Bad Faith - Illinois Court Of Appeals Holds That One Excess Insurer May Bring A Bad Faith Claim Against Another Excess Insurer
Last week, in Central Illinois Public Service Co. v. Agricultural Ins. Co., No. 5-06-0181 (January 14, 2008), the Illinois Court of Appeals considered an issue not previously addressed by Illinois courts. The court held that
one excess insurer may bring a claim for bad faith in the settlement process against another excess insurer.
The underlying case involved suits by 23 injured people against Central Illinois Public Service Company (“CIPS”) and Dover. CIPS and Dover settled with the first 10 plaintiffs for $20 million. Dover’s insurer
paid $5 million, while CIPS’ primary and first layer excess carriers paid their $15 million limits. Shortly afterwards, Great American and AISLIC, CIPS’ second and third layer excess carriers with respective limits
of $15 million and $25 million, agreed to settle with the remaining 13 plaintiffs for $29 million. Liability for the $29 million was decided in an allocation trial between Dover and CIPS, ultimately resulting in CIPS being liable
for $25.325 million. Great American paid its policy limits of $15 million, and AISLIC was responsible for $10.325 million.
Prior to the allocation trial, CIPS filed suit against its insurers. AISLIC filed a counterclaim against Great American alleging bad faith and negligence under theories of direct duty and equitable subrogation. AISLIC alleged that
a 50/50 allocation between CIPS and Dover could have been achieved or, alternatively, the allocation trial could have been settled above Great American’s policy more favorably than the jury’s 95/5 split. Great American
filed a motion to strike or dismiss for failure to state a claim under Illinois law, which was granted by the trial court. After AISLIC’s motion to reconsider was denied, AISLIC appealed.
The Illinois Court of Appeals noted that no Illinois case had considered what duties, if any, one excess insurer owes to another excess insurer; the only federal case applying Illinois law to consider the issue was Liberty Mutual Ins. Co. v. American Home Assurance Co.,
348 F. Supp.2d 940 (N.D. Ill. 2004). In ruling that no duty ran from one excess insurer to another, the Liberty court relied upon Illinois cases finding that a primary carrier owes a duty to an excess carrier to act reasonably
and in good faith in settling meritorious claims because the primary carrier controls the litigation. The Liberty court found that the lack of control over the litigation by the underlying excess carrier precluded any duty
to the secondary excess insurer.
The Illinois Court of Appeals, however, disagreed with the Liberty court’s assumption that an excess insurer could not have control over litigation such that it would not affect another insurer, and also stated that
the Liberty court failed to address that complex litigation often progresses through stages in which an insurer’s involvement or control changes. The court found, inter alia,that because AISLIC alleged that
Great American took control of the litigation at a significant stage, there was a question of fact as to control and whether Great American failed to participate in the settlement negotiations in a meaningful way so that AISLIC was
exposed to greater damages. The court further ruled that the trial court erred by finding that an underlying insurer only has a duty if it is capable of settling within its limits. Instead, the court ruled that it was just one factor
to consider, along with a refusal to negotiate, the advice of defense counsel, the prospect of an adverse verdict, and the potential for damages in excess of the policy limits. Accordingly, the court reversed the trial court and
remanded the case.