In Madison Mutual Insurance Co. v. Diamond State Insurance Co., No. 15-3292 (7th Cir. Mar. 21, 2017), the Seventh Circuit handed down a decision delineating the obligations between a professional liability insurer and a homeowner’s insurer. At bottom, the court refused to hold a professional liability insurer responsible for the defense of a suit that only tangentially referencing the insured’s professional services.
As background, Dr. William and Wendy Dribben purchased a house in 1999 at Heartland Oaks, an exclusive development. The seller of the property retained Geraldine Davidson as a real estate broker. Davidson was a resident of Heartland Oaks and one of its developers. On the land purchased by the Dribbens, a dam was constructed in order to make a lake in the center of the development. During the sale of the property, however, Davidson allegedly failed to disclose that the original owners/developers had not obtained a permit from the Illinois Department of Natural Resources authorizing the dam’s construction.
Thereafter, in 2006, the Dribbens filed suit against Davidson for the non-disclosure, which amounted to fraudulent concealment and consumer fraud. Diamond State Insurance Company, which provided Davidson with a professional liability errors and omissions policy effective from October 2005 to October 2006, agreed to defend Davidson. The counts involving Davidson were subsequently severed from the action and arbitrated in favor of Davidson.
Another action was later brought by the Dribbens in 2011 against Davidson and her husband, alleging harassment and slander. In terms of harassment, the Davidsons, which were neighbors of the Dribbens, allegedly farmed on Dribbens’ property without consent, polluted the communal lake, and generally engaged in trespass. As to slander, the Davidsons allegedly posted offensive signs and spread rumors that Dr. Dribben was a serial killer. In connection with the 2011 suit, Davidson tendered the suit to Madison Mutual Insurance Company, which provided homeowner’s coverage. While Madison agreed to defend, it also tendered the suit to Diamond State. Diamond State refused the tender on the basis that the 2011 suit did not arise out of Davidson’s professional services as a real estate broker.
In light of Diamond State’s refusal, Madison initiated a declaratory judgment action seeking a ruling that Diamond State had the duty to reimburse Madison for defense costs incurred in connection with the 2011 suit. The Illinois federal district court granted summary judgment in Diamond State’s favor.
On appeal, Madison contended that the 2011 suit arose out of actions involved in the 2006 suit. Specifically, the operative complaint in the 2011 suit noted that Davidson was a real estate broker and that she was involved in the sale of the property to the Dribbens. Therefore, although the 2005-2006 Diamond State policy was a “claims made and reported” policy, Madison argued the claims in the 2011 suit related back to the 2006 suit. The Seventh Circuit rejected that argument and affirmed the lower court’s decision. While the Seventh Circuit recognized that there was some factual overlap between the claims in the 2006 and 2011 suits, there were no allegations in the 2011 suit that Davidson breached her professional obligations as a real estate broker. Instead, the 2011 suit concerned acts committed by the Davidsons as neighboring landowners. As a result, despite the factual overlap, the 2011 suit did not predicate any theory of recovery on Davidson’s failure to disclose a lack of permit for the dam. Finally, the Seventh Circuit did not countenance Madison’s argument that the 2006 claims undergirding the suit were a “but-for” cause of the claims in the 2011 suit. The court dismissed that argument since it would stretch the logical limits of causation to wrongfully transform the 2011 suit into one based upon professional negligence.
This is an instructive ruling as to the parameters of risk covered by various types of liability policies. Here, although professional services were mentioned in the complaint, the court looked through the window dressing and found that the gravamen of the subsequent complaint really had nothing to do with the rendering of professional services.