Barr Co. v. Safeco Ins. Co. of America

• Decision Date: 15 March 1984
• Docket Number: No. 83 C 2711.,83 C 2711.
• Parties: BARR CO., formerly known as Barr-Saunders, Inc., Plaintiff, v. SAFECO INSURANCE COMPANY OF AMERICA, Defendant.
• Court: U.S. District Court — Northern District of Illinois

583 F. Supp. 248

BARR CO., formerly known as Barr-Saunders, Inc., Plaintiff, v. SAFECO INSURANCE COMPANY OF AMERICA, Defendant.

No. 83 C 2711.

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

March 15, 1984.

COPYRIGHT MATERIAL OMITTED

Jonathan B. Gilbert, Pedersen & Houpt, Chicago, Ill., for plaintiff.

Richard S. Wisner, Pretzel & Stouffer, Chtd., Chicago, Ill., for defendant.

MEMORANDUM AND ORDER

MORAN, District Judge.

Before the court is defendant Safeco Insurance Co. of America's motion to dismiss plaintiff Barr Co.'s second amended complaint. Plaintiff brings suit for non-payment on an insurance contract it entered into with defendant in January 1980. In August of 1980 plaintiff notified defendant of a pattern of employee theft it had discovered that caused a loss, it claimed, of $1,800,000 for the years 1977-1980. Plaintiff sought recovery for the portion of these thefts covered by its contract with defendant. After almost three years of supplying information requested by defendant, plaintiff was notified in February 1983 that the $300,000 inventory shortage for 1980 was considered by defendant to be normal and that defendant refused payment for this loss.

Plaintiff, an Illinois corporation with its principal place of business in Illinois, brought suit in Cook County Circuit Court, asking for declaratory relief. Defendant, incorporated and having its principal place of business in Washington, removed the case to this court. Plaintiff subsequently filed a second amended complaint containing four counts. Count I claims breach of contract and asks for $1,000,000 compensatory damages. Count II claims wilful and wanton misconduct and seeks both compensatory and punitive damages. Count III alleges deceptive trade practices and seeks compensatory and punitive damages pursuant to the Illinois Consumer Fraud and Deceptive Trade Practices Act, III.Rev.Stat. ch. 121½, §§ 261, et seq. Count IV alleges bad faith, seeking compensatory and punitive damages. Defendant moves to dismiss each count.

COUNT I

Defendant seeks to dismiss count I for failure to state a claim pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure or, in the alternative, moves for a more definite statement pursuant to Rule 12(e). Plaintiff alleges the existence of an insurance contract and a loss covered by that contract. Plaintiff's proof of loss was attached to its original complaint, as was the insurance contract. If plaintiff's loss is indeed covered by the contract, plaintiff can be granted relief. Additionally, the allegations are specific enough for defendant to frame a responsive pleading: all that is required under Rule 12(e). Questions concerning the extent of plaintiff's damage can be answered during discovery or at trial. Defendant's motion to dismiss count I is denied.

COUNT II

Defendant moves to dismiss count II for a number of reasons. The first, and most interesting basis, is that count II's claim, based upon wilful and wanton misconduct, a tort claim, is barred by section 155 of the Illinois Insurance Code, Ill.Rev.Stat. ch. 73, § 767 (1981). That section reads:

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.

The question raised by this statute is whether the remedy it provides precludes all other non-contractual remedies.

A split in authority exists within Illinois appellate courts concerning the effect of section 155 on an insured's tort claims. For example, the 5th Appellate District has held that insureds can bring tort claims against their insurers when the duty to deal fairly and act in good faith has been breached and that punitive damages, when relevant, can be awarded. See Ledingham v. Blue Cross Plan for Hospital Care, 29 Ill.App.3d 339, 330 N.E.2d 540 (5th Dist. 1975), reversed on other grounds, 64 Ill.2d 338, 1 Ill.Dec. 75, 356 N.E.2d 75 (1976). The court in Ledingham drew this conclusion without considering the effect of section 155. In the 1st and 3d Districts the appellate courts have found that section 155 preempts any tort remedies. See Kinney v. St. Paul Mercury Insurance Co., 120 Ill.App.3d 294, 75 Ill.Dec. 911, 458 N.E.2d 79 (1st Dist.1983); Hamilton v. Safeway Insurance Co., 104 Ill.App. 353, 60 Ill.Dec. 97, 432 N.E.2d 996 (1st Dist. 1982); 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). The 2d District has held that the statute preempts any award of punitive relief, but not an award of compensatory relief sounding in tort. See Hoffman v. Allstate Insurance Co., 85 Ill.App.3d 631, 40 Ill.Dec. 925, 407 N.E.2d 156 (2d Dist.1980). The 4th District has held that section 155 cannot retroactively preempt a tort remedy in a case filed before the statute was amended, see Lynch v. Mid-America Fire & Marine Ins. Co., 94 Ill.App.3d 21, 49 Ill.Dec. 567, 418 N.E.2d 421 (4th Dist.1981), but has indicated that it probably can preempt a present action. See Urfer v. Country Mutual Insurance Co., 60 Ill.App.3d 469, 17 Ill.Dec. 744, 376 N.E.2d 1073 (4th Dist.1978).¹

District courts in this circuit have also split concerning the effect of section 155. Judge Aspen has followed the reasoning of the 1st and 3d Districts in finding that section 155 precludes any tort action based on an insurance contract. See Aabye v. Security-Connecticut Life Insurance Co., No. 83 C 4178 (N.D.Ill. Jan. 11, 1984); Strader v. Union Hall, Inc., 486 F.Supp. 159 (N.D.Ill.1980). Judge Marshall, after examining legislative history not previously discussed by the courts, found that section 155 did not preclude a claim for punitive and compensatory damages sounding in tort. See Roberts v. Western-Southern Life Ins. Co., 568 F.Supp. 536 (N.D.Ill. 1983); Kelly v. Stratton, 552 F.Supp. 641 (N.D.Ill.1982). Judge Shadur has found himself bound by the 1st District's finding of preclusion, pursuant to Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), and has thus not allowed any tort claims to lie. 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).

This court has previously followed Judge Aspen in finding that section 155 precludes the filing of any court claim. See Henke v. Travelers Insurance Co., No. 80 C 5068 (N.D.Ill. Oct. 21, 1981). Plaintiff has asked the court to take another look at that ruling in light of the conflicting appellate decisions. The court is willing to do so, but first must determine its proper role under Erie. It must decide whether it is bound by decisions of the 1st Appellate District, as Judge Shadur holds, or is free to determine the law it finds would be applied by the Illinois Supreme Court, as Judge Marshall proposes.

A. Erie

The command of Erie is simple and direct:

Except in matters governed by the Federal Constitution or by Acts of Congress, the law to be applied in any case is the law of the State. And whether the law of the State shall be declared by its Legislature in a statute or its highest court in a decision is not a matter of federal concern. There is no federal general common law.

304 U.S. at 78, 58 S.Ct. at 822. The question that has arisen between the court's colleagues is the role of this court in searching for state law. Judge Shadur has held in a series of opinions that the goal of placing a diversity plaintiff or defendant in as near a position as possible to a state court plaintiff or defendant requires a federal district court to act in exactly the same role as a state trial court. See e.g. Abbott Laboratories v. Granite State Insurance Co., 573 F.Supp. at 196-200 (Appendix); Commercial Discount Corp. v. King, 552 F.Supp. 841, 847-52 (N.D.Ill.1982); Slate Printing Co. v. Metro Envelope Co., 532 F.Supp. 431, 434 (N.D.Ill.1982); National Can Corp. v. Whittaker Corp., 505 F.Supp. 147, 148, n. 2 (N.D.Ill.1981). Judge Shadur has called "the essential theory of Erie" the duty of a federal court to "decide substantive questions in diversity cases in the same way that a state trial judge counterpart sitting in the same location would." National Can Corp., supra, at 147. This district sits, for relevant purposes here, in Illinois' 1st Appellate District. A circuit court in the 1st District is bound by the 1st District Appellate Court decisions pursuant to Illinois internal choice of law rules. See People v. Thorpe, 52 Ill.App.3d 576, 579, 10 Ill.Dec. 351, 354, 367 N.E.2d 960, 963 (2d Dist.1977). Accordingly, Judge Shadur has followed Tobolt, supra, the 1st District case holding that section 155 precludes any tort claim, and has found preemption. See Abbott Laboratories, supra; Commercial Discount Corp., supra.

Judge Marshall, however, has held that the role of a federal judge, pursuant to Erie, is to apply the law that the supreme court of the state would apply. See Roberts, supra, Kelly, supra. In that approach a federal judge is acting as "a proxy for the entire state court system." 19 C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure 89 (1982). The federal courts generally agree with Judge Marshall in following the...