Fox v. Am. Alt. Ins. Corp.

• Decision Date: 07 July 2014
• Docket Number: No. 13–1290.,13–1290.
• Citation: 757 F.3d 680
• Parties: Kevin FOX, Plaintiff–Appellant, v. AMERICAN ALTERNATIVE INSURANCE CORPORATION, Defendant–Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

757 F.3d 680

Kevin FOX, Plaintiff–Appellant,

v.AMERICAN ALTERNATIVE INSURANCE CORPORATION, Defendant–Appellee.

No. 13–1290.

United States Court of Appeals,

Seventh Circuit.

Argued Oct. 31, 2013.

Decided July 7, 2014.

Michael W. Rathsack, Chicago, IL, Kathleen Zellner, Kathleen Zellner and Associates, P.C., Downers Grove, IL, for Plaintiff–Appellant.

Robert Joseph Bates, Jr., Bates Carey Nicolaides LLP, Chicago, IL, for Defendant–Appellee.

Before BAUER, MANION, and ROVNER, Circuit Judges.

ROVNER, Circuit Judge.

The dispute between Kevin Fox, the plaintiff in this diversity case governed by Illinois law, and American Alternative Insurance Corporation (AAIC) is about an insurer's duties to defend those it insures. This suit arises from a previous, civil-rights suit brought by Fox and his wife Melissa against AAIC's insureds for, among other claims, wrongful arrest and prosecution. See Fox v. Hayes, 600 F.3d 819 (7th Cir.2010). The defendants in that first suit included several detectives from Will County, Illinois, whom Fox had accused of maliciously pursuing unfounded charges against him. Following a jury verdict awarding the Foxes a total of $15.5 million in damages (including $6.2 million in punitive damages) the detectives reached a deal with the Foxes. They assigned to the Foxes any indemnity claims they might have against the insurance companies, including AAIC, who had controlled their defense. In exchange, they received the Foxes' agreement not to execute the punitive damages awards (which were not covered by any insurer's policy) against their personal assets. Armed with the assignments, Kevin Fox then filed the suit that is the subject of this appeal. That suit seeks a declaratory judgment that AAIC—as an insurer for the detectives' employer, Will County—had breached its duty to defend the detectives in the earlier suit. The district court dismissed Fox's complaint for failure to state a claim. We conclude that AAIC did not breach its duty to defend the detectives, so we affirm the judgment.

Background

Because the district court dismissed Fox's complaint, we accept as true all well pleaded facts and draw all permissible inferences in his favor. See Hecker v. Deere & Co., 556 F.3d 575, 580 (7th Cir.2009).

Kevin Fox was arrested in 2004 and charged with the sexual assault and murder of his three-year-old daughter. Will County detectives coerced a confession out of Fox and delayed the testing of DNA evidence, leaving Fox imprisoned for nearly eight months and separated from his despairing wife and son. When Fox's defense team finally obtained the DNA evidence and had it tested at a private lab, the results excluded Fox as the source of the DNA on his daughter's body, and the prosecution dropped all charges against him. Fox then proceeded to federal court where he and his wife sued under 42 U.S.C. § 1983 and Illinois state law alleging that the Will County detectives (Edward Hayes, Michael Guilfoyle, Scott Swearengen, Brad Watchl, and John Ruettiger) had arrested and prosecuted Fox without probable cause and in violation of his right to due process. The Foxes also included state law claims for malicious prosecution and intentional infliction of emotional distress. As relevant to the present suit, Fox's complaint in his § 1983 action sought both compensatory and punitive damages.

As employees of Will County, the detectives benefitted from the county's insurance policies, which provided liability coverage to its law enforcement personnel. St. Paul Fire & Marine Insurance Company supplied the first layer of coverage and its policy required it to defend the detectives against the Foxes' suit until it had exhausted its policy limit of $1 million by paying covered settlements or judgments. Will County also had two layers of excess or umbrella liability coverage. Each layer was for $5 million. One policy was from AAIC and the other came from Essex Insurance Company; AAIC provided the secondary and Essex the tertiary layer of coverage. Under AAIC's policy it was not required to “assume charge of the settlement or defense” until “the aggregate Limit of Liability of the applicable Schedule Underlying Policy [the St. Paul policy] ha[d] been exhausted by payment of claims.” None of the insurance policies provided coverage against liability for punitive damages.

The Foxes' suit proceeded to trial where the detectives were represented by Lowis and Gellen, LLP (a firm retained by St. Paul).Under some circumstances, their joint representation by a single law firm could have created a potential conflict of interest, see, e.g., Williams v. Am. Country Ins. Co., 359 Ill.App.3d 128, 295 Ill.Dec. 765, 833 N.E.2d 971, 979 (2005) (potential conflict where interests of multiple insureds are “diametrically opposed”), as could have the Foxes' claims for uncovered punitive damages, see, e.g., Nandorf, Inc. v. CNA Ins. Cos., 134 Ill.App.3d 134, 88 Ill.Dec. 968, 479 N.E.2d 988, 991–92 (1985) (potential conflict where insurer controls defense but disclaims coverage for punitive damages). But neither the attorneys nor any of the insurance companies informed the detectives of these possible conflicts. Nor were the detectives told that such potential conflicts might entitle them to representation by independent counsel at the insurers' expense. See Nat'l Cas. Co. v. Forge Indus. Staffing Inc., 567 F.3d 871, 874 (7th Cir.2009) (citing Md. Cas. Co. v. Peppers, 64 Ill.2d 187, 355 N.E.2d 24, 31 (1976)); Nandorf, 88 Ill.Dec. 968, 479 N.E.2d at 991–92.

The jury returned verdicts favorable to the Foxes. It found for them on their false arrest, due process, malicious prosecution, and emotional distress claims and awarded them $15.5 million in damages, including $6.2 million in punitive damages. The Foxes had offered to settle their claims for less than that sum, both before and after the jury's verdict on liability, but their offers were rejected. After the verdict the district court struck $2.6 million of the punitive damages awarded to the Foxes.

By September 2008, St. Paul had exhausted its $1 million liability policy limit by satisfying the judgment against Ruettiger (who had died before the trial began). AAIC then took control of the detectives' defense. The remaining detectives appealed, but not before striking the deal with the Foxes to which we alluded earlier. The deal came in two stages. First, the detectives assigned to the Foxes any claims they might have against Will County's three insurers in exchange for the Foxes' covenant not to execute the awards of punitive damages against the detectives' personal assets. Then, working with new counsel, the detectives negotiated a supplemental deal with the Foxes approximately three months later. This time they also agreed to withdraw their appeal challenging the punitive damage awards in exchange for a full and complete release of personal liability for punitive damages.

With the assignments in hand, the Foxes turned their attention to suing the insurers. They filed an action against St. Paul, AAIC, and Essex in the Circuit Court of Cook County under case number 08–CH–14936, seeking as damages for their breach of duty to the detectives the amount of punitive damages awarded against the detectives. The suit alleges substantially the same claims that Fox pursues in this present suit. That action prompted AAIC and Essex to intervene in the pending federal appeal of the wrongful prosecution judgment in order to contest, as the detectives no longer would, the punitive damage awards. They hoped to overturn that award and thereby limit any potential exposure to liability in the state court action. But despite their efforts, this court affirmed the judgment against the defendants on all but Fox's due process claim, and upheld $8,166,000 of the damages awarded, including $3.4 million in punitive damages. See Fox, 600 F.3d at 847.

Following the resolution of the § 1983 suit, Fox filed the present suit. Through his amended complaints and after stipulations and orders not contested or relevant on appeal, he targets only the detectives' excess insurer, AAIC. Fox seeks a declaratory judgment that AAIC breached its good faith duties to (1) reasonably settle the claims against the detectives within policy limits, and (2) inform the detectives of their conflicts of interest. Fox further asserts that, as assignee of the detectives' rights against their insurers, his damages for AAIC's breach equal the punitive damages awarded against the three detectives. (Although this lawsuit replicates the state-court action, neither of the parties argues that the state suit has any bearing on this case.) AAIC moved to dismiss Fox's complaint for failure to state a claim, and the district court granted the motion. It reasoned that AAIC, as excess insurer, never had any control over the detectives' defense before judgment and therefore had no duty to settle the claims against the detectives or alert them to any potential conflicts of interest.

Discussion

Lurking in the background of this appeal is the question of whether Fox's present suit is an impermissible end run around the public policy ban on an insured's recovery of punitive damages from an insurance company. In this case, Fox has foregone his right to pursue $3.4 million in punitive damages directly from the three detectives. Instead, seeking AAIC's deeper pockets, he has stepped into the shoes of those men who had so egregiously violated his civil rights. But AAIC's policy excludes coverage for punitive damages, and “in Illinois, public policy prohibits insurance against liability for punitive damagesthat arise out of the misconduct of the insured.” Crawford Labs., Inc. v. St. Paul Ins. Co. of Ill., 306 Ill.App.3d 538, 239 Ill.Dec. 899, 715 N.E.2d 653, 659 (1999); see also Bernier v. Burris, 113 Ill.2d 219, 100 Ill.Dec. 585, 497 N.E.2d 763, 776 (1986).

Three states that, like Illinois, have public policies prohibiting insurance against punitive...