Continental Cas. Co. v. Duckson (N.D. Ill. Nov. 15, 2011)
In a matter of first impression, the district court for the Northern District of Illinois rejected an insured’s argument that his professional liability was obligated to reimburse him for “claim expenses” even though it was not obligated to defend him.
The insured, a partner at a law firm, tendered his defense and indemnity to his professional liability insurer after he was sued by the Securities and Exchange Commission (“SEC”). Specifically, the SEC complaint alleged that the insured, acting as outside counsel for an investment fund, made materially false and/or misleading statements about the fund by assisting in the preparation of two private placement memoranda, both of which were misleading. The SEC complaint sought (1) a declaratory judgment; (2) permanent injunctive relief; (3) disgorgement of ill-gotten gains plus prejudgment interest thereon; (4) civil penalties; and (5) officer-director bars.
The insurer denied coverage on the ground that the SEC complaint did not seek damages covered by the policy. The court agreed, thereby rejecting the insured’s argument that the damages sought were not restitutionary in nature because money received by the SEC as civil penalties or disgorgement of ill-gotten gains can be used to compensate victims.
The insured then argued that the insurer was obligated to reimburse him for “claim expenses” even though it was not obligated to defend him. According to the insured, the policy created three entirely independent obligations: (1) the duty to defend; (2) the duty to pay “damages”; and (3) the duty to pay “claim expenses.” The insured claimed that the duty to pay “claim expenses” did not require a showing that the SEC complaint alleged covered “damages.”
In a matter of first impression in Illinois, the court held that although the subject policy could have been drafted in a more artful fashion, it did not obligate the insurer to reimburse the insured for “claim expenses” where the underlying complaint did not allege covered “damages.” Rather, the court predicted that the Illinois Supreme Court would find that the duty to pay “claim expenses” should be interpreted consistently with the duty to defend. The court stated that it would be unreasonable to hold that the insurer had a duty to defend only when the underlying complaint sought covered damages and then require the insurer to cover the insured’s defense costs as “claim expenses.”
For a copy of the decision, click here