In the
United States Court of Appeals
For the Seventh Circuit
No. 01-2855
FIRST INSURANCE FUNDING CORPORATION,
Plaintiff-Appellant,
v.
FEDERAL INSURANCE COMPANY,
Defendant-Appellee.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 00 C 8135--John W. Darrah, Judge.
ARGUED FEBRUARY 20, 2002--DECIDED MARCH 28, 2002
Before BAUER, RIPPLE and MANION, Circuit
Judges.
RIPPLE, Circuit Judge. Defrauded of over
$4.3 million, First Insurance Funding
Corporation ("First Insurance") sought
indemnification for these losses under
the terms of a financial institution bond
that its parent corporation had purchased
from Federal Insurance Co. ("Federal").
When Federal denied the claim for
coverage, First Insurance filed this
action seeking a declaratory judgment of
Federal’s obligation to indemnify for
these losses. In addition, First
Insurance alleged that Federal’s actions
constituted not only a breach of contract
but also an unreasonable and vexatious
denial of coverage in violation of the
Illinois Insurance Code. Upon Federal’s
motion, the district court dismissed the
complaint concluding that the bond did
not cover the losses for which First
Insurance sought indemnification. In the
district court’s determination, this
ruling also foreclosed First Insurance’s
claim against Federal under the Illinois
Insurance Code. For the reasons set forth
in the following opinion, we affirm the
judgment of the district court.
I
BACKGROUND
A. Facts
Operating from Northbrook, Illinois,
First Insurance serves as an insurance
premium finance company. In this role, it
provides loans to businesses that seek to
finance the payment of their annual
insurance premiums. Typically, these
businesses obtain financing from First
Insurance through an independent
insurance broker. More precisely, a
business seeking insurance coverage hires
an independent insurance broker for a
dual purpose; the broker not only
procures insurance coverage for the
business but also obtains the necessary
financing for this purchase from an
insurance premium finance company such as
First Insurance.
If the broker and its business client
select First Insurance to finance the
transaction, the parties document the
loan through a standardized finance
agreement. To expedite the loan
application process, First Insurance
provides brokers with blank premium
finance agreements as well as related
computer software. Using this material,
the broker assists its business client in
filling out the loan agreement. Once the
broker and client complete and sign the
finance agreement, they forward the
document to First Insurance which then
must review and approve the application.
Once First Insurance approves the loan,
it disburses the loan amount to the
broker who, in turn, pays the insurance
premium on behalf of its client.
Beginning in 1996, First Insurance
provided funding for a significant volume
of legitimate premium finance loans for
clients of Colesons Insurance Group
("Colesons")--an independent insurance
broker. Colesons had received
authorization from First Insurance to
select it from among vendors offering
premium financing to Colesons’ business
clients. In submitting its clients’ loan
applications, Colesons used the blank
premium finance agreements and related
software provided by First Insurance.
Based on these legitimate transactions,
Colesons developed a reputation with
First Insurance for trustworthy business
dealings.
However, at some time prior to August
2000, certain individuals associated with
Colesons began submitting fraudulently
altered premium finance agreements to
First Insurance. Specifically, these
documents bore forged signatures of
Colesons’ clients that purportedly sought
premium finance loans from First
Insurance. The fraudulently altered
documents shared certain similarities.
Each premium finance agreement bore
Colesons’ warranty that the client’s
signature was genuine. In addition, when
preparing the altered documents, the
forgers used the software program that
First Insurance had provided Colesons. In
reliance on these forged and fraudulently
altered documents, First Insurance
disbursed over $4.3 million to Colesons.
Upon discovering the fraudulent
transactions, First Insurance promptly
sought indemnification for its losses
under the terms of a financial
institution bond that its parent
corporation had purchased from Federal.
This bond, which served as an insurance
policy, provided coverage against losses
resulting from certain fraudulent or
dishonest conduct perpetrated against
First Insurance. Citing, among other
reasons, Exclusion 3.m of the bond,
Federal denied the request for
indemnification. Exclusion 3.m provides
that:
This bond does not directly or indirectly
cover . . . loss caused by any agent,
broker, factor, commission merchant,
independent contractor, intermediary,
finder or other representative of the
same general character of the ASSURED.
R.12, Ex.A. Federal reasoned that
Colesons served as an intermediary,
finder or other representative of First
Insurance. As such, in Federal’s
estimation, the terms of the bond did not
cover the losses for which First
Insurance sought indemnification.
B. District Court Proceedings
1.
On December 29, 2000, First Insurance,
invoking the diversity jurisdiction of
the district court,/1 commenced this
multi-count action against Federal. In
particular, the complaint sought a
declaratory judgment that the terms of
the bond required Federal to indemnify
First Insurance for the losses it
sustained as a result of the forgery
scheme. First Insurance also alleged that
Federal’s failure to indemnify
constituted not only a breach of contract
but also an unreasonable and vexatious
denial of coverage in violation of
Section 155 of the Illinois Insurance
Code.
Federal promptly moved to dismiss the
complaint. Specifically, the insurer
submitted that Colesons was an
intermediary, finder or similar
representative of First Insurance thereby
implicating Exclusion 3.m of the bond.
Thus, in Federal’s estimation, the bond
did not cover the losses for which First
Insurance sought indemnification.
Moreover, absent a valid claim for
coverage, Federal reasoned that First
Insurance could not maintain a cause of
action under the Illinois Insurance Code.
2.
After reviewing the pleadings, the
district court dismissed First
Insurance’s complaint. Finding the terms
of the contract unambiguous, the district
court concluded that the bond excluded
from coverage the losses for which First
Insurance sought indemnification. In the
district court’s estimation, Colesons
functioned as an intermediary or finder
of First Insurance thereby implicating
Exclusion 3.m of the bond. Because this
provision barred from coverage losses
caused by an intermediary or finder,
First Insurance could not state a valid
claim for coverage under the bond.
According to the district court, this
determination also foreclosed First
Insurance’s claim under Section 155 of
the Illinois Insurance Code. Relying on
Illinois law, the court concluded that an
insured must have a legitimate claim for
coverage before it may maintain an action
against an insurer under this statutory
provision. First Insurance’s complaint
was dismissed with leave to amend its
allegations.
Availing itself of this opportunity,
First Insurance submitted an amended
complaint to the district court./2 The
district court, however, concluded that
First Insurance had failed to allege any
new allegations and had merely
recapitulated its previous pleading.
Moreover, the district court expanded its
previous ruling, noting that, even if
Colesons had not functioned as an
intermediary or finder, the insurance
broker certainly served First Insurance
as a representative of the same general
character. Once again concluding that
Exclusion 3.m defeated First Insurance’s
request for indemnification, the district
court again dismissed the complaint with
leave to amend. First Insurance, however,
failed to amend the complaint./3
II
DISCUSSION
We review the district court’s grant of
a motion to dismiss de novo. See Tobin
for Governor v. Ill. State Bd. of
Elections, 268 F.3d 517, 521 (7th Cir.
2001). We not only accept as true all of
the well-pleaded factual allegations in
the plaintiff’s complaint but also draw
all reasonable inferences in the
plaintiff’s favor. See id. We, however,
need not accept as true "conclusory
statements of law or unsupported
conclusions of fact." McLeod v. Arrow
Marine Transp., Inc., 258 F.3d 608, 614
(7th Cir. 2001). After reviewing the
plaintiff’s pleadings under these rules,
if it appears beyond doubt that the
plaintiff cannot prove any set of facts
that would entitle it to relief, then we
shall affirm the district court’s
dismissal of the complaint. See Tobin for
Governor, 268 F.3d at 521.
A.
1.
Before turning to the provisions of the
bond, we set forth the principles that
will guide our inquiry. Interpretation of
an unambiguous contract--including
insurance policies-- poses a question of
law. See Zemco Mfg., Inc. v. Navistar
Int’l Transp. Corp., 270 F.3d 1117, 1123
(7th Cir. 2001). Under Illinois law,/4
when interpreting an insurance agreement,
the court’s primary function is to
ascertain and give effect to the true
intentions of the contracting parties.
See Fid. & Cas. Co. v. Merridew, 762
N.E.2d 570, 574 (Ill. App. Ct. 2001). In
doing so, we must consider the agreement
as a whole, "with due regard to the risk
undertaken, the subject matter that is
insured, and the purpose of the entire
contract." Maremont Corp. v. Cont’l Cas.
Co., 760 N.E.2d 550, 554 (Ill. App. Ct.
2001). Absent some contrary indication
from the terms of the agreement,
undefined and unambiguous terms are
assigned their plain and ordinary
meaning. See Benedict v. Fed. Kemper Life
Assurance Co., 759 N.E.2d 23, 27 (Ill.
App. Ct. 2001). If the terms of the
policy are unambiguous, we give effect to
the agreement as written. See id.
Although the court liberally interprets
in favor of the insured provisions that
limit or exclude coverage, it may not
read an ambiguity into a policy to
provide coverage for the insured. See
Fid. & Cas. Co., 762 N.E.2d at 574.
Rather, an ambiguity exists only if the
insurance policy is susceptible to
reasonable alternate interpretations. See
Maremont Corp., 760 N.E.2d at 554. Any
such ambiguities will be "construed in
favor of the insured and against the
insurer that drafted the policy." Id.
2.
We now address the parties’ contentions
concerning the effect of Exclusion 3.m on
First Insurance’s claim for
indemnification. This provision of the
bond provides:
This bond does not directly or indirectly
cover . . . loss caused by any agent,
broker, factor, commission merchant,
independent contractor, intermediary,
finder or other representative of the
same general character of the ASSURED.
R.12, Ex.A. The district court concluded
that this provision unambiguously barred
First Insurance from recovering, under
the terms of the bond, the losses
resulting from the forgery scheme
perpetrated against it. First Insurance,
however, submits that, during the
fraudulent transactions, Colesons acted
solely on its own behalf, and thus could
not have served as an intermediary,
finder or other representative of First
Insurance thereby rendering Exclusion 3.m
inapplicable to the request for
indemnification. Moreover, relying on an
unsupported and conclusory statement in
its pleadings, First Insurance alleges
that it never employed Colesons at any
time to serve as an intermediary, finder
or similar representative. Federal’s
position on appeal largely tracks the
rationale of the district court’s
opinion.
Because the bond does not define the
terms "intermediary", "finder", or "other
representative of the same general
character", we must assign these words
their plain and ordinary meaning.
Generally, an intermediary acts as a
middleman, "a broker, one who is employed
to negotiate a matter between two
parties, and who for that purpose may be
[an] agent of both." Black’s Law
Dictionary 731 (5th ed. 1979). Likewise,
Illinois courts have defined a finder
relationship as "an arrangement by which
an intermediary finds, introduces, and
brings together parties to a business
opportunity, leaving the ultimate
negotiation and consummation of the
business transaction to the principals."
Ruskin v. Rodgers, 399 N.E.2d 623, 637
(Ill. App. Ct. 1979) (quoting 24 A.L.R.3d
1164). Although the final phrase "other
representative of the same general
character" lacks a precise definition,
the import of these words is clear. The
parties designed the phrase as a
catchall--excluding from coverage losses
caused by entities that, although failing
to fit the technical definition of an
intermediary or finder, functioned
essentially in that same general
capacity.
Although Illinois law instructs us to
construe liberally in favor of the
insured provisions that exclude coverage,
the terms of Exclusion 3.m are
unequivocal: the bond does not cover
losses caused by an intermediary, finder
or other similar representative of First
Insurance. In its brief to this court,
First Insurance, relying on a conclusory
statement from its pleadings, submitted
that it never employed Colesons to act as
its intermediary, finder or similar
representative. However, at oral
argument, when asked directly to
characterize the relationship between
First Insurance and Colesons with regard
to the legitimate transactions, counsel
for First Insurance conceded that
Colesons functioned as an intermediary of
the premium finance company. Even absent
this concession, it is evident from the
pleadings that First Insurance enjoyed a
special relationship with Colesons. First
Insurance not only authorized Colesons to
select it from among vendors offering
premium financing to Colesons’ business
clients but also provided Colesons with
blank finance agreements and related
computer software. Colesons then used the
documents and software to obtain for its
clients premium financing from First
Insurance. This activity is the precise
type of conduct in which an intermediary,
finder or other representative engages--
bringing businesses together to
consummate a transaction. Based on the
pleadings and counsel’s concession at
oral argument, we conclude that Colesons
served as First Insurance’s intermediary,
finder or other representative of the
same general character.
Although this determination seemingly
would preclude First Insurance from
recovering its losses under the terms of
the bond, it also has submitted that
Colesons could not have functioned as an
intermediary or finder during the
fraudulent transactions. Intermediaries
or finders bring two or more parties
together for the purpose of conducting
business. Because Colesons brought First
Insurance together with a fictitious
party during the fraudulent transactions,
First Insurance posits that Colesons
could not have functioned as finder or
intermediary during the course of the
forgery scheme thereby removing the claim
for indemnification from the ambit of
Exclusion 3.m.
We cannot accept this contention. The
bond places squarely on First Insurance
the risk associated with dishonest or
fraudulent conduct perpetrated against it
by a certain class of entities. In
unequivocal terms, Exclusion 3.m states
that First Insurance, rather than
Federal, must bear losses caused by,
among others, First Insurance’s agents,
intermediaries, finders or other
representatives of the same general
character. In this case, First Insurance
cloaked Colesons with the authority to
act as its intermediary, finder or other
representative of the same general
character. During the fraudulent
transactions, First Insurance dealt with
Colesons under the apprehension that
Colesons was acting in such a capacity.
It relied on Colesons’ status as its
intermediary in approving the loans to
the fictitious customers and disbursing
the funds to this independent insurance
broker. Although employees of Colesons
abused their employer’s status as an
intermediary or finder, this factor does
not permit First Insurance to escape the
plain implications of the exclusion
clause. Under the terms of the bond,
First Insurance bore the risk of cloaking
Colesons with the authority to act as its
intermediary, finder or other
representative of the same general
character. Federal did not agree to
indemnify First Insurance for such
losses. Accordingly, we conclude that
Federal properly denied under Exclusion
3.m First Insurance’s request for
indemnification./5
B.
Finally, we turn to First Insurance’s
contention that Federal unreasonably and
vexatiously denied its request for
indemnification thereby creating a cause
of action against Federal under Section
155 of the Illinois Insurance Code.
Section 155 provides
In any action by or against a company
wherein there is in issue the liability
of a company on a policy or policies of
insurance or the amount of the loss
payable thereunder, or for an
unreasonable delay in settling a claim,
and it appears to the court that such
action or delay is vexatious and
unreasonable, the court may allow as part
of the taxable costs in the action
reasonable attorney fees, [and] other
costs.
215 ILCS 5/155(1). The Illinois
legislature designed this provision to
provide a remedy to "insureds who
encounter unnecessary difficulties
resulting from an insurance company’s
unreasonable and vexatious refusal to
honor its contract with the insured."
Korte Constr. Corp. v. Am. States Ins.,
750 N.E.2d 764, 771 (Ill. App. Ct. 2001).
However, when an insurer denies the claim
of an insured because no coverage exists,
the insurer has not failed to honor its
contractual obligations under an
insurance policy. As such, Illinois
courts allow a cause of action to proceed
under Section 155 only if the insurer
owed the insured benefits under the terms
of the policy. See Armando v. State Farm
Mut. Auto. Ins. Co., 751 N.E.2d 582, 586
(Ill. App. Ct. 2001) ("Furthermore,
because there is no coverage under the
State Farm policy, we find that State
Farm did not act vexatiously or
unreasonably in handling plaintiff’s
claim."); Martin v. Ill. Farmers Ins.,
742 N.E.2d 848, 857 (Ill. App. Ct. 2000)
("A[n] [insurer] cannot be liable for
section 155 relief where no benefits are
owed."). See also Prisco Serena Sturm
Architects, Ltd. v. Liberty Mut. Ins.
Co., 126 F.3d 886, 894 (7th Cir. 1997)
(construing Section 155 of the Illinois
Insurance Code). In this case, we have
concluded that Federal had no obligation
to indemnify First Insurance for the
losses it suffered as a result of the
forgery scheme. Pursuant to Illinois law,
absent a legitimate claim for coverage
under the terms of the bond, First
Federal may not seek relief under Section
155. As such, we conclude that the
district court properly dismissed this
portion of First Insurance’s complaint.
Conclusion
We conclude that the district court
correctly dismissed First Insurance’s
complaint. Accordingly, the judgment of
the district court is affirmed.
AFFIRMED
FOOTNOTES
/1 First Insurance is an Illinois corporation with
its principal place of business in Northbrook,
Illinois. Federal is incorporated in Indiana with
its principal place of business in Warren, New
Jersey. The amount in controversy exceeds
$75,000.
/2 In the most conclusory fashion, First Insurance
pleaded in its amended complaint that the "exclu-
sion contains one or more ambiguities that must
be resolved in favor of coverage." R.12, para.
18.b. In a similar manner, First Insurance stated
that it "never engaged, employed or contracted
with Colesons to act as its ’finder,’ ’intermedi-
ary,’ or other representative for the purpose of
generating premium finance business." R.12, para.
18.c.
/3 We note that the district court never entered a
final judgment as required by Fed. R. Civ. P. 58.
We have criticized in the past the practice
followed here. Nevertheless, because it is clear
that the district court intended to terminate the
litigation, we may exercise appellate jurisdic-
tion. See Otis v. City of Chicago, 29 F.3d 1159,
1164 (7th Cir. 1994) (en banc); Eberhardt v.
O’Malley, 17 F.3d 1023, 1024 (7th Cir. 1994).
/4 The parties agree that Illinois law governs
construction of the terms of the bond.
/5 Because we believe that Federal must prevail on
the basis of Exclusion 3.m, we need not address
its alternative arguments for affirmance.