April 19, 2016.
from the United States District Court for the Northern
District of Illinois, Eastern Division. No. 14 C 2883--John
Robert Blakey, Judge.
Hartford Casualty Insurance Company, Michael J. Duffy,
Attorney, Plaintiffs - Appellees, Ashley L. Conaghan,
Attorney, Tressler LLP, Chicago, IL.
Karlin, Fleisher & Falkenberg, LLC, Jonathan Fleisher,
Charles v. Falkenberg, III, Karlin & Fleisher, LLC, Richard
Fleisher, Defendants - Appellants: Kevin P. Brown, Attorney,
Rieck & Crotty, Chicago, IL.
BAUER, POSNER, and FLAUM, Circuit Judges.
G. Fleisher, a lawyer, had worked for two affiliated law
firms that together with their principals (some of whom
appear from their names to be relatives of his, though he was
not one of the principals) are the defendants in this
litigation and in the state court litigation from which it
March 2013 Fleisher had filed a written demand with the
defendants claiming that when he retired, in 2011, he had
accrued more than 90 weeks of unused vacation time and more
than 322 days of unused sick leave, and that the firms and
their principals were contractually required, and also
required by the Illinois Wage Payment and Collection Act, 820
ILCS 115/1 et seq., to pay him for those accruals at
the same rate of pay for the vacation time, and at 75 percent
of the rate for the unused sick time, that he'd been
receiving on the eve of his retirement. He estimated that he
was owed about $950,000 for the accruals. He wasn't paid,
and in August 2013, five months after making his demand, he
sued in a state court in Illinois, claiming that the
defendants had " in breach of their employment
agreement" failed to pay him " the compensation
owed to him for his unused but accrued sick and vacation time
under the parties' agreement."
following month the defendants sent a copy of Fleisher's
complaint to the Hartford Casualty Insurance Company, seeking
coverage of their potential debt to Fleisher and of the
associated litigation costs under the " Employee
Benefits Liability Provision" of the Business Owners
Policy that Hartford had issued to the defendants and that
was still in force. It took five months for Hartford to reply
to the defendants, and the reply when finally sent said only
that the matter was under consideration. Two months later
Hartford replied again--this time denying coverage. Days
before sending that reply Hartford sued the defendants in
federal district court under the diversity jurisdiction,
seeking a declaration that the insurance policy did not cover
Fleisher's claim. Hartford offered a variety of reasons,
of which the most important was that the defendants'
failure to pay Fleisher had not been the result of any
negligent act, error, or omission in the administration of
the employee benefits program, which was all that the policy
state court suit has been settled. The question presented by
this case is whether Hartford had a duty to defend the
defendants in that suit, in which event they presumably would
be entitled to reimbursement by Hartford for the legal fees
they incurred in that litigation. The district judge ruled
that Hartford had no such duty under Illinois law (the
applicable substantive law in this diversity suit), and he
therefore granted summary judgment in favor of Hartford,
precipitating this appeal.
insurance policy limits coverage to an " injury that
arises out of any negligent act, error or omission in the
'administration' of [the insured's] 'employee
benefits program,'" " administration"
being defined to include " handling records in
connection with 'employee benefits programs.'"
There is no coverage, however, for " failure ... to
perform any obligation or to fulfill any guarantee with
respect to: (a) The payment of benefits under 'employee
benefits programs'; or (b) The providing, handling or
investing of funds related thereto." The key term in the
policy, as far as the present case is concerned, is "
negligent act," quoted in the second line of this
paragraph. Insurance law fixes a " line of demarcation
between negligent acts and breaches of contract."
Baylor Heating & Air Conditioning, Inc. v. Federated
Mutual Ins. Co., 987 F.2d 415, 420 (7th Cir. 1993)
(Indiana law). " [I]nsurance policies are presumed not
to insure against liability for breach of contract. 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." Krueger Int'l, Inc. v. Royal Indemnity
Co., 481 F.3d 993, 996 (7th Cir. 2007) (citations
omitted) (Wisconsin law). It would be absurd for an insurance
company to insure against a breach of a contract to, say, buy
a car, for then the insured could take delivery of the car,
refuse to pay for it, and require the insurer to reimburse
the seller for the car's sale price and the cost of
case is similar. Fleisher had a contractual claim to
compensation for unpaid vacation time and sick leave, and
contended that the defendants had refused to honor the claim,
thus breaking the contract. But the defendants were not
insured against a breach of contract. Hartford therefore had
no duty to defend the defendants from having to compensate
Fleisher for the breach. Nor was it obligated to pay the
defendants' litigation expenses.
defendants have another string to their bow, however--an
argument that Fleisher's claim was based not only (or
mainly) on a breach of contract but also or instead on the
defendants' having violated the Illinois Wage Payment and
Collection Act. But the only violation of the Act that they
alleged is the breach of contract.
attempt to get around the fact that the Hartford policy did
not insure against the consequences of a breach of contract,
the defendants point out that Fleisher was in charge of
maintaining the records of employees' accrual and use of
vacation time and sick leave, and they argue that through
negligence he failed to maintain accurate records for
himself. His claim for almost a million dollars in
uncompensated accruals was therefore, the defendants contend,
the result of negligence in the administration of employee
benefits, a form of misconduct that Hartford's insurance
policy did cover. As the defendants put it in their reply
brief, where the argument is stated most clearly, " The
precipitating acts which were negligent in the present case
are Defendants' ...