Certain Underwriters v. FIDELITY AND CAS. INS.

• Court: U.S. District Court — Northern District of Illinois
• Writing for the Court: Henry R. Daar, Clausen, Miller, Gorman, Caffrey & Witous, P.C., Chicago, Ill., for defendant
• Citation: Certain Underwriters v. FIDELITY AND CAS. INS., 789 F.Supp. 927 (N.D. Ill. 1992)
• Decision Date: 06 April 1992
• Docket Number: No. 89 C0 0876.,89 C0 0876.
• Parties: CERTAIN UNDERWRITERS AT LLOYD'S LONDON AND COMPANIES IN INTEREST, SUBSCRIBING TO COVER NOTES RLJ2197 AND RLJ2197A, Plaintiff, v. THE FIDELITY AND CASUALTY INSURANCE COMPANY OF NEW YORK, Defendant.

789 F. Supp. 927

CERTAIN UNDERWRITERS AT LLOYD'S LONDON AND COMPANIES IN INTEREST, SUBSCRIBING TO COVER NOTES RLJ2197 AND RLJ2197A, Plaintiff, v. THE FIDELITY AND CASUALTY INSURANCE COMPANY OF NEW YORK, Defendant.

No. 89 C0 0876.

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

April 6, 1992.

Dwight B. Palmer, Jr., Keck, Mahin & Cate, Stanley C. Nardoni, Karon, Savikas & Horn, Ltd., Chicago, Ill., for plaintiff.

Henry R. Daar, Clausen, Miller, Gorman, Caffrey & Witous, P.C., Chicago, Ill., for defendant.

MEMORANDUM AND ORDER

LINDBERG, District Judge.

Plaintiff, Certain Underwriters at Lloyd's London and Companies In Interest ("Underwriters"), brought this tort action against defendant, The Fidelity and Casualty Insurance Company of New York ("Fidelity"), for wrongful refusal to settle an underlying product liability suit against the mutual insured, Dresser Industries, Inc. ("Dresser"). Fidelity moved for summary judgment. In the course of the briefing of the motion for summary judgment, Fidelity moved to strike a portion of plaintiff's response. The Magistrate Judge recommended that both the motion to strike and the motion for summary judgment be denied. This court accepts that portion of the report and recommendation recommending denial of the motion to strike and rejects that portion of the report and recommendation recommending denial of the motion for summary judgment. 28 U.S.C. § 636(b)(1)(B) (1988); Fed.R.Civ.P. 72(b).

FACTUAL BACKGROUND

From November 1, 1978, until November 1, 1979, Fidelity provided Dresser with primary liability insurance for personal injury claims up to $1,000,000 per occurrence. During the same period, Underwriters provided Dresser with excess liability insurance of $20,000,000 for personal injury claims. Underwriters' excess policy obligation arose only upon payment of Fidelity's $1,000,000 primary policy limit.

Terrence J. Fahy ("Fahy") brought a product liability action against Dresser because of an incident on August 23, 1979. Dresser (which is not a party to the instant action) refused to settle the Fahy lawsuit, based on its conclusion that a trial would result in a directed verdict or a jury verdict in its favor. The jury decided against Dresser and awarded $3,000,000 to Fahy. Dresser appealed and ultimately the Missouri Supreme Court affirmed the jury's verdict. Fahy v. Dresser Industries, 740 S.W.2d 635 (Mo.1987), cert. denied 485 U.S. 1022, 108 S.Ct. 1576, 99 L.Ed.2d 891 (1988). Fidelity paid $1,000,000 to Fahy according to the terms of Fidelity's primary insurance contract with Dresser. Dresser then paid the remaining $2,000,000 to Fahy. Under a reservation of rights, Underwriters indemnified Dresser for $1,980,000.

Fidelity's primary policy with Dresser provided:

With respect to such insurance as is afforded by this policy, the Company Fidelity shall:

A. Defend any suit against the Insured alleging such personal or bodily injury or injury to or destruction of property and seeking damages on account thereof, even if such suit is groundless, false, or fraudulent; but the Company may make such investigation, negotiation, and settlement of any claim or suit as it deems expedient, but the Company shall not be obligated to pay any claim or judgment or to defend any suit after the applicable limit of the Company's liability has been exhausted by payment of judgments or settlements.

Dresser entered a Claims Service Contract with Underwriters Adjusting Company ("UAC"). In relevant part, the Claims Service Contract provided that UAC will examine all reports Dresser received pertaining to losses from product liability claims. The contract further provided:

UAC shall have full authority and control in all matters pertaining to the adjustment, handling, investigation, administration of claims and losses within the discretionary settlement authority limit and may make such adjustment or settlement of claims within discretionary settlement authority limit which in its judgment it deems proper unless Dresser notified UAC to the contrary on any specific claim.

UAC agrees to obtain the prior approval of Dresser before agreeing to the payment of claims or losses (including allocated loss expenses) in excess of the settlement authority limit specified below:

(a) Products Liability -0-
                   (b) All others applicable      $10,000
                

(emphasis added)

Fidelity is one of the Continental Insurance Companies and UAC is the claims facility for the Continental Insurance Companies. According to the underwriter in charge of Fidelity's policy with Dresser, when Fidelity issued its policy, Fidelity knew that Dresser was going to execute a Claims Service Contract with Fidelity. The underwriter "had no disagreement with Fidelity's insured entering into a Claims Servicing Contract with UAC as the same is not unusual with large, sophisticated insureds such as Dresser." Neither the underwriter nor anyone else to the underwriter's knowledge at Fidelity had any objections to the Claims Service Contract between UAC and Dresser.

DISCUSSION

Underwriters alleges that Fidelity owed Underwriters a direct duty of good faith and fair dealing. This duty included an obligation to settle the Fahy claim within its policy limits, thus preventing unreasonable exposure of Underwriters to liability for a judgment exceeding Fidelity's primary policy limits.

Fidelity argues that as a matter of law, it owed no duty to Underwriters beyond its duty to Dresser. Under the equitable subrogation theory or under the direct duty theory, Fidelity did not breach a duty to settle the Fahy suit within the primary policy limits because Fidelity lacked control over the Fahy suit. Dresser had exclusive control of the Fahy claim because of the Claims Service Contract. Because Dresser insisted on litigating the Fahy claim and refused to settle, Dresser had no claim against Fidelity for bad faith failure to settle within the primary policy limits. Without Dresser having a claim, Underwriters cannot be subrogated to any rights against Fidelity. In addition when a primary and excess carrier's mutual insured has the right to refuse to settle a claim and refuses to settle a claim, an excess carrier may not bring a direct action against the primary carrier for an alleged breach of a duty to settle within the primary limits. Consequently, Fidelity urges this court to grant its motion for summary judgment.

A court will grant summary judgment if it is shown that there is no genuine issue about any material fact and the moving party is entitled to a judgment as a matter of law. Fed.R.Civ.P. 56(c). The movant bears the burden of establishing that no genuine issue of material fact exists and that the movant is entitled to a judgment as a matter of law. Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 1608, 26 L.Ed.2d 142 (1970). According to General Rule 12(m) of this court, on a motion for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure, the movant shall serve and file "a statement of material facts as to which the moving party contends there is no genuine issue and that entitle the moving party to a judgment as a matter of law...." U.S.Dist.Ct., N.D.Ill., Gen.R. 12(m). In response a nonmovant may not rest upon the mere allegations or denials but "must set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). General Rule 12(n) of this court further provides that when responding to the movant's statement the nonmovant must make "specific reference to the affidavits, parts of the record, and other supporting materials relied upon...." U.S.Dist.Ct., N.D.Ill., Gen.R. 12(n).

When determining whether summary judgment should be granted the court must consider both the substantive law and whether a reasonable jury could find for the nonmovant. Central States, S.E. and S. W. Areas Pension Fund v. Sloan, 902 F.2d 593, 596 (7th Cir.1990) (citing Checkers, Simon & Rosner v. Lurie Corp., 864 F.2d 1338, 1344 (7th Cir.1988)). When making this determination, a court will draw all reasonable inferences from the facts in the light most favorable to the nonmovant. Painewebber v. Ras, 767 F.Supp. 930, 931 (N.D.Ill.1991) (citing Hermes v. Hein, 742 F.2d 350, 353 (7th Cir.1984)). But when interpreting Rule 56(e), this Circuit has held that the nonmovant to a summary judgment motion cannot rely upon a mere denial contained in its pleading. Instituto Nacional de Commercializacion Agricola v. Continental Illinois Nat'l Bank & Trust, 858 F.2d 1264, 1271 (7th Cir.1988). Without evidence rebutting the movant's undisputed facts, the court must take as true the sworn, uncontested testimony supporting the motion for summary judgment. Baldini v. Local Union No. 1095, 435 F.Supp. 264, 268 (N.D.Ind.1977), aff'd in part and rev'd in part on other grounds, 581 F.2d 145 (7th Cir.1978).

Initially, a choice of law question must be discussed. The three possible jurisdictions whose law might control are identified by the parties as Illinois, Missouri, and Texas. Underwriters' possible theories of liability against Fidelity in these contact states include the equitable subrogation doctrine and the direct duty doctrine.

A federal court sitting in diversity must look to the forum state for substantive law including choice of law rules. International Adm'rs v. Life Ins., 753 F.2d 1373, 1376 n. 4 (7th Cir.1985). (citing Erie R. Co. v. Tompkins, 304 U.S. 64, 71-80, 58 S.Ct. 817, 818-823, 82 L.Ed. 1188 (1938) and Klaxon Co. v. Stentor Elec. Mfg., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021, 85 L.Ed. 1477). Therefore this court must look to Illinois to determine Illinois' choice of law rules. Illinois has adopted the "most significant relationship" test for determining choice of law for tort cases. FMC Corp. v. Capital Cities/ABC, Inc., 915 F.2d 300, 302 (7th Cir.1990). Generally, in a tort action, the two most important contacts are where the conduct leading to the injury occurred and where the injury...