AMERICAN SAFETY CASUALTY INSURANCE COMPANY v. CITY OF WAUKEGAN (March 16, 2012)

In 2002, DNA evidence exonerated Alejandro Dominguez from a crime for which he was convicted in 1990. He brought suit against the City of Waukegan in 2004, alleging both state and federal claims. Since Waukegan had insurance against these types of claims, it notified its carriers. However, it had different carriers in 1989 (the year of the arrest) and 2002 (the year of exoneration). Both carriers refused to defend, pointing the finger at each other. The district court dismissed his wrongful arrest claim as untimely since a wrongful arrest claim accrues on the date of the arrest. The wrongful conviction claims, which accrue upon exoneration, were tried to a jury. He received a verdict of approximately $9 million against an individual Waukegan police officer. American Safety, the 2002 carrier, eventually brought a declaratory judgment action against Waukegan, which then brought the other carrier into the suit. Judge Kendall (N.D. Ill.) concluded that American Safety’s policy did apply and that it had to indemnify Waukegan for the verdict as well as its legal fees in defending the action. The insurance companies appeal.

In their opinion, Seventh Circuit Chief Judge Easterbrook, Circuit Judge Bauer, and District Judge Shadid affirmed. The Court noted that the district court relied on McFatridge in reaching its conclusion. McFatridge held that the “occurrence” in malicious prosecution claim coverage is the exoneration since there is no claim until the plaintiff is exonerated. The Court, in that case, noted that an Illinois appellate court decision reached the same result and the Illinois Supreme Court has never spoken on the subject. The Court rejected the insurance companies’ argument that McFatridge was decided erroneously, while at the same time recognizing that it is the minority view. The Court added its view that the result was the right result for policy reasons. It also refused to certify the question to the Illinois Supreme Court. The Court turned to American Safety’s other challenges. First, it rejected the notion that American Safety’s duty to defend did not arise until the City paid its deductible. Next, it rejected the argument that the refusal to defend was not unreasonable because McFatridge had not yet been decided. The Illinois case had been on the books for years and American Safety could have filed a declaratory judgment action instead of simply refusing to defend. Finally, the Court rejected American Safety’s argument that the award of fees should be treated as damages rather than costs since the City had been dismissed as a party and was incurring them as part of its obligation to defend the officer. But the policy also covers the individual officer as well as the city so the fees are “costs” under Section 1988 and not damages.