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Fox v. American Alternative Insurance Corporation

United States Court of Appeals, Seventh Circuit

July 7, 2014

KEVIN FOX, Plaintiff-Appellant,
v.
AMERICAN ALTERNATIVE INSURANCE CORPORATION, Defendant-Appellee

Argued October 31, 2013

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 1:04-cv-07309 -- John W. Darrah, Judge.

For Kevin Fox, Plaintiff - Appellant: Michael W. Rathsack, Attorney, Chicago, IL; Kathleen Zellner, Attorney, Kathleen Zellner And Associates, P.C., Downers Grove, IL.

For American Alternative Insurance Corporation, Defendant - Appellee: Robert Joseph Bates Jr., Attorney, Bates Carey Nicolaides Llp, Chicago, IL.

Before BAUER, MANION, and ROVNER, Circuit Judges.

OPINION

Page 681

Rovner, Circuit Judge 

The dispute between Kevin Fox, the plaintiff in this diversity case governed by Illinois law, and American Alternative Insurance Corporation (AAIC) is about an insurer's duties to defend those it insures. This suit arises from a previous, civil-rights suit brought by Fox and his wife Melissa against AAIC's insureds for, among other claims, wrongful arrest and prosecution. See Fox v. Hayes, 600 F.3d 819 (7th Cir. 2010). The defendants in that first suit included several detectives from Will County, Illinois, whom Fox had accused of maliciously pursuing unfounded charges against him. Following a jury verdict awarding the Foxes a total of $15.5 million in damages (including $6.2 million in punitive damages) the detectives reached a deal with the Foxes. They assigned to the Foxes any indemnity claims they might have against the insurance companies, including AAIC, who had controlled their defense. In exchange, they received the Foxes' agreement not to execute the punitive damages awards (which were not covered by any insurer's policy) against their personal assets. Armed with the assignments, Kevin Fox then filed the suit that is the subject of this appeal. That suit seeks a declaratory judgment that AAIC--as an insurer for the detectives' employer, Will County--had breached its duty to defend the detectives in the earlier suit. The district court dismissed Fox's complaint for failure to state a claim. We conclude that AAIC did not breach its duty to defend the detectives, so we affirm the judgment.

Background

Because the district court dismissed Fox's complaint, we accept as true all well pleaded facts and draw all permissible inferences in his favor. See Hecker v. Deere & Co., 556 F.3d 575, 580 (7th Cir. 2009).

Page 682

Kevin Fox was arrested in 2004 and charged with the sexual assault and murder of his three-year-old daughter. Will County detectives coerced a confession out of Fox and delayed the testing of DNA evidence, leaving Fox imprisoned for nearly eight months and separated from his despairing wife and son. When Fox's defense team finally obtained the DNA evidence and had it tested at a private lab, the results excluded Fox as the source of the DNA on his daughter's body, and the prosecution dropped all charges against him. Fox then proceeded to federal court where he and his wife sued under 42 U.S.C. § 1983 and Illinois state law alleging that the Will County detectives (Edward Hayes, Michael Guilfoyle, Scott Swearengen, Brad Watchl, and John Ruettiger) had arrested and prosecuted Fox without probable cause and in violation of his right to due process. The Foxes also included state law claims for malicious prosecution and intentional infliction of emotional distress. As relevant to the present suit, Fox's complaint in his § 1983 action sought both compensatory and punitive damages.

As employees of Will County, the detectives benefitted from the county's insurance policies, which provided liability coverage to its law enforcement personnel. St. Paul Fire & Marine Insurance Company supplied the first layer of coverage and its policy required it to defend the detectives against the Foxes' suit until it had exhausted its policy limit of $1 million by paying covered settlements or judgments. Will County also had two layers of excess or umbrella liability coverage. Each layer was for $5 million. One policy was from AAIC and the other came from Essex Insurance Company; AAIC provided the secondary and Essex the tertiary layer of coverage. Under AAIC's policy it was not required to " assume charge of the settlement or defense" until " the aggregate Limit of Liability of the applicable Schedule Underlying Policy [the St. Paul policy] ha[d] been exhausted by payment of claims." None of the insurance policies provided coverage against liability for punitive damages.

The Foxes' suit proceeded to trial where the detectives were represented by Lowis and Gellen, LLP (a firm retained by St. Paul). Under some circumstances, their joint representation by a single law firm could have created a potential conflict of interest, see, e.g., Williams v. Am. Country Ins. Co., 359 Ill.App.3d 128, 833 N.E.2d 971, 979, 295 Ill.Dec. 765 (Ill.App.Ct. 2005) (potential conflict where interests of multiple insureds are " diametrically opposed" ), as could have the Foxes' claims for uncovered punitive damages, see, e.g., Nandorf, Inc. v. CNA Ins. Cos., 134 Ill.App.3d 134, 479 N.E.2d 988, 991-92, 88 Ill.Dec. 968 (Ill.App.Ct. 1985) (potential conflict where insurer controls defense but disclaims coverage for punitive damages). But neither the attorneys nor any of the insurance companies informed the detectives of these possible conflicts. Nor were the detectives told that such potential conflicts might entitle them to representation by ...


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