Court Finds Punitive Damages Claim Created Conflict of Interest

By Don R. Sampen, published, Chicago Daily Law Bulletin, May 5, 2026

The 1st District Appellate Court recently held that an amended complaint seeking punitive damages against an insured gave rise to a conflict of interest entitling the insured to independent counsel paid for by the insurer.

The case is Pan-Oceanic Engineering Co. v. Grange Mutual Insurance, 2026 IL App (1st) 250511-U (April 14). The insured, Pan Oceanic, was represented by Ottosen DiNolfo Hasenbalg & Castaldo Ltd. of Lisle. Grange was represented by Leahy Eisenberg & Fraenkel Ltd. of Chicago.

A Pan-Oceanic truck driven by a company employee became involved in an accident with a vehicle driven by Fletcher McQueen in 2012. McQueen sued both the company and driver. Grange, Pan-Oceanic’s auto insurer, agreed to defend and appointed one of its panel attorneys, Daniel Suber, to handle the case.

In 2017, McQueen amended his complaint to include a claim for punitive damages, apparently based on the theory that the truck, with Pan-Oceanic’s knowledge, had been incorrectly loaded, causing the driver to lose control. Suber then notified Grange and Pan-Oceanic of the increased risk in the case.

Pan-Oceanic’s president subsequently signed an acknowledgment that Grange’s policy did not cover punitive damages, and that the new claim created a conflict of interest between Grange and Pan-Oceanic, giving Pan-Oceanic the right to select independent counsel. Pan-Oceanic, however, agreed that Suber could continue to provide representation.

A jury later found in favor of McQueen and against Pan-Oceanic but not the driver. It awarded McQueen more than $163,000 in compensatory damages and $1 million in punitive damages. Pan-Oceanic appealed. The case ended up in the Illinois Supreme Court on an issue relating to Pan-Oceanic’s admission of vicarious liability. Ultimately, however, the trial court judgment was affirmed.

Thereafter, Pan-Oceanic paid McQueen the $1 million in punitive damages; Grange paid McQueen compensatory damages with interest; and Grange partially paid the fees of attorney Suber, who more than doubled his billing rate during the appellate process.

A dispute then arose over responsibility for Suber’s fees, the cost of the appeal bond, and responsibility for the punitive damage award, all leading to the instant coverage action.

In 2024, the trial court ordered Grange to pay all of Suber’s fees except to the extent of any coverage work he did. The court further held that Grange was not estopped from denying coverage for punitive damages even though it issued no reservation of rights and found Grange had no obligation to pay for the appeal bond. Both parties appealed.

Analysis

In a decision by Justice Rena M. Van Tine, the 1st District affirmed. She initially took up the issue of attorney fees and found that the addition of the claim for punitive damages did in fact give rise to a conflict of interest. This was so even though the amount of punitive damages being sought was not specified.

A conflict arose because Illinois law does not limit the amount of punitive damage that can be awarded, and the demand could result in a change of strategy. For example, Van Tine hypothecated that Pan-Oceanic might want to settle, while Grange might want to press the case to trial knowing that it would not be responsible for any punitive damages.

As for defense fees where a conflict arises, Van Tine wrote that Grange continued to be responsible, including for Suber’s increased rates, because Grange could not decline to clarify its coverage position and then invoke its own fee schedule to limit compensation. Grange therefore was obligated to pay all of Suber’s fees in defense of the underlying action.

Regarding punitive damages, Pan-Oceanic acknowledged that public policy generally prohibited coverage for punitive damages. It relied on case law, however, suggesting that if the punitive damages were vicariously imposed, coverage could still apply.

Van Tine rejected that argument. She initially observed that nothing in the plain language of the policy indicated coverage for punitive damages. The question, though, became whether the jury’s verdict imposed vicarious or direct liability on Pan-Oceanic. Van Tine relied on language in the underlying complaint alleging reckless conduct by Pan-Oceanic itself in authorizing the driver of the truck to transport an unsafe load.

Given this independent basis for punitive damages against Pan-Oceanic, along with its failure to demonstrate the damages were vicariously imposed, Van Tine found that Pan-Oceanic was responsible for payment.

Finally, regarding the cost of the appeal bond, Van Tine’s review of the Grange policy indicated that it covered the cost of bonds to release attachments and costs taxed against the insured. It did not, however, cover the cost of appeal bonds, and Grange therefore had no obligation to pay for the bond.

The 1st District therefore affirmed Pan-Oceanic’s obligation to pay the punitive damages and bond fees, and Grange’s obligation to pay attorney fees.

Key Points

• A claim against an insured for punitive damages can lead to a conflict of interest between the insured and insurer, giving rise to an obligation by the insurer to provide independent counsel to the insured paid for by the insurer.
  
• Public policy generally prohibits insuring against punitive damages, even in the absence of a reservation of rights by the insurer.
  
• An insurer has no obligation to pay the cost of an appeal bond unless its policy provides for it.