Northbrook Property & Casualty Insurance Co. v. Applied Systems, Inc., No.1-98-1170
1st District, May 17, 2000
THIRD DIVISION
| NORTHBROOK PROPERTY & CASUALTY INSURANCE COMPANY, Plaintiff-Appellee, v. APPLIED SYSTEMS, INC., Defendant-Appellant, and HARBOR SOFTWARE, INC., Defendant. | Appeal from the CircuitCourt of Cook County. Honorable Thomas A. Hett,Judge Presiding. |
JUSTICE CERDA delivered the opinion of the court:
In this declaratory judgment action, defendant, Applied Systems, Inc. (Applied), appeals the order of the circuit courtentering summary judgment in favor of plaintiff, Northbrook Property & Casualty Insurance Company (Northbrook), on theground that Northbrook had no duty under either of two commercial liability insurance policies to defend or indemnifyApplied in a federal lawsuit filed against it by Harbor Software, Inc. (Harbor). The primary issue before us is whetherApplied provided Northbrook with timely notification of the Harbor litigation under the policies as a matter of law. Wehave jurisdiction of the case pursuant to Supreme Court Rules 301 and 303 (155 Ill. 2d R. 301, 303), and for the followingreasons we affirm.
BACKGROUND
Applied and Harbor are each businesses engaged in the area of developing and marketing computer software programs tothe insurance industry. In the 1980s, Harbor's principal product was an automated management system developed forinsurance agencies known as "Sales Center Manager" ("Sales Manager"). At the same time, Applied marketed a similar, butsomewhat less advanced, product called "Agency Manager."
On November 5, 1992, Harbor filed a six-count complaint against Applied in the federal district court of New York allegingclaims for copyright infringement, violations of the Latham Act, fraud, misappropriation of trade secrets, unfair competitionand unjust enrichment. A copy of Harbor's complaint was served upon and received by Applied's corporate counsel, MarkCamasta, on the same date.
According to the complaint's allegations, Applied contacted Jeffrey Tollaksen, the co-founder of Harbor, in late 1988 toexpress Applied's interest in either acquiring or licensing the Sales Manager software. Following a meeting betweenApplied and Harbor associates in January 1989, at which Tollaksen demonstrated the Sales Manager program underApplied's assurances of confidentiality, the parties commenced negotiations regarding the formulation of an agreement thatwould grant Applied the exclusive licensing rights to Sales Manager.
During the negotiation period, Tollaksen completed, at the request of Applied, a successful integration of Sales Managerwith Agency Manager, so as to allow the two programs to operate together. Once the integration of the two programs wascomplete, Applied abruptly ended negotiations regarding the exclusive licensing agreement and informed Harbor it was nolonger interested in marketing the Sales Manager program.
Shortly thereafter, Applied offered a new version of Agency Manager which allegedly performed substantially all of theautomated marketing functions of Sales Manager, as well as many other program features. Applied allegedly copied theSales Manager software and integrated it with the old version of Agency Manager. According to the complaint, Applied"never intended to enter into an exclusive licensing agreement with *** [it], but instead sought to learn *** [its] tradesecrets, to steal the source code for the [Sales Manager] Program, to fraudulently enlist Mr. Tollaksen's services in adaptingthe [Sales Manager] Program for Agency Manager, and to unfairly compete with" it. The complaint explains that Harborfirst discovered Applied's wrongful conduct when Tollaksen saw an advertisement in an industry publication announcingthe new version of Agency Manager.
At the time Harbor filed its lawsuit, Applied was insured under a commercial general liability insurance policy ("CGLPolicy") and a commercial Excess/Umbrella liability insurance policy ("Excess/Umbrella Policy") (collectively referredherein at times as the "policies"), both issued by Northbrook. Each policy had an effective coverage period of April 1, 1992to April 1, 1993.
Coverage B of the CGL Policy, entitled "Personal and Advertising Injury Liability", requires Northbrook in part to"pay those sums that *** [Applied] becomes legally obligated to pay as damages because of *** advertising injury to whichthis insurance applies," and further "to defend any suit seeking those damages." Coverage B specifically provides coveragefor "advertising injury caused by an offense committed in the course of advertising [Applied's] goods, products or services"during the policy period.
The Excess/Umbrella Policy contains two coverage forms, Coverage A and Coverage B. Coverage A, which is entitled"Excess Liability Over Underlying Insurance," provides liability coverage over the limits provided in applicableunderlying insurance as listed in the underlying insurance schedule, and is subject to all the terms and conditions of theunderlying policy.(1)
Under Coverage B, entitled "Umbrella Liability Over the Retained Limit or Insurance Not Listed in the Schedule ofUnderlying Insurance," umbrella coverage is provided over the amount in which Applied is self-insured or the limits ofinsurance not listed in the underlying insurance schedule. The record does not disclose if any other underlying insurance isapplicable, but it does reveal that Applied has a retained limit of $10,000.
Per this coverage provision, Northbrook is required to pay those sums Applied "becomes legally obligated to pay asdamages because of injury in excess of the retained limit *** or any insurance not specified as underlying insurance,whichever is greater, caused by an occurrence during the policy period[.]" Northbrook is further obligated to "investigateand defend any claim or suit alleging damages insured by Coverages A and/or B" provided no other insurer is obliged toundertake such an investigation or defense. The term "injury" as used in Coverage B specifically includes "advertisinginjury."
Both polices contain a "Conditions" section which discusses, inter alia, the insured's duties in the event of an occurrence,claim or suit. The CGL Policy provides in relevant part:
"b. If a claim is made or suit is brought against any insured, [Applied] must:
***
(2) Notify [Northbrook] as soon as practicable.
[Applied] must see to it that [Northbrook] receive written notice of the claim or suit as soon as practicable.
c. [Applied] and any other involved insured must:
(1) Immediately send [Northbrook] copies of any demands, notices, summonses or legal papers received inconnection with the claim or suit."
The Excess/Umbrella Policy imposes similar duties upon Applied, providing:
"b. If a claim is received by any insured, [Applied] must:
***
(2) Notify [Northbrook] as soon as practicable.
[Applied] must see to it that [Northbrook] receive written notice of the claim as soon as practicable.
c. [Applied] and any other involved insured must:
(1) Immediately send [Northbrook] copies of any demands, notices, summonses or legal papers received inconnection with the claim or suit."
The term "suit" is defined by the CGL Policy, in part, as "a civil proceeding in which damages because of *** advertisinginjury to which this insurance applies are alleged." The Excess/Umbrella Policy similarly defines "suit" to mean "a civilproceeding in which damages because of injury to which this insurance applies are alleged."
As part of the discovery process in the underlying litigation, Applied was served with a "Third Set of Document Requests"by Harbor on December 15, 1993. In this document, Harbor requested Applied to produce, inter alia, "all documents usedin connection or intended to be used in connection with the marketing of the [upgraded version of Agency Manager]."
Approximately four months after its receipt of Harbor's third document request, in late March 1994, Applied tendered itsdefense in the Harbor litigation by sending notice of the case to its insurance agent, the Lambrecht Agency. Appliedspecifically sent the agency a statement prepared by Camasta describing Applied's understanding of the coverage affordedunder Coverage B of the CGL Policy in relation to the Harbor lawsuit. Camasta explains, both in Applied's statement andin an affidavit filed in connection with Northbrook's summary judgment motion, that Applied did not believe from theaverments of the Harbor complaint that Harbor sought damages for any alleged advertising injury caused by the marketingof the new Agency Manager software. According to Camasta, he "assumed" coverage was unavailable because the claimsasserted in Harbor's complaint resembled intentional tortious conduct, which he believed was excluded under the policies.Camasta did not base his assumption on any particular provision in the policies, but rather on his understanding fromstudies in law school. Camasta further explains Applied never evaluated the Harbor complaint to assess whether coveragewas afforded by the policies because the advertising injury provisions therein were, in his words, "beyond ourcomprehension."
Camasta maintains Applied understood for the first time that Harbor may pursue an advertising injury claim in December1993 when it received Harbor's request for the upgraded program's marketing materials. Shortly thereafter, Camastaexplains he reviewed some legal materials discussing advertising injury coverage. Following his own investigation andresearch of the subject, Camasta believed Northbrook may be obliged under the CGL Policy to defend Applied in theHarbor litigation and to pay any resulting damages. Camasta's statement to the Lambrecht Agency makes no demand for adefense or indemnification under the Excess/Umbrella Policy.
The Lambrecht Agency advised Northbrook of Applied's tender of defense on April 6, 1994. In response, Northbrookinformed Applied by letter dated April 22, 1994 that, for various reasons including the late notification of the Harbor suit, itwas disclaiming any coverage under the CGL Policy. Northbrook's letter does not disclaim its duties under theExcess/Umbrella Policy.
On March 2, 1995, Northbrook filed the instant declaratory judgment action against Applied and Harbor, as a necessaryparty, seeking a determination of its duties under the policies. In particular, Northbrook sought a judicial declaration that ithad no duty to defend or indemnify Applied in the Harbor litigation under either the CGL or Excess/Umbrella policies.Northbrook specifically asserted, inter alia, that Applied failed to provide timely notice of Harbor's lawsuit and,consequently, forfeited any claims of coverage under the policies.
During the pendency of Northbrook's declaratory judgment action, the Harbor case proceeded to trial in mid 1996, and inOctober of that year, a federal jury found that Applied had wilfully and maliciously misappropriated certain Harbor tradesecrets contained in the Sales Manager program. A verdict was entered in favor of Harbor and against Applied in the totalamount of $5 million.
In April 1997, Northbrook successfully moved for summary judgment pursuant to section 2-1005 of the Code of CivilProcedure (735 ILCS 5/2-1005 (West 1996)), and Applied's timely appeal followed.
ANALYSIS
The purpose of summary judgment under section 2-1005 of the Code is to determine whether there exists any genuineissues of material facts between the parties. Hubble v. O'Connor, 291 Ill. App. 3d 974, 979, 684 N.E.2d 816, 820 (1997).Summary judgment is appropriate where the pleadings, depositions, and admissions on file, together with any affidavits,present no genuine issue of material fact and show that the moving party is entitled to judgment as a matter of law. 735ILCS 5/2-1005(c) (West 1998); Hartford Accident and Indemnity Co. v. Rush-Presbyterian-St. Luke's Medical Center, 231Ill. App. 3d 143, 147, 595 N.E.2d 1311, 1313 (1992). Our review of an order granting summary judgment is conducted denovo (John Deere Insurance Company v. Allstate Insurance Company, 298 Ill. App. 3d 371, 376, 698 N.E.2d 635, 639(1998)), and we will construe all pleadings, depositions and affidavits in a light most favorable to the nonmoving party.Soderlund Brothers, Inc. v. Carrier Corp., 278 Ill. App. 3d 606, 614, 663 N.E.2d 1, 7 (1995).
In its summary judgment motion, Northbrook argues in part that it has been relieved of any contractual duties to provideApplied with defense costs and indemnification of the Harbor jury's verdict by Applied's failure to give it timely notice ofHarbor's complaint. As the record shows, Harbor filed its action against Applied on November 5, 1992, and Applied's in-house counsel received notice of the complaint on the same date. Yet, Applied waited until April 1994 to advise Northbrookof the Harbor suit, seventeen months after the underlying complaint was served.
We initially note that Applied, in giving notice to Northbrook, only tendered a defense under the CGL Policy, and did notspecifically reference coverage under the Excess/Umbrella Policy. Notwithstanding, Applied's notice was applicable underboth polices because notice by an insured to its insurance company is sufficient to charge the insurer on all policies runningin the insured's favor. See Casualty Ins. Co. v. E.W. Corrigan Construction Co., 247 Ill. App. 3d 326, 332-33 617 N.E.2d228, 233 (1993) (stating foregoing rule with regard to notice of occurrence, and holding there "if an insured notifies itsinsurer of an occurrence and references its workers' compensation policy, it should be considered notice in regards to anygeneral liability policy the insured might have with the same insurer").
An insured's duties are controlled by the terms and conditions of its insurance contract. American Country Ins. Co. v.Bruhn, 289 Ill. App. 3d 241, 247, 682 N.E.2d 366, 370 (1997). A notice of suit provision in an insurance liability policy isnot a mere technical requirement for the convenience of the insurer, but is a valid condition precedent to the triggering ofthe insurer's contractual duties. Aetna Cas. & Sur. Co. of Illinois v. Allsteel, Inc., 304 Ill. App. 3d 34, 40, 709 N.E.2d 680,685 (1999); Cincinnati Ins. Co. v. Baur's Opera House, 296 Ill. App. 3d 1011, 1015, 694 N.E.2d 593, 596 (1998)). Wherethe insured fails to comply with a notice provision, the insurer will be relieved from its duties to defend and indemnifyunder the policy. See American Family Mutual Ins. Co. v. Blackburn, 208 Ill. App. 3d 281, 291, 566 N.E.2d 889, 896(1991); Casualty Indemnity Exchange v. Village of Crete, 731 F.2d 457, 460 (1984); INA Ins. Co. of Illinois v. City ofChicago, 62 Ill. App. 3d 80, 85, 379 N.E.2d 34, 38 (1978).
A notice of suit requirement in a policy serves the purpose of enabling the insurer to conduct a timely and thoroughinvestigation of the insured's claim (See American States Ins. Co. v. National Cycle, Inc., 260 Ill. App. 3d 299, 310-11, 631N.E.2d 1292, 1300 (1994)), as well as to locate and participate in the defense of the insured. Baur's Opera House, 296 Ill.App. 3d at 1018, 694 N.E.2d at 598; see also Couch on Insurance