Court OKs Settlement Between Claimant, Insured Represented By Same Counsel

By Don R. Sampen, published, Chicago Daily Law Bulletin, August 9, 2022

The 1st District Appellate Court recently held that a $6 million settlement agreement between a claimant and insured was reasonable and in good faith even though both parties were represented by the same attorneys.

The case is Country Mutual Insurance Co. v. Olsak, 2022 IL App (1st) 200695 (June 27). The insurer, Country Mutual, was represented by Carlson Bier Associates LLC of Chicago. Norman J. Lerum P.C. of Chicago and James Messineo & Associates of Inverness represented claimant Joseph Pecoraro and insured Thomas Olsak.

The court’s decision represents the third appeal in this long-running litigation. In its lengthy opinion, the court details the course of the litigation and many issues. The discussion below highlights the main coverage issues addressed in this last appeal.

In 1998, Olsak, a high school hockey player, struck his coach, Pecoraro, in the head causing severe injury. Pecoraro brought suit against Olsak and his stepfather, Ed Pudlo. The high school board of governors were eventually added as defendants.

Pudlo had homeowner’s and umbrella coverage with Country Mutual, with limits totaling $3 million. He tendered the defense to Country Mutual, which denied coverage for Olsak based on an intentional acts exclusion, but the company did provide a defense for Pudlo. The high school board had separate coverage through TIG Insurance.

Country Mutual brought the instant coverage action in 2005 seeking a declaration that it owed no coverage to Olsak. Subsequently, in 2006, Olsak and Pecoraro reached a settlement obligating Olsak to pay Pecoraro $5,000, plus an assignment to Pecoraro of Olsak’s rights under the Country Mutual policies.

The settlement did not otherwise reflect a determination of Pecoraro’s damages. The trial court in the underlying case found the deal was entered into in good faith and dismissed Pecoraro’s claim against Olsak.

In 2007, Pecoraro’s attorneys, while still representing him, assumed the representation of Olsak. They then filed a counterclaim against Country Mutual in the coverage action alleging a breach of its duty to defend Olsak. In another count, they alleged bad faith by the insurer under section 155 of the Illinois Insurance Code, 215 ILCS 5/155.

In 2009, as the result of the first appeal in this litigation, the appellate court determined, among other things, that Country Mutual had a duty to defend Olsak in the underlying action.

In 2010, Olsak and Pecoraro renegotiated their settlement deal in the underlying case. Olsak then agreed to pay Pecoraro, not just $5,000 — the original amount that he had not fully satisfied — but $6 million, plus an assignment of Olsak’s rights against Country Mutual.

They requested the trial court in the underlying case to find the settlement reasonable. That court instead dismissed Pecoraro’s claim on the ground that the 2005 settlement had fully disposed of the claim by a final order that could not be vacated.

In 2012, the trial court in the coverage case granted a $5,000 judgment in favor of Olsak and Pecoraro on their counterclaim against Country Mutual and dismissed the declaratory action.

In 2014, however, in a second appeal of the coverage action, the appellate court reversed the dismissal and the award of $5,000. The appellate court further remanded the case for a reasonableness determination regarding the $6 million settlement.

Finally, in 2020, the trial court in the coverage case found that the $6 million settlement was reasonable and not the product of collusion. The court further found that Country Mutual’s liability would be limited to its policy limit of $3 million, and ordered it to pay that amount. The court also found that Country Mutual had not acted in bad faith for purposes of section 155.

Country Mutual appealed, and Olsak and Pecoraro cross-appealed.

Country Mutual’s Appeal

In an opinion by Justice Carl A. Walker, the 1st District affirmed. Country Mutual made several arguments on appeal, but its main one concerned the 2010 $6 million settlement, which it claimed was unreasonable in part because Olsak and Pecoraro were represented by the same counsel.

Walker acknowledged that the joint representation created an obvious conflict of interest, which, Walker said, was “troubling” and represented “a stunning lack of judgment.” Nonetheless, Walker took the position that under “the totality of the circumstances” the conflict of interest did not artificially inflate Pecoraro’s recovery.

It did not do so, he wrote, because the settlement was prompted by Country Mutual’s argument that the 2006 settlement had been invalid for lacking a specific dollar amount.

Country Mutual further argued that the $6 million settlement lacked consideration and was illusory because Pecoraro’s claim had already been dismissed, and he had no right to continue to pursue Olsak. Walker disagreed, stating that Olsak had never paid the full $5,000 required under the first settlement, which allowed Pecoraro to reinstate his claim.

Olsak and Pecoraro Appeal

The main argument raised by Olsak and Pecoraro was that, upon their agreement to a $6 million settlement, the trial court should have held Country Mutual liable for the entire amount.

Walker disagreed, saying that, subject to a few exceptions, an insurer breaching its duty to defend does not expose the insurer to liability greater than the policy limits. The breach only estops the insurer from raising policy defenses to the coverage that already exists.

One exception where an insurer may be held liable for an amount in excess of its limits is where the insured’s damages are proximately caused by the insurer’s breach of duty. But Walker said there was no evidence here that Country Mutual caused the additional $3 million in damages.

Olsak and Pecoraro also argued that Country Mutual’s conduct constituted bad faith and that its waiting 4½ years to file its declaratory judgment action was vexatious and unreasonable. Walker, however, agreed with the trial court that Country Mutual had a bona fide coverage dispute regarding coverage and rejected the section 155 claim.

The 1st District therefore affirmed the trial court in all respects.

Key Points

According to this decision, counsel representing both a claimant and insured and reaching a settlement on their behalf constitutes a conflict of interest, but the conflict will not necessarily invalidate the settlement. Also according to this decision, an insurer breaching its duty to defend remains liable only for an amount up to its policy limits, notwithstanding a settlement reached between the claimant and insured for an amount in excess of the limit.