Illinois and Wisconsin Expand Damages Recoverable in Bad Faith Actions
April, 2002
Illinois Appellate Court Authorizes Punitive Damages For Bad Faith Failure To Settle Within Policy Limits
In the words of the Illinois Appellate Court, Fifth District “[i]n this case, an insurance company took its small stake in the outcome of a personal-injury claim, $20,000 worth of liability coverage purchased by one of its customers, and transformed it into a multimillion-dollar judgment against the carrier.” O’Neill v. Gallant Ins. Co., 2002 Ill. App. LEXIS 311 (5th Dist.).
Facts
The insured (“Christine”) left her 2 year-old grandchild unrestrained in a car parked with the engine running in a grocery store lot. The child crawled behind the wheel, slipped the car into gear, and set it in motion. As the car rolled out of control, it collided with two other cars and two pedestrians. O’Neill was the most severely injured.
O’Neill was in her eighties and could not physically evade the slow-moving car, which pinned her between it and another car. O’Neill was pried loose and airlifted to St. Louis University Hospital Trauma Center, where she spent the next month in the intensive care unit. She suffered a crushed hip, a broken arm, four cracked ribs, two fractured fingers and lost more than 40% of her blood supply due to internal bleeding. The blood loss triggered respiratory shock. O’Neill was given a tracheotomy and placed on a respirator for 24 days. Following the accident, O’Neill had to be placed in a nursing home. O’Neill’s medical bills alone amounted to $105,000.
Gallant insured Christine with the statutory minimum amount of liability coverage, $20,000. O’Neill’s attorney demanded the policy limits to settle, in offering a complete release from liability for Christine in exchange for a prompt $20,000 payment. Gallant was given 30 days to decide. Gallant did not respond or try to negotiate. It did not tell Christine that O’Neill was willing to forego a potential personal judgment for more than the amount of Christine’s insurance coverage. Gallant simply ignored the offer to settle, and “a window of opportunity to protect its insured from an excess judgment closed.”
Gallant’s refusal to respond occurred under the following circumstances. Gallant’s initial adjuster noted that Christine was clearly negligent and that Gallant was responsible for the damages that she caused. His opinion was reviewed by an immediate supervisor and a claims director, both of whom concurred in his liability evaluation. Based upon that opinion, Gallant paid the two property-damage claims that stemmed from the accident. When O’Neill registered her claim through a lawyer, the claim was forwarded to a more seasoned adjuster. She examined the initial evaluation, conducted her own independent investigation, and recommended payment of the $20,000 policy limits before a demand was even made. A claims manager reviewed this recommendation, and wrote to John Moss advising that the policy limits should be tendered.
Gallant did not have its own claims department. It was one of two subsidiaries of Warrior Insurance Group (“Warrior”), which handled all claims. Moss was Warrior’s executive vice president. None of Warrior’s claims adjusters or directors had authority to settle a claim for $20,000. Even Warrior’s claims manager could not authorize a $20,000 settlement. Only Moss and Warrior’s CEO could authorize a Gallant settlement in excess of $15,000.
Warrior’s claims manager wrote Moss that tender of the policy limits was a necessary step “in order to make sure that the policyholder’s interests were treated with equal weight as the company’s interests.” Two weeks prior to the settlement demand’s expiration, the lawyers Gallant hired to defend Christine wrote Moss advising that liability was clear, that the verdict potential was 15 to 30 times the amount of coverage, and that Moss should tender the policy limits.
Moss rejected everyone’s advice, without explanation or notation in the claims diary. Moss later testified (at the trial of this case) that he believed in good faith that Christine was not liable for anyone’s injuries.
Almost a year after the policy limits demand had expired, and just days before the personal injury trial was to begin, Moss decided to authorize a $20,000 settlement offer. O’Neill refused. She had incurred more than $3,000 in costs readying the case for trial, and there was no offer to defray them. O’Neill’s economic losses had nearly doubled since the demand expired, and her contingency-fee structure had also increased.
A few days later, a jury found for O’Neill and awarded $731,063 in damages against Christine. Christine assigned her potential bad faith claim against Gallant to O’Neill, who then filed this action. The case was tried to a jury which ruled for O’Neill and awarded $710,063 in actual damages and $2.3 million punitive damages, plus interest.
A significant part of the evidence presented addressed a pattern of conduct by Gallant over the five years leading up to this bad faith action. O’Neill presented 44 known cases where Gallant’s Illinois customers suffered excess judgments after Gallant passed up the opportunity to settle within policy limits. The excess judgments exceeded the policy limits by a total of $10,849,313. All but $449,313 of this amount was awarded after Moss took control of the settlement process in June 1997.
Analysis
Gallant appealed, arguing that the jury’s bad faith finding was contrary to the manifest weight of the evidence and that punitive damages were not properly awarded. The Fifth District identified seven factors pertinent to the assessment of bad faith, and found that “every one of them supports this jury’s verdict.” Thus, the jury’s bad faith finding was not against the manifest weight of the evidence.
The court then considered whether punitive damages can be awarded for an insurer’s bad faith refusal to settle. The court answered in the affirmative: “[w]e think that where the insurer’s conduct exceeds mere negligence and, like here, demonstrates to a jury’s satisfaction that the refusal to settle within policy limits was engaged in with utter indifference and reckless disregard for its policyholder’s financial welfare, punitive damages can be awarded.”
Although punitive damages are not the law’s favorite, Illinois has traditionally authorized the recovery of punitive damages in tort cases involving intentional misconduct or a breach of fiduciary duty. When a liability insurer employs policy terms that give it irrevocable power to determine whether an offer to compromise a personal-injury claim will be accepted or rejected, it creates a fiduciary relationship between it and the insured with resulting duties that grow out of that relationship. Here, Gallant’s policy terms vested it with exclusive control over O’Neill’s claim and the defense against her lawsuit. It also retained the absolute discretion to determine whether a settlement offer should be accepted or rejected. “As was demonstrated by the staggering excess judgment total under Moss’ command,” the court wrote, “in the absence of good faith, Gallant’s policyholders confronted significant risks of personal exposure.”
Declaring that “[c]ourts must offer vigilant protection to those who find themselves in a position of vulnerability in a fiduciary relationship” [like Christine, who had known mental health problems and was not well off financially], the court found that in a case such as this “punitive damages for a bad-faith refusal to settle are appropriate and warranted.” The court explained:
Hopefully, the availability of punitive damages can provide some degree of deterrent against unscrupulous insurers who would otherwise take advantage of customers and abuse their fiduciary relationship in order to promote their own economic self-interest. Gallant needed to be told through the award of punitive damages that it had to stop its common practice of ignoring policy-limit demands in serious cases where liability was clear-cut. It had to be punished for a pattern of misconduct that exposed its policyholders to more than $10 million in excess judgments.
The court found sufficient evidentiary support for the punitive damages awarded, noting that there was ample evidence from which a jury could reasonably infer that Gallant “deliberately chose to gamble with Christine’s financial security, in the hope of merely delaying the payment of minimal policy limits,” and reasonably conclude that Gallant “threw Christine’s financial future to the wind for the small amount of revenue it could derive from its $20,000 before a judgment could be rendered.” The jurors could also have reasonably inferred that the non-tender of money until the eve of trial was a calculated, widespread design utilized to delay payment and enable Gallant to amass considerable revenue.
The Fifth District concluded:
Gallant conducted its business in a manner that was totally insensitive to the risks facing its policyholders. Its misconduct was clearly reprehensible enough to commend serious punishment. The $2.3 million in punitive damages provided a fitting measure of punishment for Gallant’s routine transformation of policy-limits settlement demands into massive excess judgments for its policyholders.
Wisconsin High Court Holds Insured May Seek Contract Damages For Tort Of Bad Faith
The Wisconsin Supreme Court holds that contract damages, such as policy proceeds for lost use of property and lost business, are recoverable in a first-party bad faith tort action, and that such damages may be sought even where the insureds’ breach of contract claim is barred by the statute of limitations. Jones v. Secura Ins. Co., 638 N.W.2d 575 (Wis. 2002).
Facts
Since 1985, plaintiffs Thomas and Joan Jones owned a residence and motel located near a lake in Woodruff, Wisconsin. In 1993, the Joneses obtained a fire insurance policy from Secura. In May 1997, they filed a claim with Secura for damages to their residence and motel, asserting that their home was leaning toward the lake, the chimney was separating from the house, and the deck was slanting. Secura denied coverage, concluding that the damage was the result of an on-going situation, rather than a collapse, and was not covered by the Joneses’ policy.
In March, 1999, the Joneses sued Secura alleging breach of the insurance contract and bad faith. The circuit court granted summary judgment for Secura on the breach of contract claim, finding it barred by the applicable one-year statute of limitations, but denied the insurer’s motion for summary judgment on the bad faith claim. Secura then asked the court to enter a declaratory judgment finding that damages for lost property, lost use of property and lost business were not recoverable under the Joneses’ bad faith tort claim because they are contract damages properly dismissed with the Joneses’ breach of contract claim. The Joneses argued that Secura is liable for any damages that are the proximate result of its bad faith. The circuit court ruled in Secura’s favor on this novel issue, and the Joneses appealed. The appellate court granted interlocutory review and certified the appeal to the Wisconsin Supreme Court.
Analysis
The Supreme Court reversed, holding that the circuit court had erred in excluding certain contract damages in a bad faith action. “Although we agree with the circuit court’s conclusion that the tort of bad faith is a separate cause of action from a breach of an insurance contract claim,” the Court wrote, “ the absence of a valid breach of contract claim does not prohibit plaintiffs from pursuing certain damages in a bad faith claim.” The Court grounded its holding on the following language from DeChant v. Monarch Life Ins. Co., 547 N.W.2d 592 (1996): “when an insurer acts in bad faith by denying benefits, it is liable to the insured for any damages which are the proximate result of that conduct.” The Court, applying DeChant’s “any damages” and “proximate result” language, concluded that “plaintiffs are entitled to pursue any damages which are the proximate result of the defendant’s alleged bad faith, including damages that were otherwise recoverable in a breach of an insurance contract claim.” The Court further noted that the circuit court’s dismissal of plaintiffs’ breach of contract claim on statute of limitations grounds “does not alter our holding in this case” because a bad faith claim is governed by a two- year statute of limitations rather than the one-year limitations period governing a breach of fire insurance contract claim.
Learning Point:
O’Neill and Secura both illustrate courts’ willingness to expand the potential range of recovery for insureds in bad faith actions. The maxim that “bad facts make bad law” is especially evident in cases like O’Neill, where the insurer’s widespread pattern of ongoing misconduct cried out for a punitive award. Insureds will undoubtedly look to use this most outrageous case as a precedential springboard for recovery of punitive damages against insurers in far less compelling circumstances. Insurers must be vigilant in countering such attempts and, hopefully, limiting O’Neill to its particular facts.
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