In its recent decision in G.M. Sign v. Pennswood Partners, 2014 Ill. App. LEXIS 188 (2nd Dist. Mar. 24, 2014), the Appellate Court of Illinois for the Second District had occasion to consider whether to engage in a choice of law analysis where only federal court precedent was available from one of the states interested in a coverage dispute.

G.M. Sign filed a class action complaint under the Telephone Consumer Protection Act (TCPA) against Pennswood Partners (“Pennswood”), a Pennsylvania corporation. The suit alleged that Pennswood intentionally sent approximately 80,000 unsolicited faxes. G.M. Sign was an Illinois corporation. Pennswood had four commercial general liability policies that were in effect during the time the faxes were sent, all of which were issued by two underwriting units of Zurich. All four policies were negotiated, delivered, and received in Pennsylvania.

Pennswood tendered the claim to Zurich and Zurich denied any obligation to defend or indemnify Pennswood. Pennswood and G.M. Sign subsequently entered into an $8 million settlement agreement that would be enforceable only against the proceeds of the policies issued by Zurich. In addition, Pennswood agreed to assign to the class its rights under the Zurich policies. The trial court approved the settlement agreement, prompting Zurich to file a declaratory judgment seeking a finding that there was no coverage under its policies pursuant to Pennsylvania law, as predicted by federal courts in Pennsylvania.  There were no controlling decisions issued by Pennsylvania state appellate courts addressing coverage owed for the claims.  Pennswood and G.M. Sign argued that Illinois law applied and that under Illinois law there was coverage. The declaratory judgment suit and the class action suit were consolidated by the trial court.

The trial court initially granted summary judgment in favor of Zurich, finding that Pennsylvania law controlled, and coverage was precluded under that state’s law as predicted by its federal courts. Three weeks later, an Illinois appellate court decided Pekin Ins. Co. v. XData, 958 N.E.2d 397 (Ill. App. 2011).  In XData, the court held that in order to determine whether a conflict of laws exists, a court should not consider federal court decisions in the absence of state law precedent because such federal decisions “only attempt to ‘predict’ [the state’s] law.”  Citing XData, G.M. Sign and Pennswood filed a motion to reconsider. The trial court then withdrew its previous order and determined that the federal decisions did not establish a conflict between Pennsylvania law and Illinois law. Therefore, the trial court held that Illinois law applied, and that Zurich had a duty to defend and indemnify Pennswood. Zurich appealed.

On appeal, Zurich argued that the trial court erred in following XData, and that under Pennsylvania law Zurich had no duty to defend or indemnify Pennswood in the underlying action. Pennswood and G.M. Sign argued that the trial court properly disregarded federal court decisions pursuant to XData, and that the trial court therefore correctly applied Illinois law.

The Second District Appellate Court declined to follow XData and concluded that the trial court should have considered federal decisions to determine whether a conflict existed. After reviewing federal decisions predicting Pennsylvania law, the Court concluded that there was a conflict between Illinois and Pennsylvania. Applying the choice-of-law rules, the court concluded that Pennsylvania law applied. Under Pennsylvania law, the Court held that the underlying complaint did not trigger a duty to defend or indemnify because it did not allege an “accident,” and there was therefore no “occurrence” under the Zurich policies.