Cips v. Agricultural Inc. Co.

• Decision Date: 14 January 2008
• Docket Number: No. 5-06-0181.,5-06-0181.
• Citation: 880 N.E.2d 1172,378 Ill. App. 3d 728
• Parties: CENTRAL ILLINOIS PUBLIC SERVICE COMPANY, Plaintiff, v. AGRICULTURAL INSURANCE COMPANY, Defendant and Counterdefendant-Appellee, and American International Specialty Lines Insurance Company, Defendant and Counterplaintiff-Appellant, and Seaboard Surety Company, Defendant.
• Court: United States Appellate Court of Illinois

880 N.E.2d 1172

378 Ill. App. 3d 728

CENTRAL ILLINOIS PUBLIC SERVICE COMPANY, Plaintiff, v. AGRICULTURAL INSURANCE COMPANY, Defendant and Counterdefendant-Appellee, and American International Specialty Lines Insurance Company, Defendant and Counterplaintiff-Appellant, and Seaboard Surety Company, Defendant.

No. 5-06-0181.

Appellate Court of Illinois, Fifth District.

January 14, 2008.

G. Keith Phoenix, Michael E. Bub, Sandberg, Phoenix & von Gontard, P.C., St. Louis, MO, attorneys for American International Specialty Lines Insurance Co.

Roger K. Heidenreich, Deborah C. Druley, Sonnenschein, Nath & Rosenthal, LLP, St. Louis, MO, Robert C. Johnson, Sonnenschein, Nath & Rosenthal, LLP, Chicago, attorneys for Agricultural Insurance Company.

Justice GOLDENHERSH delivered the opinion of the court:

Central Illinois Public Service Company (CIPS) filed an action for a declaratory judgment in the circuit court of Madison County seeking a resolution of matters regarding coverage by several insurers for an accident involving numerous plaintiffs. American International Specialty Lines Insurance Company (AISLIC), a higher-tiered excess insurer, filed a counterclaim against Great American Assurance Company, formerly known as Agricultural Insurance Company (Great American), a lower-tiered excess insurer, for negligence and bad faith in the settlement process. The circuit court dismissed the counterclaim. On review, AISLIC raises issues regarding (1) whether a lower-tiered excess insurer owes any duty to a higher-tiered excess insurer to engage in meaningful settlement negotiations and (2) whether an underlying insurer still owes that duty if it could not settle the matter within its own policy limits. We reverse and remand.

FACTS

In November 1996 an elevator at the CIPS power plant in Newton, Illinois, dropped 15 floors, injuring 23 boilermakers inside, the Philbrick plaintiffs. CIPS and Dover Elevator Company (Dover) were defendants in suits brought by the boilermakers.

The parties in this appeal are excess insurers of CIPS. CIPS had several layers of insurance. Seaboard Surety Company (Seaboard) had primary insurance coverage in the amount of $5 million. Steadfast Insurance Company (Steadfast), the first-level excess carrier, provided the next $10 million. The second-level excess carrier, Great American, provided the next $15 million. The third-level excess carrier, AISLIC, provided the final $25 million of coverage.

On September 25, 2000, CIPS and Dover made a settlement offer to the first 10 Philbrick plaintiffs in the amount of approximately $20 million. Dover's insurer paid $5 million on Dover's behalf, and Seaboard and Steadfast, CIPS's primary and first-level excess insurance carriers, provided the limits of their coverage totaling $15 million.

On October 4, 2000, CIPS sent correspondence to Great American and AISLIC asking each to consent to an additional $29 million payment to settle with the remaining 13 Philbrick plaintiffs. On October 13, 2000, Great American and AISLIC agreed to fund the $29 million settlement. The parties agreed that liability for the $29 million settlement would be decided in an allocation trial between Dover and CIPS.

The allocation trial began on October 16, 2000. A jury found CIPS 95% liable for the Philbrick damages. Thus, CIPS was responsible for $27.5 million of the $29 million settlement. After posttrial motions, the trial court reduced CIPS's share, with Great American still responsible for its policy limits of $15 million and AISLIC responsible for $10.325 million.

On October 12, 2000, CIPS filed a complaint for a declaratory judgment, naming each of its insurers as defendants. AISLIC filed a counterclaim against Great American for a failure to settle. AISLIC alleged Great American was negligent and acted in bad faith. AISLIC claimed that Great American ignored its demands to enter into good-faith settlement efforts or tender its policy limits so that AISLIC could resolve the matter. AISLIC brought claims under theories of a direct duty and equitable subrogation.

Great American filed a motion for a summary judgment on the counterclaim. Great American submitted affidavits from attorneys for the Philbrick plaintiffs stating the plaintiffs had not been willing to accept any settlement offer for less than the ultimate settlement amount. Great American also submitted the affidavit of a representative from Dover's insurer stating that he had rejected proposals that Dover's insurer fund any settlement with the Philbrick plaintiffs on a 50/50 basis. Attached to a supplemental motion was an affidavit from an attorney stating that she had represented CIPS regarding insurance coverage matters and that she was not aware of any offer by Dover's insurer to contribute 50% of the Philbrick settlement.

AISLIC filed a motion for leave to file a second amended counterclaim. The trial court granted leave but barred any claim that the underlying Philbrick suit could have been settled for less than $49 million. AISLIC's amended counterclaim contains four counts. AISLIC alleged bad faith and negligence under theories of direct duty and equitable subrogation. AISLIC also alleged that the allocation trial could have been resolved with Dover on a 50/50 basis or, alternatively, that the allocation trial could have been settled above Great American's policy limits on a percentage basis more favorable than a 95%/5% split.

Great American filed a motion to strike or dismiss the amended counterclaim. See 735 ILCS 5/2-615 (West 2000). The trial court found that AISLIC failed to state a claim under Illinois law, and the court dismissed the counterclaim. The trial court denied AISLIC's motion to reconsider, stating:

"Taking the claim as pled from AISLIC, AISLIC complains not that Great American could have settled the allocation portion of the trial within the policy limits. AISLIC seeks not only to extend Illinois law to excess insurers, but also to extend it to a duty to settle above policy limits. AISLIC's attempt to recast this claim into an argument that Great American breached a duty to tender its policy limits to AISLIC so that AISLIC could try to settle for less than AISLIC ultimately had to pay after the allocation trial is beyond a logical extension of existing law. While counsel makes an interesting argument, this court cannot create such an extension of Illinois law. The motion to reconsider is denied."

AISLIC appeals.

ANALYSIS

I

The resolution of this appeal requires us to address two issues. First, we must consider whether an underlying excess insurer can be liable to a supplemental excess carrier. We must also look at whether the trial court was correct in finding that any such duty only arises if the underlying excess insurer could have settled the claim within the limits of its own policy. These issues, including the definitions of the key terms involved, compound with each other and invite a lengthy discourse. To further complicate matters, Illinois courts have not directly addressed what duties an excess carrier may owe to another excess carrier.

Illinois courts have produced a significant amount of case law on the nature of excess insurers and the duties owed by insurers, but no case has yet directly discussed what duties, if any, an excess insurer owes to another excess insurer. Indeed, the only case to tackle the issues of the duties of an underlying excess insurer applying Illinois law is a federal district court case. Liberty Mutual Insurance Co. v. American Home Assurance Co., 348 F.Supp.2d 940 (N.D.Ill.2004). (memorandum opinion and order). Liberty Mutual Insurance Co. addressed these issues in a complex and detailed decision and provides us with a starting point to discuss Illinois law. Although Liberty Mutual Insurance Co. is not binding authority, the discussion provides insight into Illinois law and a framework for us to discuss the issues in this case.

The first item in Liberty Mutual Insurance Co. was to decide the status of the different insurers. The first tier of protection in the underlying suit was a self-induced retention held by the alleged tortfeasor. The second tier of coverage was a layer of insurance provided by American Home Assurance Company (American Home), the defendant in the declaratory action. The third tier was a layer of excess insurance provided by Liberty Mutual Insurance Company, the plaintiff in the declaratory action.

The court proceeded to address whether the second tier of coverage, provided by American Home, was primary insurance or excess insurance. The court noted that primary insurers have a duty to defend the insured because liability for a primary insurer attaches immediately upon the occurrence creating the liability for the insured, whereas liability for an excess insurer occurs only after a predetermined amount of primary insurance has been exhausted. Liberty Mutual Insurance Co., 348 F.Supp.2d at 952-53 (citing Krusinski Construction Co. v. Northbrook Property & Casualty Insurance Co., 326 Ill.App.3d 210, 219, 260 Ill.Dec. 113, 760 N.E.2d 530, 537 (2001), and Royal Insurance Co. v. Process Design Associates, Inc., 221 Ill. App.3d 966, 978, 164 Ill.Dec. 290, 582 N.E.2d 1234, 1242 (1991)). The court stated that primary, policies generally impose a duty to defend, whereas excess policies only require indemnification. Liberty Mutual Insurance Co., 348 F.Supp.2d at 953. The court found that American Home was an excess insurer: "It [(the alleged tortfeasor holding a self-insured retainer)] began investigating and defending the [u]nderlying [a]ction immediately after the accident, with no outside assistance from its insurance companies. American Home did not become involved in the litigation until a few weeks before the trial. Unlike a primary insurer, American Home clearly had no duty to defend the suit. Therefore, in considering the plain and ordinary meaning of the policy and the purpose of the contract, this [c]ourt concludes...