New precedent? Illinois court shield insurers from duty to defend lawsuit

The decision held that two insurance companies didn't owe an employer a duty to defend in an underlying Biometric Information Privacy Act suit.

The “violation-of-law exclusion” at issue in the case has divided courts. (Credit: nito/Adobe Stock)

The Illinois First District Appellate Court recently went against precedent set by the U.S. Court of Appeals for the Seventh Circuit in an insurance coverage lawsuit, finding two insurance companies didn’t owe a duty to defend an employer in an underlying Biometric Information Privacy Act class action lawsuit.

Respectfully disagreeing with the Seventh Circuit’s 2023 decision in Citizens Insurance Co. of America v. Wynndalco Enterprises, the Illinois appellate court held that National Fire Insurance Co. of Hartford and Continental Insurance Co. didn’t owe packaging company Visual Pak Co. a duty to defend in a BIPA suit over employee fingerprints that settled for $19.5 million, according to a Dec. 19 opinion authored by Justice David Ellis.

The judge wrote that the appellate court is not bound by the Seventh Circuit’s decision in a case hinging on nearly identical policy exclusions that insurers pointed to in asserting they do not owe a duty to defend.

“But we are obviously not bound by a federal court’s interpretation of Illinois law, be it a decision from a district court or a federal appellate court,” Ellis wrote. “So we will consider all the case law, even if some of those decisions, in some sense, are no longer ’good law’ on the subject, because from our perspective as an Illinois appellate court, we are bound by none of these decisions and are open to persuasion by any of them.”

The “violation-of-law exclusion” at issue in the case has divided courts, leading up to the Seventh Circuit weighing in this year in Wynndalco, and holding “that nearly identical exclusion language as in our case did not preclude defense of an underlying BIPA lawsuit; the insurer owed a duty to defend,” according to the opinion.

The decision, said the court, “abrogated the federal district court decisions that found the violation-of-law exclusion applicable.”

However, it found that the provisions before it contained “materially different language than the catchall provision in West Bend,” and was tempted to stop and find that the exclusion barred coverage “because the language of our catchall provision clearly encompasses a violation of  BIPA.”

“Simply summarized, the catchall provision is amenable to a reasonable limiting construction of statutes or other laws that protect personal privacy. BIPA is clearly one such statute. So an underlying lawsuit alleging a violation of BIPA would fall under the catchall phrase of the violation-of-laws exclusion,” Ellis wrote.

The court noted that the Seventh Circuit took a different path and reached the opposite conclusion, finding the language was too broad and declaring the entire catchall phrase ambiguous. Therefore, it held that the violation-of-law exclusion didn’t apply and that the insurer owed a duty to defend. Finding two flaws in the circuit court’s reasoning, Ellis disagreed.

“First, under Illinois law, the fact that an exclusion has a ‘broad sweep’ is not, in and of itself, a reason to deem the coverage illusory.’ It is only when the exclusion has the effect of ‘swallowing’ the coverage entirely that the exclusion can be deemed illusory—and this is plainly not the case here,” Ellis said. “And second, the fact that the exclusion might ‘conflict’ or ‘clash’ with other provisions of the coverage that are not presently at issue in this case is not a basis to invalidate the exclusion as applied to this case; our job is not to seek out other problems and solve them, but rather to adjudicate the controversy presently before us.”

While the court didn’t take issue with the decisions the Seventh Circuit cited, it took issue with how it applied the decisions to reach its own decision, disagreeing that the catchall exclusion eviscerated the coverage provision the insured relies on.

According to Ellis, it wasn’t presented with a situation where the violation-of-law exclusion swallowed or nullified the coverage for “advertising and personal injury.” The court further noted that the provision the insured relies on for coverage “includes many common-law claims that the catchall exclusion would not touch.”

“And that, under Illinois law, should be the end of any discussion that this catchall exclusion is illusory. To again quote Justice [Warren] Wolfson, ‘[a] policy need not provide coverage against all possible liabilities; if it provides coverage against some, the policy is not illusory,’” said the court. “If we stray from that doctrine, we would have to start asking such unanswerable questions as, ‘How broad an exclusion is too broad?’ or ‘What percentage of the coverage can be excluded (51 percent? 80 percent?) before the coverage is deemed illusory?’ And doing so will drag us into the dangerous zone of interfering with freedom of contract, for sometimes the insured knowingly obtains limited coverage, and the premiums are set accordingly.”

The defendants’ attorney, Bradley K. Staubus of Esposito & Staubus, in Burr Ridge, and the plaintiffs’ attorney, Todd S. Schenk, in Chicago, did not immediately respond to requests for comment.

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