Abbott Laboratories v. Granite State Ins. Co.

• Citation: 573 F. Supp. 193
• Decision Date: 14 September 1983
• Docket Number: No. 80 C 2897.,80 C 2897.
• Parties: ABBOTT LABORATORIES, et al., Plaintiffs, v. GRANITE STATE INSURANCE CO., Defendant.
• Court: U.S. District Court — Northern District of Illinois

573 F. Supp. 193

ABBOTT LABORATORIES, et al., Plaintiffs, v. GRANITE STATE INSURANCE CO., Defendant.

No. 80 C 2897.

United States District Court, N.D. Illinois, E.D.

September 14, 1983.

Judith A. Royal, Lord, Bissell & Brook, Chicago, Ill., for plaintiffs.

Elizabeth Pendzich, John J. Witous, Clausen, Miller, Gorman, Caffrey & Witous, Chicago, Ill., for defendant.

MEMORANDUM OPINION AND ORDER

SHADUR, District Judge.

Abbott Laboratories and Abbott Laboratories International Company (collectively "Abbott" in the singular) has brought this four-count diversity action challenging the refusal by its insurer, Granite State Insurance Company ("Granite"), to indemnify Abbott for certain insured losses:

1. Count I is a contractual claim for the amount due on the insurance policy.

2. Count II is based on Illinois Insurance Code § 155 ("Section 155"), Ill.Rev. Stat. ch. 73, § 767, which permits certain extraordinary costs to be taxed against an insurer that vexatiously and unreasonably refuses to pay: attorneys' fees plus an additional amount not to exceed any of the three ceiling amounts prescribed in Section 155.

3. Count III purports to be a tort claim seeking compensatory and punitive damages for Granite's wilful refusal to pay — a breach of its duty of good faith and fair dealing towards insureds.

4. Count IV characterizes Granite's assertedly vexatious and unreasonable refusal to pay as an "improper claims practice" proscribed by Illinois Insurance Code § 154.6 ("Section 154.6"), Ill.Rev. Stat. ch. 73, § 766.6, and seeks punitive damages under that provision.

Granite has now moved to dismiss Counts III and IV for failure to state a claim. For the reasons stated in this memorandum opinion and order, its motion is granted.

Count III

Granite contends Section 155¹ has displaced the common law tort remedy for vexatious delay asserted in Count III. As this Court explained in Evaluation Systems, Inc. v. Aetna Life Insurance Co., 555 F.Supp. 116, 120 (N.D.Ill.1982), the Illinois Appellate Courts are sharply divided on that issue:

Without even addressing the preemptive implications of the statutory remedy, the Fifth District Appellate Court recognized an independent tort action against insurers for breach of their implied duty of good faith and fair dealing. Ledingham v. Blue Cross Plan for Hospital Care, 29 Ill.App.3d 339, 330 N.E.2d 540 (5th Dist.1975). Ledingham has had a mixed reception in the other Illinois Appellate districts. Both the First and Third Districts have disapproved of Ledingham, concluding the original Section 155 foreclosed any judicial enhancement (via common law tort remedy) of recovery for vexatious delay. Tobolt v. Allstate Insurance Co., 75 Ill.App.3d 57 30 Ill.Dec. 824, 393 N.E.2d 1171 (1st Dist.1979); Debolt v. Mutual of Omaha, 56 Ill. App.3d 111 13 Ill.Dec. 656, 371 N.E.2d 373 (3d Dist.1978). Tobolt also found the 1977 amendment to Section 155 (its current version) also manifested a legislative intent to preempt the field. However the Fourth District has endorsed the availability of Ledingham's tort remedy in cases to which the amended Section 155 cannot be retroactively applied (it has not yet ruled whether the present Section 155 has preemptive effect). Lynch v. Mid-America Fire & Marine, 94 Ill.App.3d 21 49 Ill.Dec. 567, 418 N.E.2d 421 (4th Dist.1981). And the Second District has said a tort remedy for compensatory damages may lie despite Section 155. Hoffman v. Allstate Insurance Co., 85 Ill.App.3d 631 40 Ill. Dec. 925, 407 N.E.2d 156 (2d Dist.1980).

Employing the "Supreme Court-predictive" approach to the Erie problem posed by that split of authority, this Court's colleague Judge Marshall recently concluded Section 155 did not preempt the Ledingham tort. Kelly v. Stratton, 552 F.Supp. 641 (N.D.Ill.1982). However, for the reasons expounded at length in Commercial Discount Corp. v. King, 552 F.Supp. 841, 847-52 (N.D.Ill.1982), this Court perceives its Erie obligations differently. In this Court's view Erie (as amplified in Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021, 85 L.Ed. 1477 (1941)) demands adherence to the Illinois "internal" choice of law rule that binds a state trial court to the decisions of the Appellate Court in its own district when the Appellate Courts diverge. In this case, this Court sits in the same position as a Cook County Circuit Judge in the First Appellate District, for the Illinois venue statute (Ill. Rev.Stat. ch. 110, § 2-101) would have permitted Abbott to sue Granite (a foreign corporation) in Cook County.² Consequently the position taken by the First Appellate District in Tobolt is dispositive here: Section 155 preempts any tort remedy for vexatious and unreasonable refusal to pay insurance proceeds. Count III must therefore be dismissed.

Count IV

Tobolt, 75 Ill.App.3d at 71, 30 Ill. Dec. at 834, 393 N.E.2d at 1181 also spells the demise of Count IV by refusing to find any private right of action for violations of Section 154.6:

Plaintiffs cite the provisions of section 154.6 and its predecessor (Ill.Rev.Stat. 1977, ch. 73, par. 766.6), defining an improper claims practice as

(d) not attempting in good faith to effectuate prompt, fair and equitable settlement of claims submitted in which liability has become reasonably clear,

as showing that the legislature by it has expressly ratified the cause of action for the insurer's breach of its duty to deal in good faith with its insureds. We disagree. That section is a definition section. It provides no remedy. Section 155 does.

No other Illinois appellate court appears to have addressed the issue. Under Erie principles that should settle the matter in Granite's favor.

Abbott nonetheless urges an implied right of action is maintainable under Sawyer Realty Group, Inc. v. Jarvis Corp., 89 Ill.2d 379, 59 Ill.Dec. 905, 432 N.E.2d 849 (1982). On the contrary, proper analysis of the Sawyer standard governing judicial recognition of an implied right of action fortifies Tobolt and defeats Abbott (89 Ill.2d at 386, 59 Ill.Dec. at 908, 432 N.E.2d at 852; emphasis added, citations omitted):

It is clear that it is not necessary to show a specific legislative intent to create a private right of action. If there is no indication that the remedies available are only those the legislature expressed in the Act, then where it is consistent with the underlying purpose of the Act and necessary to achieve the aim of the legislation, a private right of action can be implied.... The court looks to the totality of circumstances in endeavoring to discover legislative intent.

No doubt authorizing private suits under Section 154.6 would be "consistent with" its underlying purpose of protecting insureds. But a private remedy is scarcely "necessary" to further that purpose. As Tobolt indicated, insureds can resort to Section 155 to redress any injury flowing from the insurer's vexatious refusal to pay. Section 155's ceilings on the penalty (a form of punitive damages) assessed for vexatious conduct reflect the Illinois General Assembly's judgment as to the necessary insurer's incentive to refrain from such conduct. If anything, such limitations on punitive damages militate against a finding of legislative intent to permit private actions under Section 154.6, for those constraints would otherwise be rendered nugatory.³ Finally, Illinois Insurance Code § 154.8, Ill.Rev.Stat. ch. 73, § 766.8, empowers the Illinois Director of Insurance to issue cease and desist orders to any insurer who commits any "improper claims practice" enumerated in Section 154.6.

Conclusion

Granite's motion to dismiss Counts III and IV is granted.

Appendix

Debates begin to grow tiresome even to the debaters (let alone the audience) whenever the debaters begin to repeat themselves.¹ But so long as the ongoing efforts to eliminate (or to impose significant curbs on) federal diversity jurisdiction do not bear fruit, definition of the federal courts' proper role in diversity cases remains highly important. And when so ordinarily thoughtful a jurist as this Court's colleague Prentice Marshall can fall victim to what this Court sees as flawed analysis in this area, this Court may perhaps be pardoned a further brief response. This Appendix will not deal chapter and verse with Judge Marshall's Roberts opinion, for a few salient points (supplementing this Court's Commercial Discount discussion) should suffice.

As a preliminary matter, this Court is of course keenly mindful that Erie v. Tompkins may forcefully be argued to undercut the Supremacy Clause. It does reduce the independent judging function of federal courts (including the Supreme Court) in diversity cases — the obligation to decide "cases" and "controversies" — to the task of slavish adherence to state court doctrine.² But because this Court "writes on the shores of Lake Michigan rather than the banks of the Potomac,"³Erie and its progeny must be followed. What does that mean to the litigant?

Any proper response to that inquiry requires answering just why federal courts are obliged under Erie to apply state substantive law in disputes between diversity-of-citizenship adversaries. Erie itself supplies the answer (304 U.S. at 74-75, 58 S.Ct. at 820-821):

Diversity of citizenship jurisdiction was conferred in order to prevent apprehended discrimination in state courts against those not citizens of the State. Swift v. Tyson introduced grave discrimination by non-citizens against citizens. It made rights enjoyed under the unwritten "general law" vary according to whether enforcement was sought in the state or in the federal court; and the privilege of selecting the court in which the right should be determined was conferred upon the non-citizen. Thus, the doctrine rendered impossible equal protection of the law. In attempting to promote uniformity of law throughout the United States, the doctrine had prevented uniformity in the administration of the law of the

...