American Centennial Ins. v. American Home Assur.

• Citation: 729 F. Supp. 1228
• Decision Date: 07 February 1990
• Docket Number: No. 89 C 2489,89 C 2790 and 89 C 3139.,89 C 2489
• Parties: AMERICAN CENTENNIAL INSURANCE COMPANY, a Delaware Corporation, Plaintiff, v. AMERICAN HOME ASSURANCE COMPANY, a New York Corporation, and Parmelee Transportation Company, an Illinois Corporation, Defendants. UNITED EQUITABLE INSURANCE COMPANY, an Illinois Corporation, Plaintiff, v. AMERICAN HOME ASSURANCE COMPANY, a New York Corporation, Defendant.
• Court: U.S. District Court — Northern District of Illinois

729 F. Supp. 1228

AMERICAN CENTENNIAL INSURANCE COMPANY, a Delaware Corporation, Plaintiff, v. AMERICAN HOME ASSURANCE COMPANY, a New York Corporation, and Parmelee Transportation Company, an Illinois Corporation, Defendants.

UNITED EQUITABLE INSURANCE COMPANY, an Illinois Corporation, Plaintiff, v. AMERICAN HOME ASSURANCE COMPANY, a New York Corporation, Defendant.

Nos. 89 C 2489, 89 C 2790 and 89 C 3139.

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

February 7, 1990.

Robert M. Greco and Marshall L. Blankenship, Schuyler, Roche & Zwirner, Chicago, Ill., for United Equitable Ins. Co.

Robert Marc Chemers, Robert J. Franco, James P. Moran and Mark D. Roth, Pretzel & Stouffer, Chtd., Chicago, Ill., for American Home Assur. Co.

Robert D. Kolar and Michele T. Oshman, Robert D. Kolar & Associates, Ltd., Chicago, Ill., for American Centennial Ins. Co.

John I. Grossbart, Harold C. Hirshman, Katharine B. Devoid and Deborah K. Sorell, Sonnenschein, Carlin, Nath & Rosenthal, Chicago, Ill., for Parmelee Transp. Co.

MEMORANDUM OPINION AND ORDER

MAROVICH, District Judge.

The plaintiffs in these consolidated cases are excess insurance carriers who are suing, inter alia, a primary carrier alleging that it breached certain duties owed to them as excess carriers. These cases are now before the court on the motions of defendant American Home Assurance Company ("American Home") to dismiss count two of each complaint for failure to state a claim upon which relief may be granted. For the reasons set forth below, American Home's motions are denied.

BACKGROUND

When deciding a motion to dismiss, this court must accept as true all well-pleaded facts alleged in the plaintiff's complaint and all inferences which may be reasonably drawn therefrom. Gray v. County of Dane, 854 F.2d 179, 182 (7th Cir.1988). The alleged facts in these cases are straightforward. On November 25, 1979, Dr. Peter Bright-Asare was a passenger on an air transport bus which was involved in an accident while being operated by Continental Air Transport Company, Inc., the predecessor of Parmelee Transportation Co. ("Continental/Parmelee"). On May 19, 1980, Dr. Bright-Asare filed suit against Continental/Parmelee in the Circuit Court of Cook County, Illinois seeking recovery for personal injuries suffered in the accident. On December 14, 1988, a jury returned a verdict in favor of Dr. Bright-Asare in the amount of $7,746,200. A judgment in that amount plus costs and interest was subsequently entered.

At all relevant times, American Home was Continental/Parmelee's primary liability carrier. The policy issued by American Home had a stated limit of $1,000,000. American Centennial Insurance Co. ("American Centennial") was one of Continental/Parmelee's excess carriers. United Equitable Insurance Company ("United"), pursuant to a Reinsurance and Assumption Agreement with United Fire Insurance Company, was another one of Continental/Parmelee's excess carriers. At all relevant times, American Home was aware that the policy which it had issued to Continental/Parmelee was primary to excess policies specifically identifying its policy as underlying insurance.

On July 18, 1980 American Home advised Continental/Parmelee by letter that it had concluded that the amount recoverable in Dr. Bright-Asare's lawsuit against Continental/Parmelee could exceed the $1,000,000 limit of American Home's primary policy. At an October 31, 1988 pretrial conference, Dr. Bright-Asare's counsel made a $300,000 settlement demand. The attorneys which American Home had retained to defend Continental/Parmelee, Epton, Mullin & Druth, Ltd. ("Epton, Mullin"), countered with a $100,000 offer at American Home's direction. At a November 29, 1988 pretrial conference, Dr. Bright-Asare's counsel made a $1,500,000 settlement demand. American Home, through Epton, Mullin, countered with a $300,000 offer.

The complaints allege eight "negative factors" of which American Home was aware by the time of the October 31, 1988 pretrial conference which point to the conclusion that American Home knew that Continental/Parmelee's liability to Dr. Bright-Asare could exceed the limit of American Home's policy.

Based on the above-summarized factual allegations, United and American Centennial argue that American Home, as a primary carrier, owed a "fiduciary duty" to them as excess carriers. They further allege that American Home breached this duty in the following manner:

"American Home carelessly and negligently failed to settle the Dr. Bright-Asare matter within American Home's policy limits when it had the opportunity to do so and when it knew that any reasonable and prudent evaluation of the facts and the circumstances known to it on and before October 31, 1988 would have led any reasonable insurer to accept the $300,000 settlement demand proposed by Bright-Asare through his counsel at the October 31, 1988 pretrial conference. The potential for exposure and negative factors militating in favor of the settlement demand proposed by Bright-Asare through his counsel were so overwhelming that the failure of American Home to settle the matter within its policy limit when the opportunity arose constitutes negligence ..."

The complaints allege causation, i.e., that Dr. Bright-Asare's lawsuit would have been settled within American Home's policy limit but for American Home's negligent failure to settle, and damages, i.e., that "demands have been made" of United and American Centennial to pay their policy limits in satisfaction of Dr. Bright-Asare's judgment.

The complaints seek a declaration that American Home is liable to American Centennial and United for any amounts which American Centennial and United may be deemed obligated to pay to or on behalf of Continental/Parmelee in satisfaction of Dr. Bright-Asare's judgment.

ANALYSIS

As a preliminary matter, this court notes that all parties to this diversity action have assumed, without arguing, that the substantive law of the forum state of Illinois applies to this case. In such a situation, this court will apply the forum state's substantive law. Checkers, Simon & Rosner v. Lurie Corp., 864 F.2d 1338, 1345 (7th Cir.1988), citing In the Matter of Iowa Railroad, 840 F.2d 535, 543 (7th Cir.1988).

BREACH OF DUTY

In both of its motions to dismiss, American Home argues that the complaints fail to state a claim upon which relief may be granted because, under Illinois law, a primary carrier owes no direct duty¹ to an excess carrier to settle a claim against their insured within the limits of the primary policy when a reasonable primary insurer under the same facts and circumstances would have done so.

In two footnotes, American Home cites Scroggins v. Allstate Ins. Co., 74 Ill. App.3d 1027, 30 Ill.Dec. 682, 393 N.E.2d 718 (1st Dist.1979) and Yelm v. Country Mutual Ins. Co., 123 Ill.App.2d 401, 259 N.E.2d 83 (3d Dist.1970) for the propositions that "an insurer does not owe a duty to exercise good faith or due care to anyone except its insured" and that "Illinois has recognized that an insurer's duty to settle is owed only to its insured." However, both of these cases involved judgment creditors of the insured suing the insured's carrier for bad faith refusal to settle. There is a qualitative difference between the positions of a potential judgment creditor and an excess carrier with regard to the settlement of claims against an insured. A potential judgment creditor is usually not likely to suffer damages when a primary carrier fails to settle the potential judgment creditor's claim against the insured and may in fact benefit from such a refusal if the judgment exceeds policy coverage. In contrast, an excess carrier can only be harmed when a primary carrier fails to settle a claim against the insured within the primary policy limit.

American Home concedes that no Illinois court has addressed the precise issue in this case. Thus, this court is presented with an unsettled question of state law which it must resolve as it thinks the Illinois Supreme Court would resolve it. Strader v. Union Hall, Inc., 486 F.Supp. 159, 161 (N.D.Ill.1980), citing Eckenrode v. Life of America Ins. Co., 470 F.2d 1, 3 (7th Cir.1972).

American Home cites three cases from other jurisdictions in which the courts allegedly refused to impose a direct duty of care on a primary carrier in favor of an excess carrier. American Home argues that those cases illustrate the better rule of law on this issue. However, one of those cases does not stand for the proposition for which American Home cites it. The holding in another one of those cases is conclusory and unconvincing. The other case is factually inapposite to the cases at bar.

Contrary to American Home's contention, the court in Commercial Union Ins. Co. v. Medical Protective Co., 426 Mich. 109, 393 N.W.2d 479 (1986), did not find that a primary insurer does not owe a direct duty of care to an excess insurer when negotiating the settlement of a claim against their insured. In fact, the court expressly left that issue open, stating that "after an examination of the facts in the instant case, we conclude that it is not the most appropriate case on which to decide the application of the direct duty rule." Id. 393 N.W.2d at 485. (The particular facts to which the court was referring were various allegations indicating that the excess carrier had participated in the later-complained-of settlement negotiations. This is a factual distinction from the cases at bar). In the same paragraph, the court referred to the direct duty theory as an "appealing" theory. Id. Furthermore, the court implied that at least in some circumstances, it would impose a direct duty on a primary carrier towards an excess carrier. The court stated:

We decline to state that under certain conditions, a direct duty of good faith and due care from a primary insurer towards an excess insurer is inappropriate. Whether a primary insurer owes a duty to act in good faith or with due care

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