Court Opinion

ID: 3000421
Source: CourtListenerOpinion
Date Created: 2015-09-24 20:04:43.707395+00
Date Added: 2024-06-11T11:45:41.515088
License: Public Domain

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

No. 06-2611
KRUEGER INTERNATIONAL, INC.,
                                              Plaintiff-Appellant,
                               v.

ROYAL INDEMNITY CO.,
                                             Defendant-Appellee.
                        ____________
           Appeal from the United States District Court
              for the Eastern District of Wisconsin.
           No. 05-C-563—William C. Griesbach, Judge.
                        ____________
      ARGUED JANUARY 10, 2007—DECIDED APRIL 9, 2007
                        ____________

  Before POSNER, MANION, and SYKES, Circuit Judges.
   POSNER, Circuit Judge. With the growth of employers’
liability for discrimination, retaliation, harassment, wrong-
ful termination, and other, similar torts committed against
employees (torts not involving physical injury and there-
fore not preempted by workers’ compensation), demand
has grown for “employment practices liability” insurance.
James B. Dolan Jr., “The Growing Significance of Em-
ployment Practices Liability Insurance,” GP Solo Magazine,
Sept. 2005, www.abanet.org/genpractice/magazine/2005/
sep/employmentinsurance.html. Despite that growing
demand, the present suit—a diversity breach of contract
2                                                No. 06-2611

suit governed by Wisconsin law—is one of only a handful
of cases (none germane to the issues in this case) in which
an appellate court has been asked to interpret such cover-
age.
  Krueger International, a manufacturer of furniture,
argues that Royal Indemnity, its liability insurer, is obliged
to indemnify it for a $5.3 million judgment that a Wiscon-
sin court entered against it in a suit by former employees.
The district court granted summary judgment for Royal.
  The insurance policy that Royal issued to Krueger covers
a “loss” to the insured due to an “employment wrongful
act,” capaciously defined as
    any error, misstatement, misleading statement, act,
    omission, neglect, or breach of duty actually or alleg-
    edly committed or attempted by the Company or
    one or more Insured Persons in their capacities as such,
    in connection with any actual or alleged wrongful
    dismissal, discharge or termination of employment,
    breach of any oral or written employment contract or
    quasi-employment contract, employment-related mis-
    representation, violation of employment discrimination
    laws (including sexual or other illegal workplace
    harassment), wrongful failure to employ or promote,
    wrongful discipline, wrongful deprivation of a career
    opportunity, failure to grant tenure, failure to adopt
    adequate workplace or employment policies and
    procedures, illegal retaliatory treatment, negligent
    evaluation, invasion of privacy, employment-related
    defamation or employment-related wrongful inflic-
    tion of emotional distress.
 The suit that resulted in the judgment that Krueger
wants Royal to indemnify it for was brought by four former
No. 06-2611                                                 3

employees of Krueger. They owned stock in the company
and their shareholder agreements gave the company an
option to redeem their shares if they left its employ.
Krueger could exercise the option at any time within
90 days after the employee notified the company that he
would be leaving. If it exercised the option, the employee
would be entitled to the assessed valuation of his shares
as of the end of the quarter before the exercise. Authority
to modify the shareholder agreement was placed in the
company’s board of directors.
  The four employees charged that when late in 2000 they
discussed the financial implications of their resigning
with Krueger’s chief financial officer (and board member),
Mark Olsen, he told them that if they resigned by the end
of the year their stock would be redeemed at its assessed
value as of the end of the third quarter of that year. So they
resigned before the end of 2000. But Krueger didn’t
exercise its option to redeem their shares until 2001, and it
used as the redemption value the assessed value of the
shares at the end of the last quarter of 2000—a lower
value than the shares had had three months earlier. The
employees sued Krueger for the difference, on various
theories including negligent misrepresentation. But the
only theory the judge allowed to go to the jury was that
Olsen had orally modified the plaintiffs’ employment
contracts to entitle the plaintiffs to the third-quarter
valuation. The jury agreed, stating that Olsen had had
“apparent authority” to modify the contracts.
  The insurance policy covers breach of an oral employ-
ment contract; losses attributable to the breach of a writ-
ten contract are excluded. The claim of the four former
employees was based on Olsen’s oral modification of a
written contract, and whether such a modification falls
4                                                No. 06-2611

within the exclusion for suits on a written contract cannot
be gleaned from the language of the policy; an orally modi-
fied written contract is an oral-written hybrid. But the
purpose behind the distinction that the policy makes
between oral and written contracts provides a clue to how
the policy applies to this case. The employer will usually
have control over the written contracts that it makes. The
coverage it needs is of oral representations by its employ-
ees that may be held to have created binding contracts; for
over those representations it has little control. The need, so
understood, for coverage extends to an oral modification
of a written contract, since the employer has no greater
control over an oral modification than it does over any
other oral representations by its employees.
   It is true that the company could provide in its written
contracts that oral modifications were unenforceable. But
it might not want to fetter its trusted employees in that
way, and anyway the provision might be ruled unenforce-
able, consistent with the traditional common law rule that
a contractual provision forbidding oral modifications
can itself be modified orally. Allen & O’Hara, Inc. v. Barrett
Wrecking, Inc., 898 F.2d 512, 518 (7th Cir. 1990) (Wisconsin
law); Call v. Ameritech Management Pension Plan, 475 F.3d
816, 820 (7th Cir. 2007); Shah v. Racetrac Petroleum Co., 338
F.3d 557, 572-73 (6th Cir. 2003).
   But the oral-written issue turns out to be unimportant
in the present case. The redemption provision that, as
orally modified, is the basis of the employees’ claim is part
of a shareholders’ agreement, not an employment agree-
ment. The shareholders’ agreement is applicable to any
shareholder, including an employee, but that doesn’t make
it an employment agreement. The breach of a shareholder
agreement, whether oral or written, is not covered by
No. 06-2611                                                     5

insurance against employment practices liability. So the
only coverage on which Krueger can hang its hat is the
coverage created by the provision insuring it against
losses resulting from misleading statements.
  However, the Wisconsin court dismissed the employees’
claim of negligent misrepresentation. The only claim they
prevailed on was their contract claim to a higher redemp-
tion price. Apart from the fact that only breach of an
employment contract is covered, insurance policies are
presumed not to insure against liability for breach of
contract. Moran Foods, Inc. v. Mid-Atlantic Market Develop-
ment Co., 476 F.3d 436, 439 (7th Cir. 2007); May Department
Stores Co. v. Federal Ins. Co., 305 F.3d 597, 602 (7th Cir. 2002);
Ingalls Shipbuilding v. Federal Ins. Co., 410 F.3d 214, 222 (5th
Cir. 2005); Pacific Ins. Co. v. Eaton Vance Management., 369
F.3d 584, 593 (1st Cir. 2004); Data Specialties, Inc. v. Trans-
continental Ins. Co., 125 F.3d 909, 913 (5th Cir. 1997). 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 create 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. Or suppose, having somehow persuaded an
insurance company to insure you against liability for
breach of contract, you hire a contractor to build an ex-
tension on your house and after he has completed his
work you refuse to pay him, and, when he sues, you turn
his claim over to the insurance company.
  Moral hazard provides a further explanation for the
distinction that the policy makes between written and oral
contracts. The breach of a written contract will often be a
deliberate act by the insured, while the breach of a con-
6                                                 No. 06-2611

tract created by an oral representation of an employee is
likely to be, from the insured’s standpoint, an unavoidable
accident. The difference lies in the nature of the act that
precipitates the breach: a deliberate decision by the in-
sured, on the one hand, and the careless or unauthorized
act of an employee on the other. Thus, as Krueger points
out, relying on the Wisconsin Supreme Court’s authorita-
tive decision in American Family Mutual Ins. Co. v. American
Girl, Inc, 673 N.W.2d 65, 76-79 (Wis. 2004), the presump-
tion against liability for breach of contract is stated too
broadly. If the act that precipitates the insured’s liability
is negligent and therefore tortious, the fact that it’s also a
breach of contract does not preclude coverage, since
coverage is based on the specific acts insured against
rather than on the particular remedy sought by the person
harmed by the act. Vandenberg v. Superior Court, 982 P.2d
229, 245-46 (Cal. 1999); Lamar Advertising Co. v. Continental
Casualty Co., 396 F.3d 654, 656-57 and n. 2 (5th Cir. 2005);
Touchette Corp. v. Merchants Mutual Ins. Co., 429 N.Y.S.2d
952, 953 (App. Div. 1980).
  In some jurisdictions, indeed, if through negligence the
contractor in our earlier example had caused physical
damage to your property, you could sue him both in tort
and in breach of contract; and his liability insurance, if it
covered the accidental infliction of harm to the property
of the contractor’s customers, would be good against either
claim. Ferrell v. West Bend Mutual Ins. Co., 393 F.3d 786, 794-
95 (8th Cir. 2005); Flintkote Co. v. Dravo Corp., 678 F.2d 942,
945-46 (11th Cir. 1982). Even if the accident caused merely
“economic loss,” which is to say loss not involving damage
to person or property, so that under the “economic loss”
doctrine the loss could be recovered if at all only in a
suit for breach of contract, 1325 North Van Buren, LLC v. T-3
No. 06-2611                                                  7

Group, Ltd., 716 N.W.2d 822, 831 (Wis. 2006); Insurance Co.
of North America v. Cease Electric Inc., 688 N.W.2d 462, 468-
72 (Wis. 2004); Rich Products Corp. v. Kemutec Inc., 241 F.3d
915, 917-19 (7th Cir. 2001) (Wis. law); Flintkote Co. v. Dravo
Corp., supra, 678 F.2d at 945-47, a liability insurance policy
might (depending on the precise wording of the policy—in
particular on whether it limited “property damage” to
physical damage) cover the loss the contractor had in-
curred as a result of the suit. Eljer Mfg., Inc. v. Liberty
Mutual Ins. Co., 972 F.2d 805, 809-12 (7th Cir. 1992); French
v. Assurance Co. of America, 448 F.3d 693, 703 (4th Cir. 2006);
Lucker Mfg., Inc. v. Home Ins. Co., 23 F.3d 808, 814-18 (3d
Cir. 1994).
  Krueger argues that Olsen’s action in “modifying” the
shareholders’ agreement in favor of the four employees
who resigned exceeded his authority, and that an unautho-
rized act that may bind the company under contract law
is from a practical standpoint no different than if Olsen
had sexually harassed an employee and Krueger been
held liable in tort to the employee under the doctrine of
respondeat superior. Royal argues that Krueger suffered no
“loss” within the meaning of the policy because all that the
plaintiffs in the suit against the company obtained was
their contractual entitlement. But the loss consisted in
Krueger’s being forced to pay money as the consequence
not of the shareholders’ agreement but (Krueger claims) of
an employee’s unauthorized act.
  We also don’t agree with Royal that since Olsen’s prom-
ise conferred a contractual entitlement on the departing
employees, Krueger’s refusal to honor the entitlement,
forcing them to sue, must have been just the kind of
deliberate breach of contract that insurance companies do
not insure against. Krueger’s refusal to honor Olsen’s
8                                               No. 06-2611

promise was the only way it could challenge his author-
ity to bind the company. An insured who broke an oral
employment contract would be forced to pay damages
for the breach, yet we know that it would be entitled to be
indemnified by the insurance company.
  The judge dismissed the employees’ claim of negligent
misrepresentation (that is, that Olsen had misrepresented
to them what would happen if they resigned by the end of
the year) on the ground not that there had been no negli-
gent misrepresentation, but that a tort claim arising from
Olsen’s promise was barred by the economic loss doctrine.
For in some states the doctrine precludes a tort suit for
purely economic loss against someone with whom you
have a contract, even if it is a suit for misrepresentation.
Cerabio LLC v. Wright Medical Technology, Inc., 410 F.3d 981,
987-88 (7th Cir. 2005) (Wisconsin law); Home Valu, Inc. v.
Pep Boys, 213 F.3d 960, 963-64 (7th Cir. 2000) (same); All-
Tech Telecom, Inc. v. Amway Corp., 174 F.3d 862, 866-67 (7th
Cir. 1999) (same). But we know that the fact that the
economic loss doctrine may channel tort-like conduct
into breach of contract need not affect insurance coverage.
And so the fact that the jury found only “contract modifi-
cation” is not dispositive; if the modification was precipi-
tated by an insured-against act, namely a misrepresenta-
tion by Olsen, there is coverage. A misrepresentation
can give rise to a tort, but it can also bind a principal and
thus give rise to a contract claim. In either case it can
inflict a loss covered by employment wrongful acts insur-
ance, since the insurance is against liability for the conse-
quences of an act, not liability based on a particular legal
theory, such as tort.
  This analysis brings Krueger to the verge of victory. But
there it falters, because, although the shareholders’ agree-
No. 06-2611                                                 9

ment is clear, and only the board of directors has express
authority to modify it, there was no misrepresentation. As
explained by the Wisconsin appellate court in the employ-
ees’ suit:
    those acts within the scope of the agent’s authority are
    the acts of the corporation. A principal may not cloak
    an agent with vestiges [sic—the court must have meant
    ‘vestments’] of authority only to renounce the agent’s
    authority to represent it after others have dealt with the
    agent to their detriment. Krueger’s argument suggests
    that a corporation should not be held responsible for
    the commitments of its agents if the board of directors
    subsequently disapproves of the agent’s decision.
That is the language of actual authority. And Krueger had
argued in the employees’ suit that it “did not acquiesce in”
Olsen’s representations—an argument irrelevant to appar-
ent authority. The court had rejected the argument, say-
ing that
    the evidence suggested that Krueger’s president and
    majority shareholder, consistent with the corporation
    bylaws, delegated stock redemption responsibilities to
    Olsen…. The board was aware of Olsen’s exclusive
    role in stock redemption transactions by virtue of the
    thirty-five to forty transactions he handled between
    1995 and 2000. Krueger’s own evidence suggests that
    the board merely served as a ‘rubber stamp’ after the
    fact for stock redemption transactions effectuated by
    Olsen.
In other words, in promising the employees the third-
quarter valuation, Olsen was exercising a power that had
been delegated to him by the board of directors (which is
authorized to modify the shareholders’ agreement). The
10                                              No. 06-2611

board merely repudiated his exercise of that delegated
power when it found out what it would cost. Thus the
judge was using the term “apparent authority” when he
meant implied authority. Implied authority, unlike appar-
ent authority, is actual authority, simply inferred rather
than expressed. Opp v. Wheaton Van Lines, Inc., 231 F.3d
1060, 1064-65 (7th Cir. 2000); FTC v. Verity Int’l, Ltd., 443
F.3d 48, 64 (2d Cir. 2006).
   Krueger argues that we must not look behind the jury’s
finding, which was that Olsen had “apparent authority,”
implying that he exceeded his authority and bound
Krueger only by virtue of the appearance of authority
that he manifested to the employees. The question, how-
ever, is what the jury meant by its finding, and the best
evidence of that is what the appellate court said. Krueger
itself wants us to look behind the verdict, because the
verdict says nothing about a misrepresentation. It is
apparent from the appellate court’s discussion that Olsen
did not misrepresent the departing employees’ shareholder
rights. He had the authority to commit Krueger to value
their shares at the third-quarter assessment, and exercised
it. When he told the employees they would get the third-
quarter valuation if they resigned by the end of the year,
he was telling the truth because he was binding Krueger
to his promise, as he was authorized to do. That the board
later disapproved Olsen’s exercise of the authority didn’t
mean he hadn’t had it when he exercised it.
  As there was neither a breach of an oral employment
agreement nor a misrepresentation, there was no insurable
act and the judgment for Royal is therefore
                                                 AFFIRMED.
No. 06-2611                                           11

A true Copy:
       Teste:

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

                USCA-02-C-0072—4-9-07