R.C. Wegman Const. Co. v. Admiral Ins. Co.

• Citation: 629 F.3d 724
• Decision Date: 14 January 2011
• Docket Number: No. 09-2022,09-2022
• Parties: R.C. WEGMAN CONSTRUCTION COMPANY, Plaintiff-Appellant, v. ADMIRAL INSURANCE COMPANY and Brian Budrik, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

629 F.3d 724

R.C. WEGMAN CONSTRUCTION COMPANY, Plaintiff-Appellant,

v.ADMIRAL INSURANCE COMPANY and Brian Budrik, Defendants-Appellees.

No. 09-2022.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 13, 2010.

Decided Jan. 14, 2011.

James E. Dahl (argued), Attorney, Dahl & Bonadies, Chicago, IL, for Plaintiff-Appellant.

Terrence J. Madden (argued), Attorney, Bryce Downey, LLC, David C. Wise, Attorney, Burke, Mahoney & Wise, Chicago, IL, for Defendants-Appellees.

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

POSNER, Circuit Judge.

The defendant insurance company, Admiral, issued a liability insurance policy that provided a $1 million ceiling on coverage for a single occurrence (that is, an event that would trigger coverage). While the policy was in effect, Brian Budrik, a worker at a construction site managed by Wegman Construction Company, was injured in a fall and sued Wegman (an "additional insured" on the policy, which had been issued to Budrik's employer), along with other potentially liable entities, for negligence. The case went to trial, Budrik prevailed, and a judgment for a little more than $2 million was entered against Wegman. Wegman then filed the present suit in an Illinois state court against Admiral, claiming that Wegman would not have been liable for damages in excess of the $1 million policy limit had Admiral discharged the implied contractual duty of good faith that insurance companies owe their insureds.

As we explained in Twin City Fire Ins. Co. v. Country Mutual Ins. Co., 23 F.3d 1175, 1179 (1994), applying Illinois law, a correlative to the standard provision that authorizes a liability insurer to control the defense of a claim against the insured is "the duty not to gamble with the insured's money by forgoing reasonable opportunities to settle a claim on terms that will protect the insured against an excess judgment. Were it not for this duty, a duty fairly implied in the insurance contract, in a case in which a claim could be settled at or near the policy limit, yet there was a good although not certain chance that it could be beaten at trial, the insurance company would be sorely tempted to take the case to trial. For that would place it in a 'Heads I win, tails you lose,' position.Suppose the claim was for $2 million, the policy limit was $1 million, the plaintiff was willing to settle for this amount, but the defendant's insurer believed that if the case was tried the plaintiff would have a 50 percent chance of winning $2 million and a 50 percent chance of losing. The insurer's incentive would be to refuse to settle, since if it lost the trial it would be no worse off than if it settled—in either case it would have to pay $1 million—but if it won it would have saved itself $1 million" (citations omitted). See also Haddick ex rel. Griffith v. Valor Ins., 198 Ill.2d 409, 261 Ill.Dec. 329, 763 N.E.2d 299, 303-04 (2001); Founders Ins. Co. v. Shaikh, 405 Ill.App.3d 367, 344 Ill.Dec. 845, 937 N.E.2d 1186, 1191-92 (2010); O'Neill v. Gallant Ins. Co., 329 Ill.App.3d 1166, 263 Ill.Dec. 898, 769 N.E.2d 100, 109-10 (2002).

Admiral removed the case to federal district court under the federal diversity jurisdiction and filed a motion to dismiss, which the district court granted, precipitating this appeal.

Before turning to the merits (which are governed by Illinois law), we take up a procedural hiccup relating to the existence of federal jurisdiction. After removal, Wegman was permitted to amend its complaint to add Budrik, the accident victim, as a defendant. Why Wegman did this is unclear, since it said in its motion to amend, and continues to insist, that it seeks no relief from Budrik, whom it describes as a "nominal" defendant. How could it seek relief against him? Budrik did not injure Wegman!

Budrik, like Wegman, is a citizen of Illinois, so if he's really a defendant the requirement of complete diversity of citizenship is not satisfied. But a party isn't permitted to destroy federal diversity jurisdiction by naming as a defendant someone against whom he does not seek relief. See Walden v. Skinner, 101 U.S. 577, 589, 25 L.Ed. 963 (1879). Otherwise Wegman could have forced the case to be remanded to the state court by naming Rod Blagojevich, or any other Illinois citizen, as a "nominal" defendant. It would be different if Budrik were an indispensable party, which is to say a party in whose absence the suit could not proceed. E.g., American National Bank & Trust Co. v. Bailey, 750 F.2d 577, 582 (7th Cir.1984); Mattel, Inc. v. Bryant, 446 F.3d 1011, 1013-14 (9th Cir.2006); Salt Lake Tribune Publishing Co. v. AT & T Corp., 320 F.3d 1081, 1095-97 (10th Cir.2003). He is not.

It is true that Budrik, unlike Blagojevich, may have a practical interest in this suit because he is a judgment creditor of Wegman, having yet to be paid the judgment entered against Wegman, which is broke; probably he'll never be paid unless Wegman replenishes its coffers by winning this suit. That might be a basis for Budrik's intervening in this litigation, Rosquist v. Soo Line R.R., 692 F.2d 1107, 1110 (7th Cir.1982); Yates v. Transamerica Ins. Co., 928 F.2d 199, 200 (6th Cir.1991); Travelers Indemnity Co. v. Dingwell, 884 F.2d 629, 637 (1st Cir.1989), but if so it would be intervention on the plaintiff side of the litigation, and so would not destroy diversity. Anyway Budrik has not sought to intervene, and has made no appearance either in the district court or in this court.

As there was no basis for adding Budrik as a party, we dismiss him from the case and move on to the merits.

The complaint alleges the following facts, which we take as true for purposes of reviewing the district judge's grant of Admiral's motion to dismiss. Wegman had been sued by Budrik in 2003, two years after his injury. Admiral exercised the option granted it by the insurance policy to defend the Budrik suit at its expense; thus, the complaint explains, Admiral "accepted Wegman's defense" and "controlled" the defense. The complaint goeson to allege that "no later than May 2005 (at the time [that Budrik's] deposition [in his tort case] was conducted), [Admiral] knew" that Budrik had sustained serious injuries that had required a lumbar fusion, and that he had experienced "substantial pain and suffering for an extended period of time," had "sustained permanent physical disabilities," had been "unable to perform construction work" since the accident, had "sustained substantial loss of income and was likely to sustain substantial loss of income in the future," and "had incurred and would incur substantial medical expenses." Admiral also knew, "as early as May 2005 and no later than April 2007," that Budrik was demanding "almost $6,000,000" to settle the suit; as a result Admiral "knew that the Budrik Lawsuit presented a realistic possibility of a potential loss to Wegman ... in excess of the Admiral Policy limits." Admiral failed to warn Wegman of this possibility. Had it done so, Wegman would have sought and obtained indemnity from its excess insurer—the policy limit in its excess policy was $10 million. A prudent insured notifies its excess insurer of any nontrivial claim.

Wegman, the complaint continues, "did not realize that the Lawsuit presented a realistic possibility of a loss in excess of the Admiral Policy limits until [September 2007,] a few days before the trial of the Budrik Lawsuit when a Wegman executive was casually discussing the Budrik Lawsuit with a relative who happened to be an attorney." Wegman promptly notified its excess insurer, but the excess insurer refused coverage on the ground that it had not received timely notice. We learned at argument that Wegman has since hired a new attorney and sued the lawyer who had been retained by Admiral to handle Wegman's defense against Budrik's suit. But the present suit is only against Admiral, for failing to notify Wegman of the possibility of an excess judgment in time for Wegman to have invoked its excess coverage.

Neither the briefs nor the complaint, nor for that matter the insurance policy, judicial opinions, or treatises on insurance law, tell us much about how situations of the sort presented by this case are handled by insurance companies. We learned a little more at the oral argument and from our own research. See Michael J. Haverson, "Litigating the Insurance Coverage Case—A Carrier's Expectations of Its Counsel," For the Defense, May 2009, pp. 49, 53, www. haverson consulting. com/ my_ web_ site/ Presentation s_ Articles_ f iles/ DRI% 20Car rier% 20Exp.pdf (visited Dec. 23, 2010); James M. Fischer, "Insurer or Policyholder Control of the Defense and the Duty To Fund Settlements," 2 Nevada L.J. 1 (2002); Ellen S. Pryor & Charles Silver, "Defense Lawyers' Professional Responsibilities: Part I—Excess Exposure Cases," 78 Tex. L.Rev. 599, 645-55, 657 (2000); Douglas R. Richmond, "Walking the Tightrope: The Tripartite Relationship Between Insurer, Insured, and Insurance Defense Counsel," 73 Neb. L.Rev. 265 (1994); Karon O. Bowdre, "Conflicts of Interest Between Insurer and Insured: Ethical Traps for the Unsuspecting Defense Counsel," 17 Am. J. Trial Advocacy 101, 139-41 (1993). The situation in question is the emergence of a potential conflict of interest between insurer and insured in the midst of a suit in which the insured is represented by a lawyer procured and paid for by the insurer.

At the outset—and in fact in this case at the outset—usually neither insurance company nor insured has reason to believe that the insured's liability to the victim of the tort for which the insured is being sued will result in a judgment (if the case goes to trial) in excess of the policy limit. That means that as a practical matter the insured has no interest in the litigation; heis not paying for his attorney and will lose nothing if he loses the suit, if we set to one side possible concerns with loss of reputation or with the insurer's upping his premiums...