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Contracts provide efficient risk transfer



The defendants, Fox Mill Limited Partnership and Kane County Land Company (jointly, FMLP), appealed against a declaration of defense costs in favor of the Wasco Sanitary District (District) ] Wasco Sanitary District v. Fox Mill Limited Partnership, and Kane County Land Company, no. 2-20-0650, 2021 IL App 200650-U, Court of Appeals of Illinois, Second District (December 9, 2021) and the Court of Appeal decided the matter.

BACKGROUND

In 1994, the district entered into an annexation agreement to provide water and sewage treatment services for FMLP's residential development, a subdivision called Fox Mill. This subdivision included approximately 800 exclusive custom homes in the village of Campton Hills. Under the agreement, FMLP would pay for or build water facilities for the district, and in return, FMLP could collect for the connection permits for the Fox Mill subdivision. (Connection permits were sold for approximately $ 25,000 for each single-family home. The agreement also provided that FMLP could sell the district's overcapacity provided the surplus was created by FMLP's improvements.

In a section of the contract entitled "Hold" Harmless and Indemnification, "the annexation agreement of 1994 provided that:

"If a claim is made against the DISTRICT, its officials, other officials, agents and employees *** or any of them shall be made a party-defendant. in any proceeding arising out of or in connection therewith agreement, annexation of the ANNEX PROPERTY, approval and construction of WASTEWATER FACILITIES or WATER FACILITIES, or development of the SUBSTANCE PROPERTY, including matters relating to hazardous materials and other environmental issues, [FMLP] shall * * * defend and hold such service, DISTRICT other service agents and employees harmless from all claims, debts, losses, taxes, judgments, c. cheeses, fees, including expenses gg and reasonable attorneys' fees, in connection therewith ***.

That attorneys also stated the agreement that:

Each such indemnified person may have a separate representative to participate in the defense this at his own expense. However, if the Illinois Rules of Professional Conduct, as amended, require that such indemnified person be defended separately where there is no consent to a conflict of interest, [FMLP] shall bear such costs. In the event of a conflict of interest, it is agreed that [FMLP] shall pay for a Kane County attorney to represent such person. THE DISTRICT and such officials, other officials, agents and employees shall cooperate in the defense of such proceedings and be available for any litigation that may be required.

The FMLP's principals, Jerry Boose and Kenneth Blood, operated other residential properties. investments in the area, including one known as B&B Enterprises. Following subsequent amendments to the 1994 agreement, FMLP allocated its rights to surplus capacity to B&B Enterprises. As an example of a transaction, in July 2008, B&B sold capacity for 106 detached single-family plots in the Norton Lakes subdivision to developers Hudson T. Harrison and others. For $ 25,000 per plot, B & B-through FMLP received $ 2,650,000 for the transaction.

One of the district's residents, Ed Fiala, and a third-party home developer, Tim Kobler Custom Homes, Inc. (Fiala), sued the district, its trustees, its external agents, and FMLP, B&B, Boose, Blood, B&B, and FMLP's attorney and Harrison. Fiala's action was brought as a presumed RICO class action (§ 18 USC 1962) concerning a pattern of extortion activities including bribery, theft and fraud aimed at depriving the district's residents and builders of their property.

The district informed FMLP that it and its trustees wanted to be defended under the 1994 annexation agreement; FMLP refused. The district began paying its own defense costs and its trustees' costs, and the district sued the FMLP.

To raise money for the Fiala litigation fees, the district added a $ 20 per month per resident fee. The FMLP argued that the Fiala disputes did not arise from the 1994 agreement because Fiala did not seek to terminate that agreement; that the district failed to "invite" the Fiala process to the FMLP; that the district failed to hire "a Kane County attorney" to represent them; and that the district refused to cooperate with the FMLP in its defense against Fiala.

The district received an order granting it approximately $ 1.3 million in legal fees paid in the Fiala process. In January 2021, the trial court changed its decision to include approximately $ 400,000 in additional fees that were not included in the original order or that had arisen since the order was entered. The FMLP appealed the judgment of the trial court in due time.

ANALYSIS

The FMLP's first assertion is that the district was forced, but failed, to "formally submit a tender" for Fiala's action to trigger the FMLP's obligation to defend claims in insurance contracts.

But the FMLP is not an insurer. and the district does not seek defense and indemnity under the terms of an insurance policy. Nothing in the 1994 annexation agreement or subsequent amendments required the district to "formally file" a lawsuit with the FMLP to trigger its obligation to defend and indemnify.

The "tender" language, which would be the standard language in a typical insurance contract, was not in the 1994 annexation contract, which categorically was not an insurance contract. The FMLP's tender argument was therefore irrelevant.

The FMLP has never denied knowing that the district was also a named respondent in any version of Fiala's complaint. FMLP would prefer an opposite result that would ultimately not make sense: to let the district jump through meaningless rings toward an absurd goal: tell FMLP something it already knew: that it was sued by Fiala and wanted to be defended and indemnified under the 1994 agreement

The FMLP could not express confusion that the district was a party to the Fiala dispute; both FMLP and the district were represented at the representatives' table in the same trial concerning the 1994 agreement. Therefore, the Court of Appeal, like the court, refused to allow the FMLP to continue to deny the obvious.

The issue of conflict resolution claimed by the FMLP was completely illusory. For example, Boose testified in his dismissal that even if the district had sought "defense through a Kane County attorney," the FMLP would still not have agreed to defend the district because the FMLP " would not have been able to afford it. " (Boose further testified that FMLP never submitted the Fiala case to FMLP's general liability insurance on its own behalf.) The issue raised by FMLP about the need for "a Kane County attorney" was just another straw man that FMLP conjured up to avoid providing the District with its contractually promised defense and indemnity.

The FMLP challenged the court's turnover decision, which released nearly $ 2 million from the FMLP's bond sent to the circuit official to cover a decade of the district's attorney's fees. FMLP chose to appeal the declaratory judgment of the trial court separately while cases were still pending in the trial court.

The Court of Appeal rejected FMLP's claims. The 1994 annexation agreement clearly obliged FMLP to defend and indemnify the district, and the trial court correctly held that FMLP had a continuing obligation to defend and indemnify the district and its trustees. Therefore, the court did not err in issuing a declaratory judgment on coverage for the benefit of the district and its trustees.

The essence of insurance is the transfer of a risk from an individual to an insurer. However, insurance is not the only risk transfer device. The agreement to "keep harmless" was a risk transfer device established through a contract between the district and FMLP. It was an effective risk transfer device and the district – even though it took them ten years to do so – got their legal fees paid from a bond issued by the FMLP. I can only wonder what took the parties and the courts so long to enforce a clear and unambiguous agreement and how much faster an insurance would have provided defense and indemnity.


© 2022 – Barry Zalma

Barry Zalma, Esq. , CFE, now limits his internship to the position of insurance consultant specializing in insurance coverage, insurance claims handling, insurance fraud and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as a lawyer for insurance coverage and claims management and more than 54 years in the insurance industry.

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