In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 15‐2310
AMERICAN ALTERNATIVE INSURANCE CORPORATION,
Plaintiff‐Appellant,
v.
METRO PARAMEDIC SERVICES, INC.,
Defendant‐Appellee.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 14 C 01235 — John J. Tharp, Jr., Judge.
____________________
ARGUED DECEMBER 8, 2015 — DECIDED JULY 12, 2016
____________________
Before WOOD, Chief Judge, and BAUER and WILLIAMS, Cir‐
cuit Judges.
WOOD, Chief Judge. This is a dispute over who is entitled to
coverage under a liability insurance policy. In the underlying
lawsuit, three female employees of Metro Paramedic Services
sued Metro Paramedic Services and Antioch Rescue Squad,
two Illinois ambulance services, alleging an unrelenting prac‐
tice of egregious sexual harassment, assault and battery, retal‐
iation for whistleblowing, and failure to supervise. Two of the
2 No. 15‐2310
employees resolved their claims on the basis of an offer of
judgment from Metro and Antioch; the third reached a settle‐
ment with both.
American Alternative Insurance Corporation (AAIC) is
Antioch’s liability insurer. In the underlying suit, AAIC cov‐
ered Antioch’s defense costs and indemnified its offers of
judgment and settlement. It insisted, however, that it had no
obligation to cover Metro under Antioch’s policy. Seeking a
declaratory judgment to this effect, it filed this suit. On cross‐
motions for judgment on the pleadings, the district court
found that AAIC owed Metro a duty to defend. We conclude
that this is indeed what the policy provides, and so we affirm
the district court’s judgment.
I
A
On July 21, 2011, Shannon Volling, Julie Banser, and April
Soulak (collectively, “the plaintiffs”) sued Antioch and Metro
in the Northern District of Illinois. The three women are for‐
mer employees of Antioch and Metro. Their complaint al‐
leged that male Antioch and Metro employees engaged in
atrocious workplace sexual harassment and other miscon‐
duct, and that the entities’ supervisors and Antioch’s board
failed to take corrective action despite the fact that they knew
what was going on.
While the plaintiffs’ allegations are too numerous to re‐
count in full, a sampling will give their flavor. For instance,
Kyle Shouse, the plaintiffs’ supervisor, pulled down Banser’s
pants in front of her co‐workers, leaving her naked from the
waist down, and then graphically described her private parts
to them. He also tried to force Volling and Banser to kiss him,
No. 15‐2310 3
put his hand down Volling’s shirt, slapped and grabbed Vol‐
ling and Banser’s buttocks, exposed himself to the plaintiffs,
made explicit, sexually offensive comments about Banser on
social media, woke female colleagues up by loudly playing
pornography, and downloaded images of bestiality onto co‐
workers’ computers. Meanwhile, Chris McBrady, another em‐
ployee, groped and made comments about Soulak and Vol‐
ling’s breasts, made repeated sexually explicit advances and
remarks to Soulak, threatened Soulak’s employment, and
called another female colleague a stripper. The plaintiffs re‐
count being subjected to additional harassment and offensive
conduct, including quid pro quo sexual demands, theft of their
undergarments from their overnight bags, display of their lin‐
gerie in the station, being sprayed with saline solution so as
to expose their breasts, and being subjected to publicly dis‐
played pornography. They add that they witnessed numerous
episodes of dangerous and unprofessional conduct, some of a
sexual nature, involving patients.
According to the plaintiffs, the Antioch board of directors,
which included Chief Wayne Sobczak, Deputy Chief Brian
DeKind, President Stephen Smouse, and Treasurer John
Edgell, received repeated direct verbal and written com‐
plaints regarding these and many similar acts. Far from cor‐
recting them, the board ignored the complaints, and many
board members directly participated in the harassment and
other shockingly unprofessional conduct. Edgell, for instance,
shoved ice down the pants and shirts of female co‐workers,
talked about having patients from a nursing home facility
perform sex acts on him, called a female paramedic “Strip‐
perella,” commented on female job applicants’ breast sizes,
placed his crotch in a female colleague’s face, and slapped fe‐
4 No. 15‐2310
male co‐workers’ buttocks. Not to be outdone, Smouse alleg‐
edly attempted to have sexual relations with female paramed‐
ics in an ambulance while returning from a medical call.
Edgell and Smouse were both intoxicated at the station while
on duty. DeKind insisted that a paramedic complete paper‐
work for a patient with whom the paramedic had had no con‐
tact.
Critically for this insurance dispute, the plaintiffs alleged
that Antioch and Metro were a partnership or joint venture.
Their complaint asserted that the two entities were jointly
staffed and operated, Metro used Antioch ambulances, and
employees of both entities used Antioch uniforms and gear.
As we noted earlier, all aspects of the underlying suit have
been resolved by settlements; only the collateral insurance
dispute remains.
B
Antioch held a liability insurance policy with AAIC that
was effective from the time of the alleged events through De‐
cember 31, 2011. (While Antioch’s policy with AAIC consisted
of several forms, for simplicity’s sake we refer to it simply as
“the policy.”) The policy states that “the words ‘you’ and
‘your’ refer to the Named Insured shown in the Declarations,
and any other person or organization qualifying as a Named
Insured under this coverage part.” It further notes that “[t]he
word ‘insured’ means any person or organization qualifying
as such under” the sections entitled “WHO IS AN
INSURED.” In those sections, the policy states, “If you are ...
a partnership or joint venture, you are an insured. Your mem‐
bers and your partners are also insureds but only within the
course and scope of your operations.”
No. 15‐2310 5
Elsewhere, the policy states that AAIC “will pay those
sums that the insured becomes legally obligated to pay as
monetary damages arising out of an ‘employment practices’
offense, ... or other ‘wrongful act’ to which this insurance ap‐
plies.” It defines an “employment practices” offense as “an
actual or alleged improper employment related practice, pol‐
icy, act or omission involving an actual, prospective, or former
volunteer or employee,” including wrongful discipline, retal‐
iation, failure to adopt adequate workplace policies, sexual
harassment, and other conduct. It defines a “wrongful act” as
“any actual or alleged error, act, omission, misstatement, mis‐
leading statement, neglect or breaches of duty committed by
you or on behalf of you in the performance of your operations,
including misfeasance, malfeasance, or nonfeasance in the
discharge of duties, individually or collectively that results di‐
rectly but unexpectedly and unintentionally in damages to
others.”
Finally, the policy excludes “sexual abuse” from coverage.
The policy defines “sexual abuse” as “sexual conduct ... which
causes injury,” including “sexual molestation, sexual assault,
sexual exploitation or sexual injury,” but not “sexual harass‐
ment.” Sexual harassment is defined as “any actual, at‐
tempted, or alleged unwelcome sexual advances, requests for
sexual favors, or other conduct of a sexual nature ... which
causes injury.”
C
AAIC covered Antioch’s defense costs and indemnified its
settlements with the plaintiffs in the underlying action. It
drew the line with Metro, however, which it refused to defend
or indemnify. On February 19, 2014, AAIC filed this declara‐
tory judgment action against Metro, seeking confirmation
6 No. 15‐2310
that it was not obliged under the policy to defend or indem‐
nify Metro. Metro filed an answer and counterclaim seeking
the opposite declaration on March 28, 2014.
Metro and AAIC’s arguments centered on whether Metro
was in a “joint venture or partnership” with Antioch, and
therefore a “named insured” under Antioch’s policy with
AAIC. In the alternative, Metro argued that it was an “addi‐
tional insured” under the policy. AAIC countered that the acts
alleged in the underlying complaint were within the policy’s
“sexual abuse” exclusion and therefore not covered. On cross‐
motions for judgment on the pleadings, see FED. R. CIV. P.
12(c), the district court held that AAIC had a duty to defend
Metro and granted Metro judgment on its duty‐to‐defend
claims. Because Metro had not moved for judgment on its fail‐
ure‐to‐indemnify claims and judgment on the pleadings was
not proper for the resolution of that issue, the district court
reserved it. The district court denied AAIC’s motion to recon‐
sider.
Before the court took up the question of summary judg‐
ment, AAIC and Metro stipulated that AAIC would pay
Metro’s duty‐to‐defend and duty‐to‐indemnify claims if the
district court’s judgment on the pleadings were upheld. The
district court then granted summary judgment to Metro on all
counts, and AAIC appealed.
II
In diversity cases where neither party raises a conflict of
law issue, federal courts apply the law of the state in which
they sit. Ball v. Kotter, 723 F.3d 813, 821 (7th Cir. 2013). The
parties agree, and we accept, that Illinois law applies to this
No. 15‐2310 7
dispute. We review the district court’s decision to grant judg‐
ment on the pleadings de novo. See Westfield Ins. Co. v. Vanden‐
berg, 796 F.3d 773, 777 (7th Cir. 2015).
The Illinois Supreme Court “has long held that an in‐
surer’s duty to defend an action brought against the insured
is ‘determined solely by reference to the allegations of the
complaint.’” Pekin Ins. Co. v. Precision Dose, Inc., 968 N.E.2d
664, 674 (Ill. App. Ct. 2012) (quoting Pekin Ins. Co. v. Wilson,
930 N.E.2d 1011, 1018 (Ill. 2010)). This is known as the “eight
corners” rule: the court “compares the four corners of the un‐
derlying complaint with the four corners of the insurance pol‐
icy to determine whether facts alleged in the underlying com‐
plaint fall within or potentially within coverage.” Id. If they
do, the insurer has a duty to defend. Wilson, 930 N.E.2d at
1017.
The insurer “may not justifiably refuse to defend an action
against its insured unless it is clear from the face of the under‐
lying complaints that the allegations fail to state facts which
bring the case within, or potentially within, the policy’s cov‐
erage.” Pekin Ins. Co. v. United Contractors Midwest, Inc., 997
N.E.2d 235, 241 (Ill. App. Ct. 2013) (quoting United States Fi‐
delity & Guaranty Co. v. Wilkin Insulation Co., 578 N.E.2d 926,
930 (Ill. 1991)). “The underlying complaint and the policy
must be construed in favor of the insured, with all doubts re‐
solved in the insured’s favor.” Employers Ins. of Wausau v. Ehlco
Liquidating Trust, 708 N.E.2d 1122, 1136 (Ill. 1999). The pri‐
mary goal in interpreting an insurance policy “is to give effect
to the intent of the parties as expressed in the agreement.”
Wilson, 930 N.E.2d at 1017 (quoting Am. States Ins. Co. v. Ko‐
loms, 687 N.E.2d 72, 75 (Ill. 1997)).
8 No. 15‐2310
A
In its sections entitled “WHO IS AN INSURED,” the pol‐
icy states, “If you are ... [a] partnership or joint venture, you
are an insured. Your members and your partners are also in‐
sureds, but only within the course and scope of your opera‐
tions.”
The complaint contains numerous allegations that Anti‐
och and Metro operated as a joint venture. These include alle‐
gations that Antioch “jointly operate[d] and staff[ed]” itself
with Metro; Metro “operate[d] ambulance and paramedic ser‐
vices jointly with” Antioch; Metro “acted as an agent of [An‐
tioch] and jointly operated” with Antioch; Metro used Anti‐
och’s ambulances; Metro hired former Antioch paramedics
and emergency medical technicians to staff these joint activi‐
ties; Metro “did not maintain any separate uniform”; and
Metro employees wore “Antioch Rescue Squad” gear. In view
of the plain language of the policy and the eight corners rule,
it is hard to resist the conclusion that Metro and Antioch were
in a joint venture and Metro is covered under the policy as a
“named insured.”
AAIC nonetheless argues that Metro does not qualify as a
“named insured” under the policy because (1) Metro was not
listed on the Declarations as required by the policy provi‐
sions; (2) Antioch was not organized as a joint venture or part‐
nership; and (3) the contract between Antioch and Metro at‐
tached to its motion for judgment on the pleadings disclaimed
that they were in a joint partnership.
One fatal problem with AAIC’s first point is that, as it con‐
cedes, the Declarations issue was not raised before the district
court. AAIC attempts to cast this as merely a failure to point
No. 15‐2310 9
the district court to a relevant provision needed to interpret
the contract, rather than waiver. But AAIC’s argument that
Metro is not a named insured because it did not comply with
the Declarations provision has nothing to do with the inter‐
pretation of the contract, as a whole or otherwise. It is a sepa‐
rate theory altogether, and is therefore waived. See James v.
Hyatt Regency Chicago, 707 F.3d 775, 783 (7th Cir. 2013).
AAIC’s second argument suffers the same fate. AAIC con‐
tends that Metro cannot be a named insured because Antioch
was not organized as a joint venture or partnership, but rather
is a dissolved company. This argument, too, was not pre‐
sented to the district court and is therefore waived. Even if it
were not waived, it is meritless. Antioch’s corporate form does
not matter: the duty to defend arises “[i]f the facts alleged in
the underlying complaint fall within, or potentially within,
the policy’s coverage.” Wilson, 930 N.E.2d at 1017. If they do,
the duty to defend applies “even if the allegations are ground‐
less, false, or fraudulent, and even if only one of several theo‐
ries of recovery alleged in the complaint falls within the po‐
tential coverage of the policy.” Valley Forge Ins. Co. v. Swiderski
Elecs., Inc., 860 N.E.2d 307, 315 (Ill. 2006). The complaint
clearly alleged that Metro participated in a joint venture with
Antioch, and that is enough.
AAIC also makes—somewhat cursorily, and in a foot‐
note—a related argument it did raise in the district court: that
the complaint’s allegations were insufficient to make Metro a
named insured because the complaint did not plead all the
elements of a joint venture under Illinois common law. AAIC
provides no evidence, however, that as a substantive matter
these criteria were not met, nor did it show that the parties
meant to incorporate all of the peculiarities of Illinois law into
10 No. 15‐2310
the policy. It is more sensible to assume that they used the
terms in their generic sense, since neither “partnership” nor
“joint venture” is defined.
When not specifically defined, “terms utilized in the pol‐
icy are accorded their plain and ordinary meaning.” Am. Nat’l
Fire Ins. Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 796
N.E.2d 1133, 1141 (Ill. 2003). In order to determine the ordi‐
nary meaning of “joint venture,” Illinois courts look to dic‐
tionaries. See Founders Ins. Co. v. Munoz, 930 N.E.2d 999, 1005
(Ill. 2010). The NEW OXFORD AMERICAN DICTIONARY 938 (3d
ed. 2010) defines a “joint venture” as a “commercial enterprise
undertaken jointly by two or more parties that otherwise re‐
tain their distinct identities.” RANDOM HOUSE WEBSTER’S
COLLEGE DICTIONARY 713 (1999) defines it as “a business en‐
terprise in which two or more companies enter a temporary
partnership.” The arrangements described in the complaint
easily match these definitions.
Finally, AAIC argues that by attaching two Metro‐Antioch
service contracts to its counterclaim, Metro disabled itself
from alleging that Metro and Antioch participated in a joint
venture. In “Article 11: Relationship of the Parties,” the con‐
tracts expressly disclaim that Metro and Antioch are joint ven‐
turers. This statement is not, however, dispositive: Illinois law
looks to the substance of the relationship rather than the par‐
ties’ characterization or intent. See Maimon v. Telman, 240
N.E.2d 652, 654 (Ill. 1968).
Moreover, even if the contracts represented an agreement
between the parties sufficient to bar suit between each other
based on a joint venture or partnership, there is no reason
why they would bar claims based on such a relationship by
third parties such as the plaintiffs. In order to trigger a duty
No. 15‐2310 11
to defend, “the facts alleged in the underlying complaint”
need only “fall within, or potentially within, the policy’s cov‐
erage.” Wilson, 930 N.E.2d at 1017. The Metro‐Antioch con‐
tracts therefore do not preclude the plaintiffs’ allegations that
Metro and Antioch engaged in a joint venture. It follows that
Metro is a named insured under the policy.
AAIC breathlessly predicts that if Metro qualifies as a
named insured, then anyone could be a named insured to an
AAIC policy so long as a third party alleged that that person
was in a joint venture with Antioch. There are two answers to
this alarm. The first is that this concern is overblown: it is un‐
clear why a third‐party plaintiff would allege that another
party is in a joint venture with Antioch unless (as Federal Rule
of Civil Procedure 11(b) and its state counterparts require)
that plaintiff had a reasonable basis for doing so. This case is
not a close one. Metro is a named insured under AAIC’s pol‐
icy with Antioch. Metro is thereby covered by the policy, and
AAIC is bound to defend it. As a result, we need not consider
its backup argument for coverage: that it is an “additional
blanket insured.” Second, if AAIC seriously fears this result,
it can always re‐draft its policies to specify each additional in‐
sured (a practice we believe is common).
B
AAIC briefly argues that the policy does not cover the un‐
derlying alleged acts, because it is limited to actions that “re‐
sult[] directly but unexpectedly and unintentionally in dam‐
ages to others.” Because the plaintiffs’ complaint states claims
for intentional harm, AAIC concludes, it does not fall within
the policy’s coverage. The most obvious problem with this ar‐
gument is that the complaint states numerous claims for neg‐
12 No. 15‐2310
ligence and unintentional harm, including negligent supervi‐
sion and retention, all of which are within the scope of the
policy even as AAIC describes it.
Similarly, the policy’s sexual‐abuse exclusion does not pre‐
clude coverage. Sexual abuse includes “sexual molestation,
sexual assault, sexual exploitation or sexual injury.” Few of
the allegations contained in the complaint fit that definition.
Moreover, the sexual‐abuse exclusion expressly notes that
“‘Sexual abuse’ ... does not include ‘sexual harassment.’” The
vast majority of the complaint’s allegations match the policy’s
definition of “sexual harassment,” which includes “any ac‐
tual, attempted or alleged unwelcome sexual advances, re‐
quests for sexual favors, or other conduct of a sexual nature ...
which causes injury.” The claimants allege sexually degrading
and discriminatory comments, a hostile environment, and a
custom, practice, and policy of sexual harassment. The pol‐
icy’s sexual‐abuse exclusion is not a bar to coverage.
III
Because Metro is a named insured and the acts alleged are
covered by the policy, AAIC had a duty to defend Metro, and
the district court’s judgment is AFFIRMED.