Breach of Defense Duty Found Despite Insurer Argument

May 17, 2018 / Writing and Speaking

By Don R. Sampen, published, Chicago Daily Law Bulletin
[May 14, 2018]

The 5th District Appellate Court recently held that an insurer breached its duty to defend despite the fact that it paid more than $1 million in defense costs under a reservation. The court further held that the insurer also breached its duty to settle by advising its insured not to settle without the insurer’s consent and by filing a declaratory action regarding coverage. Rogers Cartage Co. v. Travelers Indemnity Co., 2018 IL App (5th) 160098 (April 5).

The insured, Rogers, was represented by, among others, Lathrop & Gage LLP of Clayton, Mo. Dentons US LLP represented the insurer, Travelers.

Rogers was a trucking company in the business of hauling toxic and hazardous materials. In underlying environmental cleanup litigation, it was sued initially as a third-party defendant in the late 1990s and later directly in 2010 for land and water contamination.

Rogers tendered to Travelers, which had issued Rogers some 22 policies during the period from 1960 through 1986. The policies in earlier years did not contain a pollution exclusion. But the later policies did contain an exclusion for pollution that was “expected or intended” from the policyholder’s viewpoint. Travelers accepted the tender under a reservation and agreed to pay for counsel of Rogers’ choice.

Settlement discussions occurred during the latter part of 2010. In October, the claimants made two separate demands. One was for $4 million if Travelers would participate and resolve the claims for cash. If Travelers refused, the second proposal was for Rogers to settle on its own for $7.5 million with Rogers paying $50,000 and the balance being pursued from Travelers by the claimants.

The second proposal was never forwarded to Travelers. As to the first, Travelers rejected it in a letter to Rogers on Dec. 30, 2010. The letter stated, among things, that Travelers retained control of the defense and settlement. The letter also indicated that Travelers would regard any unilateral settlement by Rogers as constituting a breach of the Travelers’ policies cooperation clauses.

Travelers also made clear that it remained willing to discuss reasonable settlement proposals. It then filed a separate declaratory judgment in Cook County seeking a determination of no coverage under its policies.

In early 2011, Rogers settled with the claimants for $7.5 million, with all but $50,000 to be sought from Travelers. The agreement provided that a portion of the recovery from Travelers would go to pay Rogers’ coverage counsel fees in trying to recover the $7.5 million from Travelers. A portion of any excess also was to be paid to Rogers.

Rogers and the claimants then filed the instant action in downstate St. Clair County seeking to enforce the $7.5 settlement against Travelers.

After various motions and cross motions, the St. Clair County Circuit Court ultimately determined that Travelers breached its duty to settle the underlying case, the underlying settlement was reasonable, the settlement did not involve collusion, Travelers breached its duty to defend Rogers, Travelers was estopped from disclaiming indemnity coverage and Travelers must pay the settlement.

Pursuant to Section 155 of the Illinois Insurance Code, 215 ILCS 5/155, the trial court also awarded Rogers about $2.6 million in attorney fees and costs through early 2015, plus a $60,000 penalty. Travelers took this appeal.

Defense and exclusion

In an opinion by Justice Richard P. Goldenhersh, the 5th District affirmed. He initially addressed the duty to defend. He said that, in his view, Travelers’ Dec. 30, 2010, letter represented an attempt by Travelers to intimidate Rogers into going to trial, to put a stop to the negotiations and to take over the defense of the matter. As further intimidation, according to Goldenhersh, Travelers filed the declaratory action in Cook County Circuit Court.

He acknowledged the fact that Travelers had filed the declaratory action pursuant to its reservation of rights. But that did not mean, said Goldenhersh, that Travelers should be allowed to “manipulate the law.”

It also did not mean that Travelers could not be estopped from contesting coverage. Thus, despite the fact that Travelers spent more than $1 million defending the underlying litigation, Goldenhersh found that Travelers breached its duty to defend.

He next addressed the pollution exclusion. He noted that Travelers was estopped from raising the exclusion as a defense to coverage by virtue of its breach of the defense obligation. Nonetheless, he said that the exclusion would not apply in any case because of a lack of evidence that Rogers expected or intended to cause environmental damage.

Settlement and bad faith

Goldenhersh then took up the reasonableness of the settlement. He found the $7.5 million settlement amount reasonable in light of the $30 million to $40 million remediation costs estimated for the two sites involved in the litigation.

As for Travelers’ argument that the claimants would have accepted $3 million to $4 million in settlement, Goldenhersh found it disingenuous because Travelers had rejected a cash settlement in that range.

In addition, he said there was no bad faith or collusion in reaching the settlement. Goldenhersh thus rejected Travelers’ argument of bad faith based on the fact that Rogers never told Travelers about the $7.5 million alternative settlement proposal.

He rejected the further argument that money potentially coming back to Rogers under the alternative proposal was “per se collusive.” He also relied on Travelers’ breach of its defense duty in finding the settlement reasonable.

Goldenhersh briefly addressed the duty to settle under Haddick v. Valor Insurance, 198 Ill. 2d 409 (2001). He found that Travelers breached that duty also based on its Dec. 30, 2010, letter, which was “threatening” and its subsequent filing of a declaratory action in another county.

Finally, with respect to the Section 155 sanctions, Goldenhersh cited as evidence of Travelers vexatious and unreasonable conduct its “threatening” Dec. 30, 2010, letter and the filing of the declaratory action in another county.

As for Travelers’ defense that it had a bona fide dispute as to coverage based on the pollution exclusion, Goldenhersh said that a bona fide dispute could not be used to mask over Travelers’ mishandling of the settlement negotiations.

Travelers also argued that the $7.5 million settlement agreement already provided for the payment of Rogers’ attorneys fees. Goldenhersh, however, said that Rogers was entitled to an additional award of $2.6 million in fees because of a lack of evidence that money was actually added to the settlement to cover fees.

The court, therefore, affirmed the summary judgment in favor of Rogers.

Justice Judy L. Cates dissented on the ground that the failure to inform Travelers that the $7.5 million settlement was in the works set in motion the ultimate findings of bad faith against Travelers.

Key points according to 5th District:

(a) An insurer that provides its insured a defense under a reservation may nonetheless be found to have breached its duty to defend if it seeks to control the
settlement and files a declaratory action to resolve coverage.

(b) The filing of a declaratory action by an insurer prior to resolution of the underlying case may be regarded as bad faith.

(c) The fact that an insured stands to recover a substantial payment from a settlement enforceable only against an insurer does not make the settlement per se collusive.

(d) An insured that recovers attorney fees from a settlement enforceable against an insurer is not barred from the recovery of an addition fee award pursuant to Section 155 of the Insurance Code.

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