Court Opinion

ID: 3203687
Source: CourtListenerOpinion
Date Created: 2016-05-16 17:01:02.303924+00
Date Added: 2024-06-11T14:28:26.804557
License: Public Domain

In the

    United States Court of Appeals
                 For the Seventh Circuit
                     ____________________
No. 15-3417
HARTFORD CASUALTY INSURANCE CO.,
                                                     Plaintiff-Appellee,

                                  v.

KARLIN, FLEISHER & FALKENBERG, LLC, et al.,
                                     Defendants-Appellants.

             Appeal from the United States District Court
        for the Northern District of Illinois, Eastern Division.
             No. 14 C 2883—John Robert Blakey, Judge.
                     ____________________

       ARGUED APRIL 19, 2016— DECIDED MAY 16, 2016
                  __________________

    Before BAUER, POSNER, and FLAUM, Circuit Judges.
     POSNER, Circuit Judge. Ronald G. Fleisher, a lawyer, had
worked for two affiliated law firms that together with their
principals (some of whom appear from their names to be
relatives of his, though he was not one of the principals) are
the defendants in this litigation and in the state court litiga-
tion from which it arises.
    In March 2013 Fleisher had filed a written demand with
the defendants claiming that when he retired, in 2011, he
had accrued more than 90 weeks of unused vacation time
2                                                  No. 15-3417

and more than 322 days of unused sick leave, and that the
firms and their principals were contractually required, and
also required by the Illinois Wage Payment and Collection
Act, 825 ILCS 115/1 et seq., to pay him for those accruals at
the same rate of pay for the vacation time, and at 75 percent
of the rate for the unused sick time, that he’d been receiving
on the eve of his retirement. He estimated that he was owed
about $950,000 for the accruals. He wasn’t paid, and in Au-
gust 2013, five months after making his demand, he sued in
a state court in Illinois, claiming that the defendants had “in
breach of their employment agreement” failed to pay him
“the compensation owed to him for his unused but accrued
sick and vacation time under the parties’ agreement.”
     The following month the defendants sent a copy of
Fleisher’s complaint to the Hartford Casualty Insurance
Company, seeking coverage of their potential debt to Fleish-
er and of the associated litigation costs under the “Employee
Benefits Liability Provision” of the Business Owners Policy
that Hartford had issued to the defendants and that was still
in force. It took five months for Hartford to reply to the de-
fendants, and the reply when finally sent said only that the
matter was under consideration. Two months later Hartford
replied again—this time denying coverage. Days before
sending that reply Hartford sued the defendants in federal
district court under the diversity jurisdiction, seeking a dec-
laration that the insurance policy did not cover Fleisher’s
claim. Hartford offered a variety of reasons, of which the
most important was that the defendants’ failure to pay
Fleisher had not been the result of any negligent act, error, or
omission in the administration of the employee benefits pro-
gram, which was all that the policy covered.
No. 15-3417                                                   3

    The state court suit has been settled. The question pre-
sented by this case is whether Hartford had a duty to defend
the defendants in that suit, in which event they presumably
would be entitled to reimbursement by Hartford for the le-
gal fees they incurred in that litigation. The district judge
ruled that Hartford had no such duty under Illinois law (the
applicable substantive law in this diversity suit), and he
therefore granted summary judgment in favor of Hartford,
precipitating this appeal.
     The insurance policy limits coverage to an “injury that
arises out of any negligent act, error or omission in the ‘ad-
ministration’ of [the insured’s] ‘employee benefits pro-
gram,’” “administration” being defined to include “handling
records in connection with ‘employee benefits programs.’”
There is no coverage, however, for “failure … to perform
any obligation or to fulfill any guarantee with respect to:
(a) The payment of benefits under ‘employee benefits pro-
grams’; or (b) The providing, handling or investing of funds
related thereto.” The key term in the policy, as far as the pre-
sent case is concerned, is “negligent act,” quoted in the sec-
ond line of this paragraph. Insurance law fixes a “line of
demarcation between negligent acts and breaches of con-
tract.” Baylor Heating & Air Conditioning, Inc. v. Federated Mu-
tual Ins. Co., 987 F.2d 415, 420 (7th Cir. 1993) (Indiana law).
“[I]nsurance policies are presumed not to insure against lia-
bility for breach of contract. The reason is the severe ‘moral
hazard’ problem to which such insurance would often give
rise. The term refers to the incentive that insurance can cre-
ate to commit the act insured against, since the cost is shifted
to the insurance company. An example is the incentive to
burn down one’s house if the house is insured for more than
its value to the owner.” Krueger Int’l, Inc. v. Royal Indemnity
4                                                  No. 15-3417

Co., 481 F.3d 993, 996 (7th Cir. 2007) (citations omitted) (Wis-
consin law). It would be absurd for an insurance company to
insure against a breach of a contract to, say, buy a car, for
then the insured could take delivery of the car, refuse to pay
for it, and require the insurer to reimburse the seller for the
car’s sale price and the cost of litigation.
    This case is similar. Fleisher had a contractual claim to
compensation for unpaid vacation time and sick leave, and
contended that the defendants had refused to honor the
claim, thus breaking the contract. But the defendants were
not insured against a breach of contract. Hartford therefore
had no duty to defend the defendants from having to com-
pensate Fleisher for the breach. Nor was it obligated to pay
the defendants’ litigation expenses.
    The defendants have another string to their bow, how-
ever—an argument that Fleisher’s claim was based not only
(or mainly) on a breach of contract but also or instead on the
defendants’ having violated the Illinois Wage Payment and
Collection Act. But the only violation of the Act that they al-
leged is the breach of contract.
     In an attempt to get around the fact that the Hartford
policy did not insure against the consequences of a breach of
contract, the defendants point out that Fleisher was in
charge of maintaining the records of employees’ accrual and
use of vacation time and sick leave, and they argue that
through negligence he failed to maintain accurate records for
himself. His claim for almost a million dollars in uncompen-
sated accruals was therefore, the defendants contend, the re-
sult of negligence in the administration of employee benefits,
a form of misconduct that Hartford’s insurance policy did
cover. As the defendants put it in their reply brief, where the
No. 15-3417                                                   5

argument is stated most clearly, “The precipitating acts
which were negligent in the present case are Defendants’
failure to maintain the records which would have allowed
them to calculate the benefits, if any, due Ronald Fleisher
and Defendants’ failure to monitor Ronald’s maintenance of
those records.”
    The defendants are mistaken. The basis of Fleisher’s
claim was not that he had been underpaid as the result of a
negligent act, as would have been the case had the company,
for example, through carelessness mailed the money due
him to a different person and the money had never been re-
covered because the recipient had fled with it to North Ko-
rea. Rather, Fleisher’s claim was that the money he sought
was indeed owed to him by virtue of his employment con-
tract and thus that the defendants had refused to pay him
what they were contractually obligated to pay him. But, to
repeat, the consequences of a breach of contract were not
covered by the defendants’ insurance policy. This is the
norm in the insurance industry: “responsibility to make
payments according to a contract is not the sort of duty that
will support an action in negligence.” Baylor Heating & Air
Conditioning, Inc. v. Federated Mutual Ins. Co., supra, 987 F.2d
at 420 n. 8. Otherwise contracting parties would have an in-
centive not to keep track of their payment obligations, so
that insurers would be responsible for all the “forgotten”
payments.
    What is true is that Hartford should not have taken seven
months to respond to the defendants’ request for coverage,
but a delay in such a response can’t create coverage when
there clearly was no duty to defend. Employers Ins. of Wausau
v. Ehlco Liquidating Trust, 708 N.E.2d 1122, 1135 (Ill. 1999);
6                                                No. 15-3417

Lyerla v. AMCO Ins. Co., 536 F.3d 684, 692–93 (7th Cir. 2008)
(Illinois law). The defendants should have realized from the
outset that their breach of their contractual obligation to
Ronald Fleisher was not covered by their insurance policy.
The delay was not a valid ground for estopping Hartford to
deny coverage or a duty to defend.
                                                   AFFIRMED