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Essex Insurance Co. v. Blue Moon Lofts Condominium Association

United States Court of Appeals, Seventh Circuit

June 27, 2019

Essex Insurance Company, Plaintiff-Appellee,
Blue Moon Lofts Condominium Association and The Structural Shop, Ltd., Defendants-Appellants.

          Argued April 16, 2019

          Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. l:15-cv-2806 - John Z. Lee, Judge.

          Before Easterbrook, Kanne, and Scudder, Circuit Judges.


         An Illinois state court entered a $1, 356, 435 judgment against The Structural Shop in 2009, and now TSS wants its insurer, Essex Insurance Company, to pay for it. The terms of TSS's insurance policy do not cover this claim, however. The policy covers only claims first made against TSS between May 2012 and May 2013, and the lawsuit giving rise to the Illinois court's judgment was filed against TSS in 2002. Recognizing this reality, TSS has resorted to the common law doctrine of estoppel. Illinois law estops Essex from denying coverage only if the insurer misled TSS into believing it would cover the judgment, TSS reasonably relied on Essex's misleading statement or act, and TSS suffered prejudice. The district court determined that TSS suffered no prejudice and declined to apply estoppel. The district court also rejected TSS's alternative theories of recovery. Seeing no error in the district court's rulings, we affirm.



         In 2002 the Blue Moon Lofts Condominium Association filed a complaint against TSS in an Illinois state court seeking damages arising out of TSS's allegedly defective design and construction of a building. The lawsuit began as it should have-with Blue Moon, through a process server, providing notice of the action to TSS's registered agent, Thomas Donohoe, on November 7, 2002. TSS never responded to the notice or appeared in the state court action to defend itself, leading in May 2003 to the state court declaring the company in default. Years later, in 2009, the state court entered a default judgment and set the damages amount at $1, 356, 435, tacking on costs too.

         Essex knew nothing of the state court litigation that transpired between 2002 and 2009. For good reason: Essex did not insure TSS during that period and entered the picture many years later when it sold TSS an insurance policy for claims "first made" against TSS from May 2012 to May 2013. The policy defined "first made" to mean the time when TSS received either a "written demand for money damages" or "the service of suit or institution of arbitration proceedings against the Insured."

         The parties agree that Blue Moon's 2002 claim arose outside the policy period. But universal agreement on this point is only a recent development. In the years leading to this dispute, both TSS and Essex labored under the mistaken belief that Blue Moon failed back in 2002 to serve TSS with notice of the lawsuit. Against that mistaken understanding, Blue Moon and TSS further believed that Blue Moon first made a claim under the policy in 2012, when it approached TSS to collect on the default judgment-timing that would have brought Blue Moon's claim within the terms of the May 2012 to May 2013 policy.

         This confusion set the stage for this dispute. The upshot of TSS's position is that, based on Essex's conduct during 2012 and beyond while helping TSS defend against Blue Moon's claim, principles of fairness and equity demand holding Essex liable for satisfying the default judgment entered against TSS by the Illinois court. So we need to look closer at Essex's conduct during this period.


         TSS first became aware of the default judgment in August 2012, when Blue Moon contacted Douglas Palandech, an attorney and TSS's registered agent, seeking to collect. TSS expressed surprise at the development, believing the company never received notice of Blue Moon's lawsuit. Proving as much became important, for Blue Moon's failure to provide notice back in 2002 would have supplied sufficient grounds to vacate the default judgment, and-even more critically for TSS-meant that Blue Moon had first made its claim against TSS in August 2012 and thus inside the policy's May 2012 to May 2013 coverage period.

         TSS retained Palandech as outside counsel to defend the company against Blue Moon's claim and attempts to collect the default judgment. Palandech's first order of business was asking Blue Moon to supply proof of service. For a time, these requests went unanswered. ...

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