American Dental Ass'n v. Hartford Steam Boiler Inspection and Ins. Co.

• Decision Date: 06 December 1985
• Docket Number: No. 85 C 1788.,85 C 1788.
• Citation: 625 F. Supp. 364
• Parties: AMERICAN DENTAL ASSOCIATION, Plaintiff, v. The HARTFORD STEAM BOILER INSPECTION AND INSURANCE CO., Defendant.
• Court: U.S. District Court — Northern District of Illinois

625 F. Supp. 364

AMERICAN DENTAL ASSOCIATION, Plaintiff, v. The HARTFORD STEAM BOILER INSPECTION AND INSURANCE CO., Defendant.

No. 85 C 1788.

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

December 6, 1985.

Peter M. Sfikas, Peterson, Ross, Schloerb & Seidel, Chicago, Ill., for plaintiff.

Steven D. Marcus, Clausen, Miller, Gorman & Witous, Chicago, Ill., for defendant.

MEMORANDUM OPINION AND ORDER

PLUNKETT, District Judge.

Plaintiff, American Dental Association ("ADA") brings this action against The Hartford Steam Boiler Inspection and Insurance Company ("Hartford"), alleging that although ADA sustained a loss while it was covered by an insurance policy written by Hartford, Hartford has refused to pay the sum owing as a result of ADA's loss. In Count I, ADA alleges that it sustained a loss of $2,000,000, but that so far Hartford has paid only $16,036.75, leaving a balance of $1,983,963.25 due to ADA. In Count II, ADA claims that as a direct result of Hartford's wrongful conduct, ADA has suffered the loss of the use of the principal sum owed by Hartford as well as the use of the interest on that principal sum. In Count III, ADA contends that Hartford's refusal to pay the amount of the loss is vexatious and without reasonable cause, seeking attorney's fees in bringing this action pursuant to § 155 of the Illinois Insurance Code, Ill.Rev.Stat. ch. 73, § 767 (Supp.1985) ("§ 155"), plus costs of this action. In Count IV, ADA alleges that Hartford's refusal to pay constitutes a breach of its duty of good faith and fair dealing, and seeks $250,000 in compensatory damages. Finally, in Count V, ADA requests punitive damages in the amount of $10,000,000.

Presently before the court is Hartford's motion to dismiss Counts IV and V of the second amended complaint (the "complaint"), pursuant to Fed.R.Civ.P. Rule 12(b)(6).^* We have jurisdiction under 28 U.S.C. § 1332. For the reasons set forth below, Hartford's motion is granted in part and denied in part.

The facts as alleged reveal that on November 2, 1982, Hartford executed and delivered to ADA an insurance policy whereby Hartford agreed to insure ADA from January 1, 1983 until January 1, 1986, against loss of property directly damaged by an accident. On or about September 9, 1983, while the policy was in full force, ADA suffered extensive damage to the electrical system at its association headquarters, resulting in damages of $2,000,000. ADA alleges that these damages resulted from an accident covered by Hartford's insurance policy. ADA further alleges that it has requested that Hartford make payment, but Hartford has refused, except for the approximately $16,000 partial payment described above. ADA then brought this action.

Discussion

Hartford moves to dismiss Count IV on the ground that the common law tort of breach of the duty of good faith and fair dealing is preempted by § 155 of the Code and therefore, Counts IV and V fail to state a claim upon which relief can be granted.

Section 155, entitled "Attorney fees," provides, in relevant part:

In any action by or against a company wherein there is in issue the liability of a company on a policy or policies of insurance or the amount of the loss payable thereunder, or for an unreasonable delay in settling a claim, and it appears to the court that such action or delay is vexatious and unreasonable, the court may allow as part of the taxable costs in the action reasonable attorney fees, other costs, plus an amount not to exceed any one of the following amounts:

(a) 25% of the amount which the court or jury finds such party is entitled to recover against the company, exclusive of all costs;

(b) $5,000;

(c) the excess of the amount which the court or jury finds such party is entitled to recover, exclusive of costs, over the amount, if any, which the company offered to pay in settlement of the claim prior to the action.

It is Hartford's position that § 155 preempts both compensatory and punitive damages for any breach of the tort of good faith and fair dealing. ADA, however, takes the position that § 155 does not preempt any cause of action for the breach of the duty of good faith and fair dealing.

The parties' difference of opinion on this issue is quite understandable. The Illinois Supreme Court has not addressed the question, and the appellate courts are in strong disagreement over the effect of § 155. The Fifth Appellate District has held that a cause of action exists for insureds against insurers who breach their 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), rev'd on other grounds, 64 Ill.2d 338, 1 Ill.Dec. 75, 356 N.E.2d 75 (1976). The court in Ledingham, however, drew this conclusion without making any reference to § 155 and it is therefore unclear whether the court considered the statutory provision in its analysis. Furthermore, the Fifth District seems to have reversed itself, at least as to the awarding of punitive damages. See Fisher v. Fidelity and Deposit Co., 125 Ill.App.3d 632, 80 Ill.Dec. 880, 466 N.E.2d 332 (5th Dist.1984). The First Appellate District has held that § 155 preempts all tort remedies. See, e.g., Trautman v. Knights of Columbus, 121 Ill.App.3d 911, 77 Ill.Dec. 294, 460 N.E.2d 350 (1st Dist.1984); Kinney v. St. Paul Mercury Insurance Co., 120 Ill.App.3d 294, 75 Ill.Dec. 911, 458 N.E.2d 79 (1st Dist.1983); Tobolt v. Allstate Insurance Co., 75 Ill.App.3d 57, 30 Ill.Dec. 824, 393 N.E.2d 1171 (1st Dist.1979). The Third District considers punitive damages to have been preempted but it has not specifically addressed the issue of compensatory damages. See Debolt v. Mutual of Omaha, 56 Ill.App.3d 111, 13 Ill.Dec. 656, 371 N.E.2d 373 (3d Dist.1978). The Second District has held that the statute preempts an award of punitive damages but not compensatory damages. See Hoffman v. Allstate Insurance Co., 85 Ill.App.3d 631, 40 Ill.Dec. 925, 407 N.E.2d 156 (2d Dist.1980).

The issue has also been considered by several district judges here in the Northern District of Illinois, and these judges are also split on the issue. Judge Aspen has held that § 155 precludes any recovery based in tort. See Strader v. Union Hall, Inc., 486 F.Supp. 159 (N.D.Ill.1980). Judge Shadur is in agreement, as he considers himself bound by the decisions of the First Appellate District. See Abbott Laboratories v. Granite State Insurance Co., 573 F.Supp. 193 (N.D.Ill.1983); Commercial Discount Corp. v. King, 552 F.Supp. 841 (N.D.Ill.1982). Judge Marshall, on the other hand, has held that § 155 does not preclude a claim for either punitive or compensatory damages based on a tort claim. See Roberts v. Western-Southern Life Insurance Co., 568 F.Supp. 536 (N.D.Ill.1983); Kelly v. Stratton, 552 F.Supp. 641 (N.D.Ill. 1982). Judges Hart and Moran have reexamined their rulings on the effect of § 155. Both originally held that § 155 preempts any common law tort recovery against an insurer. See Gibe v. General American Life Insurance Co., No. 84 C 1280 (N.D.Ill. May 24, 1984) (Hart, J.); Henke v. Travelers Insurance Co., No. 80 C 5068 (N.D.Ill. Oct. 21, 1981) (Moran, J.). However, both judges now take the position that § 155 preempts a claim for punitive damages, but does not preempt any action for compensatory damages. See UNR Industries, Inc. v. Continental Insurance Co., 607 F.Supp. 855, 863-868 (N.D.Ill.1984) (Hart, J.); Barr Co. v. Safeco Insurance Co., 583 F.Supp. 248, 255-256 (N.D.Ill.1984). The district judges disagree not only as to the construction of § 155, but also as to how a federal judge should arrive at his or her conclusions. We now dive into this quagmire of indecision and add our thoughts on these issues.

I. The Erie Question

As an initial matter, the court must decide what its obligations are under Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). The parties are in agreement that Erie requires this court to predict what the Illinois Supreme Court would decide and to hold accordingly. This approach is favored by many of the judges in the Northern District of Illinois, particularly Judge Marshall. See Roberts v. Western-Southern Life Insurance Co., 568 F.Supp. 536 (N.D. Ill.1983); Kelly v. Stratton, 552 F.Supp. 641, 643 (N.D.Ill.1982). See also Strader v. Union Hall, Inc., 486 F.Supp. 159, 161 (N.D.Ill.1980) (Aspen, J.); Barr Co. v. Safeco Insurance Co., 583 F.Supp. 248, 252-255 (N.D.Ill.1984) (Moran, J.); UNR Industries, Inc. v. Continental Insurance Co., 607 F.Supp. 855, 863 (N.D.Ill.1984) (Hart, J.).

The rationale is that Erie requires a federal court sitting in diversity to apply the law of the state, whether embodied in a decision by the state's highest court or in a state statute. Accordingly, when the state's highest court has not addressed an issue, and the appellate courts are in conflict over the interpretation of a state statute, the federal court should predict how the Illinois Supreme Court would rule. Judge Shadur, however, takes the position that when the intermediate appellate court decisions are in conflict and no state supreme court authority exists, our obligation in the federal courts is to decide issues of substantive law in the same way that a state trial judge sitting in the same location would decide those issues. Thus, Judge Shadur has considered himself bound by the decisions of the First District of the Illinois Appellate Court. See, e.g., Abbott Laboratories v. Granite State Insurance Co., 573 F.Supp. at 196-200 (N.D.Ill.1983); Commercial Discount Corp. v. King, 552 F.Supp. 841, 847-852 (N.D.Ill.1982).

We have considered the careful analyses of both Judge Marshall and Judge Shadur. We conclude that our obligation under Erie is to predict the Illinois Supreme Court's resolution of the issue. First, the predictive approach of resolving undecided questions of state law has been adopted by the Seventh Circuit. See, e.g., White v. United States, 680 F.2d 1156,...