Insurer Escapes Contempt For Alleged Failure To Comply

The 4th District Appellate Court recently reversed contempt sanctions against an insurer for its alleged failure to comply with orders to pay an insured’s litigation costs prior to the conclusion of coverage litigation.

The insurer in Country Mutual Insurance Co. v. Hilltop View LLC, 2014 IL App (4th) 140007, 2014 WL 7273845 (4th Dist., Dec. 22, 2014), was represented by several attorneys, including Kent R. Schnack of Quincy, Keith G. Carlson and Michael T. Reagan. Edward W. Dwyer and Jennifer M. Martin of Hodge, Dwyer & Driver in Springfield, and Richard J. Wilderson of Springfield represented the insureds, which included Hilltop View LLC and Professional Swine Management LLC.

A lawsuit was brought against Hilltop and PSM in connection with odors emanating from a hog farm. Their liability insurer, Country Mutual, denied coverage based in part on a pollution exclusion in the policy. Country Mutual brought the instant declaratory lawsuit to determine its coverage responsibilities.

In October 2012, the trial court rejected application of the pollution exclusion and granted partial summary judgment to Hilltop and PSM, holding that Country Mutual was responsible for defending them in the underlying case. The insureds subsequently sent Country Mutual a demand for defense costs in the amount of about $177,000, but it was not itemized.

After denying Country Mutual’s reconsideration motion, the trial court granted its request for an immediate appeal. Country Mutual filed the appeal (not the instant appeal), and a few days later filed a motion seeking a stay. In February 2013, the trial court ordered a stay of the underlying case, found that Country Mutual was obligated to pay the insureds’ litigation costs in the declaratory action and denied any stay in that action.

The insureds’ counsel then demanded payment of fees in connection with the declaratory action, although again providing no itemized time records. When Country Mutual declined, the attorneys filed a contempt petition. The petition claimed that Country Mutual should be held in contempt for its failure to pay litigation expenses in both the underlying case and the declaratory action.

In December 2013, the trial court entered an order finding Country Mutual in indirect civil contempt because it (1) willfully failed to comply with the court’s October 2012 order finding it responsible for the insureds’ defense in the underlying case, (2) willfully failed to comply with the February 2013 order finding it responsible for litigation costs in the declaratory action and (3) in both instances acted vexatiously and unreasonably and in bad faith.

The court ordered Country Mutual to pay nearly $97,000 in connection with the declaratory action and ordered that it take other action to purge itself. Country Mutual then filed this appeal.

Underlying Costs

In an opinion by Justice M. Carol Pope, the 4th District reversed. She initially observed that indirect civil contempt requires the existence of an order of the court and proof of willful disobedience; that fact findings in connection with the contempt are overturned only if against the manifest weight of the evidence; and that, as a general matter, a party must obey a trial court’s order until the order is set aside.

Pope noted that the parties here disagreed on when the orders for Country Mutual to pay litigation costs became enforceable. Country Mutual contended they could not become enforceable, at the earliest, until an order under Supreme Court Rule 304(a) order was entered, because no final order could have been entered prior to then. Hilltop and PSM argued that the payment orders were “ancillary” and therefore immediately enforceable.

Pope said the court need not decide who was right to decide the appeal.

She found that the October 2012 order regarding the underlying defense costs could not give rise to contempt because the trial court in February 2013 stayed the underlying case, thereby putting off payment of past costs in that case until after the appellate court issued its judgment in Country Mutual’s first appeal.

Declaratory Costs

As for the February 2013 order that Country Mutual pay the insureds’ litigation costs in the declaratory action, Pope determined that the trial court never determined an amount to be paid. In addition, the insureds never provided anything other than a bill showing a gross amount due.

Under Section 155 of the Insurance Code, 215 ILCS 5/155, according to Pope, a trial court may award reasonable attorney fees upon finding that the insurer vexatiously and unreasonably denied coverage. However, the party seeking the fees has the burden of establishing the reasonableness of the fee.

With neither a hearing on the fees nor itemized bills establishing their reasonableness, Pope said the trial court could not hold Country Mutual in contempt for failure to pay fees.

In addition, the trial court erred with its Section 155 ruling. It never made a finding that Country Mutual’s decision to deny coverage was vexatious and unreasonable. Rather, the court applied the vexatious standard of Section 155 to Country Mutual’s failure to pay fees. Since the coverage action had not yet been fully decided, the fee issue was not yet ripe.

The 4th District therefore reversed the contempt finding and ordered that Country Mutual’s appeal bond be returned in its entirety.

Key Points

• By implication from the court’s decision, a trial court’s orders on the merits are not enforceable until a final order or Rule 304(a) order is entered, although ancillary orders may be enforced immediately.
• For an award of fees under Section 155, the party seeking fees must establish their reasonableness through itemized bills, and a hearing may be required.
• The vexatious and unreasonable requirements of Section 155 apply to the insurer’s denial of coverage, not to extraneous matters such as an alleged failure to comply with a payment order.