Twin City Fire Ins. Co. v. Country Mut. Ins. Co.

• Decision Date: 05 May 1994
• Docket Number: No. 93-2684,93-2684
• Citation: 23 F.3d 1175
• Parties: 39 Fed. R. Evid. Serv. 384 TWIN CITY FIRE INSURANCE COMPANY, Plaintiff-Appellee, v. COUNTRY MUTUAL INSURANCE COMPANY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1175

23 F.3d 1175

39 Fed. R. Evid. Serv. 384

TWIN CITY FIRE INSURANCE COMPANY, Plaintiff-Appellee, v. COUNTRY MUTUAL INSURANCE COMPANY, Defendant-Appellant.

No. 93-2684.

United States Court of Appeals Seventh Circuit.

Argued Feb. 18, 1994.

Decided May 5, 1994.

Richard A. Ryan (argued), Michael D. Hultquist, McCullough, Campell & Lane, Chicago, IL, for plaintiff-appellee.

John J. Foley (argued), Jennifer A. Luffman, Foley & Associates, Chicago, IL, for defendant-appellant.

Before POSNER, Chief Judge, and EASTERBROOK and RIPPLE, Circuit Judges.

POSNER, Chief Judge.

Out of a ghastly accident in 1983 grew a dispute between two liability-insurance companies that was litigated in a federal district court in Illinois under the diversity jurisdiction, resulting in a jury verdict for one of the insurance companies, Twin City, for $336,000, and an appeal by the other, Country Mutual. The accident came about as follows. A school bus owned by an Illinois school district and driven by an employee of the district, Nelma White, collided with an automobile carrying four teenage boys--Larry Hoogstraten (the driver), Paul Jacobsma, Ron Stogin, and Larry Faron. The automobile passed under the chassis of the bus, came out on the other side, and hit an automobile driven by Ron Anderson. Faron was injured, as was Anderson (there were no passengers in Anderson's car). Hoogstraten and his other two passengers were killed. Both injured victims, and the representatives of the three victims who had been killed, brought tort suits in an Illinois state court against the school district. All but Hoogstraten's representative also sued Hoogstraten's estate. Country Mutual had insured the school district for liability up to $1 million, and Twin City had insured the district for another $5 million. Twin City's was an "excess" policy: Twin City had no duty to make good on the policy until the policy limits of the "primary" insurer, here Country Mutual, were reached. Hoogstraten had carried $300,000 in liability insurance, which--his negligence being conceded--was also available to pay tort claims arising out of the accident. Country Mutual retained Edward Nielsen, a Chicago lawyer, to defend the school district. He worked closely with Michael Madden, a claims attorney for Country Mutual.

Most tort suits are settled before trial. The suits arising out of the accident in this case were no exception. In August 1985, Country Mutual's Madden wrote reassuringly to Twin City, the excess insurer, that he believed that the suits could be settled at a total cost to Country Mutual of only $650,000, well below the level at which Twin City's excess policy would kick in. He believed that $250,000 would take care of the claims by the three teenagers who had died in the accident, $200,000 would take care of Anderson, and $500,000 would take care of Faron, who had sustained brain damage. From this total of $950,000, $300,000 had to be subtracted--Hoogstraten's insurance company having tendered the full policy limits of his policy--to calculate Country Mutual's liability. The difference, $650,000, was well within its policy limit. In the following months, settlement negotiations proceeded almost as favorably as Madden had expected. By May 1986, the three death claims had been settled for a total of $300,000, of which $100,000 had been paid by Hoogstraten's insurer. That left $1 million in the pot to settle with just Anderson and Faron, whose claims, remember, had been estimated to be worth a total of $700,000. So advised, Twin City closed its claim file, believing that it would not be called upon to contribute to the settlements.

Negotiations continued with Anderson and Faron. Eventually Anderson settled for $300,000, of which Hoogstraten's insurer put up $100,000 and Country Mutual the rest. That left $700,000 in the pot. Then Hoogstraten's insurer settled with Faron for the remaining $100,000 of Hoogstraten's policy, leaving Country Mutual with $600,000 for Faron. This would have been sufficient had Madden's estimation that Faron's claim was worth only $500,000 held, especially since Faron had already received $100,000, from Hoogstraten's insurer. Yet in 1990, on the eve of trial, Nielsen recommended that Faron's claim be settled for $1 million. Country Mutual and Twin City agreed, and since only $600,000 remained of Country's Mutual's policy, Twin City was forced to ante up the difference between that and $1 million--$400,000. That is the amount it sought in this suit; why the jury shortchanged it by $64,000 is unclear, but Twin City is not complaining.

What happened to defeat Madden's original estimate of the value of Faron's claim? Nielsen's initial investigation of the accident had revealed that Hoogstraten had been speeding when he hit the bus, and it had not revealed any negligence by Nelma White, the driver of the insured's bus. The investigation had also revealed that while Faron had suffered a serious head injury, he seemed to have recovered; the psychological and cognitive impairments that he continued to complain of preexisted the accident--he had a preaccident history of drug abuse, violent behavior, learning problems, and scrapes with the law that included arrests for underage drinking, theft, and assault and battery. It was only as the date of the trial drew near that Nielsen learned that Nelma White had a history of disciplinary and safety infractions, learned that Faron had fired his original lawyer and hired an abler one, and received fresh medical evidence which revealed that Faron had suffered permanent brain damage. On the basis of this new information, only slightly offset by the fact that, Hoogstraten's estate having settled for the full policy limits, Nielsen would be able in a trial to use the "empty chair" defense--that is, blame the plaintiff's injury on the conduct of a nonparty--Nielsen persuaded the insurance companies that they would be prudent to settle for $1 million. Faron's initial demand, back in 1984, had been for $1.1 million; and on the basis of the information that Nielsen had had at that time he had regarded the demand as exorbitant. By 1990, Faron's demand had risen to $1.6 million (and this after Faron had received $100,000 from Hoogstraten's insurer), and Nielsen was now glad to be able to settle for $1 million.

In the narrative so far there is nothing to indicate any blameworthy conduct by Country Mutual toward the excess insurer. But conceivably there may have been a point during the six years of settlement negotiations in which Faron's claim could have been settled for considerably less than $1 million--for so much less in fact that Twin City would not have been required to pick up any part of the tab for the accident--and that Country Mutual had been careless in failing to seize the opportunity; stated differently but equivalently, that Country Mutual, had it been liable up to the full limit of Twin City's policy, would have been imprudent to fail to settle at that time on those terms. In arguing that Country Mutual was careless, imprudent, Twin City relies heavily on a letter Nielsen wrote Madden in 1986, evaluating the prospects for settlement. In it Nielsen describing a pretrial conference at which the lawyers for the various parties had been present, remarked: "Faron's attorneys were totally unreasonable. Their demand is either $500,000 or a structure of $40,000 per year for 20 years plus attorneys' fees of $125,000, $75,000 for medical bills and $75,000 for the plaintiff himself, totalling $275,000 in cash." If Country Mutual had settled with Faron for $500,000, the sum total of the settlements would not have exceeded the sum of Country Mutual's policy limit and that of Hoogstraten's insurer; Twin City would have paid nothing. Twin City persuaded the jury that Country Mutual's failure to settle with Faron on the basis described in Nielsen's letter violated the legal duty that a primary insurer owes an excess insurer to protect the latter's interests during the former's settlement negotiations with the insured's victims. Apart from Nielsen's letter, the only evidence that Country Mutual could ever have settled Faron's claim for less than $1 million is a demand for $750,000 that Faron's lawyer made early in the negotiations--but it was conditional on the school district's not having an excess-insurance policy, and of course it did have one. Nielsen's letter was therefore crucial evidence for Twin City. Even if Country Mutual was negligent in failing to settle sooner, without the letter Twin City's suit must fail, regardless of Country Mutual's negligence, for want of any proof of a causal relationship between a failure to settle early and Twin City's loss.

The admissibility of the letter is a hotly contested issue but one that Country Mutual argues we need not resolve if we accept its argument that a primary insurer has no duty to protect an excess insurer: that the primary insurer is not his excess insurer's keeper. Any insurer, primary or excess, has, Country Mutual concedes, a duty to his insured to avoid imprudently exposing the latter to a judgment in excess of the policy limits, Mid-America Bank & Trust Co. v. Commercial Union Ins. Co., 224 Ill.App.3d 1083, 167 Ill.Dec. 199, 202, 587 N.E.2d 81, 84 (1992); Scroggins v. Allstate Ins. Co., 74 Ill.App.3d 1027, 30 Ill.Dec. 682, 684, 393 N.E.2d 718, 720 (1979), but that duty is founded on the insurance contract itself, and there is, or at least in this case was, no contract between the primary and the excess insurer.

No case decided by an Illinois court holds that the primary insurer owes a duty of care directly to the excess insurer. There are hints (no more) of such a duty in a handful of cases from New York and New Jersey, Hartford Accident & Indemnity Co. v. Michigan Mutual Ins. Co., 93 A.D.2d 337, 462 N.Y.S.2d 175, 178-79 (1983), aff'd, 61 N.Y.2d 569, 475 N.Y.S.2d 267, 463 N.E.2d 608 (1984); Estate of Penn v. Amalgamated General...