Green v. J.C. Penney Auto Ins. Co., Inc.

• Citation: 806 F.2d 759
• Decision Date: 25 November 1986
• Docket Number: 85-3022,Nos. 85-2993,s. 85-2993
• Parties: Stanley GREEN, as Assignee of Dexter Hopkins, Plaintiff-Appellant, Cross- Appellee, v. The J.C. PENNEY AUTO INSURANCE COMPANY, INC., a corporation, Defendant- Appellee, Cross-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 759

806 F.2d 759

Stanley GREEN, as Assignee of Dexter Hopkins, Plaintiff-Appellant, Cross- Appellee, v. The J.C. PENNEY AUTO INSURANCE COMPANY, INC., a corporation,

Defendant- Appellee, Cross-Appellant.

Nos. 85-2993, 85-3022.

United States Court of Appeals, Seventh Circuit.

Argued June 3, 1986.

Decided Nov. 25, 1986.

Edward J. Kionka, Winters & Garrison, Marion, Ill., for plaintiff-appellant, cross-appellee.

David I. Hares, Shifrin & Treiman, Clayton, Mo., for defendant-appellee, cross-appellant.

Before CUMMINGS, WOOD and FLAUM, Circuit Judges.

CUMMINGS, Circuit Judge.

This case comes to us on appeal following the district court's calculation of damages pursuant to an earlier remand of this case by the Court. Our earlier remand established that defendant J.C. Penney Auto Insurance Company, Inc. ("Penney") wrongfully failed to defend its insured policyholder Dexter Hopkins ("Hopkins"). This appeal brought by plaintiff Stanley Green ("Green"), as assignee of Hopkins, raises several questions regarding the proper calculation of damages under Illinois law for a breach of an insurance company's duty to defend its insured policyholder.

I

Because this case is on appeal to this Court for the second time, see Green v. J.C. Penney Auto Insurance Co., 722 F.2d 330 (7th Cir.1983), only a brief summary of the facts is necessary. On June 17, 1977, Hopkins was involved in a car accident with Green. Hopkins was insured by Penney at the time, and the policy had a $25,000 limit. On September 12, 1977, Green submitted his claims to Penney, and indicated his willingness to settle his claim against Hopkins for $22,500. Penney responded and denied that Hopkins was insured by Penney at the time of the accident; Penney never responded to Green's settlement offer. Green then orally proposed a settlement of $25,000, which also was never accepted by Penney.

Green proceeded to file suit against Hopkins in state court for injuries sustained in the June 17 automobile accident. Penney received notice of this suit, and yet Penney never filed a declaratory action to determine its obligations under Hopkins' insurance policy, nor did it defend Hopkins under a reservation of rights. Green obtained a default judgment against Hopkins on May 25, 1978. On February 25, 1981, a judgment of $122,500 was entered against Hopkins. Green subsequently received from Hopkins an assignment of any rights Hopkins might have against Penney.

The initial district court opinion and appeal to this Court established that Hopkins' insurance policy was legally in effect at the time of the accident, and so Penney had breached its duty to defend Hopkins. On the issue of the proper measure of damages, this Court noted that the Illinois Supreme Court, in Conway v. Country Casualty Insurance Co., 92 Ill.2d 388, 65 Ill.Dec. 934, 442 N.E.2d 245 (1982), set forth several pertinent rules of law. This Court stated that an insurer's breach of its duty to defend its insured does not automatically expose the insurer to liability above the limits of the insured's policy. However, an insurer is liable for the full amount of a judgment entered against its insured, regardless of policy limits, if the insurer acted in bad faith. Green, 722 F.2d at 334. We then determined that Penney did not act in bad faith, and so Penney was not automatically exposed to liability in excess of the policy limits, even though the judgment entered in Green's underlying suit against Hopkins greatly exceeded the policy limits. We concluded that Penney's liability was the policy limit of $25,000 "plus all damages proximately caused by its failure to defend Hopkins, including reasonable attorneys' fees." Green, 722 F.2d at 335.

On remand, the district court found that but for Penney's breach of its duty to defend Hopkins, the case could have been settled for an amount within Hopkins' policy limits. Nevertheless, in calculating damages flowing from Penney's breach of this duty, the district court read this Court's prior decision as putting a ceiling of $25,000 on the damages it could award. The court also felt that our prior decision prevented it from either awarding attorneys' fees incurred by Green in prosecuting this declaratory judgment action against Penney or awarding interest on the full amount of the judgment entered against Hopkins. The court did award $480 to Green which represented fees and costs incurred in connection with the bankruptcy petition filed by Hopkins subsequent to the entry of the $122,500 judgment against him. Green appeals from the district court's calculation of damages, refusal to award interest on the entire $122,500 judgment, and refusal to award fees incurred by Green in the prosecution of this declaratory judgment action. Penney cross-appeals from the $480 of costs and fees awarded by the district court. We address these issues in this diversity case by applying Illinois law.

II

This case involves several questions of state law which have not yet been precisely articulated by the courts of Illinois. It is therefore useful at the outset to keep in mind our duty in a diversity case: we must apply the state law that would be applied in this context by the Illinois Supreme Court. Hill v. International Harvester Co., 798 F.2d 256, 261 n. 12 (7th Cir.1986). Intermediate appellate court cases are useful but not binding evidence of what the Illinois Supreme Court would do in a similar case. Commissioner v. Estate of Bosch, 387 U.S. 456, 465, 87 S.Ct. 1776, 1782, 18 L.Ed.2d 886 (1967); Hill, 798 F.2d at 261 n. 12; White v. United States, 680 F.2d 1156, 1159, 1161 (7th Cir.1982); Gates Rubber Co. v. USM Corp., 508 F.2d 603, 607 (7th Cir.1975) (Stevens, J.). See generally C. Wright, The Law of Federal Courts 373-374 (4th ed. 1983).

A

The first issue is whether our prior determination that Penney did not act in bad faith in breaching its duty to defend Hopkins prevents an award of damages against Penney in excess of the policy limits of $25,000. Several aspects of this issue in Illinois are well settled. As a general rule damages in this type of case are usually limited to the policy limits, but there is an exception to this general rule if the insurer committed the breach of his duty to defend in bad faith. Conway, 92 Ill.2d at 398, 65 Ill.Dec. at 938, 442 N.E.2d at 249; Murphy v. Clancy, 83 Ill.App.3d 779, 796, 38 Ill.Dec. 863, 877, 404 N.E.2d 287, 301 (1st Dist.1980), reversed in part on other grounds sub nom. Murphy v. Urso, 88 Ill.2d 444, 58 Ill.Dec. 828, 430 N.E.2d 1079 (1981); Aetna Cas. & Sur. Co. v. Dichtl, 78 Ill.App.3d 970, 974-975, 34 Ill.Dec. 759, 763, 398 N.E.2d 582, 586 (2d Dist.1979); Reis v. Aetna Cas. & Sur. Co., 69 Ill.App.3d 777, 790, 25 Ill.Dec. 824, 834, 387 N.E.2d 700, 710 (1st Dist.1978). It is significant to note that where an insurer does act in bad faith, he can be liable for damages in excess of the policy limit even though there is no causal relationship between the insurer's bad faith and the entry of a judgment in excess of the policy limits. Applying this rule to the instant case, if Penney had acted in bad faith, then it could have been liable for the entire $122,500 judgment, even though if Penney had defended Hopkins from the start and not breached its duty the same $122,500 judgment against Hopkins may well have occurred, in which case Penney would have had to pay only $25,000. Therefore, if Penney had acted in bad faith, its liability of $122,500 would exceed those damages needed to compensate Hopkins for Penney's breach of its duty to defend, namely $25,000 (plus costs and fees incurred by the insured in defending the underlying tort suit). This bad faith rule thus appears to be a punitive measure rather than a compensatory measure.

The issue of the proper damages for a breach of the duty to defend becomes complicated by subsequent statements made by the Illinois Supreme Court in the Conway case. After mentioning the bad faith rule, the Court in Conway continued on to say that " '[n]evertheless, damages for a breach of the duty to defend are not inexorably imprisoned within policy limits, but are measured by the consequences proximately caused by the breach.' " Conway, 92 Ill.2d at 397-398, 65 Ill.Dec. at 938, 442 N.E.2d at 249 (quoting Reis, 69 Ill.App.3d at 790, 25 Ill.Dec. at 834, 387 N.E.2d at 710) (emphasis supplied). The appellate court in Reis, though not the Illinois Supreme Court in Conway, continues by saying that "[a]ccordingly, ... if [the insured] can show that [the insurer] ... in bad faith or negligently failed to settle the claim, or because it abandoned [the insured's] defense, the excess judgment was entered, [the insured] may recover the total amount of the judgment against [the insured]." Reis, 69 Ill.App.3d at 790, 25 Ill.Dec. at 834, 387 N.E.2d at 710. These passages seem to suggest that if the insurer's breach of its duty to defend the insured proximately caused a judgment in excess of the policy limits to be entered against the insured, then the insured can recover the excess from the insurer, even though the insurer did not act in bad faith. Such a legal rule would be a compensatory measure, and as such would be consistent with the bad faith rule which is essentially a punitive measure. Under this scheme, a finding that the insurer did not act in bad faith would not preclude a damage award in excess of the policy limits.

The question of whether Illinois law allows an insurer to be liable in excess of policy limits for a breach of its duty to defend its insured, even though the insurer acted in good faith, is squarely raised by the facts of the instant case. We have already determined that Penney did not act in bad faith when it refused to defend Hopkins. However, Green made several settlement offers to Penney within the policy limits which Penney refused, apparently because of Penney's belief that Hopkins was not covered by the policy. The district court made the factual finding that but for Penney's...