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In Travelers Indemnity Co. v. Gosline (2003 WL 21230376, *2 [ND NY May 27, 2003, No. 01-CV-794 (NAM/RFT)]), the United States District Court for the Northern District of New York noted that the insurance law in Illinois bars contribution and indemnity claims against insureds of insolvent insurers since "it is evidently clear that the Illinois legislature did not want solvent insurers to be reimbursed from the proceeds of the Guaranty Fund."
Summary of this case from McPherson v. Cross Cnty. Sav. BankOpinion
No. 01-CV-794 (NAM/RFT)
May 27, 2003.
MEMORANDUM DECISION AND ORDER
Plaintiff, Travelers Indemnity Company ("Travelers" or "Plaintiff"), brought this diversity action against William V. Gosline, d/b/a Bill's Dustbuster Janitorial Service ("Gosline"), to recover for alleged property damage. See generally Dkt. No. 1, Compl. In order to fully appreciate the difficult issue presently before this Court, a recitation of the procedural history is warranted.
I. BACKGROUND
Travelers leased space in the Northway Plaza Shopping Center in Queensbury, New York, from its owner, Northway Plaza Associates ("Northway Plaza"), for its telecommunication equipment. Dkt. No. 1 at ¶ 3. The incident giving rise to Plaintiff's suit occurred on October 13, 1999, wherein a "Y" attachment valve connected to a sink faucet in a janitorial closet overflowed causing serious water damage to the floor below, the space that Travelers leased. Id. at ¶¶ 4-6. Plaintiff alleges significant damage to its business property has incurred additional expenses totaling in excess of $580,000. Id. at ¶ 7. On May 24, 2001, Plaintiff brought suit for negligence against Gosline, the janitorial company hired by Northway Plaza, alleging that in installing the "Y" attachment Gosline owed a duty of care to Travelers and breached that duty when they, inter alia, negligently installed the "Y" attachment. Id. at ¶¶ 9-11. Gosline denied the allegations contained in Plaintiff's complaint. Dkt. No. 3, Gosline Answer.
After preliminary discovery had been completed, Defendant Gosline assessed that other parties had significantly contributed to Plaintiff's damages and, thereafter, on November 1, 2001, sought leave from the Court to file a third-party action. Dkt. Nos. 10-12. Such leave was granted on November 26, 2001. Dkt. No. 13. On January 8, 2002, in compliance with that Order, Gosline filed a Third-Party Complaint asserting alternate theories of liability giving rise to contribution and/or indemnification claims against the following Third-Party Defendants:
(1) Kelly and Dutch Real Estate, Inc. — A New York Corporation with its primary place of business in New York and Principal Owner and/or Shareholder of Northway Plaza Associates, LLC, and managers of Northway Plaza Shopping Center;
(2) Northway Plaza Associates, LLC ("Northway Plaza") — A New York Limited Liability Company with its primary place of business in New York and Owner of Northway Plaza Shopping Center;
(3) "Kenny Doe" — Employee of Kelly and Dutch Real Estate, Inc. and/or Northway Plaza Associates who performs maintenance work at Northway Plaza Shopping Center;
(4) Marcus Noble, Inc.; Pitcher Noble, Inc.; Pitcher Noble, Inc. d/b/a/ Noble True Value; Ken Noble; Ken Noble d/b/a/ Noble True Value; Noble True Value (Collectively referred to as "Noble True Value" or "Noble") — New York Corporations doing business in New York and Individuals residing in New York who are the distributors and sellers of subject "Y" attachment; and
(5) L.R. Nelson Corporation ("L.R. Nelson" or "Nelson") — Incorporated in Delaware with principal place of business in Illinois, doing business in New York, and manufacturer of subject "Y" attachment.
Gosline asserts that Northway Plaza Associates, LLC and/or Kelly and Dutch Real Estate, Inc. hired "Kenny Doe" to perform, among other things, maintenance tasks at the premises known as Northway Plaza Shopping Center. Dkt. No. 14 at ¶¶ 8-9. Although Gosline admits that one of his employees bought and installed the "Y" attachment, it was, in their assesment, Kenny Doe who on the evening of October 12, 1999, and the early morning of October 13, 1999, allegedly utilized the water faucet in the janitorial closet to fill a tank of an "insecticide/pest spraying mechanism" with water and, in doing so, misused the faucet by failing to turn it off thereby damaging the "Y" attachment. Id. at ¶¶ 14-18. Thus, Kenny Doe is liable for his negligence and, in turn, Northway Plaza and Kelly and Dutch Real Estate are liable under theories of common law and respondeat superior. Id. at ¶¶ 21-37.
Gosline asserts the theory that the subject "Y" attachment was defective at the time his employee purchased it from Noble True Value and as such, Noble is liable in strict liability as the seller and distributor of the attachment. Dkt. No. 14 at ¶¶ 38-43. In the alternative, Gosline asserts that Noble is liable for failure to warn customers of the dangers in using the "Y" attachment when other similar products sold by Noble contain such an explicit warning. Id. at ¶¶ 44-49. Finally, Gosline asserts that Noble breached both explicit and implicit warranties including warranty of merchantability, fit for particular purpose, and defects in material and workmanship. Id. at ¶¶ 50-53.
Gosline asserts that the "Y" attachment was inherently defective by "design, construction, and/or manufacture" at the time it left L.R. Nelson's hands. As such, L.R. Nelson, the manufacturer of the product, would be liable for strict liability, negligence, and breach of express and implied warranties. Dkt. No. 14 at ¶¶ 54-69.
Dkt. No. 14.
After each relevant party was joined in the action, a slew of cross claims ensued amongst all the Third-Party Defendants, each pointing the blame in another's direction. Dkt. Nos. 17, 21, 22, 23, 26, 27.
Amid all these entanglements, on October 3, 2001, L.R. Nelson's insurance carrier, Reliance Insurance Company, went into liquidation. See Dkt. No. 53, Ex. A, Order of Liquidation. At the time the Third-Party Complaint was filed, L.R. Nelson was represented by the Napierski Law Firm as retained by Reliance in accordance with their duty to defend. Such representation continued until June or July of 2002, when the Illinois Insurance Guaranty Fund ("Guaranty Fund" or "Fund") assumed L.R. Nelson's defense and accordingly retained Ainsworth, Sullivan, Tracy, Knauf, Warner Ruslander, P.C. ("Ainsworth-Sullivan"). The Court received notice of this change on September 13, 2002. Dkt. No. 40. In the interim, Travelers sought leave and was permitted to file a Rule 14(a) Complaint against Third-Party Defendants True Noble and L.R. Nelson. Dkt. No. 36, Stipulation Order; Dkt. No. 38, Rule 14(a) Compl. filed on July 24, 2002. On October 25, 2002, L.R. Nelson filed their Answer to the 14(a) Complaint and included an affirmative defense asserting that, under the Illinois statutory scheme governing the Guaranty Fund, both the Fund and Nelson are immune from the suits being asserted against them.
Travelers asserts claims against L.R. Nelson and Noble True Value for negligence, strict liability, and breach of warranty.
See 215 ILL. COMP. STAT. ANN. 5/532 et seq. (West 2003); see also infra, Part II.A.3.(a) for a more detailed discussion of the specific statute.
All parties to the lawsuit were put on notice as to the presence of the Illinois Statute and its potential role in shielding Nelson's liability as early as September 20, 2002. Thereafter, L.R. Nelson attempted to assert the same affirmative defense in its proposed amended answers to Gosline's Complaint, Noble True Value's cross-claims, and Northway Plaza's cross-claims by circulating those amendments to all parties accompanied by a stipulation. Dkt. No. 50, Ex. R. Travelers and Northway Plaza were the only parties to execute a stipulation agreeing to the amendments; thus the present motion ensued.
The Court held a discovery conference on this date to resolve a dispute that arose regarding the inspection of the $3 "Y" attachment valve which may have caused the water damage. Dkt. No. 41, Order regarding inspection and testing of plastic valve. At that juncture, L.R. Nelson's counsel raised the issue of the Illinois Statute and the ancillary benefits to Nelson. Judge's Confidential Notes ("Judges Notes" or "JN") dated September 25, 2002.
II. DISCUSSION
Pending is L.R. Nelson's Motion to Amend several of his Answers to other Third-Party Defendants as well as Third-Party Plaintiff Gosline pursuant to Rule 15 of the Federal Rules of Civil Procedure in order to add an affirmative defense. Dkt. No. 50. Specifically, Nelson seeks permission to amend (1) its Answer to the cross-claim of the Noble Third-Party Defendants (Dkt. No. 27); (2) its Answer to the cross claim of the Northway Plaza Third-Party Defendants; and (3) its Answer to Defendant/Third-Party Plaintiff Gosline's Third-Party Complaint (Dkt. No 22) in order to add the affirmative defense that pursuant to the statutes governing the Illinois Insurance Guaranty Fund, all claims against Nelson in the nature of subrogation, contribution, and/or indemnity cannot be maintained and should be dismissed. Dkt. No. 50. Noble True Value and Gosline oppose the Motion. Dkt. Nos. 52-53. All other parties, as aforementioned, have stipulated to the amended answer. For the reasons that follow, L.R. Nelson's Motion to Amend is denied.
It appears that Nelson's original answer to the cross claim of the Northway Plaza Defendants has not been filed with the Clerk of the Court. As the Northway Plaza Defendants have stipulated to the proposed amendment and appear to have been properly served with the original Answer, the issue is not determinative within this motion. However, so as to maintain a complete record of the action, Nelson is directed to file their original answer to Northway Plaza's cross claim with the Clerk of the Court within five (5) days of this Order so it can be properly docketed.
A. Standard for Motion to Amend
FED. R. CIV. P. 15(a) states, in pertinent part, that leave to amend a pleading should be "freely given when justice so requires." Indeed, leave to amend should be denied only in the face of undue delay, bad faith, undue prejudice to the nonmovant, futility of amendment, or where the movant has repeatedly failed to cure deficiencies in previous amendments. Foman v. Davis, 371 U.S. 178, 182 (1962); Kropelnicki v. Siegel, 2002 WL 924443, at **9 (2d Cir. May 8, 2002) (citing Chill v. General Electric, Co., 101 F.3d 263, 271-72 (2d Cir. 1996)). District courts are vested with broad discretion to grant a party leave to amend the pleadings. See Local 802, Assoc. Musicians of Greater New York v. Parker Meriden Hotel, 145 F.3d 85, 89 (2d Cir. 1998). "The party opposing a motion for leave to amend has the burden of establishing that granting such leave would be unduly prejudicial." State of New York v. Panex Indus., Inc., 1997 WL 128369, at *2 (W.D.N.Y. Mar. 14, 1997) (citing Saxholm AS v. Dynal, Inc., 938 F. Supp. 120, 123 (E.D.N.Y. 1996)); see also Lamont v. Frank Soup Bowl, 2000 WL 1877043, at *2 (S.D.N.Y. Dec. 27, 2000) (citation omitted). This requires the non-movant to "do more than simply claim to be prejudiced." Bryn Mawr Hosp. v. Coatesville Elec. Supply Co., 776 F. Supp. 181, 185 (E.D.Pa. 1991).
The Third-Party Claimants opposing the motion assert three distinct bases for such opposition: (1) undue delay or bad faith by Nelson in asserting the proposed amendment; (2) prejudice to the parties would result if the proposed amendment were permitted; and (3) the proposed amendment is futile or meritless. The Court will consider each of these contentions separately.
1. Undue Delay or Bad Faith
Gosline and Noble assert that leave should be denied because the proposed amendments are untimely. Nelson brings this motion approximately one year after filing the Answer to Gosline's Third-Party Complaint, Dkt. No. 21, and six months after the expiration of the amendment of pleadings deadline of July 1, 2002, as set forth in the Amended Uniform Pretrial Scheduling Order, Dkt. No. 29. Furthermore, Gosline contends that Nelson delayed over ten months after insolvency of its insurer before even mentioning such a defense exists. Dkt. No. 53 at ¶ 7. Noble adds that Nelson's attorneys had indicated they were determining whether the statute was applicable, and in turn may file a motion, yet failed to take such action prior to the expiration of the deadline for amending pleadings. Dkt. No. 52 at ¶ 10.
Courts have the discretion to deny leave to amend "where the motion is made after an inordinate delay." Cresswell v. Sullivan Cromwell, 922 F.2d 60, 72 (2d Cir. 1990). Such motions, however, should not be denied on the ground of delay absent bad faith or undue prejudice. See Block v. First Blood Assocs., 988 F.2d 344, 350 (2d Cir. 1993); see also Phaneuf v. Tenneco, Inc., 938 F. Supp. 112, 115 (N.D.N.Y. 1996) (citing U.S. v. Continental Ill. Nat. Bank and Trust, 889 F.2d 1248, 1254 (2d Cir. 1989) (delay alone is insufficient ground to deny a motion to amend)).
After reviewing the relevant events as they occurred, it is clear to the Court that, contrary to the oppositions' contention, Nelson did not delay in making the within motion. Nelson's original attorneys from the Napierski law firm were hired by their insurance carrier, Reliance, in accordance with their duty to defend. Nelson's insurance carrier became insolvent on October 3, 2001, however, the Napierski law firm continued their representation of Nelson. Around June or July of 2002, the Illinois Insurance Guaranty Fund after receipt of the file, confirmed that Nelson met the specific requirements under the Fund statutes, thus they would step into the suit in place of Reliance and accordingly assume the duty to defend Nelson. They subsequently retained Ainsworth-Sullivan to proceed with Nelson's defense. Dkt. No. 50 at ¶ 7. The docket reflects that on September 13, 2002, a notice of change of attorney was filed, on behalf of Nelson, just after Travelers filed their 14(a) Complaint against Nelson. Dkt. No. 40. It was at that point that Nelson's attorneys were provided a copy of the Fund's governing statutes. Dkt. No. 50, Ex. Q, Illinois Statute. Thereafter, in the discovery conference with all parties held by this Court on September 20, 2002, Nelson's attorneys brought the statute to everyone's attention and indicated they needed to determine whether the statute was applicable to all thus necessitating a formal motion.
Upon further analysis and consideration of the Illinois statutory scheme and review of Plaintiff's 14(a) Complaint and other relevant information, Nelson's counsel determined that an affirmative defense existed with regard to the Fund under specific portions of the statute which impacts Nelson's liability. Dkt. No. 50 at ¶ 9. This affirmative defense was included in their Answer to the 14(a) Complaint filed on October 25, 2002, along with a copy of the statutory scheme. Dkt. No. 43. Nelson posited that such a defense exists as to all claims against them in the case and, accordingly, on November 1, 2002, distributed a proposed stipulation regarding the amendment to all the parties as well as the Court. Lt. from Karen Collins, dated Nov. 1, 2002. Thereafter, Nelson requested a discovery conference with the Court to address the lingering tautness that existed as a result of certain parties' refusal to stipulate to the amendment. Dkt. No. 44. Since there was no resolution, the motion to amend ensued. Judge's Notes, dated Dec. 23, 2002.
It is the Court's position that Nelson did not delay in ascertaining the applicability of the statute and subsequently alerting all parties and the Court of their intention to amend their pleadings. It is clear from a review of the timetable that Nelson appropriately reacted to certain events which were beyond control, i.e., the Fund's decision to step in. Furthermore, upon receipt of the statutory scheme, Nelson promptly amended its insurance disclosure, served a copy of the Fund statutes on all counsel, and in good faith, alerted all parties of their intention to amend. Furthermore, in accordance with Local Rules, Nelson conferred with all parties, as well as the Court, in obtaining a resolution before engaging in formal motion practice. Accordingly, Noble and Gosline have failed to meet their burden in maintaining Nelson delayed or acted in bad faith.
2. Prejudice to the Parties
Noble and Gosline assert that if the proposed amendment were permitted they would be unduly prejudiced in that: (1) the proposed amendment would require additional discovery and depositions, including depositions of witnesses already deposed, Dkt. No. 52 at ¶ 3; (2) parties would be forced to incur additional expenses associated with additional paper discovery and depositions, Dkt. No. 52 at ¶ 12; and (3) because of the "inordinate delay" in asserting the defense, the parties have been deprived of months of opportunity to plan for it, Dkt. No. 54 at 7.
In determining what constitutes prejudice from the amendment of a pleading, courts within the Second Circuit generally consider "whether the assertion of the new claim would (i) require the opponent to expend significant additional resources to conduct discovery and prepare for trial; (ii) significantly delay the resolution of the dispute; or (iii) prevent the plaintiff from bringing a timely action in another jurisdiction." Monahan v. New York City Dept. of Corrections, 214 F.3d 275 (2d Cir. 2000).
The proposed amendment concerns the applicability of an Illinois statutory scheme to the Fund's and/or Nelson's obligations and liabilities in the case at bar. Whether the statute applies as well as the ensuing effects are matters of law, not fact, for the Court to decide and, therefore, the assertion that more discovery will ensue, especially in the form of depositions, is incongruous.
Furthermore, the discovery deadline in this case expired on May 1, 2003. The parties had been aware of the existence and potential application of the statute as early as September 20, 2001, and no order to date has stayed discovery in any mode, nor has anyone requested such an order. Assuming, as this Court must that, in the absence of an order staying discovery, all parties proceeded with discovery with all deliberate speed, it is difficult for the Court to grasp how the parties can argue they were "deprived of months of an opportunity to plan" for such a defense. Aside from the discussion above outlining the relevant dates in which the defense had first been proposed, Nelson filed the Motion to Amend on January 7, 2003, well before the expiration of discovery. The filing of such a motion in no way stays discovery, and the Court has reminded the parties of this fact numerous times. JN, dated Sept. 25, 2002, regarding conference held on Sept. 20, 2002; JN, dated Dec. 23, 2002, regarding conference held on Dec. 18, 2002. Therefore, contrary to Gosline's contention, the parties have had ample time to prepare for the possibility that such a defense may be asserted. The fact that the parties opted to refrain from such discovery pending the outcome of the present motion, even after being warned by the Court that no more extensions would be granted and no stay of discovery is in place, will not prevent Nelson from proposing the amendment.
As the amendment will not prejudice the parties in any mode stated in the factors above, we submit that the opposition has failed to meet their burden in asserting such a contention.
3. Futile or Meritless Amendment
As stated above, the district court is required to grant leave to amend "freely . . . when justice so requires." FED.R.CIV.P. 15(a); Foman v. Davis, 371 U.S. at 182; Ronzani v. Sanofi S.A., 899 F.2d 195, 198 (2d Cir. 1990); 3 MOORE'S FEDERAL PRACTICE ¶ 15.08[4], at pp. 15-65. However, the Court has the discretion to deny a motion to amend especially on the grounds of futility. Nettis v. Levitt, 241 F.3d 186, 193 (2d Cir. 2001); see also Marci v. BOCES, 173 F.3d 469, 478 (2d Cir. 1999) (citing Ruffolo v. Oppenheimer Co, 987 F.2d 129, 131 (2d Cir. 1993); Health-Chem Corp. v. Baker, 915 F.2d 805, 810 (2d Cir. 1990). The Second Circuit has stated where futility is raised as an objection to the motion to amend, and
In two unpublished opinions, the Second Circuit stated that the district courts below did not abuse their discretion when they denied leave to amend pleadings on the basis of futility. BBS Norwalk One, Inc. v. Raccolta, Inc., 205 F.3d 1321 (2d Cir. 2000); Hason v. Davis, 210 F.3d 354 (2d Cir. 2000).
[w]here it appears that granting leave to amend is unlikely to be productive, it is not an abuse of discretion to deny leave to amend. See, e.g., Foman v. Davis, 371 U.S. at 182, 83 S.Ct. at 230 (denial not abuse of discretion where amendment would be futile); Health-Chem Corp. v. Baker, 915 F.2d 805, 810 (2d Cir. 1990) ('where . . . there is no merit in the proposed amendments, leave to amend should be denied'); Billard v. Rockwell International Corp., 683 F.2d 51, 57 (2d Cir. 1982) (denial not abuse of discretion where plaintiff had had 'access to full discovery' in a related case).
Ruffolo, 987 F.2d at 131.
As futility is an appropriate basis for denying leave to amend, such denial should be contemplated within the standards necessary to withstand a motion to dismiss pursuant to FED.R.CIV.P. 12(b)(6). Dougherty v. North Hempstead Bd. of Zoning Appeals, 282 F.3d 83, 88 (2d Cir. 2002) (citing Ricciuti v. N.Y.C. Transit Auth., 941 F.2d 119, 123 (2d Cir. 1991)). Here, Gosline raised, and Noble implied, that Nelson's motion to assert this affirmative defense, based upon the Illinois Guaranty Fund Act (215 ILL. COMP. STAT. 5/532 et seq. (2003)), would be futile. For the most part, Gosline bases the objection of futility upon a conflicts of law analysis. As set forth below, there are, however, other reasons to support the contention of futility.
(a) Illinois Insurance Guaranty Fund Act
As previously stated, Nelson's insurer, Reliance Insurance, is in liquidation. Inasmuch as Nelson is an Illinois corporation, it has availed itself of the Illinois Insurance Guaranty Fund ("Guaranty Fund"), which steps into the shoes of the insurer when insolvency becomes an issue and provides insurance coverage, albeit under limited circumstance. Similar to its Answer to Travelers' Rule 14(a) Complaint, submitted after the Guaranty Fund became the insurer, Nelson wishes to add another affirmative defense against the Third-Party Claims filed by Gosline and Noble. Within their respective claims, both Gosline and Noble seek either contribution or indemnification against all the Third-Party Defendants including Nelson. Dkt. Nos. 14 21. With regard to these Third-Party Claims, initially Nelson made general denials of the allegations and asserted several affirmative defenses but none were based upon the limitations imposed by the Illinois Guaranty Fund Act. 215 ILL. COMP. STAT 5/532 et seq. (2003). Now, Nelson asks this Court for leave to add the following affirmative defense:
L.R. Nelson was insured by Reliance Insurance at the time of the alleged occurrence which plaintiff complains. Reliance Insurance is in liquidation and consequently, L.R. Nelson corporation is being defended through the Illinois Insurance Guaranty Fund. Pursuant to the statutes governing the Illinois Insurance Guaranty Fund, all claims against L.R. Nelson in the nature of subrogation, contribution, and/or indemnity cannot be maintained and should be dismissed.
Dkt. No. 50, Ex. R.
Nelson interprets the breadth of this statute very broadly and submits that it is an absolute bar to all claims against it, whether prosecuted by the Plaintiffs or the Third-Party Claimants. Dkt. No. 50, K. Collins, Esq. aff. This Court does not accept the proposition that this provision of the law is as comprehensive, in terms of its impact upon this litigation, as Nelson would want us to believe. In fact, Nelson misapprehends the scope of this statute, and has utterly failed to thoroughly read the integral precision and harmony of all of its operational provisions. Nelson fails to consider the statutory coordination between sections 5/534.3(b)(v) and 5/546(a), which is the more pertinent provision relative to our case. At most, after all is said and done, as it relates to the third-party actions here, the Guaranty Fund coverage may serve only as an offset, not a definite bar.
Nelson's proposed affirmative defense relies upon the following provision of the Guaranty Fund Act:
(b) Covered Claim does not include. . . .
(v) any claim for any amount due any reinsurer, insurer, insurance pool, or underwriting association as subrogated recoveries, reinsurance recoverables, contribution, indemnification or otherwise. No such claim held by a reinsurer, insurer, insurance pool, or underwriting association may be asserted in any legal action against a person insured under a policy issued by an insolvent company other than to the extent such claim exceeds the Fund obligation limitations set forth in Section 537.2 of this Code.
215 ILL. COMP. STAT. 5/534.3(b)(v) (2003).
The purpose of the Guaranty Fund Act is to protect the public from losses arising from the insolvency of Illinois insurers. Urban v. Loham, 592 N.E.2d 292, 294-95 (Ill.App.Ct. 1992). An Illinois insurer that holds a certificate of authority to transact insurance business within the state is deemed to be a member of the Guaranty Fund. Further, it is the intent of this statute to place plaintiffs or claimants, which includes third-parties, in the same position they would have been if the defendant's liability insurer had not become insolvent. Claudy v. Commonwealth Edison Co., 626 N.E.2d 1088, 1100 (Ill.App.Ct. 1993); Norberg v. Centex Homes Corp., 616 N.E.2d 1342, 1347 (Ill.App.Ct. 1993) (The Fund assumes the defense of the insolvent insurance company's insured). That is, the Guaranty Fund is obligated to pay the covered claim, and not the judgment. Id. A covered claim is defined in two ways; what it is and what it is not. Under the statute, a covered claim means
an unpaid claim for a loss arising out of and within the coverage of an insurance policy to which this Article applies and which is in force at the time of the occurrence giving rise to the unpaid claim, including claims presented during any extended discovery period which was purchased from the company before the entry of a liquidation order or which is purchased or obtained from the liquidator after the entry of a liquidation order, made by a person insured under such policy or by a person suffering injury or damage for which a person insured under such policy is legally liable. . . .
215 ILL. COMP. STAT. 5/534.3(a). Exclusions from a covered claim include, inter alia: (1) amounts in excess of the applicable limits of liability provided; (2) punitive damages; and (3) any first party claim by an insured who is an affiliate of an insolvent company. Id. at 5/534.3(b)(i), (ii), (iii).
Contemplating the purpose of section 5/534.3(b)(v), it is evidently clear that the Illinois legislature did not want solvent insurers to be reimbursed from the proceeds of the Guaranty Fund. Claudy v. Commonwealth, 266 N.E.2d at 1101 (citing Pierre v. Davis, 520 N.E.2d 743, 744 (Ill.App.Ct. 1987) ("It is clear that the legislature did not want the assets of the [Guaranty] Fund depleted to reimburse solvent insurance companies for payments made to claimants or their insured under policies for which they received a premium.")). Therefore the applicability of the provisions of this law to the Plaintiff's claim, as opposed to the Third-Parties, is readily apparent.
Though it is not the issue for this Motion to Amend, yet remains pertinent for our discussion, Nelson intimates that the Plaintiff has been fully reimbursed by its insurance carrier for its loss in this occurrence with the exception of the deductible. Dkt. No. 50 at ¶ 9. Under these circumstances, if true, section 5/534.3(b)(v) may be a bar to both the Plaintiff and its insurance company from recovering the reimbursed amount from the Guaranty Fund. However, this section does not apply to the Third-Party Claimants, who, for several reasons, have claims for contribution and/or indemnity against Nelson. The most obvious reason being that neither Gosline nor Noble are a "reinsurer, insurer, insurance pool, [n]or underwriting associations" who are bringing a claim as "subrogated recoveries, contribution, or indemnification." 215 ILL. COMP. STAT. 5/534.3(b)(v); see also 215 ILL. COMP. STAT. 5/534.5 ("member company" defined). The fact that both Gosline and Noble have insurance coverage, which indubitably will be interjected into this lawsuit if the Plaintiff's claims against each of them are successful, does not alter this determination.
Nelson plead this statutory provision as an affirmative defense in its answer to the Plaintiff's Rule 14(a) Complaint, thus preserving this contention as to Plaintiff. Dkt. No. 43.
In Claudy v. Commonwealth, supra, a wrongful death action was brought by the decedent's wife against the utility company and the city for her husband's electrocution when he was removing a tree from a power line for his employer. The defendant city filed a third-party complaint against the employer. After the employer's insurance company went into liquidation, the Guaranty Fund assumed the defense. Eventually, the wife settled with the city and, as a part of the settlement, the wife received an assignment of the city's third-party action. The Claudy court concluded that the assignment of the third-party action did constitute a "covered claim" pursuant to Guaranty Fund Act and, further, the wife was "clearly not an insurer, reinsurer, insurance pool or underwriting association" for the purpose of this statute. Claudy, 266 N.E.2d at 1101. And, for other reasons as well, the wife nor the city for that matter were barred from asserting the contribution actions against the employer. Id.
Another instructive permutation regarding which claims are considered covered claims, may be found in Norberg v. Centex Homes Corp., 616 N.E.2d 1342 (Ill.App.Ct. 1993). In Norberg, an injured worker sued the developer, and the developer, in turn, filed a third-party complaint against the injured worker's employer. The jury returned a verdict in favor of the plaintiff against the developer and also returned a verdict for the developer against the employer for 50 percent liability on the judgment. Under these circumstances, the developer was not an insurance company and remained solely classified as a tortfeasor, therefore section 5/534.3(b)(v) was inapplicable. Norberg, 616 N.E.2d at 1346-49. However, as will be discussed below, another provision of the Guaranty Fund Act, section 5/546(a) (the non-duplication recovery provision), was triggered, and indeed may be relevant in our case. Id. at 1348-49. Rather than being a bar like section 5/534.3(b)(v), section 5/546(a) is relevant only in determining the amount of recovery from the Guaranty Fund. Id.; see also Herriford v. Boyle, 550 N.E.2d 654, 658 (Ill.App.Ct. 1990).
Because Gosline and Noble are both deemed a party and not an "insurer," none of the provisions of the Guaranty Fund, at this juncture of the litigation, constitute an affirmative defense. The tortfeasor remains liable to the plaintiff or third-party, notwithstanding the Guaranty Fund, and the plaintiff or claimant would be entitled to "recover all damages that naturally and proximately flow from the commission of a tort [even] when the [Guaranty] Fund is involved. . . ." Lonigro v. Lockett, 625 N.E.2d 265, 270 (Ill.App.Ct. 1993) (citing Urban v. Loham, 592 N.E.2d 1342, 292 (Ill.App.Ct. 1992); see also Modern Steel Treating Co. v. Liquid Carbonic Industrial/Medical Corp., 698 N.E.2d 710 (Ill.App.Ct. 1998); Herriford v. Boyles, 550 N.E.2d 654 (Ill.App.Ct. 1990) (The Fund is not liable as the tortious wrongdoer but only stands ready to indemnify the tortfeasor for a loss); Pierre v. Davis, 520 N.E.2d 743 (Ill.App.Ct. 1987). Thus, if Gosline and Noble were to recover a contribution and/or indemnification verdict against Nelson, Nelson would remain liable for the amount of the recovery no matter if its previous insurer was solvent and required to indemnify it from the loss, or if the Guaranty Fund, who only steps into the shoes of the insurer because of insolvency, provides the indemnification. Essentially, under this scenario, the judgment would be against the tortfeasor and not the Guaranty Fund, and the extent of the indemnification provided by the Guaranty Fund is nothing more than an offset against that judgment. This notion of offset is solidified by the Guaranty Fund Act's "non-duplication recovery" provision as set forth in section 5/546(a).
In Illinois, as in New York, to preserve an affirmative defense it must be plead in an answer or reply. The term "affirmative defense" is defined as "[a] defendant's assertion raising new facts and arguments that, if true, will defeat the plaintiff's or prosecution's claim, even if all allegations in the complaint are true." BLACK'S LAW DICTIONARY 430 (7th ed. 1999). As stated above, the relevant sections of the Guaranty Fund Statute do not "defeat" the claimants' claims at this juncture and whether it will have any other effect has no bearing on the ultimate decision of liability. Furthermore, nowhere in the Guaranty Fund Statute is there any mention of a need to preserve any rights which may be provided in the statute by pleading affirmative defenses nor does the Illinois statute setting forth affirmative defenses indicate that Nelson must plead such a defense:
The facts constituting any affirmative defense, such as payment, release, satisfaction, discharge license, fraud, duress, estoppel, laches, statute of frauds, illegality, that the negligence of a complaining party contributed in whole or in part to the injury of which he complains, that an instrument or transaction is either void or voidable in point of law, or cannot be recovered upon by reason of any statute or by reason of any statute or by reason of nondelivery, want or failure of consideration in whole or in part, and any defense which by other affirmative matter seeks to avoid the legal effect of or defeat the cause of action set forth in the complaint, counterclaim, or third-party complaint, in whole or in part, and any ground or defense, whether affirmative or not, which, if not expressly stated in the pleading, would be likely to take the opposite party by surprise, must be plainly set forth in the answer or reply.
735 ILL. COMP. STAT. 5/2-613(d).
Furthermore, New York's statute on affirmative defenses states:
A party shall plead all matters which if not pleaded would be likely to take the adverse party by surprise or would raise issues of fact not appearing on the face of a prior pleading such as arbitration and award, collateral estoppel, culpable conduct claimed in diminution of damages as set forth in article fourteen-A, discharge in bankruptcy, facts showing illegality either by statute or common law, fraud, infancy or other disability of the party defending, payment, release, res judicata, statute of frauds, or statute of limitation. The application of this subdivision shall not be confined to the instances enumerated.
N.Y. C.P.L.R. 3018(b).
Section 5/546(a) requires the plaintiff, or in this case the third-party claimants to exhaust insurance policies before the Guaranty Fund must pay. Lonigro v. Lockett, 625 N.E.2d at 271; Claudy v. Commonwealth, 626 N.E.2d at 1101-02 (citing Herriford v. Boyles, 550 N.E.2d at 658). This provision of law provides:
An insured or claimant shall be required first to exhaust all coverage provided by any other insurance policy, regardless of whether or not such other insurance policy was written by a member company, if the claim under such other policy arises from the same facts, injury, or loss that gave rise to the covered claim against the Fund. The Fund's obligation. . . . shall be reduced by the amount recovered or recoverable, whichever is greater, under such other insurance policy. . . . To the extent that the Fund's obligation . . . is reduced by application of this Section, the liability of the person insured by the insolvent insurer's policy for the claim shall be reduced in the same amount.
This provision is consistent with the overall purpose of the statute which is to place the claimants in the same position they would have been if the liability insurer had not been insolvent thereby eliminating any potential windfall to either the claimant or the Guaranty Fund. Lonigro, 625 N.E.2d at 273; Tralmer v. Soztneps, Inc., 670 N.E.2d 811, 813 (Ill.App.Ct. 1996). Furthermore, it is black letter law that insurers are generally not permitted to plead as an affirmative defense their ability or inability to pay the judgment, unless they disclaim coverage, therefore, the question of exhausting other insurance becomes a relevant post-verdict matter. See, e.g., Norberg v. Centex, 616 N.E.2d at 1346-49. Guaranty Fund's role in our case then is best preserved by filing a notice of insurance coverage disclosing all of its relevant provisions. In that regard, attaching a copy of the statute would suffice, which Nelson has done. Dkt. No. 50, Ex. Q. In any event, whatever funds, if at all, the Guaranty Fund is responsible to pay, will be an offset against whatever the tortfeasor is obligated to pay on the verdict, as any other insurance would be.
It is premature to contemplate how sections 5/546(a) and 5/534.3(b)(v) will apply if there is a third-party verdict against Nelson. We do not know the amount of insurance available, the size of any verdict, the apportionment of liability, nor the impact of settlement within the parties. Yet, discussed below are three scenarios which may be instructive when such considerations are ripe for review:
In Norberg v. Centex Homes Corp. 616 N.E.2d 1342 (Ill.App.Ct. 1993), as stated above, the third-party plaintiff received a jury verdict against the third-party defendant for 50 percent of the verdict. The case was settled in the amount of $260,000, and each tortfeasor's share was $130,000. The third-party defendant's insurer was insolvent so Guaranty Fund was substituted to indemnify this tortfeasor and was ultimately obligated to pay the third-party plaintiff the sum of $130,000. The third-party plaintiff had an insurance deductible of $100,000, therefore, the issue before the court was whether the Guaranty Fund had to pay the entire sum. After extensive analysis of the facts including acknowledging that there was no subrogation in place, the Norberg court concluded that the third-party plaintiff was "holding" the sum of $30,000 for its insurer, Travelers, and to the extent the claim exceeded the deductible by $30,000, it was not considered to be a "covered claim" under the act. Guaranty Fund was responsible to pay only the $100,000 deductible. Id. at 1346-49.
In the Claudy v. Commonwealth Edison Co., 626 N.E.2d 1088 (Ill.App.Ct. 1993) scenario, as stated above, the plaintiff entered into a settlement with the defendant city in the amount of $400,000 and also received an assignment of the city's (a self-insured municipality) contribution claim against the decedent's employer. The court weighed whether the non-duplication recovery provision of section 5/546(a) and the "covered claim" provision of section 5/534.3(b)(v) would bar the plaintiff recovery from the Guaranty Fund under this assignment. The answer was a resounding no. The court's analysis was quite simple: if the city is not barred from recovering from the defendant employer, neither should the plaintiff who was assigned the city's rights against the tortfeasor-employer. Id. at 1100-1102.
Lastly, the court in Pierre v. Davis, 520 N.E.2d 743, 745 (Ill.App.Ct. 1987) provides the following illustration:
If the judgment against the defendant exceeded the amount of the worker's compensation lien of $6,983.56, the plaintiff would be entitled to recover the excess from the defendant or the Fund. For [another] example, if the judgment against the defendant was $50,000 and the worker's compensation lien was $7,000, section 534.3(b)(ii) would only preclude the plaintiff or the worker's compensation insurer from asserting any claim for the first $7,000 of the judgment since that amount would be an 'amount due an insurer' under the statute. [citation omitted]. The plaintiff (the injured worker) would be entitled to recover the balance from the defendant or the Fund.
These cases highlight that the discussion of Guaranty Funds's impact on this litigation is best reserved until post-verdict.
CONCLUSION
Based upon all of the foregoing, the relevancy of the Guaranty Fund vis-à-vis the Third-Parties is yet to be determined but it is certainly not an affirmative defense, thus rendering the pleading of the defense futile. Gosline raised that this defense should be denied on conflict of law principles. Considering this Court's decision on the Guaranty Fund's role in this litigation, the conflict of law issue, at least at this stage of the litigation, is moot. Therefore, Defendant Nelson's Motion to Amend is DENIED.
SO ORDERED.