Court Opinion

ID: 2996417
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:28:30.988692+00
Date Added: 2024-06-11T11:45:29.749762
License: Public Domain

In the
 United States Court of Appeals
              For the Seventh Circuit
                        ____________

Nos. 02-2301 & 02-2334
TIG INSURANCE COMPANY,
                                             Plaintiff-Appellee,
                               v.

RELIABLE RESEARCH COMPANY,
                                         Defendant-Appellant,
                              and

SECURITY UNION TITLE INSURANCE COMPANY,
                                         Intervenor-Appellant.
                        ____________
          Appeals from the United States District Court
              for the Southern District of Illinois.
           No. 01-C-45—David R. Herndon, Judge.
                        ____________
   ARGUED DECEMBER 11, 2002—DECIDED JUNE 30, 2003
                   ____________

  Before COFFEY, EASTERBROOK, and DIANE P. WOOD,
Circuit Judges.
   DIANE P. WOOD, Circuit Judge. Security Union Title
Insurance Company is out $245,000 as a result of the faulty
title work of its agent, Reliable Research Company, in a
closing involving Mortgage One. Things began to unravel
for both Security Union and Reliable when Reliable ten-
dered the Mortgage One claim to TIG Insurance Company,
2                                   Nos. 02-2301 & 02-2334

its error and omissions insurer. TIG discovered, to its
surprise, that Reliable had not been totally forthcoming
with it when Reliable had applied for the policy in question.
This prompted TIG to file a complaint in federal court
seeking rescission of the policy on the basis of a material
misrepresentation on Reliable’s application for coverage.
Typical procedural skirmishing ensued: Reliable filed a
counterclaim against TIG, and Security Union intervened
with claims against both TIG and Reliable. The district
court granted TIG’s motion for summary judgment, find-
ing that the undisputed facts showed that Reliable’s
application contained a material misrepresentation that
warranted rescission of the entire policy. Accordingly, the
court rescinded Reliable’s policy with TIG and ordered a
premium refund. It later entered judgment for Security
Union on its claim against Reliable. On this appeal, Reli-
able and Security Union have jointly challenged the ruling
in favor of TIG. (Reliable has not raised any separate
challenge to the ruling adverse to it in the Security Union
action.)
  Before oral argument, this court sua sponte questioned
Security Union’s standing to appeal the district court’s
judgment and ordered the parties to brief the issue on
appeal. Deeper problems emerged at the argument, where
it became apparent that the district court may have
lacked subject-matter jurisdiction over Security Union’s
intervening counterclaim against TIG. The record now
reveals that the part of TIG that is involved in this case is
a California corporation with its principal place of busi-
ness in Texas, and that Security Union is also a California
corporation (with its principal place of business in Califor-
nia). Because the only basis for federal subject-matter
jurisdiction was diversity, see 28 U.S.C. § 1332, and
diversity is plainly lacking, we must dismiss this claim for
want of jurisdiction. With respect to TIG’s claim against
Reliable, as to which federal jurisdiction is secure, we
affirm.
Nos. 02-2301 & 02-2334                                         3

                               I
  Reliable is a title insurance and escrow issuing agent
for Security Union. To perform its job, Reliable searches
public records, and then, assuming a favorable result, it
issues title insurance policies underwritten by Security
Union. To protect itself against the occasional mishap in
its general, title, deed and escrow work, Reliable pur-
chased professional errors and omissions insurance (E&O)
from TIG.
   In applying for E&O coverage from TIG in mid-1999,
Reliable submitted a form that, among other things,
asked Reliable to list every claim or suit filed against it
in the last ten years. In response to this question—number
24 on the application—Reliable disclosed only one claim
filed nine years earlier that was resolved without any
loss to Reliable or its E&O carrier at the time. In a re-
newal application Reliable revealed that this suit was
filed against it by Trans America Finance. Reliable’s
application was incorporated into the policy that TIG
ultimately issued, which contained the following provi-
sion against misrepresentation:
    If any Insured under this policy, or any of your autho-
    rized representatives, conceals or misrepresents any
    material fact or circumstance concerning this insur-
    ance, this policy will be void.
Undisclosed to TIG in response to Question 24, or anywhere
else, was the fact that on November 8, 1995, in response to
a complaint filed by one Thomas LeChien, an Illinois
Circuit Court entered a permanent injunction against
Reliable enjoining it from “preparing Deeds or other
legal documents relating to the transfer of real estate . . .
and that . . . Reliable Research, Inc. . . . cease and desist the
unlawful practice of law.”
  Some time after obtaining E&O coverage, Reliable
submitted claims for two lawsuits to TIG for defense. The
4                                  Nos. 02-2301 & 02-2334

first related to a suit brought against it by Ethel Hudgens
and the Illinois State Bar Association (ISBA) alleging
that Reliable had violated the LeChien injunction, and
that Reliable had failed properly to record a carry-back
provision in a sale that Reliable closed. This error left
Hudgens an unsecured creditor when the buyers subse-
quently filed for bankruptcy. Reliable’s request for repre-
sentation and coverage under the E&O policy in the
Hudgens/ISBA matter was the first inkling TIG had
that the LeChien injunction existed. TIG took steps to
preserve its rights, including a reservation of the right to
rescind Reliable’s policy. Mortgage One Corporation filed
the second lawsuit in question. It was similar to the
Hudgens/ISBA action, in that it alleged that Reliable
had failed to discover a writ of attachment on property
that Mortgage One subsequently purchased, and that
Reliable’s error resulted in Mortgage One’s loss of a se-
curity interest in the property. TIG again agreed to as-
sume the defense subject to its earlier reservation of the
right to rescind Reliable’s policy based on the failure to
disclose the LeChien injunction.
  On January 18, 2001, TIG filed a complaint seeking
both a declaratory judgment confirming its right to rescind
the Reliable policy and actual rescission of the policy, on
the ground that Reliable’s failure to disclose the LeChien
injunction constituted a material misrepresentation on
Reliable’s part. TIG then filed a motion for summary
judgment on May 11, 2001. Over three months later, on
August 27, 2001, Security Union moved successfully to
intervene in the lawsuit. In its complaint Security Union
sued Reliable to recover the $245,000 that it had paid in
conjunction with Reliable’s faulty title search in the
Mortgage One case; it also brought a claim against TIG for
a declaration that TIG was obliged to cover Reliable in the
claim by Security Union—the mirror image of the de-
claratory judgment that TIG was seeking. In early January
Nos. 02-2301 & 02-2334                                       5

2002, the district court granted TIG’s motion for sum-
mary judgment finding that the E&O policy application
unambiguously required Reliable to disclose the LeChien
injunction and that Reliable’s failure to do so constituted
a material misrepresentation as a matter of law. The
district court then rescinded TIG’s policy and ordered a
refund of Reliable’s premium.

                              II
   We turn first to the question of federal jurisdiction over
the portion of this case that involves Security Union’s claim
against TIG. The problem, as we noted above, is a funda-
mental one: did the district court properly assert diver-
sity jurisdiction over this claim? As an intervening plain-
tiff in a case where federal jurisdiction is premised on 28
U.S.C. § 1332, Security Union bore the burden of estab-
lishing subject-matter jurisdiction. Del Vecchio v. Conseco,
Inc., 230 F.3d 974, 979 (7th Cir. 2000) (citing McNutt
v. General Motors Acceptance Corp. of Indiana, 298 U.S.
178, 189 (1936)). See also FED. R. CIV. P. 8(a). This means
that it needed to put evidence into the record showing
that complete diversity existed between itself and TIG.
Security Union has not met that burden, despite being
given several chances to do so. In its intervening complaint,
Security Union alleged that TIG was a Texas corporation
with its principal place of business in Texas. So far, so good:
if that had been uncontested as a factual matter, then
diversity would have been present, because Security Union
is a California corporation with its principal place of
business in California. But TIG contested a crucial part of
the jurisdictional allegation: it responded that it was a
California corporation with its principal place of business
in Texas. Because corporations have the citizenship of both
their state of incorporation and the state where their
principal place of business is located, see 28 U.S.C.
6                                    Nos. 02-2301 & 02-2334

§ 1332(c)(1), jurisdiction is lacking under TIG’s version of
the facts. The discrepancy between the two parties’ ac-
counts was not resolved in the district court, though it
should have been. In any event, this court (as was its
duty) sought clarification. In a supplemental statement
Security Union again insisted that TIG is a Texas corpora-
tion with its principal place of business in Texas, but it
did not document that fact in any detail. For its part, TIG
filed a response to Security Union’s memorandum in
which it reiterated that it is a California corporation with
its principal place of business in Texas. Because the bur-
den of proving subject-matter jurisdiction lies on the party
attempting to assert jurisdiction, we must conclude on
this record that diversity jurisdiction is lacking between
these two companies.
  Security Union has attempted to wiggle its way out of
the inevitable dismissal of its claim against TIG by an end-
run around § 1332. It need not satisfy that statute, it
asserts, because non-diverse parties may intervene in a
diversity suit without depriving the court of its original
diversity jurisdiction. That proposition, however, was
debatable before 1990, and whatever support it may
have had was eliminated with the enactment of the sup-
plemental jurisdiction statute, which was part of the
Judicial Improvements Act of 1990, Act of Dec. 1, 1990,
Pub. L. 101-650, 104 Stat. 5089, codified at 28 U.S.C.
§ 1367. See Turner/Ozanne v. Hyman/Power, 111 F.3d
1312, 1319 (7th Cir. 1997); Wilson v. City of Chicago, 120
F.3d 681, 684 (7th Cir. 1997). Section 1367(b) explicitly
states that
    In any civil action of which the district courts have
    original jurisdiction founded solely on section 1332 of
    this title, the district courts shall not have supplemental
    jurisdiction under subsection (a) over claims by plain-
    tiffs . . . seeking to intervene as plaintiffs under Rule
    24 . . . when exercising supplemental jurisdiction over
Nos. 02-2301 & 02-2334                                    7

    such claims would be inconsistent with the jurisdic-
    tional requirements of section 1332.
28 U.S.C. § 1367(b) (emphasis added).
  That language is as clear as it could be, and it means
that Security Union cannot rely on supplemental jurisdic-
tion to support its Rule 24 claim in intervention against
TIG, because the exercise of such jurisdiction would be
inconsistent with the requirements of § 1332. No other
basis for jurisdiction exists. Security Union is mistaken
to think that the Declaratory Judgment Act, 28 U.S.C.
§ 2201, can help it, because that statute does not and
cannot serve as an independent basis for federal jurisdic-
tion. See Ameritech Benefit Plan Comm. v. Communication
Workers of Am., 220 F.3d 814, 818 (7th Cir. 2000), cert.
denied 531 U.S. 1127 (2001). Since the record does not
refute the fact that TIG is indeed a California corporation,
complete diversity between TIG and Security Union, also
a California corporation, is lacking, and we are left with
no choice but to dismiss Security Union’s claim against
TIG for want of jurisdiction. In light of this conclusion,
we have no need to address the question whether Se-
curity Union had standing to appeal the district court’s
judgment, and we therefore express no opinion on that
point.

                            III
  We turn then to Reliable’s appeal from the judgment
in favor of TIG. Federal jurisdiction is secure over this
part of the case, as Reliable is a Missouri corporation
with its principal place of business in Missouri, and the
amount in controversy easily exceeds $75,000. Reliable
would like us to find that genuine issues of fact remain
on the question whether its failure to disclose the
LeChien injunction justifies TIG’s rescission of the insur-
ance policy.
8                                   Nos. 02-2301 & 02-2334

  Illinois law permits an insurer to rescind an insurance
policy if the insured’s application for coverage contains
a misrepresentation that was made with intent to deceive
or that is material. Methodist Med. Ctr. v. American Med.
Ctr. of Ill., 38 F.3d 316, 319 & n.6 (7th Cir. 1994) (quoting
215 ILL. COMP. STAT. 5/154). (We analyze this appeal
under Illinois law even though Reliable’s E&O policy
with TIG did not contain a choice of law provision, because
the parties now agree that Illinois law governs. See In re
Stoecker, 5 F.3d 1022, 1029 (7th Cir. 1993).) Rather than
pressing the argument that Question 24 did not require
disclosure of the LeChien injunction, an argument that
the district judge rejected as patently absurd, Reliable
appears to concede that it should have disclosed the
injunction on its application for E&O coverage. Its princi-
pal effort to avoid liability is through the argument that
its failure to disclose was not material.
   We agree with both the district court and Reliable that
there is no serious question about whether the applica-
tion called for Reliable to disclose the injunction. Reliable
had argued that the phrase “claims/suits” on the applica-
tion was ambiguous. The district court dismissed this
with the observation that these are two of the “most
common terms in the law.” A lawsuit that was resolved
by a permanent injunction obviously constituted a
“ ‘claim/suit’ instituted against Reliable Research in the
preceding ten years,” in the words of Question 24, and
we agree with the district court that there is no genuine
issue of fact on the question whether Reliable’s failure
to disclose that injunction constituted a misrepresentation.
  As we noted above, however, a misrepresentation stand-
ing alone is not enough for rescission: the misrepresenta-
tion must either be material or intentionally deceptive.
215 ILL. COMP. STAT. 5/154. The parties here have focused
on materiality, rather than intent to deceive, and we
accordingly do likewise.
Nos. 02-2301 & 02-2334                                      9

   A misrepresentation is material if it “affects either the
acceptance of the risk or the hazard assumed by the com-
pany.” Id; see also Garde v. Inter-Ocean Insur. Co., 842 F.2d
175, 176 (7th Cir. 1988). The district court found that
Reliable’s omission of the LeChien injunction was ma-
terial as a matter of law, and granted summary judgment
in TIG’s favor on that basis. We review that decision
de novo. Methodist Med. Ctr., 38 F.3d at 319. Illinois
courts frame the materiality question in terms of whether
“ ‘reasonably careful and intelligent persons would regard
the facts as stated to substantially increase the chances
of the event insured against, so as to cause a rejection of
the application.’ ” Id. at 320 (quoting Small v. Prudential
Life Ins. Co., 617 N.E.2d 80, 83 (Ill. App. Ct. 1993)). Testi-
mony from an insurer’s underwriter may be used to es-
tablish the materiality of omitted information. Id.
  Reliable makes several arguments in support of its
position that the omission of the LeChien injunction was
not material as a matter of law. First, it insists that TIG
merely insured Reliable against “faulty title work,” and as
such an injunction barring Reliable from engaging in
the unauthorized practice of law does not “increase the
chances of the event insured against.” Id. (internal quota-
tion marks and citation omitted). This argument, however,
directly conflicts with Reliable’s application for insurance
from TIG, which listed its work as: 70% title agent; 20%
escrow agent/closer; 10% title abstractor. Reliable’s claim
that its business is comprised of 95% title insurance and
5% escrow closings is a half-truth; these figures represent
Reliable’s breakdown of profits, not a breakdown of the
work that it performs. Most damaging to Reliable’s argu-
ment that TIG only insured its title work is its response
to Question 30 on the application for insurance. Question 30
asked if Reliable wished “to apply for coverage limited to
escrow/closing operations only without coverage for any
other title-related activity.” Reliable answered “no” to this
10                                Nos. 02-2301 & 02-2334

question, which strongly suggests that it sought insurance
for all of its work. And as TIG points out, the policy that
it issued to Reliable is not nearly as narrow as appel-
lants would have this court believe. Nowhere in the
policy is coverage limited to Reliable’s title search work;
instead the policy states that it covers “Damages arising
out of Wrongful Acts committed in the course of your
providing Professional Services.” Such a statement of
coverage, in the context of Reliable’s application, can
mean only that TIG insured all of the work Reliable de-
scribed, not merely its title searching.
  Reliable’s second argument has somewhat more sub-
stance. Relying heavily on Golden Rule Insurance Co.
v. Schwartz, 751 N.E.2d 123 (Ill. App. Ct. 2001), affirmed
in part, vacated in part on other grounds by 786 N.E.2d
1010 (Ill. 2003). Reliable asserts that the record does
not support the conclusion that omission of the LeChien
injunction was material as a matter of law. In Reliable’s
view, the district court gave undue weight to the affidavit
of TIG’s underwriter Kerrie Ronan, which TIG submitted
in support of its motion for summary judgment. At
most, Reliable urges, this affidavit raises a question of
fact for the jury on materiality. Ronan merely testified
that she would not have issued the policy had she known
of the LeChien injunction. While an underwriter’s tes-
timony is allowed to establish the materiality of a mis-
representation, Reliable insists that such testimony must
do more than merely state the obvious: if we had known
of this risk we wouldn’t have issued the policy in
the first place. Instead, it argues, the underwriter should
testify from personal knowledge and experience about
what information shapes the decision to underwrite a
policy and how that information is used. If such testimony
is inconsistent or in any way supports conflicting infer-
ences, a jury should resolve the issue. Golden Rule, 751
N.E.2d at 133.
Nos. 02-2301 & 02-2334                                  11

   Ronan’s affidavit, in Reliable’s view, supports more
than one logical inference about whether Reliable’s failure
to disclose the LeChien injunction was material. In her
affidavit, Ronan swore that “[w]ith the absence of any
significant claims or suits listed on the Reliable 8/26/99
Application, the Reliable account was favorably analyzed
by the Underwriters as a ‘clean’ account.” (Emphasis
added.) This statement, Reliable insists, contradicts
Ronan’s subsequent assertion that had TIG known of the
LeChien injunction it would have never issued Reliable
E&O coverage. Reliable’s point is that TIG considered
Reliable a “clean” account despite the fact that Reliable
did reveal one claim against it in response to Question 24.
If the account could be “clean” with one claim, then maybe
it would have been “clean” with the LeChien injunction too.
At a minimum, Reliable argues, TIG cannot now insist
that disclosure of the LeChien injunction would auto-
matically have been material or would have downgraded
Reliable from its “clean” risk status.
  All undisclosed claims are not equal, however. We find
nothing contradictory in Ronan’s statements, which merely
attest that the absence of “significant” claims or suits
against Reliable made it a clean risk. It is perfectly rea-
sonable to conclude that the nine-year-old claim that
resulted in no loss to Reliable or its E&O carrier would
not be considered significant, but that disclosure of a
permanent injunction barring Reliable from engaging in
the unauthorized practice of law would. Indeed, because
Reliable’s failure to comply with the LeChien injunction
led directly to TIG’s exposure with respect to the
Hudgens/ISBA suit, it borders on the surreal to think
that the nondisclosure was immaterial. In any event, we
agree with the district court that “a court order perma-
nently enjoining a title company from the unauthorized
practice of law would be a ‘red flag’ to any reasonably
careful and intelligent underwriter of Title and Escrow
Professional Liability Insurance.”
12                                Nos. 02-2301 & 02-2334

  Finally, Reliable invokes the strong policy preference
in Illinois to send materiality questions to the jury.
Golden Rule, 751 N.E.2d at 132. We acknowledge that
this preference exists, but (aside from the fact that
judge/jury allocations in state courts do not bind federal
courts) it is triggered only where the issue actually pre-
sents a choice for the jury. The federal court was bound
to follow FED. R. CIV. P. 56, under which summary judg-
ment is proper when there are no genuine issues of ma-
terial fact. Furthermore, nothing in the Supreme Court
of Illinois’s recent decision affirming in part the lower
court’s decision in Golden Rule Insurance Co. v. Schwartz,
786 N.E.2d 1010 (Ill. 2003), changes the substantive law
that would be applied. There the Supreme Court of Illi-
nois found a question of fact over whether the insurer
would have issued the insurance policy at issue “had it
known the true facts.” Id. at 1017. No such question of
fact exists here, as we have already explained. It is clear
that the permanent injunction barring Reliable from
engaging in the unauthorized practice of law was mate-
rial to TIG’s insurance decision, and summary judgment
was proper on TIG’s claims.

                            IV
  For the reasons we have explained, Security Union’s suit
against TIG is DISMISSED for want of jurisdiction. As a
practical matter, this may not mean much, because TIG’s
suit against Reliable raised the same questions about its
right to rescind the E&O policy in question. As to that,
we AFFIRM the judgment of the district court in favor of
TIG. Costs on appeal shall be assessed against Reliable
and Security Union.
Nos. 02-2301 & 02-2334                                13

A true Copy:
      Teste:

                      ________________________________
                      Clerk of the United States Court of
                        Appeals for the Seventh Circuit

                 USCA-02-C-0072—6-30-03