Haddick v. Valor Ins.

• Decision Date: 14 August 2000
• Docket Number: No. 3-00-0027.,3-00-0027.
• Parties: Ella HADDICK, Special Administrator of the Estate of James Griffith, Plaintiff-Appellant, v. VALOR INSURANCE, Defendant-Appellee.
• Court: United States Appellate Court of Illinois

735 N.E.2d 132

315 Ill. App.3d 752

248 Ill.Dec. 812

Ella HADDICK, Special Administrator of the Estate of James Griffith, Plaintiff-Appellant, v. VALOR INSURANCE, Defendant-Appellee.

No. 3-00-0027.

Appellate Court of Illinois, Third District.

August 14, 2000.

William K. Brown (argued), Goldfine & Bowles, P.C., Peoria, for Ella Haddick.

James P. Newman (argued), Newman & Pelafas, Chicago, for Valor Insurance.

Justice BRESLIN delivered the opinion of the court:

Plaintiff Ella Haddick, administrator of the estate of her son, James Griffith, filed this suit against defendant Valor Insurance Company (Valor), alleging that Valor acted in bad faith when it refused to settle a claim against its policyholder within the policy limits. The trial court granted Valor's motion to dismiss, finding that Valor had no duty to settle prior to the filing of a lawsuit against its policyholder.

We reverse and hold that an insurance company has a duty to act in good faith in settling a claim against its policyholder in a timely manner both before and after suit is filed. We further hold that a plaintiff may maintain a cause of action against an insurance company for failure to settle a claim in good faith though the plaintiff withdrew her offer to settle within the policy limits before filing suit.

FACTS

On May 6, 1996, Griffith was killed in a single car accident when the vehicle in which he was traveling left the road. Both of the occupants of the car, Griffith and Larry Woodley Jr., had been thrown from the car. The two men were taken to a hospital where Griffith died. Griffith incurred medical bills in excess of $80,000.

The vehicle was owned by Woodley. A police report from the accident included an accident reconstruction report indicating that Woodley was driving. At the hospital, the police officer asked an emergency room doctor to question Woodley about who was driving. Woodley responded to the doctor's question that he was. Woodley was then arrested for driving under the influence. Approximately a week later, Woodley claimed that he could not remember who was driving.

On August 22, 1996, after a demand for settlement was made by Haddick's attorney on behalf of Griffith's estate, Valor responded by letter indicating that it would discuss settlement after receiving a copy of the police report. Haddick sent a copy of the report to Valor but heard nothing from Valor for seven months. Thereupon Haddick sent a letter to Valor on March 7, 1997, demanding that it settle for the policy limits of $20,000. The letter outlined Haddick's claim, discussed the probability that Woodley was driving the vehicle, and requested that settlement be made within 14 days. Valor responded that it was still investigating the claim to determine who was driving. At the end of the 14 days, Haddick extended the deadline for settlement for another two weeks after learning that a new claims adjustor had taken over the case.

After Valor did not respond, Haddick sent a letter indicating that suit would be filed and she would no longer accept settlement for the policy limits. Approximately one year later, Valor offered the policy limits of $20,000 but that offer was rejected. The case went to trial and a verdict was returned in favor of Haddick for $150,924.80.

Following the entry of judgment against him, Woodley assigned to Haddick all of his causes of action against Valor. Haddick then filed this action against Valor claiming that it should be liable for the whole judgment because it acted in bad faith in refusing to settle within the policy limits. The trial court granted Valor's motion to dismiss pursuant to section 2-615(b) of the Illinois Code of Civil Procedure (Code) (735 ILCS 5/2-615(b) (West 1998)), and Haddick appeals.

ANALYSIS

On appeal, we must determine whether the trial court erred when it dismissed Haddick's complaint pursuant to section 2-615(b) of the Code (735 ILCS 5/2-615(b) (West 1998)).

A motion to dismiss pursuant to section 2-615 admits all well-pled facts in the plaintiff's complaint. Jackson v. Michael Reese Hospital & Medical Center, 294 Ill.App.3d 1, 228 Ill.Dec. 333, 689 N.E.2d 205 (1997). Considering such well-pled facts as true, an involuntary dismissal on the pleadings is proper if it is clearly apparent that no set of facts can be proved which would entitle the plaintiff to recover. Grassini v. Du Page Township, 279 Ill. App.3d 614, 216 Ill.Dec. 602, 665 N.E.2d 860 (1996). On appeal, this court reviews the trial court's decision to dismiss a claim de novo. Kedzie & 103rd Currency Exchange, Inc. v. Hodge, 156 Ill.2d 112, 189 Ill.Dec. 31, 619 N.E.2d 732 (1993).

The trial court dismissed Haddick's complaint finding both that Valor had no duty under Illinois law to settle Haddick's claim prior to suit being filed and that Haddick could not maintain a bad faith claim after she withdrew her policy limit demand. Haddick disputes both of these findings.

An insurer has a duty to act in good faith in responding to settlement offers arising from the insurer's exclusive control over settlement negotiations. See Krutsinger v. Illinois Casualty Co., 10 Ill.2d 518, 141 N.E.2d 16 (1957). While the insurer may have an incentive to refuse settlement and proceed to trial, the policyholder may prefer to settle within the policy limits to avoid the risk of trial, thus avoiding a verdict in excess of the policy limits for which the policyholder will theoretically be personally liable. Cramer v. Insurance Exchange Agency, 174 Ill.2d 513, 221 Ill.Dec. 473, 675 N.E.2d 897 (1996).

The duty to settle is implied in law to protect the policyholder from exposure to liability in excess of coverage as a result of the insurer's gamble on which only the policyholder may lose. 14 Couch on Insurance 3d § 203:13 at 203-22. When an insurer breaches that duty by refusing to settle, the insurer may be liable for the full amount of a judgment against the policyholder, regardless of the policy limits. Cramer, 174 Ill.2d at 526, 221 Ill. Dec. 473, 675 N.E.2d at 903.

In Krutsinger, the court stated that an insurer who undertakes the defense of a suit against the insured, where the damages sought are in excess of the policy limits, cannot arbitrarily refuse a settlement within policy limits. Krutsinger, 10 Ill.2d at 527,141 N.E.2d at 21. Similarly, in Cramer, the court stated that the duty to settle arises because the policyholder has relinquished defense of suit to the insurer. Cramer, 174 Ill.2d at 525, 221 Ill.Dec. 473, 675 N.E.2d at 903. Valor seizes upon the "defense of suit" language in both cases to argue that Illinois law imposes no duty upon the insurer to settle in good faith prior to suit being filed.

Neither Krutsinger nor Cramer involved a factual situation similar to that before us, however, where the plaintiff sought to settle within the policy limits prior to filing suit. Thus, neither court discussed whether a duty exists between the insurer and the policyholder prior to the filing of a suit by a third-party. Indeed, this issue appears to be one of first impression in Illinois.

Haddick cites Cernocky v. Indemnity Insurance Co. of North America, 69 Ill. App.2d 196, 216 N.E.2d 198 (1966), which, while somewhat factually different from the case before us, is more on point than Krutsinger and Cramer. In that case, the plaintiffs were injured in a car accident with the defendants. The plaintiffs' attorney attempted to commence negotiations with the defendants' insurer both prior to filing suit and after filing suit. The insurer refused to participate in settlement negotiations and refused to disclose the policy limits. After a judgment was entered in favor of the plaintiffs for a sum in excess of the policy limits, the defendants sued their insurer for the difference. The trial court directed a verdict for the insurer and the appellate court reversed.

On review, the Cernocky court held that an insurer will be liable beyond the policy limits for failing to settle a case where there is evidence of negligence or bad faith. Cernocky, 69 Ill.App.2d at 205, 216 N.E.2d at 203. The court quoted the following language from Ballard v. Citizens Casualty Co. of New York, 196 F.2d 96 (7th Cir.1952) in discussing the duty which an insurer owes its policyholder to settle in good faith:

"When a liability insurance company by the terms of its policy obtains from the insured a power, irrevocable during the continuance of its liability under the policy, to determine whether an offer of compromise of a claim shall be accepted or rejected, it creates a fiduciary relationship between it and the insured with the resulting duties that grow out of such relationship." Cernocky, 69 Ill. App.2d at 207-08, 216 N.E.2d at 204.

This language indicates that a duty to the policyholder is created not upon the instigation of suit by a third-party but upon the conception of the insurance contract. Though Cernocky is somewhat different from the case at bar in that the defendants' attorney attempted to engage in negotiations both before and after filing suit, the basis for the court's holding, that a fiduciary duty is created by virtue of the insurance contract, is still applicable here.

Because the scope of an insured's duty to its policyholder prior to the filing of suit by a third-party has never been determined in Illinois before now, a review of case law from other jurisdictions is helpful in resolving this issue. Some jurisdictions have found that an insurer has a duty to settle in good faith prior to the filing of suit. See Smith v. Blackwell, 14 Kan. App.2d 158, 791 P.2d 1343 (1989) (additionally, insurer cannot cure a breach of this duty by offering the policy limits after suit is filed); see also Griggs v. Bertram, 88 N.J. 347, 443 A.2d 163 (1982) (because policyholder is prohibited from defending himself both before and after suit is filed, insurer owes a duty to act in good faith); Openshaw v. Allstate Insurance Co., 94 Idaho 192, 484 P.2d 1032 (1971) (...