Illinois Court Finds Allegations of Intentional Misconduct Precludes E&O Coverage

Ill. State Bar Ass’n Mut. Ins. Co. v. Leighton Legal Grp., LLC¸ 2018 IL App. (4th) 170548, arose from underlying litigation wherein the plaintiffs, beneficiaries of a trust, filed suit against the insured, an attorney and co-trustee for the trust.  The complaint contained various causes of action relating to the insured’s creation of a second trust that allegedly deprived the plaintiffs of the benefits due to them through an original trust of which they were beneficiaries.  In sum, the plaintiffs contended that the insured took the principal of the first trust to which the plaintiffs were beneficiaries and “poured” it into a second trust created by the attorney.  Although the plaintiffs were also beneficiaries of the second trust, they alleged that it contained materially different terms and created a self-compensation scheme for the insured.  To that point, the insured had appointed himself as a co-trustee under the second trust, eliminated the requirement to use a qualified financial institution as a co-trustee, and included a clause that invalidated a gift to a beneficiary that unsuccessfully challenged the validity of a testamentary document.

The underlying complaint filed by the plaintiffs was replete with allegations of willful conduct by the insured in carrying out the scheme.  The Illinois State Bar Association Mutual Insurance Company (“ISBA”) denied coverage to the insured asserting that the intentional conduct alleged in the complaint was excluded from coverage.  More specifically, ISBA claimed that an exclusion for any claim “arising out of any criminal, dishonest, fraudulent or intentional act or omission” barred coverage for the claim.  ISBA also argued that the policy’s insuring agreement required a “negligent act, error or omission in the rendering of or failure to render professional services.”

ISBA filed a declaratory judgment action seeking a determination it owed no coverage to the insured.  The trial court granted the insured’s motion for judgment on the pleadings and found that ISBA owed a duty to defend, and ISBA appealed.

The Appellate Court of Illinois, Fourth District, reversed the trial court’s decision and found in favor of ISBA.  The insured had argued that as long as the underlying complaint could be based on negligence, a duty to defend was owed by ISBA.  The court found, however, that the allegations in the complaint concerned conduct by the insured that fit squarely within the policy exclusion.

In interpreting the policy exclusion, the court held that a provision precluding coverage for intentional conduct required that the insured intend to cause the consequence of his act or omission, or believe that the consequences of his act or omission were substantially certain to result.  In that sense, an exclusionary clause for intentional conduct does not apply merely because an insured intended to act, but rather only applies to “intentional misconduct.”  As the underlying complaint alleged that insured created the second trust for the purpose of establishing a self-compensation scheme, the claim addressed “intentional misconduct” that could not be the result of negligence.  The Appellate Court therefore reversed the trial court decision and entered judgment in favor of ISBA.