The Illinois Appellate Court affirmed a ruling granting summary judgment to American Family Mutual Insurance Company on its declaratory judgment action seeking a determination that it has no duty to defend the insured defendants in an underlying trade secret misappropriation action the company brought in federal court. American Family Mut. Ins. Co. v. Roth et al., No. 1-07-0526 (Ill. App., 2d Dist., Mar. 31, 2008).

American Family, a Wisconsin-based insurer, entered into written agency agreements with defendants Bonnie Roth and Connie Roth, owners of Roth & Roth Insurance, pursuant to which Bonnie and Connie worked as exclusive agents of American Family. The agency agreements provided that the policies, policyholder records, and other materials furnished by American Family to the defendants remained American Family’s property and that all originals and copies were to be returned to American Family within 10 days of termination of the agreements. The agreements also contained provisions, signed by the defendants, governing their access to American Family’s proprietary computer system, software and database, which included customer lists and confidential customer information. In addition, the agreements contained nonsolicitation agreements prohibiting the defendants from soliciting American Family policyholders for one year following termination of the agreements.

After terminating the agreements with Bonnie and Connie, American Family demanded the return of all of its property, including policyholder records, and reminded Bonnie and Connie that privacy laws and the agreements prohibited them from disclosing policyholder information to third parties. Nonetheless, the defendants solicited American Family customers, including sending a solicitation letter to at least one American Family customer that contained personal financial information Connie Roth obtained while an agent of American Family.

American Family sued the defendants in federal court alleging violations of the Wisconsin Uniform Trade Secrets Act, Wis. Stat. Ann. § 143.90(1)(c); federal law; and state common law for breach of contract and tortious interference. American Family also instituted a declaratory judgment action in the Illinois circuit court seeking a determination that it has no duty to defend the defendants in the federal court action pursuant to the terms and conditions of the business-owners’ package insurance policy it had issued to them as its agents. The circuit court granted summary judgment in favor of American Family.

On appeal, the defendants asserted that the circuit court erred because the underlying complaint contained factual allegations of “personal and advertising injury” that brought the action within the policy’s coverage. But the appellate court rejected this argument, finding that the defendants’ alleged retention and use of confidential information gleaned from American Family’s database and computer system amounted to trademark and trade secret infringement, thus bringing the action with the policy exclusion for injuries knowingly caused by the insured and arising out of such infringement. The appellate court also found that the defendants’ alleged retention of American Family’s information and use of that information to solicit American Family’s customers constituted a breach of the agency agreements, thus bringing the action within an exclusion to the policy’s coverage for injuries that arise from breach of contract. Accordingly, the court concluded that American Family did not owe a duty to defend its former agents in the underlying action.