In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 05-4514
GREY DIRECT, INC.,
Plaintiff-Appellant,
v.
ERIE INSURANCE EXCHANGE,
Defendant-Appellee.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 04 C 5790—Amy J. St. Eve, Judge.
____________
ARGUED MAY 11, 2006—DECIDED AUGUST 21, 2006
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Before POSNER, EASTERBROOK, and WOOD, Circuit Judges.
WOOD, Circuit Judge. The question in this case is who
should bear the loss from a printing company’s mistake that
wound up costing the company (or a related firm) nearly $1
million. The company, Unicomm Direct (“Unicomm”),
assigned its rights under an insurance policy with Erie
Insurance Exchange to Grey Direct, Inc., the direct mail
company whose work Unicomm was handling. Grey now
takes the position that the insurance covered this loss. Erie
begs to differ: in its view, Unicomm did not even purchase
the relevant coverage until well after the error occurred and
the loss was established, and thus Erie had neither a duty
to defend nor a duty to indemnify Unicomm. Furthermore,
it continues, nothing in the dealings between the parties
2 No. 05-4514
supports the notion that Erie graciously agreed after the
fact to cover this large known loss. The district court was
persuaded by Erie’s arguments and granted summary
judgment in its favor. Our de novo review brings us to the
same conclusion; we therefore affirm.
I
In 2003, Grey managed an advertising campaign for
United Airlines called “Fly Three, Fly Free.” Under that
program, customers who purchased three round-trip flights
on United during a specified time period were entitled to a
travel certificate that could be redeemed for one free round-
trip flight. Grey decided to hire another firm, CommDirect,
a direct-mail advertising production company, to print and
mail the travel certificates to qualifying customers. Mary
Manade Lipuma is the director, sole shareholder, and only
employee of CommDirect. Together with her husband, she
also owns Unicomm, which is in the same business as
CommDirect.
After Grey hired CommDirect to produce the travel
certificates, Lipuma transferred the job to Unicomm. She
did not inform Grey about this decision, but the record does
not reflect whether there was anything in the agreement
with Grey that specifically prohibited subcontracting. On
September 11, 2003, Unicomm made a grave error: it
mailed two travel certificates, instead of one, to roughly
6,000 United customers. Lipuma admitted responsibility for
the error on September 18, 2003, in a letter to Grey. Grey
indemnified United for the resulting loss, to the tune of
$967,720. On December 3, 2003, Grey sued CommDirect;
during the course of those proceedings, it learned that
Unicomm had actually done the work and committed the
error. Upon learning this, Grey voluntarily dismissed the
action against CommDirect and filed a new suit for breach
of contract against Unicomm, in which it obtained a default
No. 05-4514 3
judgment on June 20, 2004, for the full loss, plus court costs
and attorney’s fees. At that point, the court ordered
Unicomm to assign its rights against its insurer, Erie, to
Grey.
Unicomm had purchased its business owners’ insurance
from Erie in August of 2003. The policy, which was issued
September 4, 2003, for the period of August 25, 2003,
through August 25, 2004, did not include a Printers Errors
and Omissions provision. After the expensive September 11
printing error, Grey told Lipuma that she would have to
purchase this type of coverage if she wanted to continue to
work with Grey. Lipuma accordingly added this coverage to
Unicomm’s policy on October 23 or 24, 2003; the effective
date on the amended declaration page Erie issued at the
time was October 15, 2003. Erie charged $54 for the Errors
and Omissions provision, pro-rating the price to cover the
partial period from October 15, 2003 through August 25,
2004, rather than the full annual fee of $63. Whether later
events changed the effective date of the Printers Errors and
Omissions provision is a matter of dispute, which we
address below.
One month after Grey filed suit against CommDirect,
Unicomm sent a copy of the complaint to Erie. That letter,
dated January 2, 2004, requests coverage under the
Unicomm policy and represents that Grey’s complaint
was “against the Company [i.e., Unicomm] and Comm-
Direct, Inc.” The enclosed complaint, however, plainly
names only CommDirect as a defendant. Erie responded on
January 21, 2004, acknowledging receipt of Unicomm’s
demand and denying coverage on the ground that the
lawsuit did not involve any of the types of injury the
policy covered (bodily injury, property damage, personal
injury, or advertising injury). Erie reserved the right to
assert other grounds for disclaiming coverage, but it did not
specifically mention the Errors and Omissions endorsement.
Erie did, however, note that “some of the damages being
4 No. 05-4514
claimed occurred prior to our policy inception.” Unicomm
wrote back on February 23, 2004, asserting for the first
time that the Printers Errors and Omissions endorsement
that had been added after the incident covered the loss;
Erie (which claims it never received that letter) stood firm
and continued to deny that it had either a duty to defend or
a duty to indemnify under the policy. There is no record
that Erie was given notice of Grey’s second suit, the one
against Unicomm, until after the default judgment was
entered.
At this point, Grey (Unicomm’s assignee) filed the present
suit against Erie, alleging that Erie had breached its
alleged duties to defend and indemnify Unicomm in
the underlying action. The district court found, on Erie’s
motion for summary judgment, that Erie had no duty to
defend, because the September 11, 2003, error was a
“known loss” of which Unicomm was aware in October 2003
when it contracted for Printers Errors and Omis-
sions coverage and there was no evidence that the parties
intended it to be covered. Finding no disputed issues of
material fact, it entered judgment for Erie. Grey now
appeals.
II
Grey offers three reasons why we should reverse the
district court: first, that Erie should be estopped from
relying on the “known loss” doctrine; second, that the
“known loss” doctrine does not apply to a policy docu-
ment issued after the insurance company has learned about
the loss; and third, that Erie is precluded from raising
defenses that it did not mention in its reservations of rights
letters or in earlier pleadings. Erie’s response boils down to
the simple assertion that Unicomm’s policy did not include
coverage for Printers Errors and Omissions until October
15, 2003, well after the date when the loss occurred, and
No. 05-4514 5
nothing in Illinois’s “known loss” doctrine, rules of estoppel,
or other insurance rules required Erie to defend Unicomm.
Even taking the facts in the light most favorable to Grey, as
we must, see Valentine v. City of Chicago, 452 F.3d 670, 677
(7th Cir. 2006), it is hard to imagine what the thread is on
which Grey hangs its case. A closer look, however, shows
that a single error on Erie’s part is what seems to underlie
this litigation.
Erie does not keep hard copies of the original insurance
policies that it delivers to its clients, because of the prohibi-
tive amount of space this would require. Instead, Erie
stores in electronic format the various documents that make
up a policyholder’s contract. When Erie receives a request
from its insured or another authorized person for a copy of
a policy, it refers that request to a processor (not to an
underwriter). The processor must ascertain whether any
endorsements were added after the original issuance of the
policy. If, as in the case of the Unicomm policy, there was a
later endorsement with a different effective date, the
processor must work backwards through the different
versions of the policy to arrive at the actual language of the
policy on any given earlier date.
In this case, Erie’s processor, Rebecca Murzynski, failed
to notice that there was an endorsement to the Unicomm
policy added effective October 15, 2003. When, in January
2004, she created a paper copy of the policy, she there-
fore failed to back up and re-create the policy as it had
existed prior to October 15, 2003. This meant that the
copy of the policy she printed in January 2004 erron-
eously indicated that Printers Errors and Omissions
coverage had existed from the outset (August 2003), rather
than only from October 15, 2003. Nonetheless, Grey in-
sists that the January 2004 version of the policy that
Murzynski mistakenly generated is controlling, notwith-
standing the fact that undisputed evidence shows that
it was not until after the September 11 error that Grey
6 No. 05-4514
asked Lipuma to procure the additional insurance, and that
she did not do so until October 23 or 24 of 2003. In other
words, Grey suggests that the copy of the policy re-created
months after its purchase materially altered the terms of
the contract. But nothing in the record supports this rather
outlandish hypothesis. First, other evidence makes it clear
that Lipuma purchased the Errors and Omissions provision
in October in response to the September 11, 2003, printing
mistake so that Grey would continue to work with Unicomm
in the future. Nothing indicates that either party, at that
time, thought that the change would be retroactive. Second,
there is no evidence indicating that either Erie or Lipuma
asked for a change in terms in January 2004, when
Unicomm asked for a copy of the policy. The fact that the
insurance company inadvertently provided flawed evidence
of the policy, in the form of the computer-generated copy
does not change the terms of the contract itself.
Nevertheless, even if we did treat the January 2004
copy as somehow modifying the policy, the September
printing error remains a “known loss” that would not be
covered by the policy. Illinois, whose law governs here,
holds that “the insurer has no duty to defend or indemnify
the insured with respect to the known loss ab initio, unless
the parties intended the known loss to be covered.” Out-
board Marine v. Liberty Mut. Ins., 607 N.E.2d 1204, 1210
(Ill. 1992). A known loss occurs when “the insured knows or
has reason to know, when it purchases a [ ] policy, that
there is a substantial probability that it will suffer or has
already suffered a loss.” Id. Viewed from the perspective of
October 15, 2003, or any time thereafter, the loss incurred
as a result of the September 11 mailing was known.
Outboard Marine indicates that Erie had no duty either to
defend in proceedings relating to that loss or to indemnify
any resulting judgment. Even if we thought that
Murzynski’s January 2004 error had the effect of adding the
Printers Errors and Omissions clause to the policy effective
No. 05-4514 7
August 2003, it would cover only other unknown events
meeting that description, not the September 11, 2003, gaffe,
unless there is evidence that the parties intended also to
cover the known loss. Grey argues that the January
document is exactly the kind of evidence of intent to assume
the known risk to which the Illinois Supreme Court re-
ferred, but we cannot accept it as such. The loss, recall, was
known by that time to be at least $967,720; Unicomm paid
$54 for the Printers Errors and Omissions endorsement. It
is simply beyond the pale to think that Erie was willing to
accept $54 in exchange for a certain duty to pay out nearly
a million dollars.
Another way of looking at this problem is through the
lens of the doctrine of mistake. The Restatement (Second)
of Contracts recognizes that under some circumstances a
mistake of one party makes a contract voidable:
Where a mistake of one party at the time a contract was
made as to a basic assumption on which he made the
contract has a material effect on the agreed exchange of
performances that is adverse to him, the contract is
voidable by him if he does not bear the risk of the
mistake under the rule stated in § 154, and
(a) the effect of the mistake is such that enforce-
ment of the contract would be unconscionable, or
(b) the other party had reason to know of the
mistake or his fault caused the mistake.
RESTATEMENT (SECOND) OF CONTRACTS § 153 (1981). See
also People ex rel. Department of Public Works & Bldgs. v.
South East Nat’l Bank, 266 N.E.2d 778, 780-81 (Ill. App.
1971). Here, the relevant time relates to the endorsement
to the Unicomm policy. Erie, taking matters as favorably to
Grey as we can, thought that the effective date of the en-
dorsement was October 15, 2003; because of Murzyn-
ski’s mistake, one version of the contract said that the
Printers Errors and Omissions coverage had existed from
8 No. 05-4514
the start, and thus prior to the September 11, 2003, loss.
This mistake has a material effect on the agreed exchange,
as we have just noted; the criteria spelled out in § 154
do not suggest that Erie should bear this loss (it was not
allocated by the agreement, Erie did not enter into the
contract aware that its knowledge was limited about the
facts relevant to the mistake, nor is it reasonable for the
court to allocate the risk to Erie), see RESTATEMENT (SEC-
OND) OF CONTRACTS § 154; and the effect of holding Erie to
the erroneous January version of the policy would indeed be
unconscionable. Moreover, the record leaves no doubt that
Unicomm had reason to know that it did not have this
coverage, well before it received the erroneous version of the
policy and long before it filed this lawsuit.
Our view of the case makes it unnecessary to dwell on
Grey’s other arguments. As the district court held, an
insurance company is not estopped from arguing that
it should be relieved of a duty to defend, if there was
never any such duty in the first place. See Employers Ins.
of Wausau v. Ehlco Liquidating Trust, 708 N.E.2d 1122,
1135 (Ill. 1999) (“Application of the estoppel doctrine is not
appropriate if the insurer had no duty to defend. . . . These
circumstances include . . . when the policy and the com-
plaint are compared, there clearly was no coverage or
potential for coverage.”); U.S. Fidelity & Guar. Co. v. Wilkin
Insulation Co., 578 N.E.2d 926, 930 (Ill. 1991). We thus
have no need to speculate about whether the Illinois
Supreme Court would hold that the known loss defense
is exempt from general estoppel doctrine. Second, we
disagree with Grey that Erie waived its arguments that it
had no duty to defend Grey’s first suit against CommDirect
because it never issued a policy to CommDirect, and that it
had no duty to defend Unicomm because it did not learn of
the new suit against Unicomm until after the default
judgment was entered. Erie’s answer to Grey’s second
amended complaint pleaded that CommDirect was never an
No. 05-4514 9
insured under any Erie policy. The record is devoid of
evidence showing that Erie received actual notice of the
second complaint—the one against Unicomm—prior to the
time when Grey’s counsel sent it a letter in June 2004
alerting it to the default judgment. It is noteworthy, in this
regard, that the CommDirect suit and the Unicomm suit
were filed under separate docket numbers and heard by two
different district court judges. The record thus does not
support the proposition that they were really just one big
integrated piece of litigation that Erie failed to handle
properly.
Finally, there is no evidence suggesting that Erie waived
either the known loss defense or any other defenses. To the
contrary, its letter of January 21, 2004, said that “Erie
Insurance specifically reserves the right to assert such
other grounds for disclaiming coverage and/or liability
under the policy that may be discovered during the course
of Erie Insurance’s investigation of the facts [ ] underlying
the claim or any claim arising there from [sic] . . . .” Grey
suggests that this language does not save Erie, because
by January 21, 2004, as a company it already knew about
the printing error and thus its known loss defense, and
so this was not something it discovered later during the
course of its investigation. Erie’s actual knowledge about
the error changed over time, however. More importantly, we
have noted that under Illinois law, a person claim-
ing waiver “has the burden of proving that the insurer’s
words or conduct were inconsistent with an intent to rely on
the provisions of the policy.” Loyola Univ. of Chicago v.
Human Ins. Co., 996 F.2d 895, 901 (7th Cir. 1993) (citing
Buchalo v. Country Mutual Ins. Co., 404 N.E.2d 473, 478
(Ill. App. 1980)). The evidence must be “clear, precise, and
unequivocal.” Id. Grey’s evidence of waiver does not
satisfy this demanding standard.
10 No. 05-4514
III
The district court correctly ruled that Erie had no duty to
defend Unicomm in the litigation over the expensive error
it committed on September 11, 2003. Had it not been for
Erie’s inadvertent printing of a copy of the insurance policy
that made it appear that the Printers Errors and Omissions
coverage had been in effect throughout the duration of the
policy—a proposition that the record unequivocally shows
is not correct—this lawsuit could never have been filed.
Nothing indicates that Erie had any intention of providing
coverage for the known loss from that mistake, nor did any
of its actions estop it from taking that position here. The
judgment of the district court is AFFIRMED.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—8-21-06