Allianz Insurance Company v. Guidant Corporation

No. 2--07--0814 Filed: 12-29-08
______________________________________________________________________________

IN THE

APPELLATE COURT OF ILLINOIS

SECOND DISTRICT
______________________________________________________________________________

ALLIANZ INSURANCE COMPANY, ) Appeal from the Circuit Court
ZURICH SPECIALTIES LONDON ) of Du Page County.
LIMITED, GERLING KONZERN )
ALLGEMEINE VERSICHERUNGS--AG, )
LIBERTY INTERNATIONAL )
INSURANCE COMPANY, AMERICAN )
INTERNATIONAL LINES INSURANCE )
COMPANY, WESTCHESTER FIRE )
INSURANCE COMPANY, and )
LUMBERMENS MUTUAL CASUALTY )
COMPANY, )
)
Plaintiffs-Appellees, )
)
v. ) No. 03--L--1178
)
GUIDANT CORPORATION, )
ENDOVASCULAR TECHNOLOGIES, )
INC., GUIDANT SALES CORPORATION, )
ADVANCE CARDIOVASCULAR )
SYSTEMS, INC., and ORIGIN )
MEDSYSTEMS, INC., ) Honorable
) Bonnie M. Wheaton,
Defendants-Appellants. ) Judge, Presiding.
______________________________________________________________________________

JUSTICE GROMETER delivered the opinion of the court:

This appeal involves the scope of insurance coverage for numerous product liability claims

involving an implantable graft used in the repair of abdominal aortic aneurysms. The circuit court

of Du Page County granted partial summary judgment in favor of plaintiffs, Allianz Insurance

Company (Allianz) and other insurers. On appeal, defendants, Guidant Corporation (Guidant) and
No. 2--07--0814

several of its affiliates, seek reversal of the trial court's ruling. For the reasons that follow, we

affirm.1

I. BACKGROUND

A. The Ancure Device

The medical instrument at the center of this dispute is the "Ancure Endograft System"

(Ancure Device), a Y-shaped, synthetic vascular graft with an accompanying delivery catheter. The

Ancure Device is used in the repair of an abdominal aortic aneurysm, a potentially life-threatening

condition arising from the development of a weak area in the abdominal portion of the wall of the

aorta. As a result of this weakness, the artery balloons and, in more severe cases, ruptures.

Abdominal aortic aneurysms generally require open abdominal surgery to repair. However, the

Ancure Device provides an alternative to traditional "open repair" surgery. The device is implanted

by making small incisions in the arteries of the patient's groin and threading the delivery catheter

upward through blood vessels to where the graft is put in place to support the weakened area. The

Ancure Device was developed by Endovascular Technologies, Inc. (EVT), in the 1990s. Guidant

acquired EVT in 1997. In September 1999, the United States Food and Drug Administration (FDA)

approved the Ancure Device for sale.

B. The Insurance Policies

1
This is the third time that the parties have appeared before us. See Allianz Insurance Co.

v. Guidant Corp., 373 Ill. App. 3d 652 (2007); Allianz Insurance Co. v. Guidant Corp., 355 Ill. App.

3d 721 (2005). The facts presented in this opinion are taken from those prior decisions in addition

to the record on appeal.

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Allianz and Zurich Specialties London Limited (Zurich), Gerling Konzern Allgemeine

Versicherungs--AG (Gerling), Liberty International Insurance Company (Liberty), American

International Specialty Lines Insurance Company (AISLIC), Westchester Fire Insurance Company

(Westchester), and Lumbermens Mutual Casualty Company (Lumbermens) (collectively the Excess

Insurers and, together with Allianz, the Insurers),2 insured Guidant and four of its affiliates, Guidant

Sales Corporation, Origin Medsystems, Inc., Advanced Cardiovascular Systems, Inc., and EVT

(collectively the Affiliates and, together with Guidant, the Policyholders).

This litigation involves two distinct policy periods. The first policy period is from September

1, 2000, to September 1, 2001 (Year One). In July 2000, the Policyholders provided Allianz with

a completed application for Year One coverage. After receiving and approving the application,

Allianz, the first-layer carrier, issued a "claims made" commercial umbrella liability insurance

policy.3 The policy provided limits of coverage of $25 million per occurrence and $25 million in

the aggregate for claims in excess of a self-insured retention (SIR) of $5 million per occurrence and

2
In an order dated July 23, 2008, we granted unopposed motions to dismiss Zurich, Liberty,

and Westchester as parties to this appeal.
3
A "claims made" insurance policy is "[a]n agreement to indemnify against all claims made

during a specified period, regardless of when the incidents that gave rise to the claims occurred."

Black's Law Dictionary 809 (7th ed. 1999).

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$8 million in the aggregate.4 Subsequent layers of Year One coverage were provided by Gerling,

AISLIC, Lumbermens, and Westchester.

Allianz later issued a policy providing coverage to the Policyholders for the second policy

period, from September 1, 2001, to September 1, 2002 (Year Two). This policy provided limits of

coverage of $25 million per occurrence and $25 million in the aggregate for claims in excess of an

SIR of $5 million per occurrence and $10 million in the aggregate. The Excess Insurers issued

various one-year policies in excess of the Allianz policy for Year Two. During both Year One and

Year Two, the policies issued by the Excess Insurers "followed form" to the Allianz policies, that

is, the Excess Insurers' policies adopted virtually the same terms and conditions as the Allianz

policies. The issues presented in this appeal involve coverage issued by the Insurers to the

Policyholders for Year One.

C. The Batch Clause

The Allianz policies contain, and the non-Allianz policies incorporate, the following "Batch

Clause," which is the focus of the instant litigation:

"It is agreed that the policy section, Definitions, (6) 'Occurrence', with respect to

'products-completed operations hazard' is amended to include the following[:]

The term 'batch' means all products which have the same known or suspected

defect or deficiency which is identified by the same advisory memorandum[.]

4
A SIR is defined as "[t]he amount of an otherwise-covered loss that is not covered by an

insurance policy and that [usually] must be paid before the insurer will pay benefits." Black's Law

Dictionary 1365 (7th ed. 1999).

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The term 'advisory memorandum' is any communication issued by you to

inform health professionals or other appropriate persons or firms of a risk of 'bodily

injury' or 'property damage' from a product in use[.]

Coverage does not apply to any loss, claim, or 'suit' which arises out of a

defect or deficiency which was known or suspected prior to the retroactive date

shown in this policy[.]

When this endorsement is attached to your policy, all losses arising from a

single 'batch' of your product will be considered to be one 'occurrence[.]' Therefore,

when multiple losses are considered to be one 'occurrence' you must only meet a

single 'self-insured retention' amount[.] Likewise, our limit of liability due to 'bodily

injury' and 'property damage' is limited to that of a single 'occurrence[.]'

All claims made by persons or organization [sic] seeking damages because

of 'bodily injury' or 'property damage' arising out of one batch will be deemed to have

been made at the time the first of those claims is made against you[.]"

D. The Recall

Soon after the Ancure Device was approved by the FDA, EVT became aware of various

malfunctions in the delivery catheter that was used to insert the graft. Some of these malfunctions

resulted in the delivery system becoming improperly lodged in patients' bodies, often requiring the

removal of the delivery system by traditional open surgical repair. In response to these problems

with the delivery system, some EVT sales representatives developed a procedure to break or cut the

handle of the delivery system when it became lodged and could not be removed without resorting

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to traditional open surgical repair. This procedure, which became known as the "Handle-Breaking

Technique," was not presented to the FDA for approval.

On March 16, 2001, Guidant issued a press release stating that it was voluntarily halting the

production and sale of the Ancure Device. According to the press release, this action was taken "as

a result of Guidant's identification of certain deficiencies in the company's ANCURE-related

regulatory processes and communications with the [FDA]." The press release explained that these

deficiencies "are limited to *** regulatory issues associated with the deployment system of the

product" and that patients already implanted with the Ancure Device "are not affected by this action."

At the time of the recall, more than 7,600 devices had already been sold. Guidant followed up the

press release with three "Dear Doctor" letters. Those letters were issued on March 21, 2001, March

31, 2001, and May 2, 2001.

Meanwhile, the FDA initiated an investigation into EVT regarding its failure to make certain

disclosures about the performance of the Ancure Device. In 2003, the federal government filed

criminal charges and a civil action against EVT for failing to report problems with the Ancure

Device. On June 12, 2003, EVT pleaded guilty to 10 charges, including misbranding and making

false statements to government regulators. As a result of the plea agreement, EVT paid the federal

government $92.4 million, which included a forfeiture of $10.9 million, a criminal fine of $32.5

million, and a civil settlement of $49 million.

E. The Underlying Product Liability Claims

After the Insurers' policies took effect on September 1, 2000, the Policyholders began to

receive product liability claims involving the Ancure Device. For purposes of the coverage issue

presented under the claims-made policies at issue here, the underlying Ancure claims fall into three

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categories: claims made in Year One, claims made in Year Two, and claims made after the

termination of the Year Two policies.

1. Claims Made in Year One

Two Ancure claims were made during Year One--the Carter claim and the Krupa claim. In

handwritten letters dated March 9, 2001, and April 7, 2001, Harry Carter alleged that the Ancure

Device had failed to "stay deployed properly when inserted into [his] aorta and left and right femoral

iliac artery." Carter further alleged that "the right branch closed up, shutting off blood flow through

the right iliac artery" and that "a second operation was necessary to correct the condition." Guidant

settled the Carter claim for $10,000 prior to litigation.

In a letter dated June 14, 2001, Ray Krupa complained that the Ancure Device was not

accurately labeled in that it was "approximately 4 cm shorter than the packaging information"

indicated. As a result of this alleged defect, Krupa stated, he had been required to undergo open-

repair surgery. The Krupa claim was settled prior to litigation for $200,000.

2. Claims Made in Year Two

During Year Two, between 14 and 17 more Ancure claims were made.5 All of the Year Two

claims have been resolved.

3. Claims Made after the Termination of the Year Two Policies

Hundreds more Ancure claims were made following the conclusion of Year Two on

September 1, 2002. Some of these claims have been resolved while others are pending in court or

the subject of tolling agreements.

5
The parties dispute the number of claims made in Year Two. For purposes of this appeal,

the dispute is not material.

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G. The Illinois and Indiana Lawsuits

This coverage litigation commenced on November 6, 2003, when Allianz filed a complaint

in the circuit court of Du Page County, Illinois, against Guidant, seeking, inter alia, a declaration that

the "policies issued to Guidant do not provide coverage for claims, losses, or liabilities related to the

Ancure Device." All of the Excess Insurers and the Affiliates were later added. Thereafter, the

Insurers filed a consolidated complaint against the Policyholders. Two days after Allianz sued

Guidant in Illinois, the Policyholders filed a separate coverage action in Marion County, Indiana,

against the Insurers. In their complaint, the Policyholders alleged that the Insurers had breached their

duties to defend and indemnify the Policyholders for losses stemming from the Ancure Device and

sought a declaration that they are entitled to coverage for the Ancure claims.

H. The Summary Judgment Rulings in Illinois

On March 8, 2006, the Insurers filed a motion for partial summary judgment in the Illinois

action, arguing that the insurance policies in effect during Year One do not afford coverage for any

Ancure claims. Specifically, the Insurers argued that (1) the Policyholders had not established

coverage for Year One, because the Ancure claims actually made during that period do not exceed

the applicable SIR, and (2) the Batch Clause had not been triggered, so losses on claims made after

Year One could not be aggregated with those actually made in Year One to exhaust the SIR for that

year. The Policyholders opposed the motion and filed a cross-motion for partial summary judgment

on the ground that the Batch Clause was indeed triggered in Year One.

On June 12, 2006, the Illinois court granted the Insurers' motion for partial summary

judgment regarding Year One coverage and denied the Policyholders' cross-motion for partial

summary judgment (the Illinois Year One Ruling). The court agreed with the Insurers that the losses

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associated with the two Ancure claims made during Year One do not exceed the applicable SIR. The

court then rejected the Policyholders' argument that the Batch Clause allowed them to aggregate all

Ancure claims regardless of whether those claims arose out of "the same known or suspected defect

or deficiency." Instead, the court agreed with the Insurers that the only reasonable interpretation of

the Batch Clause is that, for claims to be aggregated, those claims must involve persons seeking

damages arising out of products that have the same defect or deficiency. As the court stated:

"I think if you apply the rules of English grammar to the definition of batch, one

would reach the inescapable conclusion that the clause 'which have the same known or

suspected defect or deficiency' modifies the word batch, and the known or suspected defect

or deficiency is further modified by the clause which is identified by the same advisory

memorandum.

I believe that applying these rules of English grammar one is left with the inescapable

conclusion that batch refers to all products of the same type which have the same known or

suspected defect or deficiency, and not all products of that same type, regardless of whatever

deficiency or defect it noted.

I think the [Insurers'] interpretation of the batch clause is the correct one under rules

of common sense and rules of English grammar and rules giving words their ordinary

meaning."

On July 5, 2006, the Policyholders moved for reconsideration of the Illinois Year One Ruling. This

motion was denied on August 1, 2006. At the time it was entered, the Illinois Year One Ruling did

not include language that it was enforceable or appealable, and none of the parties requested the

inclusion of such language. See 210 Ill. 2d R. 304(a) (providing that "[i]f multiple parties or

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multiple claims for relief are involved in an action, an appeal may be taken from a final judgment

as to one or more but fewer than all of the parties or claims only if the trial court has made an express

written finding that there is no just reason for delaying either enforcement or appeal or both").

On August 28, 2006, the Insurers moved for summary judgment regarding the extent of their

coverage obligation for the Year Two policy period. In their motion, the Insurers argued that there

is no coverage under the Year Two policies because: (1) the Policyholders' losses in Year Two do

not exceed the applicable SIR; (2) the "Dear Doctor" letters do not constitute "advisory

memorand[a]" as that term is defined in the Batch Clause; and (3) the "Dear Doctor" letters do not

warn about the defects alleged in any of the claims made in Year Two. On March 2, 2007, the

Illinois court denied the Insurers' motion for partial summary judgment regarding Year Two coverage

(the Illinois Year Two Ruling). The court found that there were genuine issues of material fact

regarding (1) whether the losses incurred by the Policyholders with respect to claims made in Year

Two exceeded the applicable SIR; and (2) whether the "Dear Doctor" letters constituted "advisory

memorand[a]" under the Batch Clause. The court also found that, unlike with respect to the Illinois

Year One Ruling, Guidant introduced evidence that potentially showed that the Batch Clause applied

to aggregate claims made in Year Two with claims made in subsequent years.

I. The Summary Judgment Ruling in Indiana

On September 26, 2006, Guidant filed a motion for partial summary judgment in the Indiana

action, seeking a declaration that Allianz had a duty to defend it on the underlying Ancure claims

and that Allianz breached its duty by failing to do so.6 The Policyholders contended that, contrary

6
The motion was directed only at Allianz, but the Excess Insurers opposed the motion, "to

dispute the Policyholders' interpretation of the Allianz Policy to which their policies follow form."

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to the analysis in the Illinois Year One Ruling, the Batch Clause had been triggered in Year One,

thereby giving rise to a duty to defend under Allianz's primary policy. All of the Insurers contested

the Year One coverage issue on the merits. Moreover, they filed their own motion for partial

summary judgment on the Year One coverage issue, essentially reiterating the arguments made in

Illinois.

On March 23, 2007, the Indiana court issued two separate orders. In one of the orders, the

court denied the Insurers' motion for partial summary judgment (the Indiana Batch Clause Order),

stating in relevant part:

"The Court finds as a matter of law based upon the uncontroverted material facts that

coverage for at least some Ancure claims was triggered in Year 1 by operation of the Batch

Clause.

***

First, the Court finds that the Batch Clause provides coverage for claims arising from

a batch of products, regardless of whether the claims for which coverage is sought allege the

same or different product 'defects or deficiencies.' *** The Policyholders have identified

a batch of pre-recall Ancure devices. The Policyholders have also shown through

uncontroverted evidence that the $5 million per occurrence SIR applicable in Year 1 has been

exhausted as to claims arising from that batch of products.

***

Second, and in the alternative, even if the Court did not accept the Policyholders [sic]

reasonable interpretation of the language of the Batch Clause, and then found the clause to

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be ambiguous *** such ambiguity *** would be construed against the Insurers and in favor

of coverage.

***

Third, and also in the alternative, the Insurers' motion must be denied in all events,

because the Policyholders have raised genuine issues of material fact as to whether one or

more 'batches' (as the Insurers construe the term) existed, or may yet exist, that would trigger

coverage for the Year 1 claims even under the Insurers' reading of the Batch Clause."

The Indiana court acknowledged the contrary holding in the Illinois Year One Ruling, but stated that

it was "unable to concur in [the Illinois court's] construction of the Batch Clause." The Indiana

Batch Clause Order was not certified as a final and appealable order by the Indiana court. See

Indiana Trial Rules 54(B), 56(C). Moreover, the Insurers did not seek such certification and they

did not appeal the ruling.

In the other order entered on March 23, 2007, the Indiana court granted partial summary

judgment in the Policyholders' favor on the issue of Allianz's duty to defend (the Indiana Duty-to-

Defend Order). The court based its decision on the "mere potential for coverage" and "potential ***

exhaustion of the SIR." The court stated that it "need not consider *** the Batch Clause *** or the

SIR" in reaching its decision. Despite this statement, a footnote in the Indiana Duty-to-Defend Order

purports to incorporate by reference the Indiana Batch Clause Order.7 Furthermore, the court found

"no just reason for delay" and certified the Indiana Duty-to-Defend Order such that it could be

7
Similarly, a footnote in the Indiana Batch Clause Order purports to incorporate by reference

the Indiana Duty-to-Defend Order. The text of both footnotes is set forth later in this opinion.

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immediately appealed. See Indiana Trial Rules 54(B), 56(C). On April 19, 2007, the Insurers

appealed the Indiana Duty-to-Defend Order.

J. Further Proceedings In Illinois

Meanwhile, on April 30, 2007, the Insurers filed a motion for a finding pursuant to Supreme

Court Rule 304(a) (210 Ill. 2d R. 304(a)), that the Illinois Year One Ruling was enforceable and

appealable. In its motion, the Insurers argued that, because of the Illinois Year Two Ruling, which

found that factual issues regarding coverage under Year Two precluded summary judgment, there

was no longer a valid reason for delaying an appeal on the Illinois court's finding as a matter of law

that there was no coverage under Year One. The Policyholders opposed the request, and, on May

23, 2007, they filed a motion to reconsider, asking the court for the second time to vacate the Illinois

Year One Ruling. The Policyholders argued that, under the full faith and credit clause of the United

States Constitution (U.S. Const., art. IV, §1), Indiana's subsequent grant of partial summary

judgment to the Policyholders in its Duty-to-Defend Order, which "expressly incorporated the ***

findings and conclusions" of the Indiana Batch Clause Order, was entitled to collateral-estoppel

effect with respect to the Illinois Year One Ruling. The Insurers objected to the Policyholders'

request. They contended that the Indiana Duty-to-Defend Order was not entitled to collateral-

estoppel effect, because it was entered nine months after the Illinois Year One Ruling and it did not

rely on an interpretation of the Batch Clause.

On July 11, 2007, the Illinois court heard oral argument on both the Insurers' motion for a

Rule 304(a) finding and the Policyholders' second motion to reconsider the Illinois Year One Ruling.

The court denied the Policyholders' motion to reconsider, stating:

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"I think this entire argument displays a fundamental misapplication of the doctrine

of collateral estoppel. Collateral estoppel relates to application of a prior judgment to

pending litigation. There is absolutely nothing in the doctrine of collateral estoppel that

would require this Court to go back and vacate a prior order that had been entered as a result

of a subsequent decision in a sister state.

Leaving aside the issue of whether [the Indiana Duty-to-Defend O]rder addressed the

[SIR] or the Batch Clause, which I don't believe it did by its expressed terms, I think that this

Court is not required to reconsider a prior ruling on the basis of what [the Indiana court] may

have decided in a subsequent action, so for that basis I'm going to deny the motion to

reconsider."

The court also granted the Insurers' Rule 304(a) motion, finding that "there is no just reason to delay

enforcement or appeal" of the Illinois Year One Ruling. The Policyholders then filed the instant

appeal.

K. Decision of the Court of Appeals of Indiana

On April 17, 2008, after the parties submitted their briefs to this court, the Indiana Court of

Appeals issued an opinion reversing the Duty-to-Defend Order entered by the Indiana trial court.

Allianz Insurance Co. v. Guidant Corp., 884 N.E.2d 405 (Ind. App. 2008). The Indiana Court of

Appeals held that the trial court erred in concluding that the Policyholders were required to establish

only the "potential," rather than the actual, exhaustion of the SIR to trigger the duty to defend.

Allianz Insurance Co., 884 N.E.2d at 420. The court then stated:

"Although the trial court's analysis was erroneous, we may affirm summary judgment

if it is sustainable on any theory or basis found in the record. [Citation.] The only way in

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which summary judgment can be properly granted in the Policyholders' favor on their claim

for breach of the duty to defend is if we find that they did, in fact, establish that the Batch

Clause was triggered as a matter of law and there are no questions of fact regarding the

exhaustion of the SIR." Allianz Insurance Co., 884 N.E.2d at 420.

Since the Policyholders conceded that the only two Ancure claims made during Year One were

insufficient to exhaust the SIR, the court considered whether the Batch Clause had been triggered.

Ultimately, the reviewing court found that the Batch Clause had not been triggered, because

the "Dear Doctor" letters relied upon by the Policyholders to activate the Batch Clause did not

qualify as "advisory memorand[a]" as that term is defined in the insurance policies. Allianz

Insurance Co., 884 N.E.2d at 421-22. The court explained:

"Rather than informing health professionals of a risk of bodily injury stemming from the

Ancure Device, all of the letters sought to do the opposite; namely, they sought to assure the

physician community that, notwithstanding regulatory and communication deficiencies, the

product itself was safe and effective." Allianz Insurance Co., 884 N.E.2d at 422.

Based on this finding, the court determined that the Batch Clause could not have been triggered, the

SIR could not have been exhausted, and the Insurers had no duty to defend the Year One claims.

Allianz Insurance Co., 844 N.E.2d at 422-23. The court also concluded that, "for a group of products

to qualify as a batch, they must share the same defect or deficiency." Allianz Insurance Co., 884

N.E.2d at 422 n.9. The court found no evidence of record "establishing that the claims sought to be

aggregated by the Policyholders are based on products that share the same defect or deficiency."

Allianz Insurance Co., 884 N.E.2d at 422 n.9. The Policyholders have since asked the Indiana

Supreme Court to review the decision of the Indiana Court of Appeals.

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II. ANALYSIS

A. Full Faith and Credit

On appeal, the Policyholders contend that we need not even reach the merits of the Illinois

Year One Ruling. According to the Policyholders, pursuant to the full faith and credit clause of the

United States Constitution (U.S. Const., art. IV, §1), the Indiana trial court's "judgment" has

collateral-estoppel effect as to the Illinois Year One Ruling.8 Initially, we address the Insurers'

response that the Policyholders have forfeited this issue by failing to plead collateral estoppel.

Collateral estoppel is an affirmative defense. Midwest Physician Group, Ltd. v. Department of

Revenue, 304 Ill. App. 3d 939, 952 (1999). Generally, to avoid surprise to the opposing party, an

affirmative defense must be set out in a party's answer to a complaint or it will be considered

forfeited. Cordeck Sales, Inc. v. Construction Systems, Inc., 382 Ill. App. 3d 334, 376 (2008). In

this case, however, the Policyholders' answer was filed long before March 23, 2007, when the

Indiana orders giving rise to the claim of collateral estoppel were entered. Thus, the Policyholders

could not have pleaded the affirmative defense at the time they filed their answer to the Insurers'

complaint. See Tarzian v. West Bend Mutual Fire Insurance Co., 74 Ill. App. 2d 314, 324 (1966)

(holding that affirmative defense that arose immediately prior to trial is available without pleading).

We also find that the element of "surprise" is absent here. The Insurers were parties to the suit in

Indiana, and they do not dispute that they participated in the Indiana action. In fact, they appealed

the Indiana Duty-to-Defend Order. Accordingly, we decline to find forfeiture and we address the

merits of the Policyholders' claim of collateral estoppel.

8
The same argument was the subject of a motion to bifurcate that accompanied the

Policyholders' opening brief. We denied the motion to bifurcate on December 28, 2007.

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The Policyholders assert that, under the doctrine of collateral estoppel, the Indiana

"judgment" was entitled to preclusive effect in Illinois on the question whether the Batch Clause was

triggered in Year One and the SIR thereby satisfied. The Policyholders acknowledge that the

Insurers tendered the Batch-Clause-interpretation issue to the Illinois court first and that the Illinois

court issued a ruling in the Insurers' favor before the Indiana court issued its decisions. However,

they assert that the Insurers did not obtain a final ruling from the Illinois court on the matter until

after the Indiana court entered a final judgment resolving the same issue against the Insurers. Thus,

they reason, the Indiana judgment must control over the Illinois Year One Ruling, which, although

entered earlier, was not final when the Indiana judgment was entered. The Policyholders ask us to

vacate the Illinois Year One Ruling pending the conclusion of appellate proceedings in Indiana. The

Insurers respond that neither of the two orders entered by the Indiana court on March 23, 2007,

precludes consideration of the policy-interpretation issue presented here. They point out that,

although the Indiana Duty-to-Defend Order contained language indicating that it was final and

appealable, that order expressly declined to rely on the Batch Clause for support. The Insurers

further note that, while the Indiana Batch Clause Order did address the policy-interpretation issue,

that order is not final and appealable.

Collateral estoppel, also referred to as issue preclusion, is an equitable doctrine of judicial

origin created to prevent relitigation of previously adjudicated claims. Ballweg v. City of

Springfield, 114 Ill. 2d 107, 113 (1986); see also Du Page Forklift Service, Inc. v. Material Handling

Services, Inc., 195 Ill. 2d 71, 77 (2001); Tofany v. NBS Imaging Systems, Inc., 616 N.E.2d 1034,

1037 (Ind. 1993) ("Generally, collateral estoppel operates to bar a subsequent re-litigation of the

same fact or issue where that fact or issue was necessarily adjudicated in a former suit and the same

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fact or issue is presented in the subsequent lawsuit"); Eichenberger v. Eichenberger, 743 N.E.2d 370,

374 (Ind. App. 2001) ("Issue preclusion bars subsequent relitigation of the same fact or issue where

that fact or issue was necessarily adjudicated in a former suit and the same fact or issue is presented

in a subsequent action"). The doctrine is founded upon the principle of judicial economy. Ballweg,

114 Ill. 2d at 113; Tofany, 616 N.E.2d at 1039 ("Collateral estoppel promotes judicial economy; in

particular, it reduces the amount of court time devoted to retrying previously litigated issues"). The

full faith and credit clause of the United States Constitution extends the doctrine of collateral

estoppel to judgments entered in foreign states. U.S. Const., art. IV, §1 ("Full Faith and Credit shall

be given in each State to the public Acts, Records, and judicial Proceedings of every other State");

see also In re Liquidation of Legion Indemnity Corp., 373 Ill. App. 3d 969, 974 (2007) (noting that

the full faith and credit clause extends doctrine of res judicata to judgments entered in other states);

Raikos v. Nehring, 527 N.E.2d 1141, 1146 (Ind. App. 1988) (considering whether the full faith and

credit clause applied with regard to Illinois judgment and claim of issue preclusion).

Traditionally, there are three threshold requirements for the application of collateral estoppel.

Gumma v. White, 216 Ill. 2d 23, 38 (2005); Illinois Health Maintenance Organization Guaranty

Ass'n v. Department of Insurance, 372 Ill. App. 3d 24, 35 (2007); In re C.M., 675 N.E.2d 1134, 1137

(Ind. App. 1997). First, the issue decided in the prior adjudication must be identical to the issue

presented in the suit in question. Gumma, 216 Ill. 2d at 38; Bojrab v. John Carr Agency, 597 N.E.2d

376, 379 (Ind. App. 1992). Second, there must have been a final determination on the merits in the

prior adjudication by a court of competent jurisdiction. LaSalle Bank National Ass'n v. Village of

Bull Valley, 355 Ill. App. 3d 629, 635 (2005); In re C.M., 675 N.E.2d at 1137. Finally, the party

against whom the estoppel is asserted must have been a party to or in privity with a party to the prior

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adjudication. Gumma, 216 Ill. 2d at 38; In re C.M., 675 N.E.2d at 1137. Even if the threshold

requirements are established, the doctrine's application depends on certain other circumstances. See

American Family Mutual Insurance Co. v. Savickas, 193 Ill. 2d 378, 388 (2000) ("Even when the

threshold requirements are satisfied, the doctrine should not be applied unless it is clear that no

unfairness will result to the party sought to be estopped"); Reising v. Guardianship of Reising, 852

N.E.2d 644, 649 (Ind. App. 2006) (noting that, once threshold elements of collateral estoppel are

met, the court must consider whether the party against whom the judgment is pled had a full and fair

opportunity to litigate the issue in previous litigation and whether it would be otherwise unfair under

the circumstances of the particular case to apply collateral estoppel); In re C.M., 675 N.E.2d at 1137

(same).

Although the elements of collateral estoppel are essentially identical under both Illinois and

Indiana law, those elements are analyzed differently in each state. For this reason, the parties dispute

whether Illinois or Indiana law should apply to our collateral-estoppel analysis. The parties rely on

conflicting rulings regarding whether the forum state may apply its own rules of collateral estoppel

when deciding the effect of a foreign judgment. Compare Morris B. Chapman & Associates, Ltd.

v. Kitzman, 193 Ill. 2d 560, 565 (2000) (applying Missouri law in determining whether Illinois claim

is barred as res judicata by a Missouri court judgment), with Finley v. Kesling, 105 Ill. App. 3d 1,

7 (1982) ("[I]t has been recognized that the forum [s]tate may apply its own rules of collateral

estoppel" when deciding the effect of a foreign judgment). We need not resolve this dispute,

however, for we reach the same result under the law of either state. We address the issue under

Illinois law first.

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In Illinois, the applicability of the doctrine of collateral estoppel is a question of law, which

we review de novo. In re A.W., 231 Ill. 2d 92, 99 (2008). Our supreme court has held that, for the

purpose of applying the doctrine of collateral estoppel, "finality requires that the potential for

appellate review must have been exhausted." Ballweg, 114 Ill. 2d at 113. In this case, the Insurers

appealed the Indiana Duty-to-Defend Order to the Indiana Court of Appeals. After the parties filed

their briefs in this cause, the Indiana Court of Appeals issued a decision reversing the judgment of

the trial court, remanding the cause, and denying the Policyholders' request for rehearing. Allianz

Insurance Co., 884 N.E.2d 405. The Policyholders then filed a petition to transfer the cause to the

Indiana Supreme Court. That court has yet to rule on the petition. Accordingly, under Illinois law,

the doctrine of collateral estoppel would not apply, because the Indiana Duty-to-Defend Order, which

purports to incorporate the Indiana Batch Clause Order, is not yet final.

The same result follows under Indiana law, albeit for a different reason. Under Indiana law,

whether one judgment has collateral-estoppel effect as to a second judgment is also a question of law

subject to de novo review. See Kieler v. C.A.T., 616 N.E.2d 34, 36 (Ind. App. 1993). Applying

Indiana law, we find that the Illinois court did not err in concluding that the Indiana court's orders

of March 23, 2007, do not have collateral-estoppel effect as to the Illinois Year One Ruling.9

9
As noted above, the Indiana Court of Appeals has since reversed the Indiana trial court. This

ruling would seemingly render the Policyholders' collateral-estoppel argument moot, as the positions

of both the Illinois and the Indiana courts would now be aligned. However, it is the Policyholders'

position that the opinion of the Indiana Court of Appeals is not "certified and final," because they

have petitioned the Indiana Supreme Court for transfer. Thus, they reason, the judgment of the

Indiana trial court is still valid. See In re Big Raccoon Conservancy District, 363 N.E.2d 1004, 1009

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At the outset, we note that throughout their briefs the Policyholders refer to an Indiana

"judgment" rendered on March 23, 2007. However, as set forth in the background section of this

decision, the Indiana trial court actually entered two separate orders on March 23, 2007--the Duty-to-

Defend Order and the Batch Clause Order. This distinction is significant. Under Indiana law, for

collateral estoppel to preclude the relitigation of an issue, that identical issue must have been decided

expressly and finally in a prior judgment. Indianapolis Downs, LLC v. Herr, 834 N.E.2d 699, 704

(Ind. App. 2005) ("Collateral estoppel does not extend to matters that were not expressly adjudicated

and can be inferred only by argument"); Bojrab, 597 N.E.2d at 379. In this case, the issue that the

Policyholders argue is precluded concerns the interpretation of the Batch Clause. The Indiana trial

court did not decide this issue in any final judgment. Of the two orders entered by the Indiana trial

court on March 23, 2007, only the Duty-to-Defend Order expressly states that there is no just reason

for delay and expressly directs the entry of a final judgment. See Indiana Trial Rule 54(B) ("A

judgment as to one or more but fewer than all of the claims or parties is final when the court in

writing expressly determines that there is no just reason for delay, and in writing expressly directs

entry of judgment, and an appeal may be taken upon this or other issues resolved by the judgment;

but in other cases a judgment, decision or order as to less than all the claims and parties is not final");

Indiana Trial Rule 56(C) ("A summary judgment upon less than all the issues involved in a claim

or with respect to less than all the claims or parties shall be interlocutory unless the court in writing

(Ind. App. 1977) ("A judgment is final pending appeal"). Accordingly, we proceed under the notion

that, despite the reviewing court's opinion, the Indiana trial court's decision remains valid until the

Indiana Supreme Court either denies the petition to transfer or resolves the case after allowing the

petition to transfer.

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expressly determines that there is no just reason for delay and in writing expressly directs entry of

judgment as to less than all the issues, claims or parties"). However, the Indiana trial court declined

to address the policy-interpretation issue in its Duty-to-Defend Order. The court found that the

"mere potential for coverage" and the "potential *** exhaustion of the SIR" were sufficient to trigger

the duty to defend. Therefore, the court concluded that it did not have to address the Batch-Clause-

interpretation issue, which was "more properly made in resisting the duty to indemnify." Thus, the

Indiana court expressly stated that its judgment on Allianz's duty to defend did not turn on the Batch-

Clause-interpretation issue.

Moreover, while the Indiana Batch Clause Order did interpret the Batch Clause, that order

did not include the language required by Indiana Trial Rules 54(B) and 56(C) to make the ruling final

and appealable.10 We can conceive of no reason for the Indiana court to have issued two separate

orders, designating one final and appealable and the other not, if it intended both of the orders to

have conclusive effect. See Rabel by Rabel v. Midwestern Electric, Inc., 550 N.E.2d 340, 341 (Ind.

App. 1990) ("Our rules specifically state a partial summary judgment order which does not include

the required language *** 'shall be,' interlocutory").

The Policyholders insist that the Indiana Duty-to-Defend Order should be read to include

findings on the Batch-Clause-interpretation issue because of footnotes in both of the Indiana orders.

The footnote in the Duty-to-Defend Order provides:

"The Court has simultaneously heard and considered the Insurers' Motion for Partial

Summary Judgment re 'Year 1 Policies,' which was filed January 4, 2007. That motion and

10
Our finding that the Indiana Batch Clause Order is not final under Indiana law provides an

alternate basis for a lack of finality under Illinois law.

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the instant motion present certain overlapping issues regarding coverage under Year 1 and

the 'Batch Clause' contained in the subject policies. Accordingly, for the sake of

completeness, all findings and conclusions set forth in the Order denying the Insurers' motion

regarding Year 1 coverage are incorporated by reference in this [Duty-to-Defend] Order, and

vice versa."

Similarly, the footnote in the Batch Clause Order states:

"The Court has simultaneously heard and considered the Policyholders' Motion for

Partial Summary Judgment Re: Allianz Insurance Company's Duty to Defend, which was

filed September 26, 2006. That motion and the instant motion present certain overlapping

issues regarding coverage under Year 1 and the 'Batch Clause' contained in the subject

policies. Accordingly, for the sake of completeness, all findings and conclusions set forth

in the Order granting the Policyholders' Motion on the Duty to Defend are incorporated by

reference in this [Batch Clause] Order, and vice versa."

We are not persuaded that the inclusion of these footnotes renders final the findings on the Batch-

Clause-interpretation issue. The language of the footnotes makes clear that their inclusion was only

to address certain unidentified "overlapping" issues. Equally clear is the notion that the

interpretation of the Batch Clause is not one of those overlapping issues. The Indiana court made

this plain when it stated in the Duty-to-Defend Order that it did not address the Batch-Clause-

interpretation issue in its ruling on the Policyholders' motion for partial summary judgment as to

Allianz's duty to defend.

The Policyholders also insist that the Indiana court could not have ruled on its motion for

partial summary judgment regarding Allianz's duty to defend without interpreting the Batch Clause.

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In support of this position, the Policyholders cite language from the Indiana Duty-to-Defend Order

indicating that Allianz's duty to defend arose "upon the exhaustion of the SIR in August 2003." They

also cite to case law for the proposition that a judgment is conclusive as to those matters that were

necessary to reach the judgment, whether or not expressly set forth and regardless of whether the

rendering court's stated reasons for its judgment are inconsistent or mistaken. Ultimately, we do not

find this argument persuasive. Under Indiana law, "[t]here is no estoppel where anything is left to

conjecture as to what was necessarily involved and decided." Peterson v. Culver Educational

Foundation, 402 N.E.2d 448, 461 (Ind. App. 1980); see also Indianapolis Downs, LLC, 834 N.E.2d

at 704 ("Collateral estoppel does not extend to matters that were not expressly adjudicated and can

be inferred only by argument"). Despite its inclusion of the statements that the Policyholders cite,

the Indiana trial court expressly based its ruling on the "potential" for coverage and therefore decided

that it would not have to address the Batch-Clause-interpretation issue in making its duty-to-defend

ruling. Thus, the Policyholders' attempt to avoid the Indiana court's own language is based purely

on "conjecture."

Moreover, we fail to see how the principle behind collateral estoppel would be promoted by

the doctrine's application in this case. The parties litigated the Batch-Clause-interpretation issue in

Illinois prior to litigating the issue in Indiana. The Illinois court entered its Year One Ruling

resolving the Batch-Clause-interpretation issue in the Insurers' favor prior to the date the Indiana

court entered its Duty-to-Defend and Batch Clause Orders. The Illinois court also denied the

Policyholders' initial motion for reconsideration of its Year One Ruling prior to the date the Indiana

court entered its orders. In other words, under the procedural posture of this case, the parties did not

"relitigate" the Batch-Clause-interpretation issue in Illinois after the Indiana court entered its orders.

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To the contrary, as the Indiana court itself recognized, the Batch-Clause-interpretation issue had

already been litigated and decided in Illinois prior to the date the Indiana court entered its orders on

March 23, 2007. Since the Batch-Clause-interpretation issue had been argued and decided in Illinois

prior to the date the Indiana court entered the orders alleged to have preclusive effect, the principle

underlying the doctrine of collateral estoppel--judicial economy--would not be served. In fact, all

of the time and work devoted to this issue by the parties and the Illinois court would go for naught.

See Freeman United Coal Mining Co. v. Office of Workers' Compensation Program, 20 F.3d 289,

294 (7th Cir. 1994) (noting that the purpose of collateral estoppel is to prevent relitigation of the

same issues in a subsequent case and that the reasons for the doctrine are "hardly served" where the

effort of litigation has already been undertaken).

In sum, we conclude that the Indiana "judgment" did not have collateral-estoppel effect with

respect to the Illinois Year One Ruling. Under Illinois law, neither the Indiana Batch Clause Order

nor the Indiana Duty-to-Defend Order is final, because the potential for appellate review has not been

exhausted. Further, under Indiana law, the Indiana Batch Clause Order was not designated as final

and appealable, and the Indiana Duty-to-Defend Order, which was so designated, expressly declined

to consider the Batch-Clause-interpretation issue.

B. Batch Clause

We now address the Policyholders' claim that the Illinois trial court erred in granting

summary judgment in favor of the Insurers on the Batch-Clause-interpretation issue. "The

construction of an insurance policy and a determination of the rights and obligations thereunder are

questions of law for the court which are appropriate subjects for disposition by way of summary

judgment." Crum & Forster Managers Corp. v. Resolution Trust Corp., 156 Ill. 2d 384, 391 (1993).

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Summary judgment is appropriate where the pleadings, depositions, affidavits, and admissions on

file, if any, reveal that there is no genuine issue of material fact and that the moving party is entitled

to judgment as a matter of law. Legion Insurance Co. v. Empire Fire & Marine Insurance Co., 354

Ill. App. 3d 699, 703 (2004). We review a grant of summary judgment de novo (Virginia Surety Co.

v. Northern Insurance Co. of New York, 362 Ill. App. 3d 571, 573 (2005)) and may affirm on any

basis in the record, irrespective of whether the trial court relied on that ground or whether its

reasoning was correct (Fabiano v. City of Palos Hills, 336 Ill. App. 3d 635, 641 (2002)).

Insurance policies are interpreted in accordance with the principles of contract construction.

Aurelius v. State Farm Fire & Casualty Co., 384 Ill. App. 3d 969, 973 (2008). The cardinal rule of

contract construction is to ascertain and give effect to the intent of the parties. Aurelius, 384 Ill.

App. 3d at 973. The best indication of the parties' intent is the language of the contract itself.

Farmers Automobile Insurance Ass'n v. Wroblewski, 382 Ill App. 3d 688, 696 (2008). In construing

an insurance policy, the contract must be read as a whole, giving meaning to all terms in the policy.

Clarendon America Insurance Co. v. 69 West Washington Management LLC, 374 Ill. App. 3d 580,

585 (2007). "If the words used in the policy are clear and unambiguous, they must be given their

plain, ordinary, and popular meaning." Central Illinois Light Co. v. Home Insurance Co., 213 Ill.

2d 141, 153 (2004). The fact that the parties disagree about the interpretation of a particular

provision does not render the provision ambiguous. Liberty Mutual Fire Insurance Co. v. St. Paul

Fire & Marine Insurance Co., 363 Ill. App. 3d 335, 341 (2005). Rather, a policy will be deemed

ambiguous where its words are susceptible to more than one reasonable interpretation. Benedict v.

Federal Kemper Life Assurance Co., 325 Ill. App. 3d 820, 824 (2001). A provision that is found to

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be ambiguous and that limits the insurer's liability will be construed in favor of the insured. Jones

v. Country Mutual Insurance Co., 371 Ill. App. 3d 1096, 1099 (2007).

Under the claims-made policies at issue here, the only Ancure claims that could potentially

implicate the Year One policies are those claims of which the Policyholders received written notice

between September 1, 2000, and September 1, 2001. It is undisputed that the only two such claims

were the Carter claim, which was resolved for $10,000, and the Krupa claim, which was resolved

for $200,000. Standing alone, the two Year One claims do not exhaust the applicable SIR. As a

result, the Policyholders attempt to exhaust the SIR by aggregating the Year One claims with claims

made in later years pursuant to the Batch Clause.

The parties agree that whether aggregation is permissible under the terms of the policy turns

on the last sentence of the Batch Clause. To place that sentence in context, we again reproduce the

language of the Batch Clause in its entirety: