Pekin Insurance Co. v. KCJ Consulting, Inc.

2020 IL App (4th) 190831-U

• Court: Appellate Court of Illinois
• Decided: May 21, 2020
• Docket: 4-19-0831
• Status: Unpublished

Opinion

NOTICE FILED This order was filed under Supreme 2020 IL App (4th) 190831-U May 21, 2020 Court Rule 23 and may not be cited Carla Bender as precedent by any party except in NO. 4-19-0831 the limited circumstances allowed 4th District Appellate under Rule 23(e)(1). Court, IL IN THE APPELLATE COURT

OF ILLINOIS

FOURTH DISTRICT

PEKIN INSURANCE COMPANY, ) Appeal from the Plaintiff-Appellant, ) Circuit Court of and ) Coles County KCJ CONSULTING, INC., an Illinois Corporation; ) No. 19MR114 KIRBY C. JOHNSON, Individually and d/b/a ) Positively 4th Street Records; and MINERVA ) ) Honorable SPORTSWEAR, INC., an Illinois Corporation, ) Mitchell K. Shick, Defendants-Appellees. ) Judge Presiding.

JUSTICE CAVANAGH delivered the judgment of the court. Justices DeArmond and Harris concurred in the judgment.

ORDER ¶1 Held: The trial court erred in granting defendant’s motion to stay.

¶2 Plaintiff, Pekin Insurance Company (Pekin), filed a declaratory judgment action

against its insured, defendants Kirby C. Johnson and his affiliates (Johnson), challenging its duty

to defend Johnson in an underlying federal lawsuit. The circuit court granted Johnson’s motion to

stay and Pekin filed this interlocutory appeal, claiming the court abused its discretion. We reverse.

¶3 I. BACKGROUND

¶4 In February 2019, Johnson was sued in federal court by Minerva Sportswear, Inc.

(hereinafter Minerva) for, generally speaking, infringing upon Minerva’s exclusive contractual

right with the Illinois High School Association (IHSA) to advertise and provide merchandise for

the high school state finals track meet. Minerva alleged four grounds for relief: (1) a violation of section 43(a) of the federal Lanham Act (the sale of goods using a false designation or false

representation) (15 U.S.C. § 1125(a) (2012)); (2) a violation of the state Uniform Deceptive Trade

Practices Act (passing off goods as those of another or misrepresenting that goods have

sponsorship) (815 ILCS 510/2(a) (West 2018)); (3) a state violation of tortious interference with

prospective economic advantage; and (4) unjust enrichment based on a tort theory. In other words,

Minerva claimed Johnson advertised and produced t-shirts and other merchandise with “state

finals” wording and sold this merchandise under the guise that it was authorized by IHSA and/or

produced by Minerva. Pekin has been defending Johnson in the federal lawsuit under a reservation

of rights.

¶5 In March 2019, Pekin filed a declaratory judgment action in the circuit court of

Coles County seeking an order declaring that Pekin had no duty to defend Johnson in the federal

lawsuit in light of the allegations in the federal complaint and the language of the applicable

insurance policies. Pekin has insured Johnson under a commercial general liability policy since

October 2014 with annual renewals. In its complaint, Pekin asserted it had no duty to defend

Johnson because the federal complaint alleges conduct not covered under any Pekin insurance

policy either based on the policy exclusions or the date of the alleged violations (Minerva alleges

Johnson has engaged in the alleged conduct since May 2006). Pekin also sought reimbursement of

costs spent on Johnson’s defense under its reservation of rights.

¶6 In August 2019, Johnson filed a motion to stay in the declaratory judgment action

until the federal lawsuit has been resolved. Johnson claimed the declaratory judgment action

involved the same facts that will determine liability in the federal lawsuit, i.e., whether Johnson

disparaged Minerva’s products and, if so, to what level of culpability. That is, the answer to these

questions, according to Johnson, would determine whether Pekin has a duty to defend Johnson

-2- based on the provisions of the insurance policy. And, Johnson claims, if those questions are

answered in this declaratory judgment action before the federal lawsuit is resolved, the parties

could be collaterally estopped from arguing otherwise.

¶7 In response to Johnson’s motion to stay, Pekin claimed resolution on the issue of

whether it had a duty to defend Johnson in the federal lawsuit did not require a finding on an issue

of ultimate fact. Instead, according to Pekin, the circuit court need only look to the provisions of

the insurance policy and the allegations in the federal complaint to see that coverage was not

triggered. Or, in the alternative, if coverage seemed to be triggered by the allegations in the federal

complaint, Pekin still had no duty to defend because of certain policy exclusions for intentional or

knowing violations.

¶8 We review the allegations in the underlying complaint and the applicable terms of

the insurance policy.

¶9 A. Minerva’s Federal Complaint

¶ 10 With regard to the allegations against Johnson, Minerva, in its first claim, alleged

Johnson, in advertising its products, “intentional[ly], willful[ly], and [with] malicious intent” made

“false or misleading descriptions of fact and false or misleading representations of fact, that

misrepresent the nature, characteristics, and qualities of their goods” in violation of section 43(a)

of the Lanham Act (15 U.S.C. § 1125(a) (2012)). In its second claim, Minerva alleged Johnson

“willfully caused” irreparable injury to the public and Minerva by performing acts that constitute

violations of the Uniform Deceptive Trade Practices Act (815 ILCS 510/2(a) (West 2018)). As

noted, these counts allege intentional and knowing conduct.

¶ 11 In its third claim—the state tort claim, Minerva alleged Johnson “maliciously,

fraudulently, willfully, and/or with gross negligence” interfered with Minerva’s expected

-3- economic advantage. In its fourth claim, Minerva alleged Johnson was unjustly enriched, and

Minerva was impoverished from each sale of Johnson’s state final merchandise.

¶ 12 B. Pekin’s Insurance Policy

¶ 13 Pekin issued Johnson a one-year commercial liability policy, beginning October

20, 2014, and renewing annually thereafter. The policy covered Johnson for “bodily injury” and

“property damage” caused by an “occurrence” within the “coverage territory.” The policy also

provided coverage for “personal and advertising injury liability.” The policy stated:

“SECTION I – COVERAGES

***

COVERAGE B PERSONAL AND ADVERTISING INJURY

LIABILITY

1. Insuring Agreement

a. We will pay those sums that the insured becomes legally obligated

to pay as damages because of ‘personal and advertising injury’ to which this

insurance applies. We will have the right and duty to defend the insured

against any ‘suit’ seeking those damages. However, we will have no duty

to defend the insured against any ‘suit’ seeking damages for ‘personal and

advertising injury to which this insurance does not apply. We may, at our

discretion, investigate any offense and settle any claim or ‘suit’ that may

result.

2. Exclusions

This insurance does not apply to:

-4- a. Knowing Violation of Rights of Another

‘Personal and advertising injury’ caused by or at the direction of the

insured with the knowledge that the act would violate the rights of another

and would inflict ‘personal and advertising injury.’

b. Material Published With Knowledge of Falsity

‘Personal and advertising injury’ arising out of oral or written

publication material, if done by or at the direction of the insured with

knowledge of its falsity.

c. Material Published Prior to Policy Period

‘Personal and advertising injury’ arising out of oral or written

publication of material whose first publication took place before the

beginning of the policy period.

g. Quality Or Performance of Goods—Failure to Conform to

Statements

‘Personal and advertising injury’ arising out of the failure of goods,

products or services to conform with any statement of quality or

performance made in your ‘advertisement.’

i. Infringement Of Copyright, Patent, Trademark Or Trade Secret

‘Personal and advertising injury” arising out of the infringement of

copyright, patent, trademark, trade secret or other intellectual property

rights.

-5- However, this exclusion does not apply to infringement, in your

‘advertisement’, of copyright, trade dress or slogan.

l. Unauthorized Use Of Another’s Name or Product

‘Personal and advertising injury’ arising out of the unauthorized use

of another’s name or product in your e-mail address, domain name or

metatag, or any other similar tactics to mislead another’s potential

customers.”

SECTION V - DEFINITIONS

14. ‘Personal and advertising injury’ means injury including consequential

‘bodily injury’, arising out of one or more of the following offenses:

d. Oral or written publication, in any manner, of material that slanders or

libels a person or organization or disparages a person’s or organization’s

goods, products or services;

g. Infringing upon another’s copyright, trade dress or slogan in your

‘advertisement.’ ”

¶ 14 After considering the parties’ respective arguments, the circuit court found, without

specificity, “that several of the defenses to coverage raised by [Pekin] in these cases would require

-6- the court to make a determination on an issue of ultimate fact in the underlying federal litigation

that would bind the parties. Therefore, the motion[] to stay filed by [Johnson is] well taken and is

granted[.]”

¶ 15 This appeal followed.

¶ 16 II. ANALYSIS

¶ 17 In this interlocutory appeal, Pekin argues the circuit court abused its discretion in

granting Johnson’s motion to stay because the declaratory-judgment action does not involve a

determination of ultimate fact in the underlying case. Pekin insists the stay was entered in error

because the “only issue is actually whether the complaint contains allegations which trigger a duty

to defend.”

¶ 18 Because a stay is injunctive in nature, this court has jurisdiction to review the stay

order under Rule 307(a)(1) (eff. Feb. 26, 2010), which allows appeals from interlocutory orders

“granting, modifying, refusing, dissolving, or refusing to dissolve or modify an injunction.” See

Blumenthal v. Brewer, 2016 IL 118781, ¶ 39 (“[T]he denial of a stay of trial court proceedings is

treated as a denial of a request for a preliminary injunction and is appealable as a matter of right

under Illinois Supreme Court Rule 307(a)(1).”).

¶ 19 A. Duty to Defend

¶ 20 In Illinois, an insurer is obligated to defend an action against an insured where the

claims against the insured are covered “actually or potentially” by the insured’s policy. Illinois

Masonic Medical Center v. Turegum Insurance Co., 168 Ill. App. 3d 158, 162 (1988). An insurer’s

“duty to defend includes the right to control the defense so as to allow insurers to protect their

financial interest in the outcome of the litigation and to minimize unwarranted liability claims.”

Id. at 163.

-7- ¶ 21 In determining whether an insurer has a duty to defend its insured, a court looks to

the allegations in the underlying complaint and compares them to the relevant provisions of the

insurance policy. Outboard Marine Corp. v. Liberty Mutual Insurance Co., 154 Ill. 2d 90, 107-08

(1992). “If the facts alleged in the underlying complaint fall within, or potentially within, the

policy’s coverage, the insurer’s duty to defend arises.” Id. at 108. However, if it is clear from the

face of the complaint that the allegations fail to state facts that bring the case within, or potentially

within, the policy’s coverage, an insurer may properly refuse to defend. State Farm Fire &

Casualty Co. v. Hatherly, 250 Ill. App. 3d 333, 336 (1993) (quoting United States Fidelity &

Guaranty Co. v. Wilkin Insulation Co., 144 Ill. 2d 64, 73 (1991)).

¶ 22 Ordinarily, in a declaratory judgment action on an insurer’s duty to defend the

insured, courts follow the eight-corners rule, comparing the four corners of the underlying

complaint with the four corners of the insurance contract. Country Mutual Insurance Co. v. Dahms,

2016 IL App (1st) 141392, ¶ 37. “[A] court ordinarily looks first to the allegations in the underlying

complaint and compares those allegations to the relevant provisions of the insurance policy,” and

“[i]f the facts alleged in the underlying complaint fall within, or potentially within, the policy’s

coverage, the insurer’s duty to defend is triggered.” (Emphasis in original and internal quotation

marks omitted.) Id.

¶ 23 We say “ordinarily” because there is an exception to the eight-corners rule: in

deciding whether the insurer has a contractual duty to defend the insured, the court may consider

factual matters external to the underlying complaint and the insurance policy “as long as [these

factual matters] do not bear upon issues in the underlying litigation” (Millers Mutual Insurance

Ass’n of Illinois v. Ainsworth Seed Co., 194 Ill. App. 3d 888, 889 (1989)) or “impact upon the

underlying plaintiff’s ability to pursue a theory of liability” (Fremont Compensation Insurance

-8- Co. v. Ace-Chicago Great Dane Corp., 304 Ill. App. 3d 734, 743 (1999)). Thus, the eight-corners

rule bars extrinsic evidence only if, as a result of the proposed declaratory judgment, the plaintiff

in the underlying lawsuit could be hampered by collateral estoppel. Maryland Casualty Co. v.

Peppers, 64 Ill. 2d 187, 197 (1976). Otherwise, extrinsic evidence is admissible on the question of

the insurer’s duty to defend the insured. “The only time such [extrinsic] evidence should not be

permitted is when it tends to determine an issue crucial to the * * * underlying lawsuit” (Pekin

Insurance Co. v. Wilson, 237 Ill. 2d 446, 461 (2010)), in which case the requested factual

determination is regarded as “premature” (Peppers, 64 Ill. 2d at 197). (Internal quotation marks

omitted.)

¶ 24 Pekin does not seek a factual determination on whether defendants did, in fact,

market and sell State Finals merchandise to the detriment of Minerva, whether they interfered with

Minerva’s status as an exclusive vendor, or whether any of the other allegations in the underlying

complaint are true. Instead, Pekin seeks only a determination that the allegations in Minerva’s

complaint do not trigger coverage under the Pekin policies, regardless of their truth or falsity. This

determination requires only the application of the eight-corners rule—the comparison of the

allegations in the underlying complaint with the language of the policy.

¶ 25 This is not the proceeding to decide whether Pekin is obligated to defend and

indemnify Johnson. Nor is it the proceeding to determine whether Johnson committed the acts

alleged in the federal lawsuit. Those issues are beyond the scope of this interlocutory appeal. We

determine only whether the trial court’s decision to grant the stay was appropriate.

¶ 26 B. Motion to Stay

¶ 27 We will not disturb a circuit court’s decision on a motion to stay absent an abuse

of discretion. Pekin Insurance Co. v. Johnson-Downs Construction, Inc., 2017 IL App (3d)

-9- 160601, ¶ 10. “An abuse of discretion occurs if the court ‘acted arbitrarily without the employment

of conscientious judgment or, in view of all the circumstances, exceeded the bounds of reason and

ignored recognized principles of law so that substantial prejudice resulted.’ ” Id. (quoting Cullinan

v. Fehrenbacher, 2012 IL App (3d) 120005, ¶ 10).

¶ 28 Applicable to the analysis of determining whether the stay was appropriately

entered is the Peppers doctrine. See Peppers, 64 Ill. 2d at 197. Under the Peppers doctrine, it is

inappropriate for a circuit court to decide an issue of ultimate fact critical to the underlying case.

Id. The concern is that prematurely adjudicating such issues in the declaratory judgment action

would result in collateral estoppel in the underlying litigation. TIG Insurance Co. v. Canel, 389

Ill. App. 3d 366, 375 (2009). If such a risk is present, the court should enter a stay until the pertinent

issue in the underlying case has been adjudicated. This is so because the underlying tort case, as

opposed to the declaratory-judgment case, is a better forum within which to determine the

parameters of Johnson’s conduct. See State Farm Fire & Casualty Co. v. John, 2017 IL App (2d)

170193, ¶ 23; Peppers, 64 Ill. 2d at 197.

¶ 29 As stated, Pekin claims it owes no duty to defend or indemnify Johnson because

the federal complaint does not allege any conduct that would be covered under the policy. For

example, Pekin claims, (1) there are no allegations of bodily injury, property damage, or “personal

and advertising injury,” (2) the complaint seeks damages for willful, intentional, and malicious

conduct, and (3) Minerva alleges Johnson was “palming off” of merchandise—a claim not covered

under the policy. Pekin has not asked the circuit court to make a determination as to the nature of

Johnson’s actual conduct. Thus far, Pekin has only asked the court to consider Minerva’s

allegations against Johnson and whether those allegations fall within the coverage of its policy.

- 10 - ¶ 30 Confronted with these issues in the declaratory judgment action, the circuit court

will not be asked to determine an ultimate fact. Instead, the issue is whether Johnson is alleged to

have caused Minerva’s injuries, as opposed to whether Johnson, in fact, caused the injuries. To

determine if Pekin has a duty to defend Johnson in the federal lawsuit, the court will compare the

allegations in Minerva’s complaint to the relevant policy language. That is, the court will

determine if there are allegations that implicate the policy’s coverage. This will not require the

court to make a factual finding regarding the cause of Minerva’s alleged injuries.

¶ 31 For example, per Johnson’s arguments, the circuit court would only need to

examine the underlying complaint to determine whether Minerva alleged disparagement and the

insurance policy to determine whether coverage was provided. The court would not be required to

determine whether Johnson’s conduct actually constituted disparagement. With respect to

intentional versus negligent conduct, again, Pekin is only arguing that the federal complaint alleges

solely intentional conduct. Thus, the court’s examination would be limited to the allegations of the

federal complaint to determine what was being alleged by Minerva. It would not be required to

evaluate Johnson’s actions and determine whether they were, in fact, intentional. See Johnson-

Downs Construction, 2017 IL App (3d) 160601, ¶ 13 (holding the circuit court could make a

determination of whether the complaint contained any allegations that the insurer had a duty to

defend by comparing the complaint to the language in the insurance policy without deciding

liability).

¶ 32 Under these circumstances, a stay was unwarranted. Thus, we find the circuit court

abused its discretion in granting the motion to stay. The declaratory judgment action can proceed

to resolution prior to the conclusion of the underlying federal lawsuit.

¶ 33 III. CONCLUSION

- 11 - ¶ 34 For the reasons stated, we reverse the circuit court’s order granting Johnson’s

motion to stay.

¶ 35 Reversed.

- 12 -