., Stone
Container v, Hartford Steam Boiler Inspection & Ins. Co., 165 F.3d 1157, 1159-1160 (7" Cir. 1999)
(holding, under Illinois law, that “the ambiguities in insurance contracts should be resolved in favor
of the insured”); Zransamerica Ins. Co. v. South, 975 F.2d 321, 328 (7" Cir, 1992) (“under Mlinois
law... where there is ambiguity in the insurance policy, all exclusions, conditions or provisions
which tend to limit or defeat liability should be construcd most favorably of the insured”). See also
Home Indemnity Co. v. Wil-Freds, Inc., 601 N.E.2d 281, 284 (ll. 2d Dist. 1992) (“A determination
concerning the applicability of an exclusionary clause is governed by the same liberal duty to defend
standard); American Standard Ins, Co, v, Allstate Ins. Co., 569 N.E.2d 162, 165 (ill. 1 Dist. 1991);
International Mineral & Chemical Corp. y. Liberty Mutual Ins. Co., 522 N.E.2d 758, 764 (LLL 1"
Dist.1988) (“if the language of the policy is ambiguous or otherwise susceptible to more than one
reasonable interpretation, it will be construed in favor of the insured . . . this doctrine is . . .
particularly applicable to ambiguities in clauses purporting to take away coverage otherwise granted
by the policy”).

We understand that QBE might argue that this result unfairly limits the scope of the

exclusion, because it might allow coverage for claims brought by a liquidator that belong to a

We note that in Shapo v. Engle, No. 98 C 7909, 1999 WL 528528 (N.D. IIL, July 13, 1999), Chief Judge
Kocoras addressed, but did not interpret, 215 ILCS §§ 5/19 | and 5/193 in the context ofa RICO claim. ‘The district court
resolved the issue of whether the liquidator’s claims fell within RICO by looking at how the complaint was drafted, rather
than at the nature of the claims at issue. The court found that, in that case, the liquidator had chosen to proceed on behall’
of the policy holders and creditors of the company in liquidation, by expressly identifying himself that way in the
complaint. As a result, the liquidator’s claims did not fall within the RICO statute. [In Gary v. Am, Casualty Co. of
Reading, Pa., 753 F, Supp. 1547 (W.D. Okla. 1990), one of the cases that QBE argues should guide our determination
(OBE Mem, at 14-15), the court looked to the nature of the claims and not merely the words used in the complaint to
express them. In our case, either approach leads to the same result. Although we find the rationale of Gary helpful in
this case, for the reasous expressed above we do not hold, as Gary did, that the exclusion clause in this case bars
coverage

31



exclusion. However, in a post-liquidation setting, the Liquidator has the exclusive right to bring
claims on behalf of the participants. See People Ex Rel. Bailor v. Bell Mutual Casualty Co., 298
N.L. 2d 167 (Il. 1973) (individual claimants (e.g., policyholders, creditors, etc.) can only intervene
in liquidation proceedings for relief under the Tllinois Insurance Code once a liquidator is appointed
by the Court; individual claimants cannot bring suit in their own names or on behalf of a class for
relicf). Thus, applying the exclusion merely because the claims are brought by the Liquidator would
result in excluding from coverage participant claims (hat, prior to liquidation, would have been
covered.”

We conclude that the answer to whether the exclusion clause applies in this casc must be
found by looking at the nature of the claims that are being asserted, and applying the well-established
principle that exclusion clauses are to be narrowly construed. The claims alleged by the Liquidator
in Counts I, I] and V1 in the underlying suit belong to both the Trust und the ‘Trust participants. By
definition, the exclusion clause bars coverage for claims brought by or on behalf of the Trust. This
means that the intent of the Insurer, QBE, was to exclude coverage for claims that belong to and can
be asserted on behalf of the ‘rust. The problem with applying the exclusion clause and clfectuating
that intent here is that to do so would throw out the baby with the bath water — that is, it would bar
coverage of claims belonging to the Trust at the price of excluding coverage for claims belonging
{o participants that were not intended to fall within the exclusion. That would have the cffect of

expanding the scope of the insured v. insured exclusion, and thus would contravene the well-settled

*We do not sec this as a situation where any tension created by the Liquidator asserting the same conduct as a
breach of duty to the Trust (which would be excluded) and the participants (which would not be excluded) can be
resolved by allocating any ultimate loss between covered and uncovered claims. Unlike the situation in Level 3
Communications, lnc., the parties here have not pointed us to any term of the insurance policy that sets forth a procedure
for allocating between covered and uncovered claims; nor do the parties here explain how such an allocation could be
done in this case.

30



QBE also expected that SUA would maintain complete underwriting files on all D&O
policies issued on behalf of QBE (PL.’s 56.1(a)(3) St. 25). Although QBE did not use any written
underwriting guidelines in deciding whether to issue the renewal D&O policy in 1999, Mr. Gaizutis
of SUA testified that the information continued in the renewal application and the Farth Care
financial statements were used for underwriting D&O risks (Pl.’s Rule 56.1(a)(3) St., Tab 33, at 40-
41). Every document that QBE relied on in underwriting the 1999 renewal policy is in the QBE
underwriting file in London (Dels.’ 56.1 Add’! Facts 128).

dD.

The Renewal Application provided that:

Vor the purpose of this renewal application, the undersigned authorized agent of the

person(s) and entity(ies) proposed for this insurance declares that to the best of

his‘her knowledge and belief, afier reasonable inquiry, the statements herein are truc

and complete. The underwriter is authorized to make any inquiry im connection with

this renewal application, Accepting this renewal application does not bind the
underwriter to complete the insuranec.

The infonnation contained in and submitted with this renewal application is on file
with the underwriter and along with the renewal application is considered physically
attached to the policy and will become part of it. The underwriter will have relied
upon this renewal application and attachments in issuing any policy. This renewal
application will become a part of such policy if issued.

Ifthe information in this renewal application materially changes prior to the effective
date of the policy, the applicant will notify the underwriter, who may modify or
withdraw any quotation

(PL.’s 56,1(a)(3) St. 130). The provision of the renewal application requiring the Trust to advise the

insurer of any changes in the infonnation contained in the application is common in insurance

applications of this type (4. §[ 33). Mr. Monteau of lackler was familiar with the provision of the



premium assessment that was designed to address the negative surplus problems. QBE argues that
if it had known that Mr. Binstock was not a Trustce, and that his signature on the resolution may
have been forged, QBE would not have placed the confidence it did place in the existence of the
Board Resolution when renewing the policy (PI.’s 56.1(a)(3) St. 4 59, 78, 82-83).

Conversely, the defendants argue that the issue of Mr. Binstock’s signature is a non-starler
for purposes of summary judgment because, even if Mr. Binstock’s signature was forged and even
though Mr. Binstock was not a Trustce, there is no evidence or argument that the Board Resolution
was not still legally valid because it carried the signatures of the other Trustees. Thus, argue
defendants, QBE’s reliance on the Board Resolution is the material issue, not whether Binstock
signed the document (Fifer’s Mem. at 11, citing Methodist Med. Ctr. of Hlinois v. American Med.
See. Inc., 38 F.3d 316, 320 (7" Cir. 1994) (misrepresentations over immaterial facts cannot justify
recision)).

We have not bcen pointed to evidence that somcone forged Mr. Binstock’s signature, and the
evidence is certainly susceptible of the interpretation that he signed the resolution but just docs not
recall doing so. In any cvent, there is a genuine dispute of material fact on the issuc of whether QBE
would have accepted the risk of underwriting the D&O policy it issued to Earth Care if it had known
that the Board Resolution adopting the special premium assessment was signed by Mr. Binstock,
who was not a Trustee (P1.’s 56,1(a)(3) St. ff] 59-61; Def.’ 56.1 Add’] Facts 4] 127). Thus, we may
not grant summary judgment based on this issue.

Cc
QBE argues that Mr. Kengott’s facsimile of June 28, 1999, which responded to QBE’s

request for an update on the special premium assessment, contained material mistepresentations.



interests and/or recovery the participants have in the claims alleged are derivative of those held
directly by the Trust (/d, at 14),

The determination of the question raised by Count If] turns in the first instance on an
interpretation of the role of the Liquidator when acting pursuant to authority granted by Section
5/191 and 193. Does the statute mean that the Liquidator is some separate legal entity — an
independent third-party who always operates oulside the identified role of Trust, as the Liquidator
has argued? Or does the slatule mean that the Liquidator always sues as “the Trust,” as QBE argues?
Or, docs it mean that the Liquidator can wear the hats of the Trust or the Trust’s creditors,
participants cte. or both - cven in the same legal proceeding?

To date, no Illinois court has interpreted the statutory language in the context of an insured
v. insured exclusion clause like the onc here. This Court is therefore lefl without guidance from the
Tilinois state courts as to how to determine what role the Liquidator plays in this case for purposes
of applying the exclusion clause at issue. In a case where a choice needed to be made betwecn
compeling statutory interpretations, such as the ones posed to us by the partics in this case, that
choice might posc a certification question for the state courts. See, e.g., Lehman Bros. v. Schein, 416
U.S. 386, 393 (1974) (state certification desirable but also discretionary means for federal court to
ascertain undecided point of state law). But, here, the Court does not consider certification
appropriate or necessary because, under any reasonable interpretation of the statute, the exclusion
clause docs not apply to bar coverage of the Liquidator’s claims

If we interpret the statute as the Liquidator most broadly suggests we read it - that the
Liquidator is never the Trust, but is instead some separate, unique entity — then the exclusion clause

would not apply in this case lo bar coverage of the claims he asserted against the (rustees in the

27



law” for one side or the other. Where resolution of the legal issuc ends the case, a final judgment
is entered on cross motions under Rule 56(c) for the prevailing party.

With regard to factual issues, a genuine issue for trial exists only when “the evidence is such
that a reasonable jury could retum a verdict for the nonmoving party.” Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 248 (1986). Ifthe evidence is merely colorable, or is not significantly probative,
summary judgment may be granted. /d. at 249-50; see also flip Side Productions, Inc. v. Jam
Productions, Ltd., 843 F.2d 1024, 1032 (7" Cir), cert, denied, 488 U.S. 909 (1988). In deciding a
motion for summary judgment, the Court must view all evidence in the light most favorable to the
nonmoving party, Valley Liquors, Inc. v. Renfield Importers, Ltd., 822 F.2d 656, 659 (7" Cir), cert.
denied, 484 U.S. 977 (1987), and must draw all reasonable inferences in the nonmovant’s favor.
Santiago v. Lane, 894 I.2d 218, 221 (7" Cir. 1990),

When a material fact or a set of facts yields competing, but reasonable, inferences, then there
is a genuine issue that precludes summary judgment. The non-moving party's burden is to identify
facts that are both material and genuinely disputed, Celotex Corp. v. Catrett, 477 U.S. 317, 324
(1986) To be material, a fact must be outcome determinative under the substantive law governing
the motion, /nsolia v. Philip Morris Inc., 216 F.3d 596, 598 (7" Cir, 2000). A “genuine issue” exists
when the party opposing the motion for summary judgment serves and files, pursuant to local Rule
56.1, a concise statement outlining the material facts (hat require denial of summary judgment,
supported by citations to the evidentiary materials that support those denials (e.g., affidavits,
depositions, answers to interrogatories, admissions ctc.). Fed, R.Civ.P. 56(c). Although the party
seeking summary judgment bears the initial burden of proving that there is no genuine issuc of

material fact, Celotex, 477 U.S. at 323, the non-moving party cannot rely upon the pleadings alone,



participation of, or intervention of, any of the Directors and Officers, or the
Company or any Affiliate,

(/d. | 87). The Policy also contains a warranty clause, which states as follows:

Tis warranted that the particulars and statements contained in the Application are the
basis of this Policy and are to be considered as incorporated into and constituting a
part of this Policy.

By acceptance of this Policy the Directors and Officers and the Company agree:

q)

(2)

(fd. 4) 88).

That the statements in the Application are their representations, that they shall be
decmed material to the acceptance of the risk or the hazard assumed by the
Underwriters under this Policy, and that this Policy is issued in rcliance upon the
truth of such representations;

That in the event the Application contains misrepresentations made with the actual
intent to deceive, or contains misreprescntations which materially affect cither the
acceptance of the risk or the hazard assumed by Underwriters under this Policy, this
Policy in its entirety shall be void and of no effect whatsocver; and

That this Policy shall be deemed to be a single unitary contract and not a severable

contract of insurance or a scrics of individual contracts of insurance with the
company and cach of the Directors and Officers.

TIL.

We now tum to QBE’s motion for summary judgment on Counts I and TI, which seek to

establish (hat the policy is void and/or unenlorecable. There is no dispute that Illinois law applics.

We will address the legal standards first, and then move to a discussion of the disputed fact issues

that require denial of summary judgment.

“THinois law permits an insurer to rescind an insurance policy if the insured’s application for

coverage contains a misrepresentation thal was made with intent to deceive or that is material.” 77G

Insurance Co. v, Reliable Research Co., 334 F.3d 630, 635 (7" Cir. 2003) (referencing 215 ILCS


truth or falsity of his answer, but only so far as that belief is not clearly contradicted by the factual
knowledge on which it is based.” Je. at 1017.

After Golden Rule and TIG, where an insurance policy involves a “knowledge and belicf”
clause, as does the Policy at issue here, the determination of whether a misrcpresentation is material
involves the following three steps: (1) determining whether misrepresentations were made; (2) if”
so, determining the applicant’s knowledge and belicf at the time the misrepresentations were made
concerning their truth or falsity; and (3) if the applicant made a misrepresentation that he orshe knew
or believed to be a misrepresentation, was it material (/.e., did it affect the insurer’s acceptance of
the risk, and would the insurer have issued the policy had it known the true facts). Golden Rule, 786
N.E.2d at 1017. QBE points to three alleged misrepresentations that it argues meet this standard,
and warrant the relief it secks in Counts | and Ll. We address each of those in tum.

A.

QBE argues that Earth Care’s answer to Question 4(a) of the renewal application — that there
had been no changes to the Board of Directors within the past year - was a matenal
misrepresentation, because when Messrs. Abbick and Fifer left the Board of Trustees (or announced
their intention to do so) in or around April 1999 — prior to the June 15, 1999 effective date of the
Policy — those departures were not reported to QBE (QBE Mem. at 4-5), QBE argues that this
omission was matcrial because “the fact that the Trust was not reporting changes in the Board of
Trustees at the time of the renewal gave QBE a level of confidence in the Trust’s plans to remedy
its financial difficulties” (P1.’s 56.1(a)(3) St. | 80), and given the Trust’s financial difficulties, the
additional information that Trustees were resigning would have resulted in non-renewal of the Policy

(Id. 481). Tn support of this argument, QBE relies on case law in Illinois that imposes upon the

16



in the Policy bars coverage of negligence and breach of fiduciary duty claims the Liquidator has
asserted against Earth Care’s former trustccs in a state court lawsuit (the “underlying lawsuit").

The parties have filed various motions for summary judgment. QBE has sought summary
judgment on Counts J and IL, arguing that the undisputed material facts show that the policy is void
or unenforceable (doc. # 87-2), a claim that the defendants assert is nol ripe for summary judgment.
QBE also has sought summary judgment on Count ITl, arguing that the undisputed material facts
show that the insured v. insured exclusion applics (doc. # 87-1), The Liquidator (joined by Messrs.
Abbick and Fifer) also have moved for summary judgment on Count I], arguing that the same
undisputed material facts show that the insured v. insured cxclusion does not apply (doc. # 86)

On September 30, 2003, the Court heard oral argument on the summary judgment motions
relating to Count IIT. On that same date, the Court issucd a minute order denying QBE’s summary
judgment motion directed to Counts | and TT, granting the defendants’ summary judgment motion
on Count IL, and denying QBE’s summary judgment motion on Count Ll (doc, # 107)? This
Memorandum Opinion and Order sets forth the Court’s reasoning for those rulings.

lL

The legal standards governing a motion for summary judgment are well-established.
Summary judgment is proper if the record shows that there is no genuine issue as to any material
fact, and that the moving parties are entitled to judgment as a matter of law, Fed. R. Civ. P, 56(c).
Where the issues to be decided are purely legal, and the parties have filed cross-motions for summary

judgment on that issuc, the Court must resolve the legal issuc and enter judgment “as a matter of

20n Qctober 15,2002,by conseut of the parties (doc. ## 72-73) and pursuant to 28 U.S.C. § 636 (c), this case
was assigned to this Court for all proceedings, including the entry of final judgment (doc. # 74).

2



Counts Tand II of the underlying lawsuit allege breaches of fiduciary duty and negligence by
the Trustee defendants, both to the Trust and to the participants of the Trust (Sec. Am. Compl. Ex. C,
at Counts | (fj 39-41), II (4 44-46)). Counts ITI and IV allege breach of fiduciary duty and negligent
misrepresentation by Fackler— again, both to the Trust and to the participants (Jd, at Counts TTT (4{{]
49-51) and IV ( 4] 54-56)). Counts I through IV cach assert damages to the Trust in excess of $6
million (dd., 4] 42, 47, 52, 57). The remaining (wo counts allege breach of fiduciary duty by Fackler
solely to the Trust (/d., Count V), and a constructive trust on monics allegedly received by Mr.
Abbick and Hlinois Zephyr in breach of Mr. Abbick’s fiduciary duty to the Trust and its parlicipants
(d., Count V1 (9 64-65)). Counts V and VI seck recovery of approximately $1.7 million (/d., 4]
62, 66).

On August 31, 2002, the state court overseeing the liquidation of the Trust authorized the
Liquidator to enter into a settlement with Mr. Fifer, who was joined only on Counts T and TT in the
underlying lawsuit (P1.’s Rule 56.1(b)(3)(B) St., Tab 1). It was contemplated that the settlement
amount, $900,000.00, would be paid through proceeds of the Policy (/d.). The Liquidator informed
the Court presiding over the underlying lawsuit that the Liquidator had not setiled with other
defendants, and he intended to prosecute the claims against them (/d.).

B

The Liquidator’s motion for summary judgment on Count III of the sccond amended
complaint seeks to avoid the effect of the insured v. insured exclusion. The Liquidator argues that
the Section 5/193(3) of the Code “authorizes the Liquidator to sue on behalf of Earth Care’s
creditors, members and policyholders, not simply on behalf of the Trust” and that “is exactly what

the Liquidator has done in the [u]nderlying lawsuit” (Liquidator Mem. at 5). The Liquidator further

25



IN ‘THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION prereren
ONT 24 7003
QBE INTERNATIONAL INSURANCE LTD.,  )
)
Plaintiff, )
) No. 01 C 0508
vs. )
) Magistrate Judge Schenkicr
J. ANTHONY CLARK, e# al, )
)
Defendants. )

MEMORANDUM OPINION AND ORDER

Plaintiff, QBE International Insurance I.1d. (“QBE”), filed this action against (1) J. Anthony
Clark, in his capacity as the Director of Insurance of the State of Illinois and as the Liquidator of the
Ilinois Earth Care Workers’ Compensation Trust (the “Tiquidator”),! and (2) Charles A. Abbick,
Oliver B. Fifer, and Jacqui Bradley, all of whom were trustees of the Earth Care Workers’
Compensation ‘Trust. In Count I of its second amended complaint, QBE asserts a claim under 215
ILCS 5/154 for recission of the Directors and Officers Insurance Policy (“the Policy”) issued by OBE
to Earth Care Trust and its Trustees, based on alleged misrepresentations and false warranties by
Earth Care in its renewal application for the Policy (Sec. Am. Compl. 4] 24-27). In Count Ll, QBE
asserts aclaim for common law misrepresentation in connection with the renewal application for the
Policy, and sccks a declaratory judgment that the Policy issued to Earth Care is null and void and that
QBE has no obligations or liability under the Policy other than to return the premium payment (Scc.

Am. Compl. 4928-30). In Count III, QBE secks a declaration that the “insured v. insured” exclusion

‘Pursuant to Fed. R.Civ.P. 25, on September 30, 2003, the Court granted the Liquidator's unopposed oral
motion to substitute the current Director of the Illinois Department of Insurance, J. Anthony Clark, for the previous

06

Director, Nathanicl Shapo, as a defendant in this case (doc. # 107).



its participants or creditors, an insurer would be free to negotiate for such an exclusion. But, QBE
did not do so here.

QBE also argues that holding the exclusion clause inapplicable would expose il lo the risk
of collusion, the very risk that QBE sought lo avoid with the insured v. insured exclusion. We
disagree. The claims at issue are brought by a Liquidator who is winding up the affairs of the Trust,
not by the Trust as an ongoing entity. There is no evidence that the Liquidator’s motivation or
rationale for bringing claims that belong to Trust participants is collusive in the ways that the Leve/
3 case defined collusion. QBE points to the Liquidator’s settlement with Mr, Fifer in the underlying
lawsuit for $900,000.00 (slightly less than the $1 million limit on the Policy) which is to be paid —
if at all — out of proceeds from the Policy and not by Mr. Fifer, himself. To the extent that QBE
suggests that the settkement was collusive because there was no risk that Mr. lifer would be held
liable had he gone to trial or because the amount of the settlement was excessive, QBE has failed to
offer evidence to support either suggestion. On that score, we note that the claims against Mr. Fifer
and the other Trustees in Counts | and U of the underlying lawsuit assert more than $6 million in
damages; there is nothing on ils face thal would suggest a $900,000.00 settlement with onc of five
‘Trustee defendants was improper. What’s more, at oral argument, QBE indicated that it was made
aware of this settlement and elected not to invoke its right under the Policy to refuse to consent to
it (see also Taiquidator’s Reply to Pl.’s Rule 56.1(b)(3)(B) St, Tab 1).

QBE plainly did not believe that there was a significant risk of collusive suits by participants
against l'rustees, because it did not seek to exclude those types of claims from coverage. QBE has

nol explained to the Court’s satisfaction why the risk of collusion nonetheless would exist when the

Liquidator asserts those claims of the participants, when the participants _ in a post-liquidation



underlying lawsuit. This would be the easiest case, since the Liquidator’s claims by definition would
always fall outside the plain language of the exclusion clause: he would not be acting “by or on
behalf of the company.”*

If we interpret the statute as QBE reads it — thal the Liquidator is the Trust for all purposes

— then the exclusion clause on its face would apply to bar coverage here. However, we do not find

*The federal bankruptcy and regulatory (FDIC, FSLIC and R'I'C) cases cited by the parties provide some — but
not conclusive — support for this interpretation. Analogies can be made to both lines of cases and the one here. The
bankrupicy code and 215 ILCS § 5/191 and 193 share common purposes — the winding up of a company’s business
affairs and the consolidation of individual and corporate claims for that purpose (with the effect that individual claims
no longer can proceed outside of the statute’s purview). But, the bankruptcy code is explicit about who the bankruptcy
trustee always represents (i.¢,,the estate not merely the debtor), and the liquidation statute is not, as it scparutely states
that the Liquidator may deal with property of the company (Section 5/193(1)) and may assert claims of creditors,
members and sharcholders of the company (Section 5/193(3)). Cf 11 U.S.C. § 323(a), Unlike the case with bankruptcy
code and the majority of case law interpreting it, we do not find that 215 TLCS § 5/191 and 193 provide express support
for treating the liquidator with the same degree of independence enjoyed by a bankruptcy trustee. See, ¢.g., County Seat
Stores, Inc. v. National Union Fire las. Co., 280 B.R. 319, 325-26 (S.D.N. Y, 2002) (“Simply stated, a bankruptcy trustee
charged with a statutory duty and endowed with special statutory powers, is an independent and disinterested entity,
separate und distinct from the debtor, as well as the pre-petition company, and as such docs not strictly “stand in the
shoes” of the debtor”); Gray v. Executive Risk Indemnity, Inc. (In re Molten Metal Technology, Inc.), 271 B.R.711, 729+
30 (Bankr.D.Mass. 2002) (finding that Trustce is not the legal equivalent of the Debtor because (1) both entities co-exist
“side-by-side, having different powers and rights;” (2) the duty of the Trustee is to the estate, whereas the duty of the
Debtor 1s to the company’s stockholders; (3) the Trustee is not governed by the pre-petition company’s officers and
directors: and (4) the claims brought by the Trustee belong to the bankruptcy estate which is separate from the Debtor
and as @ beneficiary of those claims “the Debtor stands last in priority”); Reiser v. Baudendistel (In Re Buckeye
Countrymark. Inc.), 251 B.R, $35, 840 (Bankr. $.D. Ohio 2000) (finding a bankruptcy trustee is a separate legal entity
from the debtor because it does not represent the Debtor nor owe ita fiduciary obligation); but see Reliance Ins. Co. of
Hlinois v, Weis, 148 B.R. 575 (B.D. Mo. 1992) (finding no legal distinction between the debtor corporation and its
bankruptcy estate); National Union Fire Insurance Co. of Pittsburgh v. Olympia Holding Corp., Case No. 1:94-cv-2081-
GET (9/18/1995), affirmed without opinion in National Union Fire v. Olympia Holding, 148 F.3d 1070 (1 1" Cir, 1998)
{holding “there is no significant legal distinction between the company and the Trustee for the bankruptcy estate”).

Similarly, the regulatory cases are not entirely analogous because the Liquidator, although a statutory receiver
and a state administrative agent, is not a regulatory agency in possession of his own claims as well as the claims of the
insolvent entity. See, ¢.g., Federal Deposit Ins. Co. v. Zaborac, 773 F.Supp. 137, 143-44 (C.D, IL, 1991) (holding that
FDIC “docs not strictly step into the shoes of the failed bank” because “under statute and regulations, FDIC (and
formerly FSLIC) may bring suit nol only as a successor to [the Debtor], and not only on behalf of itself as a creditor, but
also on behalf of the creditors and shareholders of [Debtor], and as subrogee to rights of depositors against [Debtor]"),
affirmed in PDIC y, American Casualty Co. of Reading, Pu., 998 F.2d 404, 407 (explicitly refusing to rule on whether
the insured versus insured exclusion clause does not preclude coverage because FDIC is pursuing the action on behalf’
of itself as the Manager of the FST.IC Resolution lund and for the benefit of the Debtor’s “depositors, other creditors,
and shareholders”); ef Mi. Hawley lng. Co. v. FSLIC, 695 £. Supp. 469, 482 (C.D, Cal, 1987) (holding exclusionary
clause does apply to FSLIC/Recciver because the receiver brought “an action against the insured directors acting
solely as receiver for the failed S&L, and not on its own behalf in its corporate capacity”).

28



Mr. Gaizutis did not forward to Mr. Cullum the June 28 facsimile he had reccived from Mr. Kengott,
and that facsimile therefore was not seen by Cullum or QBE. Moreover, the June 28, 1999 facsimile
from Mr, Kengott to Mr. Gaizutis is nol contained in the QBE underwriting files for the Policy
(Defs.’ $6.1 Add’l Facts 4 129)

In his communication to Mr. Cullum, Mr. Gaizutis stated that he considered the Trust’s
response to QBE’s inquiry concerning the special premium assessment to be very positive (P1.’s
56.1(a)(3) St. 167; Dels.’ 56.1(b)(3) Resp. 467). Mr. Gaizulis’ facsimile to Mr. Cullum omitted
the last line of Mr. Kengott’s June 28, 1999 facsimile, which had stated to Gaizutis that gathering
the trust members’ responses to the special premium assessment was a “work in process” (/d.). On
or about June 30, 1999, following receipt of the information that Mr. Gaizutis provided regarding
the Trust members’ responses to the special premium assessment (Pl.’s 56.1(a)(3) St. 68), QBE
agreed to renew the policy on the amended terms recommended by SUA.

Although Mr, Monteau had told Mr. Kengott that the Trust members’ responses to the special
premium assessment was “healthy,” the parties do not dispute that Emie Fackler, the founder of
Fackler testified in his deposition that he would not have characterized the Trust members’ response
to the special premium assessment as “healthy.” Instead, Mr. [‘ackler would have described the
Trust members’ response to the assessment as “disappointing” (P1.’s 56.1(a)(3) St. | 70), even if it
was also a “work in process” (Defs.’ 56.1(b)(3) Resp. §] 70).

Mr. Link, who was in charge of Fackler’s Accounting Department, testified that, unlike
Mr. Monteau, he would not have characterized the Trust members’ response at all, but would have
simply indicated how much had been collected on the special premium assessment ($11,000 out of

a $1.5 million) as of June 1999; and he testified that such an amount could not be characterized as

12



5/154), “A misrepresentation is material if it ‘alfcets cither the acceptance of the risk or the hazard
assumed by the company.’ 4d Tlinois courls frame the materiality question in terms of whether
“reasonably carcful and intelligent persons would regard the facts as stated to substantially inercase
the chances of the event insured against, so as lo cause arejection of the application.’” /d. (citing and
quoting Methodist Med. Ctr. v. American Med. Ctr. of IL, 38 F.3d 316, 320 (7" Cir, 1994) and Small
v. Prudential Life Ins. Co., 617 N.E.2d 80, 83 (1993)). “Testimony from an insurer’s underwniler
may be used to establish the materiality of omitted information.” Jd.

There is a strong policy preference in Tllinois to send materiality questions to the jury. 77G,
334 F.3d at 635. See also Golden Rule Insurance Co. v. Schwartz, 751 N.E.2d 123 (2001), affirmed
in part, vacated in part, 786 N.E.2d 1010 (2003). And, where the parties to an insurance contract
have included “knowledge and belict” language in their contract, the rule in Ilinois is that such
language avoids rigid application of the materiality statute set forth in 215 ILCS 5/154. In Golden
Rule, the Ulinois Supreme Court specifically held that even though Section 5/154 states that a
matcrial misreprescntation, “even if imecently made, can serve as the basis to void a policy,” the
inclusion of “knowledge or belief” language in a contract can establish a “lesser knowledge
standard.” 786 N.E.2d at 1016. The Llinois Supreme Court explained that “this lesser standard
shifts the focus from the determination of truth to a determination of whether the applicant, based
on what it knew, believed to be true.” Jd, At the same time, the Golden Rule Court held that “the
presence of ‘knowledge and belief’ provision in a policy will not insulate an applicant’s responses

from all review,” because “the twin qualifiers of knowledge and belief require that knowledge not

defy beliel, .. what the applicant in fact believed to be true is the determining factor in judging the