‘Series-qualifier Canon’ Applies to Bar Coverage in Contract Spat

By Don R. Sampen, published, Chicago Daily Law Bulletin, February 18, 2025

The 7th U.S. Circuit Court of Appeals, applying Illinois law and relying in part on the “series-qualifier canon” of contract construction, held that an insured’s failure to comply with contract requirements did not involve a “wrongful act” for which insurance coverage was available.

The case is Philadelphia Indemnity Insurance Co. v. Bellin Memorial Hospital, No. 24-1056, 2025 U.S. App. Lexis 868 (7th Cir., Jan. 14). The insurer, Philadelphia, was represented by Cope Ehlers P.C. of Chicago. Williams Barber & Morel Ltd. of Chicago represented the claimant, Bellin. Winston & Strawn LLP of Chicago represented the insured, Kinsey & Kinsey Inc.

Kinsey, a software consulting company, entered into a contract with Bellin to install a computer program to upgrade Bellin’s human resources and business management system. Kinsey ultimately failed to install the program to which the parties agreed, and upon discovery of its failure, offered to install the correct software but only for an additional fee.

Bellin rejected the offer and sued the company, its president and senior consultant in state court for intentional and negligent misrepresentation, deceptive trade practices and breach of contract. Philadelphia provided the three defendants a defense under a professional liability policy. That policy covered claims “arising out of a wrongful act” defined as a “negligent act, error, or omission” committed while providing professional services.

When the case proceeded to trial, the court granted a directed verdict on the breach of contract claim against Kinsey, but left the amount of damages to the jury. The parties then negotiated a partial settlement that released the consultant from all liability in exchange for Philadelphia paying $1 million to Bellin.

The settlement also contained a setoff provision that allowed the $1 million payment to be applied to the claims against the company and its president but only if Bellin prevailed on a claim covered by the insurance policy. The setoff would not apply for damages relating to non-covered claims.

Bellin then dismissed its negligent misrepresentation claim against the company and president, and the case went forward on the contract and other claims. The jury ultimately awarded damages on the breach of contract claim only for $1.39 million, which the trial court reduced to $750,000.

When Bellin took steps to collect its award, however, Philadelphia, filed this declaratory action seeking a determination that the damage judgment was covered by the settlement and that the $1 million payment would provide an offset to the damages awarded. Kinsey filed a counterclaim seeking the same relief. The district court found in favor of Bellin so that the offset would not apply. Kinsey then brought this appeal.

Series-qualifier Canon

In an opinion by Judge Michael Brennan, the 7th Circuit affirmed. He began by addressing Kinsey’s argument that, under the definition of “wrongful act” — “negligent act, error, or omission” — the policy covered “negligent acts” and also, separately, “errors” and “omissions.” So, even if the errors or omissions constituted a breach of contract, they would be covered.

Brennan, however, applied the “series-qualifier canon” of construction, which provides that a modifier beginning a series of terms modifies all the terms, at least where, as here, the terms appear in a straightforward, parallel construction. He further cited Illinois and federal decisions that reached the same interpretation, either by applying the canon or otherwise finding, when construing the same policy language, that “negligent” modifies each of “act, error, or omission.”

He acknowledged that canons are not absolute and this one, like others, is sensitive to context. But taking the context into account, he reached the same conclusion.

Contract Breach Arguments

Kinsey nonetheless argued that if the definition covered only negligence, then the company was found liable only for negligence since the jury rejected any award of punitive damages.

In response, Brennan wrote that Illinois courts recognize a difference between acts of negligence and breaches of contract. They also refuse to allow insureds to obtain insurance coverage for damages resulting from breaches of contract due to the moral hazard of an insured intentionally breaching and then shifting the risk to insurance. He observed, moreover, that negligence was not at the heart of the state court judgment and played no role in the judgment.

The policy here also contained a contract exclusion that barred coverage for claims arising out of liability “assumed under contract” unless the insured “would have been legally liable in the absence of such contract.” Kinsey contended that its conduct fit into the exception, but Brennan rejected the contention on the grounds that Kinsey would not have installed the software for Bellin without a contractual agreement.

But given that, Kinsey argued the contract exclusion made the professional liability policy illusory because Kinsey provided services exclusively through contract, and all claims brought against Kinsey would fall under the exclusion. Brennan explained, however, that the exclusion was smaller in scope than the policy’s coverage, that negligence is covered but not intentional acts, and that the contract exclusion protects against the moral hazard.

The court therefore affirmed in favor of Bellin, finding the policy did not cover the breach-of-contract claim, and that the setoff therefore did not apply to the damage judgment.

Key Points

• As a matter of policy interpretation, the “series-qualifier canon” generally applies such that a modifier beginning a series of terms modifies all the terms when they appear in a straightforward parallel construction.
• According to this court, whether a breach of contract arises from a negligent act and thereby gives rise to insurance coverage may turn on whether negligence is at the heart of the judgment and plays a role in the claim.