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June 12, 2001

No. 2--00--0877

IN THE

APPELLATE COURT OF ILLINOIS

SECOND DISTRICT

JUSTICE BOWMAN delivered the opinion of the court:

Defendant, Utica Mutual Insurance Company (Utica), appealsfrom the denial of its motion to dismiss and the entry of summaryjudgment in favor of plaintiff, Shriver Insurance Agency (Shriver),by the circuit court of Du Page County. The court found that theexclusion upon which Utica relied in disclaiming its duty to defendShriver in an action brought against it by Reliance InsuranceCompany (Reliance) did not apply and that Utica was liable toShriver for the expenses Shriver incurred in defending theunderlying action.

On appeal, Utica contends that the trial court erred ingranting Shriver's summary judgment motion, as the comparison ofthe allegations in Reliance's complaint with the language ofUtica's insurance policy established that Utica had no duty todefend Shriver in the lawsuit brought by Reliance. Additionally,Utica contends that the "true but unpleaded facts" doctrine reliedupon by the trial court did not apply to create the potential forcoverage.

Shriver is an insurance agency that had a contract for severalyears with Home State Holdings Group (Home State) to act as HomeState's agent. As its agent, Shriver collected and remittedpremiums on insurance policies issued under the contract. HomeState sold insurance on behalf of out-of-state insurance companies,or "fronting companies." Up until May 1997, Home State soldinsurance on behalf of Security Insurance Company (Security). Italso sold insurance on behalf of Reliance. In May 1997, thepolicies covering Shriver's customers, Robinson Bus Company andWhite Transportation (collectively Robinson), which had beenfronted by Security for Home State, were canceled by Home Statefour months before expiration. Home State issued new policies,fronted by Reliance, at a lower rate. As a result, Home State owedShriver approximately $208,000 in unearned premiums on the canceledSecurity policy and Shriver owed Home State an undisclosed amountfor the premiums on the Reliance policy. The new policy had a newdeposit and new installments. Home State told Shriver that itcould offset the old premium on the Security policy against the newpremium on the Reliance policy.

Subsequently, Reliance wrote Shriver, informing it thatShriver should not be offsetting premiums and that it should bepaying Reliance directly. In August 1998, Reliance filed acomplaint in the United States District Court for the NorthernDistrict of Illinois, alleging that Shriver had failed to payReliance the premiums it collected on the insurance policies issuedto Robinson.

At the time Reliance brought its action against Shriver,Shriver had an insurance broker's "errors and omissions" liabilitypolicy with Utica. Pursuant to that policy, Utica agreed to defendany claim asserting "a negligent act, error or omission" first madeduring the policy period even if the allegations of the claim weregroundless, false, or fraudulent. On November 9, 1998, Shrivernotified Utica of the lawsuit, explaining the circumstances givingrise to Reliance's claim. In a letter dated November 19, 1998,Utica acknowledged notice of Shriver's claim and enclosed aquestionnaire for Shriver to complete. Shriver completed andreturned the questionnaire.

On February 3, 1998, Utica advised Shriver that, based on theexclusion section of its errors and omissions policy, it would notdefend or indemnify Shriver for any damages or expenses relating tothe lawsuit. That section provided in relevant part:

"SECTION IV - EXCLUSIONS

This insurance does not apply to any claim for, or arising outof:

* * *

4. Any liability for money received by an insured orcredited to an insured for fees, premiums, taxes, commissions,loss payments, or escrow or brokerage monies."

Shriver defended itself.

The federal district court held that Shriver was entitled to offset its debt to Home State on the Reliance policy against HomeState's debt to Shriver on the Security policy. The SeventhCircuit Court of Appeals subsequently affirmed the district court'sdecision. Reliance Insurance Co. v. Shriver, Inc., 224 F.3d 641(7th Cir. 2000).

Because of Utica's refusal to defend Shriver, Shriver broughtan action for declaratory judgment, estoppel, and breach ofcontract against Utica. Utica moved to dismiss the action pursuantto section 2--615 of the Code of Civil Procedure. 735 ILCS 5/2--615(West 1998). Utica asserted that, because its errors and omissionspolicy excluded coverage for "liability for money received by aninsured or credited to an insured for *** premiums" and because thebasis for the underlying action was that Shriver owed Reliancemoney for premiums on an insurance policy, Utica owed no duty todefend Shriver. Consequently, Shriver's complaint should bedismissed for failure to state a cause of action.

Shriver responded to Utica's motion to dismiss and also fileda motion for summary judgment. Shriver argued that paragraph fourof section IV of Utica's errors and omissions policy did not applybecause that exclusion applied only to "liability for moneyreceived" and the wrongful conduct in question in the underlyingaction was Shriver's alleged "failure to pay" and not its"liability for money received." Additionally, Shriver contendedthat, where an insurer is aware of true but unpleaded factsindicating that a claim is potentially covered, the insurer mustdefend. Attached to Shriver's motion was the affidavit of thepresident of Shriver, Charles M. Shriver (Charles Shriver or Mr.Shriver), and a copy of the letter he sent to Utica informing it ofReliance's action against Shriver and of the facts leading up tothe lawsuit. Utica filed a reply in support of its motion todismiss and as a response to Shriver's motion for summary judgment. Additionally, Utica filed its own motion for summary judgment,incorporating the arguments and authorities it relied upon in itsmotion to dismiss and in the aforementioned reply and response.

Relying specifically on the letter sent by Charles Shriver toUtica, the trial court granted Shriver's motion for summaryjudgment. The court found that Utica's duty to defend had beeninvoked by true but unpleaded facts known to Utica as evidenced byShriver's correspondence to Utica. This appeal ensued.

Utica first contends that the trial court erred in grantingShriver's motion for summary judgment because a comparison of theallegations in Reliance's complaint with the language of Utica'serrors and omissions insurance policy established that Utica had noduty to defend Shriver in the lawsuit. Summary judgment is properwhen the pleadings, depositions, and the admissions on file, alongwith any affidavits, show that there exists no genuine issue ofmaterial fact and that the moving party is entitled to judgment asa matter of law. Cosgrove v. Commonwealth Edison Co., 315 Ill.App. 3d 651, 654 (2000). Our review of a ruling on a motion forsummary judgment is de novo. Outboard Marine Corp. v. LibertyMutual Insurance Co., 154 Ill. 2d 90, 102 (1992).

Whether an insurer has a duty to defend depends on acomparison of the allegations of the underlying complaint to therelevant policy provisions. Country Mutual Insurance Co. v. Hagan,298 Ill. App. 3d 495, 500 (1998). The allegations of the complaint and not the findings of the underlying litigation are dispositiveof the insurer's duty to defend. Northbrook Property & CasualtyInsurance Co. v. Transportation Joint Agreement, 309 Ill. App. 3d261, 264 (1999). In determining an insurer's duty to defend,courts must liberally construe both the insurance policy and theunderlying complaint in favor of the insured. Federated MutualInsurance Co. v. State Farm Mutual Automobile Insurance Co., 282Ill. App. 3d 716, 725 (1996). An insurer must defend only if thecomplaint alleges facts within or potentially within the coverageof the policy, unless the insurer possesses knowledge of true butunpleaded facts that, when taken together with the allegations inthe complaint, indicate that the claim is within or potentiallywithin the policy coverage. Indiana Insurance Co. v. Hydra Corp.,245 Ill. App. 3d 926, 929 (1993).

In its lawsuit Reliance sought to recover from Shriverpremiums for several insurance policies Reliance issued to two ofShriver's customers. Specifically, Reliance's complaint alleged:

"7. Shriver collected premiums for the aforesaidpolicies on behalf of Reliance, which premiums Shriver wasobligated to pay to Reliance.

8. Shriver has failed and refused to pay said premiums,amounting to $259,169, to Reliance.

9. Shriver is indebted to Reliance in the sum of$259,169.15 plus interest."

The provisions of the errors and omissions policy applicablein the present case provided in relevant part:

"SECTION II - COVERAGE

* * *

1. Coverage

On behalf of the insured we will pay for loss up to theLimits of Liability, in excess of the deductible, that theinsured becomes legally obligated to pay as a result of aclaim first made against the insured during the policy period,or any Extended Reporting Period provided. The loss mustarise out of the negligent acts, errors, or omissions in theconduct of the insured's business ***.

* * *

With respect to the insurance afforded by this policy, weshall defend any claim first made during the policy periodseeking damages to which this insurance applies even if theallegations of the claim are groundless, false, or fraudulent. We may make such investigation of any negligent act, error, oromission as we deem expedient

* * *

SECTION IV - EXCLUSIONS

This insurance does not apply to any claim for, or arising outof:

* * *

4. Any liability for money received by an insured orcredited to an insured for fees, premiums, taxes, commissions,loss payments, or escrow or brokerage monies."

Utica maintains that the complaint's allegations set forthprecisely the type of risk Utica sought to exclude in the foregoingexclusion. Shriver disagrees, arguing that Reliance's claim wasfor Shriver's failure to pay premiums and that, based on thelanguage of the exclusion, such a claim was not excluded.

When construing the language of an insurance policy, courtsmust accord terms their plain and ordinary meaning and apply thoseterms as written unless such application contravenes public policy. Pekin Insurance Co. v. Willett, 301 Ill. App. 3d 1034, 1037 (1998). Provisions that limit or exclude coverage must be construedliberally in favor of the insured and against the insurer. StateFarm Mutual Automobile Insurance Co. v. Villicana, 181 Ill. 2d 436,442 (1998). But, if an exclusion is clear and unambiguous and doesnot contravene public policy, it will be applied as written. PekinInsurance Co., 301 Ill. App. 3d at 1037.

Here, the clear and unambiguous language of the exclusiondemonstrates that the exclusion applied to the allegations ofReliance's complaint. Shriver, however, contends that, becauseReliance sued for Shriver's failure to pay premiums to Reliance andnot for money received for premiums, the exclusion did not apply. We do not agree. To accept Shriver's argument we would have toconclude, as Utica points out, that Shriver's "failure to pay" hadnothing to do with the fact that it had collected premium moniesdue Reliance. However, the complaint alleges that Shriver"collected premiums" for Reliance and then failed and refused topay those premiums to Reliance. According to Reliance's complaint,the basis for Shriver's liability was Shriver's failure to forwardto Reliance the premiums collected or received on behalf ofReliance for insurance policies issued by Reliance.

Shriver also contends that, for Reliance's lawsuit toconstitute a "claim for, or arising out of any liability for moneyreceived by [Shriver]," Reliance had to allege that Shriver'sreceipt of the money was "wrongful." Shriver asserts that, because"Reliance made no allegation that Shriver's actual receipt of thepremiums to be collected was in some way wrongful," the exclusiondid not apply. However, the exclusion makes no reference to the wrongful receipt of money by an insured, and we refuse to read suchan interpretation into it. The explicit language of the exclusiondenies coverage for any liability for money received for premiumsand not just liability brought about by an insured's wrongfulreceipt of premium money. We agree with Utica that Reliance'scomplaint alleged the type of risk Utica intended to exclude fromcoverage.

Illinois courts have not published any decisions interpretingthe identical exclusion at issue here. However, similar oridentical exclusions have been interpreted by a number of otherjurisdictions, and we find particularly instructive the decision inUtica Mutual Insurance Co. v. Miller, 130 Md. App. 373, 746 A.2d935 (2000), wherein the exclusion in question was identical to theexclusion at issue in the present case.

In Miller, the appellant, Utica Mutual Insurance Co. (UticaMutual), contended that the trial court erred in determining thatit had a duty to defend the appellee, Miller, because the "moneyreceived" exclusion in its errors and omissions policy barredcoverage. In considering this issue, the Maryland Court of SpecialAppeals pointed out that, in determining whether coveragepotentially existed, it must compare the insurance policy to theallegations set forth in the underlying action. Miller, 130 Md.App. at 384, 746 A.2d at 940. The court stated that the "gravamen"of the underlying complaint was that the insured broker (Miller)"failed to remit $326,480.12 in premiums collected on behalf of" aninsurer. Miller, 130 Md. App. at 384, 746 A.2d at 940. The courtdetermined that, if the only cause of action asserted in theunderlying complaint was "based on [Miller's] failure to remitpremiums collected, [the court] would hold that [Utica Mutual] hadno duty to defend under the monies received exclusion" Miller, 130Md. App. at 385, 746 A.2d at 942.

Unlike our case, however, the underlying complaint in Millercontained other claims that did not fall under the expressprovisions of the money-received exclusion and, therefore, UticaMutual had a duty to defend on those alternate claims. Nonetheless, the court repeated its prior determination regardingthe application of the exclusion, stating that, "[i]f at some pointduring litigation these [alternate] claims were dismissed, and allthat remained were the claims based on the premiums received, then[Utica Mutual's] duty to defend would be extinguished." Miller,130 Md. App. at 387, 746 A.2d at 942.

Here, as in Miller, the "gravamen" of the underlying complaintwas that the insured broker, Shriver, failed to remit $259,269.15in premiums collected on behalf of Reliance. Thus, on the face ofthe complaint, the allegations failed to state facts that broughtthe case within or potentially within the policy's coverage. Acomparison of the complaint with the exclusion in question leads usto conclude, as did the court in Miller, that a claim based onpremiums collected but not forwarded to an insurer is excluded fromcoverage under the insurer's errors and omissions policy.

Shriver contends, however, that Miller is distinguishablebecause the broker there, unlike Shriver, had actually received thedisputed premiums. Here, Shriver asserts, Utica was aware of thetrue but unpleaded fact that Shriver never received the returnpremium from Home State nor the premiums from the new Home Statepolicy fronted by Reliance. Therefore, even if the allegations ofthe underlying complaint alone did not put Utica on notice of itsduty to defend, the complaint together with unpleaded facts thatUtica learned of after the filing of the complaint triggered itsduty to defend.

Utica argues that the "true but unpleaded facts" doctrineapplies only to facts taken in addition to the allegations of theunderlying complaint and not to facts that are offered incontravention of the allegations. Utica maintains that Shriver didnot offer any additional facts but, instead, asked the court toreject the complaint's allegations in favor of Shriver's version ofthe "true facts." Utica asserts that the record is absent of anytestimony that the statements in Shriver's correspondence were trueor that Utica knew them to be true. Alternatively, Utica arguesthat, even if Shriver's unpleaded facts were true, the facts haveno bearing on the duty to defend.

Shriver responds that Utica never disputed the facts offeredby Shriver in support of its motion for summary judgment and thatthe trial court noted, in making its ruling, that Utica made nocontention that "the facts as claimed by Shriver in its motion andas provided to Utica by Shriver were anything but true." The trialcourt's ruling, however, ignored Utica's contention in its motionto dismiss that Shriver's attachments to its summary judgmentmotion (which included Charles Shriver's affidavit, his letter toUtica, and Utica's questionnaire) did "not place at issue any 'truebut unpleaded facts known to the insurer to be correct.' " Uticaalso contended that Charles Shriver's belief that he was not liabledid not equate with knowledge by Utica that Shriver was "correct"in his assertion. We are of the opinion that these contentions byUtica sufficiently communicated its position that it was notaccepting the facts as related by Charles Shriver to be true. Also, the bystander's report, filed in lieu of a report ofproceedings of the hearing before the trial court, states thatUtica advised the court that it would rest on the arguments itpresented in its motion to dismiss as well as in its subsequentmotion for summary judgment. Consequently, in our view, the recordbefore us does not support the trial court's conclusion that Uticadid not contest the veracity of the facts as claimed by Shriver.

In making its ruling that Utica's duty to defend had beeninvoked by true but unpleaded facts known to Utica, the trial courtstated that it found "most helpful" this court's decision inIndiana Insurance Co. v. Hydra Corp., 245 Ill. App. 3d 926 (1993).However, our decision in Indiana Insurance Co. was not based on the"true but unpleaded facts" doctrine because there was no evidenceof unpleaded facts that indicated that the underlying claim fellwithin or potentially within the policy coverage. IndianaInsurance Co., 245 Ill. App. 3d at 929. Moreover, we do notbelieve that the doctrine was meant to be applied to situationssuch as existed in this case, i.e., where the only extraneous factsthe insurer possessed were supplied by the insured. In such asituation the insurer has no way of knowing whether the facts aretrue unless it conducts an independent investigation. A similarconclusion was set forth in a footnote in Associated Indemnity Co.v. Insurance Co. of North America, 68 Ill. App. 3d 807, 817 n.5(1979), the case that established the "true but unpleaded facts"doctrine in Illinois.

Typically, in cases where the "true but unpleaded facts"doctrine has been applied to show that an insurer had the duty todefend, the extraneous facts possessed by the insurer and known tobe true were facts the insurer discovered during its owninvestigation of the underlying action.

In La Rotunda v. Royal Globe Insurance Co., 87 Ill. App. 3d446 (1980), the court determined that Royal Globe had a duty todefend where the results of its own investigation disclosed thetrue but unpleaded fact that all of the land in question was notused as a junkyard or refuse dump. Therefore, smoke from the land,which caused a driving accident on a neighboring road, might havecome from the vacant part of the land and not the junkyard, makingthe business exclusion in Royal Globe's policy inapplicable.

In Associated Indemnity Co., the insurer, Insurance Company ofNorth America (INA), knew that unpleaded facts related to it byAssociated Indemnity were true. INA possessed a file containingdocuments produced in the underlying litigation that verified thetruth of Associated Indemnity's facts. Also, INA knew the facts tobe true because it was defending another party in the underlyingaction. Associated Indemnity Co., 68 Ill. App. 3d at 818-19.

Nonetheless, even if we were to accept the trial court'sconclusion in the instant case that Shriver's unpleaded facts mustbe assumed to be true, we do not believe these facts raised thepossibility that Reliance's action against Shriver was within thecoverage of Utica's policy.

The exclusion in question provided:

"This insurance does not apply to any claim for, or arisingout of:

* * *

4. Any liability for money received by an insured orcredited to an insured for fees, premiums, taxes, commissions,loss payments, or escrow or brokerage monies." (Emphasisadded.)

In his letter to Utica, Charles Shriver explained the factsleading up to Reliance's lawsuit. He explained that a policyfronted by Security of Hartford for Home State had been canceledearly and that the "eventual return premium under the policy ***was a credit due back from [Home State] on our account current." According to Mr. Shriver's letter, Home State issued a new policyfronted by Reliance and told Mr. Shriver that he could use the oldpremium against the new premium as an offset. Mr. Shriver furtherstated in his letter that Reliance subsequently informed him thathe should not be offsetting premiums and that he should be payingReliance directly. Mr. Shriver explained that he had no contractwith Reliance but that Home State advised him to send moneydirectly to Reliance. Mr. Shriver stated further that he contactedReliance and explained to it that he "would be using the offsetpremium on Robinson Bus which Home State said [he] could use." Hefurther stated that, after receiving Reliance's approval, he "senta check for $166,000 and used the offsetting credit premium fromHome State for the balance that was due." (Emphasis added.) Hethen explained to Utica how he subsequently received a statementfrom Reliance asking him for monies that he had already paidthrough the premium offset and the check he had sent. Mr. Shriveradvised Utica of the pending lawsuit.

Charles Shriver's letter establishes that the premium money atissue in the Reliance lawsuit was credited to Shriver and that Mr.Shriver, in turn, applied the credit premium as payment on thepremium due on the policy fronted by Reliance. Nothing in Mr.Shriver's letter proves that the premium was credited to theaccount of the policyholder, as Shriver alleges in its brief.

Upon receiving Charles Shriver's letter, Utica sent him aquestionnaire, instructing him to complete it and to return it"with all related files material." From the record before us, wecannot discern what "files material," if any, was submitted by Mr.Shriver to Utica. The only documents in the record that appear tohave been sent to Utica are Charles Shriver's letter and thequestionnaire he completed. Charles Shriver's responses to thequestionnaire indicate that the error alleged to have beencommitted by his insurance agency pertained to a dispute over apremium. In the column where Mr. Shriver was to check the alleged"cause of loss," he checked "other." The causes of loss listed onthe questionnaire clearly dealt with negligent acts, errors oromissions, i.e., conduct the policy was designed to cover. However, Reliance's complaint did not allege negligent conduct onthe part of Shriver.

Throughout its brief, Shriver refers to the investigationUtica conducted after receiving Charles Shriver's letter and to thefacts Utica learned from that investigation. However, the recordreveals that Utica's questionnaire constituted the extent of itsinvestigation. After receiving Charles Shriver's responses to thequestionnaire, Utica apparently determined that no furtherinvestigation was required, and, in our view, such a determinationwas justified. The face of the complaint, the contents of CharlesShriver's letter, and his responses to Utica's questionnairedemonstrated that Reliance's lawsuit pertained to a claim for moneyeither received by Shriver or credited to Shriver for a premium. We conclude, therefore, that Reliance's complaint alleged a premiumdispute and that, even when considered with the extraneous factsset forth in Charles Shriver's letter, the dispute was excludedfrom coverage.

Accordingly, because Utica owed no duty to defend Shriver,Shriver's complaint failed to state a cause of action. We,therefore, reverse the judgment of the circuit court of Du PageCounty and remand this cause for the entry of judgment on Utica'smotion to dismiss.

Reversed and remanded.

McLAREN and O'MALLEY, JJ., concur.