Good Faith Covenant Assists Jilted Agent

By Don R. Sampen, published, Chicago Daily Law Bulletin 

December 11, 2018

The 1st District Appellate Court recently held that an insurance agent adequately alleged breach of the implied covenant of good faith and fair dealing against an insurance company in connection with the agent’s transfer of business to another agent.

The plaintiff agent in Slay v. Allstate Corp., 2018 IL App (1st) 180133 (Nov. 9, 2018), was represented by Cohen Rosenson & Zuckerman, LLC. Cozen O’Connor represented the insurer, Allstate.

Plaintiff Mary Slay alleged that she was recruited to become an exclusive Allstate insurance agent in Florida in 2004. Ray McKnight, an Allstate territory manager, recruited her to purchase a book of business from an agent who was planning to retire.

According to her complaint, however, McKnight failed to tell Slay that Allstate was in the process of canceling, or not renewing, significant categories of policies in Florida at the time. He also failed to tell her that his wife had an interest in opening her own office in competition with Slay, through the purchase of a different book of business.

Slay claimed that over the next few years her business was adversely affected by the agency opened by McKnight’s wife, by Allstate’s decision to no longer write commercial policies in Florida and not to renew some 95,000 homeowner policies and by other Allstate actions.

In 2011, Allstate terminated Slay’s agency agreement — allegedly for failing to meet her production requirements. At that time Slay made arrangements to transfer her accounts to her husband, who operated a successful independent Allstate agency. Allstate, however, refused to approve the transfer to her husband and, instead, transferred her interest in her customer accounts to McKnight’s wife. Allstate offered Slay a $40,000 termination payment.

In refusing to approve Slay’s proposed transfer, Allstate relied on language in Slay’s agency agreement to the effect that Allstate retained the right to approve or disapprove an agent’s transfer of accounts upon termination.

It also relied on language in an agency manual, which was incorporated into the contract. The language in the manual stated that Allstate would not approve the transfer of accounts to an independent agency. In a “note” following that language, however, the manual added that the company might consider an exception if the independent agent was a spouse of the former Allstate agent.

Slay brought suit against Allstate alleging breach of contract. In particular, she contended that Allstate’s failure to approve the transfer of accounts to her husband materially breached Allstate’s covenant of good faith and fair dealing in connection with the discretion Allstate exercised over the transfer of the accounts. Slay claimed that Allstate acted in an arbitrary and capricious manner and contrary to her reasonable expectations.

Allstate moved to dismiss under Section 2-619 of the Code of Civil Procedure (735 ILCS 5/2-619), attaching an affidavit and the agency manual, which had not been included as part of Slay’s complaint. Slay opposed the motion on various grounds, including that it was not properly brought under Section 2-619 but more appropriate under Section 2-615. The trial court dismissed, relying on both Sections 2-615 and 2-619. Slay brought this appeal.

Analysis

In an opinion by Justice Joy V. Cunningham, the 1st District reversed. Initially, she observed that the trial court was correct in construing the Section 2-619 motion as having been brought under Section 2-615, because the motion contended that the complaint’s allegations were legally insufficient. She further observed that the agency manual, which was attached to Allstate’s affidavit, would not be factor in a Section 2-615 motion.

Cunningham then took up the requirements for a cause of action based on breach by the defendant of the implied covenant of good faith and fair dealing. She observed that such a breach involves an abuse of discretion by the defendant by acting in a manner contrary to the reasonable expectations of the parties.

Cunningham found that Slay alleged adequate facts to state a cause of action. In particular, her complaint claimed that Slay had a reasonable expectation that Allstate would not deny the sale of accounts to her husband for bad-faith, arbitrary or capricious reasons.

Slay, moreover, adequately alleged that her husband was a reasonable candidate for the accounts, in that he already was an Allstate independent agent. Slay further alleged that Allstate’s disapproval was arbitrary and capricious in that it was for the sole benefit of McKnight’s wife.

In so finding, Cunningham distinguished another case, Barille v. Sears Roebuck & Co., 289 Ill.App.3d 171 (1st Dist. 1997), in which the court found the allegations inadequate to support a claim for breach of the duty of good faith and fair dealing. Cunningham said that the allegations in the instant case were more specific than those in Barille.

Cunningham also dealt with Allstate’s arguments made under Section 2-619 and the agency manual. Allstate tried to focus on the manual language that no transfer could be made to an independent agent, and to downplay the “note” that recognized a possible exception for a spouse. Cunningham observed that the “note” preserved Allstate’s discretion, to which the covenant of good faith would apply.

She further rejected the position that Slay was not really harmed by Allstate’s action, because Slay received a $40,000 termination payment. The fact that Slay received the payment, according to Cunningham, did not mean that she was not harmed.

The 1st District, therefore, reversed the dismissal and remanded in favor of Slay.

Key points

• A contracting party’s duty to exercise good faith and fair dealing with respect to matters as to which that party may exercise discretion under the contract may give rise to a cause of action for breach, even if that party complies with the contract’s literal terms.
• A motion to dismiss brought under Section 2-619 of the Illinois Code of Civil Procedure may be construed by the court as if brought pursuant to Section 2-615.