Insurer Clear to Challenge Settlement
August 25, 2009
The 2d District Appellate Court recently held that a liability insurer that breached its duty to defend was not estopped from challenging the trial court's finding relating to the reasonableness of the underlying settlement between the insured and plaintiff. Stonecrafters Inc. v. Wholesale Life Insurance Brokerage Inc., 2009 WL 2139386 (July 13).
The plaintiff and third-party citation petitioner, Stonecrafters, was represented by Anderson & Wanca, Rolling Meadows. Wildman, Harrold, Allen & Dixon, Chicago, and Gummerson, Rausch, Wand, Gray & Wombacher, Woodstock, represented the insurer, Milwaukee Insurance Co. (MIC).
Stonecrafters filed a class action against Wholesale Life for violation of the federal Telephone Consumer Protection Act and Illinois Consumer Fraud Act, based on Wholesale Life's alleged sending of mass, unsolicited, one-page facsimile advertisements to prospective clients without permission. Wholesale Life tendered to its CGL insurer, MIC, which denied coverage and provided no defense.
A year and a half later, Stonecrafters and Wholesale Life reached a settlement for about $6 million. The trial court entered an order certifying the settlement class, and approving the class notice. It also made a determination that the settlement was made in reasonable anticipation of liability, was fair and reasonable, and conformed to the standard of a prudent uninsured.
The settlement itself provided that the judgment was to be collectible only against Wholesale Life's insurers, including MIC, and involved Wholesale Life's assignment to the class of its claims against the insurers.
As class representative, Stonecrafters then initiated third-party citation proceedings against various respondents, including MIC, to discover and collect on Wholesale Life's CGL policies. Stonecrafters filed a motion for payment of insurance proceeds, and MIC moved to strike, arguing that the turnover of insurance proceeds and coverage determinations could not be adjudicated in a supplementary third-party citation proceeding.
The trial court denied MIC's motion, but thereafter agreed with MIC that it was entitled to take discovery going to the reasonableness of the underlying settlement. Stonecrafters resisted discovery and filed a motion for partial summary judgment on the issue of whether MIC breached its duty to defend.
The trial court ultimately ruled that MIC had, in fact, breached its duty to defend and was estopped to raise policy defenses. It also ruled, however, that the estoppel did not bar MIC from challenging the reasonableness of the underlying settlement.
Stonecrafters sought certification of two questions pursuant to Illinois Supreme Court Rule 308: (a) whether an insurer, as a citation respondent, which is estopped to raise policy defenses, is collaterally estopped to challenge a trial court's findings regarding the reasonableness of an underlying settlement between the plaintiff and insured, and (b) whether such insurer is entitled to take discovery regarding the reasonableness of the settlement.
In an opinion by Justice Michael J. Burke, the 2d District answered the first question in the negative and the second affirmatively.
Burke began his analysis, however, by addressing a third question, one that had apparently been raised by MIC in an untimely fashion but which went to the court's subject matter jurisdiction. The question was whether the trial court acted within its authority in addressing the arguably "unliquidated" claim against MIC as part of a supplementary proceeding.
Burke found that this question was essentially answered in Second New Haven Bank v. Kobrite, Inc., 86 Ill.App.3d 832 (2d Dist. 1980), in which the court held that an insurer and third-party citation respondent may litigate any proper defense to recovery under the policy. Under Kobrite, Burke found that insurance proceeds are a potential asset of the debtor-insured and are subject to citation proceedings. It therefore rejected MIC's argument that subject matter jurisdiction was lacking.
As for whether MIC could challenge the trial court's express finding of reasonableness of the underlying settlement, Burke relied principally on Guillen v. Potomac Ins. Co. of Illinois, 203 Ill.2d 141 (2003). The Supreme Court there found that, even though the insurer breached its duty to defend the insured which had assigned its right to indemnification to the plaintiff in the underlying suit, the insurer was nonetheless entitled to challenge the settlement agreement that was negotiated by the insured.
In so finding, the Guillen court expressed its concerned with the insurer's lack of opportunity to present any evidence on the issue of the reasonableness of the insured's decision to settle. It further held that the underlying plaintiff would have the burden of proving reasonableness because it would have better access to facts bearing upon reasonableness.
The Guillen court also indicated that the litmus test of reasonableness was whether the insured's decision conformed to the standard of a prudent uninsured, and whether the amount of damages agreed to was what a reasonably prudent person in the position of the insured would have settled for.
Based on Guillen, Burke rejected Stonecrafters' position that MIC should be collaterally estopped. He noted that MIC had not had the opportunity to present any evidence on the issue of the reasonableness of Wholesale Life's decision to settle, and that, in fact, no evidentiary hearing had taken place in which either Stonecrafters or MIC could have presented facts on that subject.
The record revealed, moreover, that, while the trial court scheduled a fairness hearing to provide an opportunity for class proponents and opponents to voice their opinions on the settlement, MIC was not a class member and received no notice of the hearing.
Burke also discussed the traditional collateral estoppel requirements that the issue previously decided be identical to the one presented in the pending matter, and that the party against whom the estoppel is asserted be either a party or in privity with a party to the prior matter. As to these requirements, MIC argued that the issue in the class action differed from that here in the supplementary proceeding, and that it was not in "privity" with Wholesale Life because their interests differed.
Burke said, however, that he need not decide the collateral estoppel issue because, under Guillen, Stonecrafters must prove that the settlement is reasonable before it could have a binding effect upon MIC.
Finally, with respect to the discovery issue, Burke found that, because MIC retained the right to controvert any preliminary showing of reasonableness with its own affirmative evidence bearing on the reasonableness of the settlement, a hearing would be required before the trial court. In light of the hearing requirement, the discovery process was necessary so that the parties could obtain the evidence for their respective claims and defenses.
Accordingly, the court found that the settlement was subject to challenge by MIC and that MIC was entitled to take discovery.
