Scroggins v. Allstate Ins. Co., 77-1941

• Decision Date: 07 August 1979
• Docket Number: No. 77-1941,77-1941
• Citation: 30 Ill.Dec. 682,393 N.E.2d 718,74 Ill.App.3d 1027
• Parties: , 30 Ill.Dec. 682 Michael SCROGGINS and Catherine Russo, Plaintiffs-Appellants, v. ALLSTATE INSURANCE COMPANY, Defendant-Appellee, and Anastasios Karabatsos and Kyriakos Karabatsos, Defendants.
• Court: United States Appellate Court of Illinois

Page 718

393 N.E.2d 718

74 Ill.App.3d 1027, 30 Ill.Dec. 682

Michael SCROGGINS and Catherine Russo, Plaintiffs-Appellants, v. ALLSTATE INSURANCE COMPANY, Defendant-Appellee and Anastasios Karabatsos and Kyriakos Karabatsos, Defendants.

No. 77-1941.

Appellate Court of Illinois, First District, Second Division.

Aug. 7, 1979.

Heller & Morris, Chicago, Schwartzberg, Barnett & Cohen, Chicago, for plaintiffs-appellants; Benjamin H. Cohen, Hugh J. Schwartzberg, Chicago, of counsel.

Hinshaw, Culbertson, Moelmann, Hoban & Fuller, Chicago, for defendant-appellee; D. Kendall Griffith, Jill B. Berkeley, Stephen R. Swofford, Chicago, of counsel.

STAMOS, Presiding Justice:

Plaintiffs, Michael Scroggins and Catherine Russo, brought this action to recover damages for injuries allegedly incurred when they were struck by an automobile. Counts I through III of plaintiffs' complaint named as defendants Anastasios Karabatsos, the driver of the vehicle, and Kyriakos Karabatsos, his father. Count IV of the complaint was directed against the individual defendants' insurer, defendant Allstate Insurance Company (Allstate); it sought damages for Allstate's allegedly wrongful refusal to negotiate in good faith with plaintiffs, as claimants against Allstate's insureds.

On Allstate's motion, the circuit court of Cook County dismissed Count IV, finding that there was no just reason to delay enforcement of or appeal from the order. Plaintiffs appeal from this dismissal, contending that Allstate's alleged breach of its duty to negotiate in good faith with plaintiffs gives rise to a cause of action on their behalf.

In more detail, plaintiffs' complaint alleged that the driver of the vehicle which struck them was proceeding down a street when he saw someone he knew crossing the street in mid-block. The driver allegedly increased his speed and aimed his car at his acquaintance, not intending to hit her, but just "goofing off." However, when he swerved to avoid the pedestrian, he lost control of his vehicle and collided with plaintiffs, who were standing across the street. Counts I through III of the complaint alleged negligence and wilful and wanton conduct on the part of the driver and his father, for whom the driver was allegedly acting as agent.

Count IV of the complaint alleged that Allstate insured the driver and his father up to a liability limit of $50,000 per occurrence and $100,000 for more than one occurrence. Allstate acknowledged coverage, opened a claim file, and requested information regarding plaintiffs' special damages. Plaintiffs' attorneys eventually responded by requesting that Allstate review its file for the purpose of making a settlement offer. Plaintiffs enclosed copies of statements by the driver and the pedestrian. In addition, plaintiff Scroggins submitted "special damages items" amounting to approximately $1150, while those submitted by plaintiff Russo came to about $13,000. Plaintiffs demanded $25,000 for Scroggins and the policy limits of $50,000 for Russo. Plaintiffs asserted that based upon those facts, the witness' statements, and the medical reports and bills, all "reasonable minds of prudent insurers" would evaluate Russo's claim as exceeding the policy limits ($50,000) and Scroggins' claim as exceeding $1000. However, Allstate offered Russo only $20,000 and Scroggins only $1000. Plaintiffs essentially asserted that this constituted an intentional breach of duty on the part of Allstate to negotiate in good faith with plaintiffs, as claimants against Allstate's insureds. Plaintiffs alleged that they were damaged in that Scroggins was embarrassed because of his inability to pay medical expenses, plaintiffs were forced to file a lawsuit and incur the attendant expense, and plaintiffs had suffered great emotional and mental distress, whereupon plaintiffs sought compensatory and punitive damages.

The issue is whether, on the facts alleged, plaintiffs have stated a cause of action against Allstate. Because liability insurance policies ordinarily leave to the insurer the decision whether to settle a claim against the insured, it is generally held that this gives rise to a duty on the part of the insurer to give some consideration to the insured's interest in an action where recovery may otherwise exceed the policy limits. (See Annot., 60 A.L.R.3d 1190, 1192 (1974).) Accordingly, in Illinois there is imposed upon the insurer a duty, part of the implied-in-law duty of good faith and fair dealing arising out of the insurance relation, to give to the insured's interests consideration at least equal to that of its own in such a case. (Cernocky v. Indemnity Ins. Co. (1966), 69 Ill.App.2d 196, 207, 216 N.E.2d 198; See Ballard v. Citizens Cas. Co. (7th Cir. 1952), 196 F.2d 96; Olympia Fields Country Club v. Bankers Indem. Ins. Co. (1945), 325 Ill.App. 649, 60 N.E.2d 896.) If the insurance company instead commits conduct constituting fraud, negligence, or bad faith in refusing to settle a case within policy limits, it may be liable for the full amount of a judgment obtained against its insured, irrespective of its policy limits. (DeGraw v. State Security Ins. Co. (1976), 40 Ill.App.3d 26, 37-38, 351 N.E.2d 302; Cernocky v. Indemnity Ins. Co. (1966), 69 Ill.App.2d 196, 204-08, 216 N.E.2d 198; See generally 44 Am.Jur.2d Insurance §§ 1530-32 (1969); 7A J. Appleman, Insurance Law and Practice §§ 4711-13 (1962); Keeton, Liability Insurance and Responsibility for Settlement, 67 Harv.L.Rev. 1136 (1954); other authorities collected in 6 Am.Jur. Proof of Facts 2d at 248-50 (1975), Id. at 25-26 (1978 Supp.)) The fact of the entry of the excess judgment against the insured itself constitutes the damage that permits the insured to recover for breach of the duty owed. Wolfberg v. Prudence Mut. Cas. Co. (1968), 98 Ill.App.2d 190, 240 N.E.2d 176; See Annot., 63 A.L.R.3d 627 (1975).

Because the duty, though implied in law, arises out of the insurance contract relationship (Brown v. State Farm Mut. Auto. Ins. Ass'n (1971), 1 Ill.App.3d 47, 50-51, 272 N.E.2d 261; Cernocky v. Indemnity Ins. Co. (1966), 69 Ill.App.2d 196, 206-07, 216 N.E.2d 198), it is clear that the duty is owed to the insured, such that in appropriate circumstances constituting a breach of that duty, the insured may sue his insurer for damages resulting from the insurer's wrongful failure to settle a claim against him. (Annot., 60 A.L.R.3d 1190, 1192-93 (1974); See other authorities cited Supra.) However, the question arises whether, and under what circumstances, a third party injured by the insured may bring such an action against the insured's liability insurer. See generally Annot., 63 A.L.R.3d 677 (1975).

Where the insured's claim for wrongful failure to settle is assignable (See generally Annot., 12 A.L.R.3d 1158 (1967)), as in Illinois (Brown v. State Farm Mut. Auto. Ins. Ass'n (1971), 1 Ill.App.3d 47, 272 N.E.2d 261), a third party claimant who has obtained an excess judgment against the insured may acquire and prosecute the insured's claim by virtue of an assignment. (See Browning v. Heritage Ins. Co. (1975), 33 Ill.App.3d 943, 948, 338 N.E.2d 912; Smiley v. Manchester Ins. & Indem. Co. (1973), 13 Ill.App.3d 809, 301 N.E.2d 19.) Similarly, depending upon the particular language of a jurisdiction's garnishment statute (See generally Annot. 60 A.L.R.3d 1190 (1974)), a judgment creditor of an insured may be able to bring a garnishment action against the insurer, although it has been held that such an action does not lie under the applicable statute in Illinois. (Powell v. Prudence Mut. Cas. Co. (1967), 88 Ill.App.2d 343, 232 N.E.2d 155.) In either case, it is clear that the claim asserted by the injured third party is predicated upon an alleged breach of the duty owed by the insurer to its insured. See Browning v. Heritage Ins. Co. (1975), 33 Ill.App.3d 943, 948, 338 N.E.2d 912; Powell v. Prudence Mut. Cas. Co. (1967), 88 Ill.App.2d 343, 232 N.E.2d 155.

In the instant case, however, plaintiffs are suing in their own right, as third party claimants against the insured, for the insurer's allegedly wrongful refusal to settle their claim. Even assuming arguendo that they have adequately alleged a breach of the duty of good faith and fair dealing on the part of the insurer, that duty is one which the insurer owes to its insured, not to third parties. (Yelm v. Country Mut. Ins. Co. (1970), 123 Ill.App.2d 401, 404, 259 N.E.2d 83.) Yet it is elementary that in an action founded on a breach of duty, the plaintiff must allege facts showing a breach of a duty owed to him. (E. g., Browning v. Heritage Ins. Co. (1975), 33 Ill.App.3d 943, 947-48, 338 N.E.2d 912.) Thus, the rule in Illinois and nearly all jurisdictions is that in the absence of statutory or contractual language sanctioning a direct action, an injured third party has no action against the insurer for breach of the duty to exercise good faith or due care by virtue of his standing as judgment creditor of the insured. (Yelm v. Country Mut. Ins. Co. (1970), 123 Ill.App.2d 401, 259 N.E.2d 83; Accord, e. g., Murphy v. Allstate Ins. Co. (1976), 17 Cal.3d 937, 941-42, 132 Cal.Rptr. 424, 553 P.2d 584; See Annot., 63 A.L.R.3d 677, 682, and cases cited at 686 (1975).) For the same reason, because the duty is intended to benefit the insured and not third parties, actions by injured claimants founded on third party beneficiary principles have not been permitted. E. g., Murphy v. Allstate Ins. Co. (1976), 17 Cal.3d 937, 943-44, 132 Cal.Rptr. 424, 553 P.2d 584; Bennett v. Slater (1972), 154 Ind.App. 67, 289 N.E.2d 144; Annot., 63 A.L.R.3d 677, 682-83, 701 Et seq. (1975).

In addition to the absence of any duty owed to third parties by the insurer, courts have relied on the absence of damages in refusing to permit direct actions against insurers by judgment creditors of the insured. (Yelm v. Country Mut. Ins. Co. (1970), 123 Ill.App.2d 401, 404, 259 N.E.2d 83; Bennett v. Slater (1972), 154 Ind.App. 67, 289...