Lawndale Restoration Ltd. Partnership v. Acordia of Illinois, Inc.

                                                                      SECOND DIVISION
                                                                      July 25, 2006




Nos. 1-05-2875 and 1-05-2876, Consolidated.

LAWNDALE RESTORATION LIMITED                            )      Appeal from the
PARTNERSHIP, BOULEVARD REALTY                           )      Circuit Court of
SERVICES CORP., BOULEVARD MANAGEMENT,                   )      Cook County.
INC., LOCAL REDEVELOPMENT AUTHORITY                     )
OF LAWNDALE, INC., LASALLE BANK                         )
NATIONAL ASSOCIATION A/T/U/T No.                        )
11886009, PYRAMID WEST REALTY AND                       )
MANAGEMENT, INC.,                                       )
                                                        )
       Plaintiffs-Appellants,                           )
       Cross-Appellees,                                 )
                                                        )
                v.                                      )
                                                        )
ACORDIA OF ILLINOIS, INC., AND                          )
RALPH AULENTA,                                          )
                                                        )      Honorable
       Defendants-Appellees,                            )      Lee Preston,
       Cross-Appellants.                                )      Judge Presiding.

       JUSTICE WOLFSON delivered the opinion of the court:

       Defendants Acordia of Illinois, Inc. (Acordia) and Ralph Aulenta (Aulenta) are

insurance producers who secure insurance on behalf of their clients and receive a

commission from the insurance company. The plaintiffs (Lawndale), providers of low

income housing in Chicago, were Acordia=s clients. Lawndale filed a complaint alleging

Acordia wrongfully collected insurance premiums in excess of the premiums charged by

the insurers.

       Lawndale=s complaint contains counts alleging fraud and breach of fiduciary duty;

it also seeks an accounting. Lawndale moved for partial summary judgment on portions

of Count I, the fraud count, alleging, among other things, a violation of section 507.1 of
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the Insurance Code. 215 ILCS 5/507.1 (West 2000) (repealed by P.A. 92-386 ' 10, eff.

Jan. 1, 2002, replaced by 215 ILCS 5/500-80 (West Supp. 2002)).

       The trial court denied the motion and certified two questions for interlocutory

appeal, pursuant to Supreme Court Rule 308(a) (155 Ill. 2d R. 308(a)). We agreed to

answer the two questions. After closer examination, we have decided to answer only

one of them, the question that asks whether Acordia=s insurance compliance self-

evaluative audit document is protected from disclosure in this case. We hold it is not.

FACTS

       In its fraud count, Count I, Lawndale alleges Acordia provided insurance

brokerage services in its capacity as an insurance producer. An insurance producer is

"an individual who solicits, negotiates, effects, procures, renews, continues or binds

policies of insurance covering property or risks located in Illinois." 215 ILCS 5/491.1

(West 2000) (repealed by P.A. 92-386 ' 10, eff. Jan. 1, 2002, replaced by 215 ILCS

5/500-10 (West Supp. 2002)). Aulenta, the president of Acordia, was personally

involved in providing insurance brokerage services to Lawndale.

       In paragraph 8 of the fraud count, under the "Facts" section, Lawndale sets out

former section 507.1 of the Illinois Insurance Code. Under section 507.1, an insurance

producer may not receive compensation from a client without memorializing the

arrangement in a separate written document signed by the client, clearly specifying the

amount or extent of the fee. Lawndale contends Acordia collected amounts in excess of

the actual cost of insurance coverage without disclosing the true cost of the insurance.

In paragraph 8, Lawndale alleges these amounts constitute fees received in violation of

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the Insurance Code.

       From 1990 through 1999, Lawndale says, Acordia obtained insurance policies for

Lawndale and misrepresented the cost of the premiums. The amounts of the inflated

premiums were stated in various documents. Lawndale repeatedly says Acordia made

"false and fraudulent representations, pretenses, and promises" concerning the cost of

insurance and premiums. Based on the representations, Lawndale paid the excess

premiums. Acordia intentionally concealed its scheme to defraud Lawndale by sending

false premium notices, binders, invoices, and declaration pages to Lawndale and its

agents. As a direct and proximate result of Acordia=s alleged fraud, Lawndale was

damaged in an amount exceeding $50,000. Lawndale also requests punitive damages

for "intentional and tortious conduct."

       In its breach of fiduciary duty count, Lawndale alleges Acordia was required to

use Lawndale=s funds solely for the purpose of purchasing insurance coverage. In

paragraph 20, Lawndale cites section 507.1 of the Insurance Code to support its claim

of fiduciary duty. Lawndale alleges Acordia wrongfully retained the funds received from

Lawndale without disclosing the excess amounts in writing. It says Acordia used the

funds for purposes other than securing insurance coverage, in violation of the Code.

Lawndale requests damages in excess of $50,000.

       Lawndale filed a motion for partial summary judgment directed only at portions of

Count I. In the motion, Lawndale said Aulenta was indicted on 14 counts of money

laundering, mail fraud, and engaging in monetary transactions with illegally obtained

proceeds. In January 2004, Aulenta stipulated in a plea agreement to having defrauded

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Lawndale out of $1,718,162. He admitted he "styled the excess premium payments

from Lawndale as a fee to Acordia or its predecessor entity, but never disclosed to

Lawndale that he was charging it a fee or the fee amount, even though he admits this

was improper." Citing section 507.1 of the Insurance Code, Lawndale requested partial

summary judgment in the amount Aulenta admits he overcharged Lawndale plus

interest. Lawndale did not allege any elements of fraud in its motion, nor is fraud

mentioned in the motion.

          In response, Acordia contended Lawndale=s motion for partial summary judgment

is based solely on section 507.1 and not on any cause of action appearing in the

complaint. Acordia contended section 507.1 does not provide for a private right of

action.

          The trial court agreed with Acordia, finding no private right of action is implied

under section 507.1 of the Insurance Code. 215 ILCS 5/507.1 (West 2000). The court

denied the motion for partial summary judgment.

          Lawndale brought a motion to compel Acordia to disclose a document previously

identified by Acordia as "Memorandum prepared by counsel re: alleged fraud in

anticipation of litigation," and listed on Acordia=s privilege log as Item 20 ("Document

20"). The document is a memorandum prepared by Acordia=s outside counsel

describing the results of a 1999 internal company-wide audit of Acordia=s accounts. The

memorandum is directed to Acordia and the Illinois Department of Insurance.

          The court granted Lawndale=s motion to compel, finding defendant waived the

self-evaluative privilege under section 155.35 of the Insurance Code. 215 ILCS

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5/155.35 (West 2000). The court based its decision on a prior ruling in another case. In

Village of Rosemont v. Acordia of Illinois, Inc., No. 01 L 016214 (April 23, 2003), the trial

court found Acordia had waived its privilege by voluntarily disclosing to the Department

of Insurance the same document involved in this case. That order was not appealed.

       The trial court certified the following two questions for appeal, pursuant to

Supreme Court Rule 308(a) (155 Ill. 2d R. 308(a)):

       (1) "whether plaintiffs have an implied private right of action for Acordia=s alleged

violations of Section 507.1 of the Illinois Insurance Code;"

       (2) "whether Acordia=s disclosure of the document subject to Plaintiffs= Motion to

Compel to the Illinois Department of Insurance waived any privilege accorded to the

document pursuant to the Illinois Insurance Compliance Self-Evaluative Privilege Act,

215 ILCS 5/155.35, the work-product doctrine (IL Supreme Court Rule 201(b)(2)), or

both, or was otherwise required to be disclosed."

       We decline to answer question (1). Our answer to question (2) is "yes."

DECISION

I. Private Right of Action under Section 507.1

       It is clear that Lawndale=s complaint does not allege a private right to damages

under section 507.1. We believe the more interesting question is whether Lawndale

may use section 507.1 to prove its fraud and breach of fiduciary counts. However, our

review is limited to the question certified by the trial court, and we may not rule on the

propriety of any underlying order. Hayes v. Wilson, 283 Ill. App. 3d 1015, 1018, 670

N.E.2d 867 (1996).

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       If the question certified by the trial court calls for a hypothetical answer with no

practical effect, we should refrain from answering it. We granted certification based on

a misapprehension of the pleadings in this case. The question of whether a private right

of action exists came up in connection with the trial court=s denial of plaintiffs= motion for

partial summary judgment. That motion was directed only to portions of Count I. Count

I alleges a scheme to defraud. The plaintiffs are not seeking damages simply for

violation of the statute. The certified question is general, overbroad, and the answer to

it has little to do with the vitality of Count I. Count I is a fraud count, not a "separate

written document" count. We do not see how answering the question would materially

advance the ultimate termination of the litigation, as required by Rule 308(a).

II. Privilege

       The trial court granted Lawndale=s motion to compel Acordia to disclose

Document 20, finding Acordia waived any privileges attached to the document. Acordia

says it undertook the 1999 company-wide audit on its own initiative to assess

compliance with state and local laws and identify ways to improve compliance. The

parties agree Document 20 fits the definition of a "self-evaluative audit document" under

section 155.35(b)(1) of the Insurance Code, but they disagree on whether Acordia

waived the privilege created by the statute. Acordia contends the work-product doctrine

also protects Document 20 from disclosure.

A. Section 155.35

       Section 155.35 of the Illinois Insurance Code states, in pertinent part:

                "(a) To encourage insurance companies and persons

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          conducting activities regulated under this Code, both to

          conduct voluntary internal audits of their compliance

          programs and management systems and to assess and

          improve compliance with State and federal statutes, rule,

          and orders, an insurance compliance self-evaluative

          privilege is recognized to protect the confidentiality of

          communications relating to voluntary internal compliance

          audits***

                                        ***

          (b)(1) An insurance compliance self-evaluative audit

          document is privileged information and is not admissible as

          evidence in any legal action in any civil, criminal, or

          administrative proceeding, except as otherwise provided in

          subsections (c) and (d) of this Section***

                                        ***

          (b)(3) A company may voluntarily submit, in connection with

          examinations conducted under this Article, an insurance

          compliance self-evaluative audit document to the Director, or

          his or her designee, as a confidential document under

          subsection (f) of Section 132.5 of this Code without waiving

          the privilege set forth in this Section to which the company

          would otherwise be entitled *** Nothing contained in this

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              subsection shall give the Director any authority to compel a

              company to disclose involuntarily or otherwise provide an

              insurance compliance self-evaluative audit document."

              (Emphasis added.) 215 ILCS 5/155.35 (West 2000).

       Paragraph (b)(3) drives our consideration of this issue. The parties agree

Acordia submitted Document 20 to the Department on its own initiative and not in

response to an examination by the Department. They disagree on the meaning of

paragraph (b)(3) as applied to a company that voluntarily submits to the Department the

results of a self-evaluative audit outside the context of an examination.

       Acordia contends paragraph (b)(3), rather than mandating waiver of the privilege

in the instant case, provides additional protection to an insurance company by

expanding the explicit privilege for situations involving an examination by the

Department. We do not agree.

       Paragraph (b)(1) sets out the privilege and protects the creation of an insurance

compliance self-evaluative audit document. The only language in the statute that refers

to sending the document anywhere is in paragraph (b)(3). That paragraph says sending

a self-audit document to the Department in connection with an examination does not

waive the privilege. The logical conclusion from paragraph (b)(3) is that sending a self-

audit document to anyone, including the Department when not conducting an

examination, does waive the privilege. If the legislature had intended to protect the

confidentiality of any and all disclosures to the Department, there would have been no

need to include the limiting language--"in connection with examinations."

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       Where courts consider the existence of a non-statutory critical self-analysis

privilege, they add a general proviso: "no document will be accorded a privilege unless it

was prepared with the expectation that it would be kept confidential, and has in fact

been kept confidential." (Emphasis added.) Dowling v. American Hawaii Cruises, Inc.,

971 F.2d 423, 426 (9th Cir. 1992). Because there is no common law insurance

compliance self-evaluative audit privilege in Illinois, we must look to the statute creating

the privilege to determine whether Acordia in fact kept the audit report confidential.

   Similar statutes in other states expressly protect such disclosures whether or not

they are in connection with an examination. The Illinois legislature could have created

the broader privilege, but did not. See Mich. Comp. Laws ' 500.221(5) (West 2002)

("Disclosure of an insurance compliance self-evaluative audit document to a

governmental agency, whether voluntary or pursuant to compulsion of law, does not

constitute a waiver of the privilege ***"); N.D. Cent. Code ' 26.1-51-05(3) (1999)

(same); Or. Rev. Stat. ' 731.762(4) (2001) (same); N.J. Stat. Ann. ' 17:23C-1(b) (West

1999) ("Voluntary compliance reviews shall be privileged and shall not be considered

public records or public documents subject to inspection or examination under any

statutory or common-law right to know request***"); Tex. Insur. Code Ann. ' 751.251(a)

(2005) ("The disclosure to the commissioner under this subchapter of a document ***

does not constitute the waiver of any applicable privilege or claim of confidentiality

regarding the document ***"). But see D.C. Code Ann. ' 31-853(b) (2003) ("If, in

connection with examinations conducted under the insurance laws, a company

voluntarily submits an insurance compliance self-evaluative audit document to the

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Commissioner ***, as a confidential document, [the privilege applies].)"

       Acordia contends requiring it to disclose Document 20 would undermine the clear

legislative purpose of section 155.35 and discourage insurers from undertaking the self-

assessments encouraged and protected by the statute. In subsection 155.35(a), the

statute provides, in part:

              "The General Assembly hereby finds and declares that

              protection of insurance consumers is enhanced by

              companies= voluntary compliance with this State=s insurance

              and other laws and that the public will benefit from incentives

              to identify and remedy insurance and other compliance

              issues. It is further declared that limited expansion of the

              protection against disclosure will encourage voluntary

              compliance and improve insurance market conduct quality

              and that the voluntary provisions of this Section will not

              inhibit the exercise of the regulatory authority by those

              entrusted with protecting insurance consumers." (Emphasis

              added.) 215 ILCS 5/155.35(a) (West 2000).

       We do not believe our reading of the statute contravenes the intent of the

legislature. The statute=s purpose is to encourage companies to conduct "voluntary

internal audits of their compliance programs and management systems and to assess

and improve compliance with State and federal statutes, rules, and orders***" 215 ILCS

5/155.35(a) (West 2000). Acordia went beyond the protections of the statute, beyond

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the "limited expansion" referred to in section 155.35(a).

       Rather than keep its internal audit document confidential, Acordia chose to

disclose it to the Department while under no obligation to do so. The Act was intended

to protect confidential internal voluntary self-evaluative audits. It was not intended to

protect audit documents that are freely disclosed to third parties, including the

Department.

       The legislature created a "limited expansion" of the privilege. 215 ILCS

5/155.35(a) (West 2000). The statute recognizes the self-evaluative audit privilege can

be waived when the holder of the privilege shares the information with others. That is

the import of the provision in (b)(3) for continuing protection when the audit is sent to the

Director while an examination is ongoing. No other protection is provided to the

privilege holder who decides to send the audit to another who does not come within the

limitation in (b)(3). In that case, the "limited expansion" would be exceeded.

       Acordia also contends generally that public policy favors disclosure to

government agencies of the type of document at issue in this case. We leave the

creating of public policy to the General Assembly. The legislature occupies a superior

position to the judicial branch when it comes to determining public policy. Reed v.

Farmers Insurance Group, 188 Ill. 2d 168, 175, 720 N.E.2d 1052 (1999).

       Acordia contends other statutorily-created privileges cannot be waived under any

circumstances, citing Zajac v. St. Mary of Nazareth Hospital Center, 212 Ill. App. 3d

779, 789, 571 N.E.2d 840 (1991). In that case, however, section 8-2102 of the Medical

Studies Act specifically provided: " >[t]he disclosure of any such information or data,

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whether proper, or improper, shall not waive or have any effect upon its confidentiality,

nondiscoverability, or nonadmissibility.= " (Emphasis in original.) Zajac, 212 Ill. App. 3d

at 789, quoting Ill. Rev. Stat. 1987, ch. 110, par. 8-2102. The wording of the statute in

this case does not contain the sweeping language precluding waiver that is in the

Medical Studies Act.

       We are bound by the language in the statute. The "primary objective when

construing the meaning of a disputed statute is to ascertain and give effect to the intent

of the legislature." People v. Robinson, 172 Ill. 2d 452, 457, 667 N.E.2d 1305 (1996).

"The best indication of legislative intent is the statutory language, given its plain and

ordinary meaning." In re R.L.S., 218 Ill. 2d 428, 433, 844 N.E.2d 22 (2006). "When the

statutory language is clear, it must be given effect without resort to other tools of

interpretation." R.L.S., 218 Ill. 2d at 433.

       It is not our prerogative to judge the wisdom of creating a limited or partial

privilege. "It is the dominion of the legislature to enact laws and it is the province of the

courts to construe those laws." Shields v. Judges= Retirement System of Illinois, 204 Ill.

2d 488, 497, 791 N.E.2d 516 (2003).

       The self-evaluative audit privilege is a creature of statute. The legislature can

give it and the legislature can take it away. For example, in January 1995, the

legislature created an environmental audit privilege. 415 ILCS 5/52.2 (West 1996)

(repealed by P.A. 94-580 ' 10, eff. Aug. 12, 2005). Ten years later, the statute was

repealed--no privilege.

       By the clear language of subsection 155.35(b)(3), the legislature intended that a

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self-evaluative audit document submitted to the Department, in connection with an

examination, is privileged. There is no privilege available for a company that chooses to

disclose such documents to the Department in the absence of an examination.

B. Work-Product

       Acordia contends Document 20 is protected from disclosure by Illinois= attorney

work-product doctrine. The doctrine protects "material prepared by or for a party in

preparation for trial" that contains "theories, mental impressions, or litigation plans of the

party=s attorney." (Emphasis added.) 166 Ill. 2d R. 201(b)(2). Materials are protected if

they are prepared for any litigation or trial as long as they were prepared by or for a

party to the subsequent litigation. Fischel & Kahn, Ltd. v. Van Straaten Gallery, Inc.,

189 Ill. 2d 579, 591, 727 N.E.2d 240 (2000).

       Examples of documents prepared "in preparation for trial" include:

              "memoranda made by counsel of his impression of a

              prospective witness, as distinguished from verbatim

              statements of such witness, trial briefs, documents revealing

              a particular marshalling of the evidentiary facts for

              presentment at the trial, and similar documents which reveal

              the attorney=s >mental processes= in shaping his theory of his

              client=s cause***" Monier v. Chamberlain, 35 Ill. 2d 351, 359-

              60, 221 N.E.2d 410 (1966).

       The party claiming the privilege has the burden of showing the facts that give rise

to the privilege. Mlynarski v. Rush Presbyterian-St. Luke=s Medical Center, 213 Ill. App.

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3d 427, 431, 572 N.E.2d 1025 (1991). Privileges are strongly disfavored and must be

strictly construed as an exception to the general duty to disclose. In re Marriage of

Daniels, 240 Ill. App. 3d 314, 324-25, 607 N.E.2d 1255 (1992).

       Acordia says the document qualifies because it contains: an assessment by

counsel of the evidence that could expose Acordia to potential liability, summaries and

impressions of counsel=s interviews with potential witnesses, and an organization of that

evidence by counsel. It says the document was prepared "in preparation for trial"

because the audit was conducted following the discovery of irregularities in some

accounts. The audit, says Acordia, anticipated future litigation related to those

accounts.

       We have examined Document 20 and find no evidence the document was

prepared "in preparation for trial" within the meaning of the work-product privilege.

There is nothing to indicate the document was created in anticipation of any pending or

imminent litigation. Document 20 is dated November 30, 1999. Lawndale=s lawsuit was

filed November 14, 2002. Although there is no temporal requirement for the privilege to

apply, the three-year gap is further evidence the document was not prepared in

anticipation of litigation or trial. Acordia=s suggestion at oral argument that the

document was prepared in anticipation of the imminent Rosemont litigation is not

persuasive, as Rosemont=s lawsuit was filed December 18, 2001, two years after the

audit document was prepared.

       Illinois Supreme Court Rule 201(b)(2) "sets the parameters for the scope of

discovery of work product materials." Fischel & Kahn, 189 Ill. 2d at 590. Here, nothing

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in the record tell us there was litigation to prepare for when the audit was conducted.

Work product will "reveal the shaping process by which the attorney[s] [have] arranged

the available evidence for use in trial as dictated by [their] training and experience."

Monier, 35 Ill. 2d at 359. See also M. Graham, Cleary & Graham=s Handbook of Illinois

Evidence ' 504.1, at 325 (7th ed. 1999). The work-product doctrine does not apply.

CONCLUSION

         We decline to address Question (1) concerning "whether plaintiffs have an

implied right of action for Acordia=s alleged violation of Section 507.1 of the Illinois

Insurance Code" as our decision to answer the question was improvident.

         Our answer to question (2)--"whether Acordia=s disclosure of the document

subject to Plaintiff=s Motion to Compel to the Illinois Department of Insurance waived

any privilege accorded to the document pursuant to the Illinois Insurance Compliance

Self-Evaluative Privilege Act, 215 ILCS 5/155.35, the work-product doctrine (IL

Supreme Court Rule 201 (b)(2)), or both, or was otherwise required to be disclosed"--is

"Yes."

         First certified question not answered; second certified question answered yes;

cause remanded.

         GARCIA, P.J., and SOUTH, J., concur.




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