Opinion ID: 590939
Heading Depth: 3
Heading Rank: 2

Heading: Applied to this case

Text: 32 The policy at issue has two principal components: the statement of coverage, and the list of exclusions. The statement of coverage provides: 33 In consideration of the payment of the premium ... the Company ... agrees with the NAMED INSURED as follows: 34 .... 35 To pay on behalf of the INSURED all sums which the INSURED shall become legally obligated to pay as DAMAGES because of: 36 A. Any act, error or omission of the INSURED, or any person for whose acts the INSURED is legally liable in rendering or failing to render PROFESSIONAL SERVICES for others in the conduct of the NAMED INSURED's profession as a licensed Life Agent, Broker, General Agent or Manager.... 37 B. Any real or alleged failure in rendering or failing to render PROFESSIONAL SERVICES under the Employee Retirement Income Security Act of 1974 ... or the Investment Companies and Advisors Act of 1940.... 38 C. A PERSONAL INJURY caused by an offense arising out of rendering or failing to render PROFESSIONAL SERVICES for others in the conduct of the NAMED INSURED's profession.... 39 .... 40 D. Any actual or alleged failure of a General Agent or Manager covered by this Policy to supervise, manage or train any INSURED. 41 R.1 Ex.1 at 1-2. The list of exclusions states: This Policy does not apply to: 42 I. Any act, error, or omission or PERSONAL INJURY of the INSURED committed with dishonest, fraudulent, criminal or malicious purpose or intent.... 43 II. Bodily injury, sickness, disease or death of any person, or to injury or destruction of any tangible property including loss of use thereof. 44 .... 45 VII. Any claim, based upon a loss arising out of the INSURED making promises or guarantees as to the future value of an investment. 46 .... 47 X. Any claim arising out of, or contributed to by, any co-mingling of, or use of, client funds. 48 XI. Any claim arising out of DAMAGES which are expected or intended by the INSURED. 49 XII. Any claim arising out of insolvency, receivership or bankruptcy of any organization (directly or indirectly) in which the INSURED has placed or obtained coverage or in which an INSURED has placed the funds of a client or account. 50 XIII. Any claim arising out of the INSURED's activities in computer programming or processing if the resulting programs are sold or distributed or if a fee is charged for the use of the program. 51 .... 52 XVII. Any claim based solely upon a loss alleged to have been sustained through fluctuation in market value of any security. 53 R.1 Ex.1 at 8-10. 54 The issue is whether, in light of the terms of the policy that Transamerica issued to Mr. South and the factual context of the claims brought by Mr. Brunsmann and others, those underlying claims fall within the insolvency exclusion. As was the district court, we are convinced that it is clear and free from doubt that the claims do fall within the exclusion: they arise out of the insolvency of an organization (directly or indirectly) in which the insured placed the funds of a client. Had First Columbia been solvent, the fact that it was not authorized to transact business in Illinois would have been of no import: under Illinois law, although an insurer is not authorized to do business, all contracts with that insurer are still valid and enforceable. Ill.Rev.Stat. ch. 73, p 733-4 (1992). 4 Mr. Brunsmann and Mr. South suggest that there still would be claims of misrepresentation because the investment would not be guaranteed by the state fund. But any such claims would be meritless because the plaintiffs would have suffered no injury and therefore could claim no damage from such a misrepresentation, by itself. Thus, we conclude that the claims directly arise from First Columbia's insolvency and are within the insolvency exclusion. 5 55 Mr. South and Mr. Brunsmann submit that the exclusion is ambiguous and should be interpreted in favor of coverage. They correctly note that, when the phrase arising out of has appeared in coverage clauses, Illinois courts have held that the phrase is both broad and vague, and must be liberally construed in favor of the insured. Maryland Casualty Co. v. Chicago & N.W. Transp. Co., 126 Ill.App.3d 150, 81 Ill.Dec. 289, 292, 466 N.E.2d 1091, 1094 (1984). 6 They argue that, by a parity of reasoning, when the phrase appears in an exclusion clause, it also should be construed in favor of coverage by giving the same words a narrow, rather than broad, interpretation. In the context of this case, this argument, even if valid, would be of no benefit to the appellants. The phrase in question is modified in the exclusionary clause by the phrase directly or indirectly. Reading the two phrases together, the clause excludes coverage for claims that directly or indirectly arise out of the insolvency of any organization in which Mr. South has placed the funds of a client. Read thus, the clause includes claims, such as that brought by Mr. Brunsmann, in which the insolvency of an invested-in organization directly or indirectly causes the injury upon which the claim is based. 56 Appellants also submit that Mr. Brunsmann's claim against Mr. South had two proximate causes, the insolvency of First Columbia and Mr. South's negligence, one of which is covered and one excluded, and thus the entire claim must be covered under the principle announced in United States Fidelity & Guaranty Co. v. State Farm Mutual Automobile Insurance Co. (USF & G I), 107 Ill.App.3d 190, 63 Ill.Dec. 14, 437 N.E.2d 663 (1982), and United States Fidelity & Guaranty Co. v. State Farm Mutual Automobile Insurance Co. (USF & G II), 152 Ill.App.3d 46, 105 Ill.Dec. 254, 504 N.E.2d 123, appeal denied, 115 Ill.2d 551, 110 Ill.Dec. 466, 511 N.E.2d 438 (Ill.1987) (collectively USF & G ). In these two connected cases, Happyland Day Care Center had purchased from USF & G insurance against claims caused by an occurrence and arising out of the ownership, maintenance or use of the insured premises and all operations necessary or incidental to the business of the named insured conducted at or from the insured premises. USF & G I, 63 Ill.Dec. at 15-16, 437 N.E.2d at 664-65. The insurance policy excluded claims arising out of the ownership, maintenance, operation, use, loading or unloading of any ... automobile or aircraft owned or operated by any person in the course of his employment by any insured. Id., 63 Ill.Dec. at 16, 437 N.E.2d at 665. While some of the children were being driven from the day care center to a dance class, a child was injured when she fell from, was thrown from, or otherwise exited the automobile. Id. A two-count complaint was filed on behalf of the child against the insured day care center. Count I alleged that the owner or employees of the day care center were negligent in operating the day care center: that they failed to care adequately for the children, failed to retain control and discipline over the children, and failed to supervise adequately the children. Count II alleged that the defendants negligently operated the automobile and failed to provide adequate safety devices to protect the child passengers. USF & G brought a declaratory judgment action seeking to establish that it did not owe a defense or coverage to the day care center. The Illinois courts ruled against USF & G. The Illinois Appellate Court determined that the injury was caused by two independent, proximate causes: the negligence of the day care center to supervise the children and the negligence of the day care employees in operating the vehicle. The court then held: 57 If a proximate cause of an injury is within the included coverage of an insurance policy, the included coverage is not voided because an additional proximate cause of the injury is a cause which is excluded under the policy. Thus, in order for an injury to be excluded from coverage under an insurance policy, the injury must have been caused solely by a proximate cause which is excluded under the policy. 58 USF & G II, 105 Ill.Dec. at 256, 504 N.E.2d at 125. Because USF & G could not prove that the automobile-related negligence was the sole proximate cause of the injury, the court ruled that the claim was covered and thus USF & G had a duty to defend (USF & G I ) and to indemnify (USF & G II ). 59 USF & G must be read together with Allstate Insurance Co. v. Pruitt ex rel. Pruitt, 177 Ill.App.3d 407, 126 Ill.Dec. 716, 532 N.E.2d 401 (1988), which limits the applicability of the USF & G principle to cases in which the two causes of injury are wholly independent of one another. In Pruitt, Allstate Insurance Company issued to Roy Pruitt, Sr., a homeowner's insurance policy, which included coverage for personal injury damages caused by a member of the household. However, the policy contained a clause excluding bodily injury damages arising out of the ownership, maintenance, use, loading or unloading of any motorized land vehicle or trailer. Pruitt, 126 Ill.Dec. at 717, 532 N.E.2d at 402. After Pruitt's son, Roy Jr., ran into a man while riding his motorized mini-bike, the injured man sued Roy Jr. for negligence in operating the mini-bike, and he sued Roy Sr. for negligent failure to supervise his son. The insurance company sought a declaration that it was not obligated to defend or indemnify the Pruitts. Relying on USF & G I, the Pruitts argued that the separate and distinct allegation of failure to supervise may be covered even in a case where negligent operation is also alleged and excluded. Pruitt, 126 Ill.Dec. at 718, 532 N.E.2d at 403. The Illinois Appellate Court distinguished USF & G I as a case in which the underlying complaint described acts of alleged negligence and theories of recovery wholly independent from those relating to the allegedly negligent operation of the automobile. Id., 126 Ill.Dec. at 718-19, 532 N.E.2d at 403-04. In contrast, the claim of negligent supervision against Pruitt was based solely on the minor's ownership and operation of the mini-bike. Id. Because Roy Sr. was negligent only if Roy Jr. was, the excluded cause predominated and the claim was not covered. See also State Farm Fire & Cas. Co. v. Mann, 172 Ill.App.3d 86, 122 Ill.Dec. 130, 134, 526 N.E.2d 389, 393 (1988) (the [USF & G I ] court limited its holding to cases where the actionable event could be proved independent of the excluded motor vehicle); Allstate Ins. Co. v. Panzica, 162 Ill.App.3d 589, 114 Ill.Dec. 28, 30, 515 N.E.2d 1299, 1301 (1987) (Under Illinois law it is clear that where the instrumentality which causes the injury is excluded, no liability coverage is afforded for negligent entrustment of the instrumentality. This is because an injury resulting from the use of the instrumentality is a necessary element of the cause of action.), appeal denied, 119 Ill.2d 553, 119 Ill.Dec. 381, 522 N.E.2d 1240 (1988); State Farm Fire & Cas. Co. v. McGlawn, 84 Ill.App.3d 107, 39 Ill.Dec. 531, 533, 404 N.E.2d 1122, 1124 (1980) (finding negligent entrustment claim excluded because derivative of excluded underlying negligence claim). 60 The appellants are correct to point out that Mr. South's failure to investigate First Columbia is a second cause of their injury, along with First Columbia's insolvency. But these two causes are not wholly independent: Mr. South's negligence depends upon the insolvency of First Columbia. If First Columbia were healthy and solvent, Mr. South would not be liable for negligence; even if he breached a duty owed to his clients, that breach would have caused no injury and thus would not support a claim for recovery. 7 Thus, because the excluded cause predominates, this case is more closely analogous to Pruitt than to the USF & G cases. As did the Illinois Appellate Court in Pruitt, we conclude that, under the terms of the policy, the insurer has no duty to defend or indemnify the insured. 61 One final argument made by Mr. South is that the district court erred in granting Transamerica's May 3 Rule 59(e) motion to amend insofar as it extended the declaratory judgment to cases not yet filed against Mr. South and/or claims against Mr. South as yet unknown. This extension, contends Mr. South, precludes coverage for potential claims that might involve the sale of First Columbia annuities but, because of circumstances peculiar to such unfiled lawsuits, do not arise out of First Columbia's failure and liquidation. 62 We cannot accept Mr. South's argument for two reasons. First, the May 10 declaration did not expand the scope of the April 26 declaration. Rather, the May 10 declaration clarified the scope of the April 26 declaration. The April 26 declaration states that Transamerica has no duty to defend or indemnify Mr. South for any and all claims of loss ... including claims made by the named defendants. 8 The May 10 declaration states that Transamerica has no duty to defend Mr. South for (A) any and all claims of loss, and (B) any and all claims of loss ... asserted by the named defendants. 9 The May 10 declaration is no more inclusive than the April 26 declaration: they both extend to any and all claims of loss related to First Columbia annuities, including the claims brought by the named defendants. 63 Second, Mr. South argues that the declaration could be interpreted to preclude coverage to Ronald South for any claims concerning annuities issued through First Columbia Life Insurance Company regardless of the cause. Appellant's Reply Br. at 8 (emphasis in original). Such an interpretation would be unreasonable given that the district court's decision in this case rests upon the insolvency exclusion, which states: This Policy does not apply to: 64 .... 65 XII. Any claim arising out of insolvency, receivership or bankruptcy of any organization (directly or indirectly) in which the INSURED has placed or obtained coverage or in which an INSURED has placed the funds of a client or account. 66 R.1 Ex.1 at 9. The district court ruled that this clause excludes coverage for liability stemming from Mr. South's failure to investigate properly the financial soundness of First Columbia. While the focus of the case was sharpened by the substance of the complaints filed against Mr. South by the other named defendants, there was no need to distinguish one complaint from another: they all alleged that Mr. South was negligent to encourage investors to purchase annuities from an insolvent company. The declaratory judgment simply states that Transamerica has no duty to defend or indemnify Mr. South for any and all such claims. Given the ordinary preclusive effect that a judgment on the particular claims presented would have upon future litigation between Transamerica and Mr. South, we fail to see how the declaratory judgment prejudices Mr. South's right to future coverage for claims unrelated to First Columbia's insolvency. 10