Opinion
Case No. 94 C 2579
August 19, 2002
ORDER
In this long-running litigation, the City of Chicago ("City"), an "additional insured" under a primary insurance policy held by Great Lakes Dredge Dock Co. ("Great Lakes"), filed suit against a consortium of insurers ("London Insurers") in connection with the Chicago Flood of 1992. On August 27, 1999, this court issued an opinion in which it found defendant London Insurers liable to plaintiff City for $500,000 in indemnity plus defense costs incurred. Great Lakes Dredge Dock cc. v. Commercial Union Assurance Co. ("Great Lakes I"), No. 94 C 2579, 1999 WL 705599 (N.D. Ill. Aug. 27, 1999) On September 18, 2000. the court issued another opinion holding that the City was entitled to attorney's fees and costs, plus an additional $25,000 penalty from London Insurers, pursuant to section 155 of the Illinois Insurance Code, 215 ILCS 5/155(1). Great Lakes Dredge Dock Co. v. Commercial Union Assurance Co. ( "Great Lakes II"), No. 94 C 2579, 2000 WL 1898533 (N.D.Ill. Sept. 18. 2000). On appeal, the Seventh Circuit affirmed this court's judgment with respect to the indemnity and defense costs. Great Lakes Dredge Dock Co. v. city of Chicago ("Great Lakes III"), 260 F.3d 789, 797-98 (7th Cir. 2001). However, the appeals court remanded the section 155 penalty issue, among others, without expressing an opinion on. that issue. Id. Now before the court is London Insurers' motion to deny the City's request for an additional penalty under section. 155 of the Illinois Insurance Code. For the following reasons, the court denies the motion.
Background
In Great Lakes I, this court considered whether London Insurers were liable to the City under plaintiff Great Lakes' primary insurance policy with London insurers, The City claimed that London Insurers breached the policy when they failed to indemnify and defend the City in connection with litigation following the Chicago flood. The City was an additional insured to the extent of $1 million under Great Lakes' primary policy and sought that million plus an additional million in defense costs. (The court found that the primary policy provided $1 million in liability coverage and $1 million in defense costs. Great Lakes I, 1999 WL 705599, at *3 n. 2.) London Insurers argued that "because the policy limits of the primary policy were quickly exhausted on behalf of Great Lakes, nothing is owed to the City" Id. at *3 The City argued that London Insurers should not be able to avoid paying the policy limits to the City.
Initially, this court held that London Insurers failed to defend the City and that this "failure . . . breached the insurance contract" Id. Next, the court considered whether London Insurers could be required to pay damages, despite the fact that the policy limits were exhausted. To answer this question, the court first observed that "London Insurers' failure to respond to the City's request for coverage in the two years that followed the flood, its failure to defend, its failure to consider the City's interest, and its failure to take any of the steps Illinois law requires it to take to avoid liability for defense and indemnity costs must he viewed as unreasonable and vexatious. Accordingly, the court finds that the City has adequately shown that London Insurers acted in bad faith." Id. at *8. "Where bad faith has been shown, Illinois law is clear than an insurer's liability is not satisfied by the fact that the policy limits have been exhausted." Id. (citing Conway v. Count'y Cas. Ins. Co., 442 N.E.2d 245 (Ill. 1982)). The court recognized that the City's award may be limited by the policy limits, but declined to summarily award those limits. "Rather, the court must attempt to ascertain the loss attributable to the insurer's breach of its contractual obligations." Id. (citing Conway, 442 N.E.2d at 249). The court made its attempt, noting that "it is inconceivable that any reasonable insurer would have ignored its named insured [Great Lakes] to pay the full policy limits on behalf of the additional insured [the City]." Id. "In view of this reality, the court believes that London Insurers should be held liable to the City for half of the $1 million primary policy liability limit." Id. The court also held that London Insurers should be liable for the City's defense costs. Those defense costs were ultimately calculated at $495,000. in its next opinion, Great Lakes II, the court considered whether to award the City a penalty pursuant to section 155. Relying on its holding in Great Lakes I that London Insurers' conduct was "vexatious and unreasonable," the court granted attorney's fees, costs, and a $25,000 penalty pursuant to section 155. Great Lakes II, 2000 WL 1898533, at *14.
The statute provides in relevant part:
In any action by or against a company wherein there is in issue the liability of a company on a policy or policies of insurance or the amount of the loss payable thereunder, or for an unreasonable delay in setting a claim, and it appears to the court that such action or delay is vexatious and unreasonable, the court may allow as part of the taxable costs in the action reasonable attorney fees, other costs, plus [certain penalties].215 ILCS 5/155.
Discussion
The court agrees with the City that London Insurers' motion to deny the section 155 penalty is, essentially, a motion to reconsider this court's previous award of the penalty. This is because, as the City points out, the Seventh Circuit remanded this court's decision for reasons not pertaining to the penalty award. Great Lakes III, 260 F.3d at 797-98. Therefore, the court now considers whether London Insurers have presented a proper reason to reconsider the earlier order.
The Seventh Circuit has held that motions for reconsideration are appropriate where:
the Court has patently misunderstood a party, or has made a decision outside the adversarial issues presented to the Court by the parties, or has made an error not of reasoning but of apprehension. A further basis for a motion to reconsider would be a controlling or significant change in the law or facts since the submission of the issue to the Court. Such problems rarely arise and the motion to reconsider should be equally rare.Bank of Waunakee v. Rochester Cheese Sales, Inc., 906 F.2d 1185, 1191 (7th Cir. 1990) (citations omitted). Reconsideration is inappropriate where parties "merely rehash their earlier arguments," Dickson v. Chi. Allied Warehouses, Inc., No. 90 C 6161, 1994 WL 75001, at *3 n, 2 (N.D. Ill. Mar. 10, 1994), or where parties "introduce new legal theories for the first time [or] raise legal argumentation which could have been heard during the pendeney of the previous motion," In re Oil Spill by Amoco Gadiz, 794 F. Supp. 261, 267 (N.D. Ill. 1992).
London Insurers state that they "adopt and reallege their . . . Response in Opposition to the City's Motion for Attorneys' Fees, Costs and a Penalty Under Section 155 of the Illinois Insurance Code." (Def.'s Mem. at 2.) This court has already addressed the multiple arguments presented in that brief, Furthermore, London Insurers' new arguments are based primarily on Cramer v. Insurance Exchange Agency, 675 N.E.2d 897, 903-05 (Ill. 1996), which was decided approximately three years before the parties first briefed the issue of section 155. Therefore, London Insurers have not established a legitimate reason for this court to reconsider its previous ruling. However, out of an abundance of caution, the court will consider the merits of London Insurers' motion.
London Insurers present two basic arguments in objection to this court's previous award pursuant to section 155 in Great Lakes II, First, they cite Cramer v. Insurance Exchange Agency for the proposition that they "cannot be liable . . . under both a common law cause of action and a statutory cause of action . . ." (Def's Mem. at 3.) Second, they contend that they "cannot be penalized twice for the same alleged misconduct" because "[p]unitive damage awards cannot be excessive and cannot be any greater than necessary to punish and deter." ( Id.) Both arguments are premised on the erroneous notion that this court "found the Primary London Insurers liable and penalized them under a common law theory of bad faith failure to settle third party claims." (Id.) In other words, London Insurers argue that this court found them liable in Great Lakes I based on a common-law tort theory. Therefore, they contend, the court erred in Great Lakes II when it awarded a section 155 penalty to the City, because the statute applies only to breach-of contract cases where bad faith is found. As the court discusses below, however, London Insurers' liability in Great Lakes I did not arise out of any common-law tort theory, but rather out of its contractual duty to defend the City, as defined by the insurance policy at issue.
London Insurers rely primarily on Cramer v. Insurance Exchange Agency, a 1996 Illinois Supreme Court case, for the proposition that section 155 is inapplicable in this case. Under the Illinois Supreme Court's interpretation of section 155, the "statute provides an extra contractual remedy to policyholders whose insurer's refusal to recognize liability and pay a claim under a policy is vexatious and unreasonable." Cramer, 675 N.E.2d at 900. "Ordinarily, a policyholder may bring a breach of contract action to recover the proceeds due under the policy. Pursuant to the statute, a plaintiff may also recover reasonable attorney fees and other costs, as well as an additional sum that constitutes a penalty." Id. at 900-01, However, the Cramer court also held that "[m]ere allegations of bad faith or unreasonable and vexatious conduct . . . are not sufficient to constitute a separate and independent tort." Id. at 906.
London Insurers do not argue that this court found them liable on the non-existent tort of bad faith or unreasonable and vexatious conduct. However, they argue that the court found them liable on the basis of a different, viable common-law tort, the "duty to settle." A typical case involves a policyholder, a liability insurer, and a third party. The liability insurer assumes the policyholder's defense under the policy and has begun negotiating a settlement with a third party. "In the typical "duty to settle' case, the third party has sued the policyholder for an amount in excess of the policy limits but has offered to settle the claim against the policyholder for an amount equal to or less than those policy limits." Id. In such a situation, the insurer may have an incentive to decline the settlement offer and proceed to trial, while the policyholder prefers to settle within the policy limits. "This court has recognized that the insurer has a duty to act in good faith in responding to settlement offers." Id. (citing Krutsinger v. Illinois Casualty Co., 141 N.E.2d 16 (Ill. 1957)). "When an insurer breaches this duty by refusing to settle, the insurer may be liable for the full amount of a judgment against the policyholder, regardless of policy limits." id.
The Cramer court recognized that the "duty to settle" arises where the policyholder relinquishes defense of the suit to the insurer. Id. "In these cases, the policyholder has no contractual remedy because the policy does not specifically define the liability insurer's duty when responding to settlement offers. The duty was imposed to deal with the specific problem of claim settlement abuses by liability insurers where the policyholder has no contractual remedy." Id. In other words, liability arises out of a tort theory, not contract law. The court implied that in this situation, section 155 would not apply.
However, where a policyholder directly sues an insurer because the insurer refuses to pay, as happened in this case, the policyholder does not need a new cause of action, "The policyholder has an explicit contractual remedy. He can sue for the proceeds due under the policy. The extent of this remedy is controlled by contract law. The fact that a policyholder cannot recover as much as he could in tort arises from the fact that contract law imposes limitations on recovery." Id. at 904. For example, attorney's fees and punitive damages are usually unavailable in breach-of contract actions. As a result, the Illinois legislature enacted section 155, thereby "expand[ing] plaintiff's relief to include reasonable attorney fees, costs, and a limited penalty, in addition to a breach of contract action to recover the amount due under the policy." Id. at 901.
In this case, London Insurers seem to argue that because this court found "bad faith," it was relying on a common-law tort theory. This is not so. In Great Lakes I, the court relied on Conway v. Casualty insurance Co., a 1982 Illinois Supreme Court case, to allow the City to recover damages, despite the fact that the primary policy had already been exhausted on behalf of Great Lakes. Great Lakes I, 1999 WL 705599, at *8 In Conway, the Illinois Supreme Court observed that "since the insurer's duty to defend its insured is not dependent upon a duty to indemnify, but arises from the undertaking to defend stated in the policy, an insurer's payment to its policy limits, without more, does not excuse it from its duty to defend." Id. at 247 (emphasis added). The court cautioned that "[t]he mere failure to defend does not, in the absence of bad faith, render the insurer liable for that amount of the judgment in excess of the policy limits." Id. at 249 (quoting Reis v. Aetna Cas. Surety Co., 387 N.E.2d 700, 710 (Ill.App.Ct. 1978)). However, "damages for a breach of the duty to defend are not inexorably imprisoned within the policy limits, but are measured by the consequences proximately caused by the breach." Id. at 249 (quoting Reis, 387 N.E.2d at 710).
In Great Lakes I, this court applied Conway and held that London Insurers acted in bad faith in failing to defend the City, and that the $995,000 was the proximate result of the breach. This award was not a "bad faith penalty," as London Insurers (and the Seventh Circuit, see Great Lakes III, 260 F.3d at 797) suggest, nor did it represent punitive damages or attorney's fees. Common-law punitive damages and attorney's fees were unavailable to the City as this case was decided under contract law. See Cramer, 675 N.E.2d at 904. Rather, the award was compensation for "the loss attributable to the insurer's breach of its contractual obligations." Great Lakes I, 1999 WL 705599, at *8. Section 155 provides that in such a situation, where the insurer has acted in bad faith, the court may also award attorney's fees and a limited penalty. That is precisely what this court did in Great Lakes II. 2000 WL 1898533, at *14.
The award of indemnity and defense costs based on a contractual duty-to-defend theory, in addition to a section 155 penalty, is not new to Illinois courts. See, e.g., Employers Ins. of Wausau v. Ehlco Liquidating Trust, 708 N.E.2d 1122, 1139-40 (Ill. 1999). it is also applied where, as here, the policyholder is an additional insured, rather than a primary policyholder. Korte Constr. Co. v. Am. States Ins., 750 N.E.2d 764 (Ill.App.Ct. 2001) (affirming section 155 penalty against insurer who breached its duty to defend an additional insured). Furthermore, the $995,000 award resulting from Great Lakes I "exceeded the policy limits" only from London Insurers' perspective because London Insurers had (wrongfully) exhausted the policy on behalf of Great Lakes. In reality, the court awarded less than half of the policy limits to the City ($500,000 for indemnity and $495,000 for defense costs). The court relied on Conway only to reject London Insurers' argument that the City should be altogether precluded from any recovery simply because London Insurers already paid out the limits of the policy to Great Lakes. London Insurers' liability arose out of their contractual duty to defend the City. The section 155 penalty was therefore proper.
Conclusion
For the foregoing reasons, London Insurers' motion to deny the City's request for an additional penalty is denied.
ENTER: