Insurer off Hook for Settlement Insured Was Not Obligated to Pay

June 11, 2024 / News / Writing and Speaking

by Don R. Sampen, published, Chicago Daily Law Bulletin, June 11, 2024

The 7th U.S. Circuit Court of Appeals recently addressed the removability to federal court of a collection action against an insurer, and then held that an insurer owed no coverage for a settlement the insured reached with the claimant for which the insured would bear no legal responsibility.

The case is Jimenez v. Kiefer, 2024 U.S. App. Lexis 11094, F.4th (7th Cir. 2024). The claimants, Maria Jimenez and her husband, were represented by the Law Office of Peter V. Bustamante of Chicago. Amundsen Davis LLC of Chicago represented the insurer, Travelers Commercial Insurance Co.

Jimenez was injured in an automobile accident allegedly caused by Travelers’ insured Stephen Kiefer. She made a pre-suit settlement demand of $100,000, the limit on Travelers’ policy, which was not accepted.

Jimenez and her husband then brought suit in state court against Kiefer, for whom Travelers appointed counsel and authorized a $100,000 settlement. That offer was rejected and the Jimenezes subsequently reached a deal with Kiefer.

Kiefer stipulated to a $600,000 judgment against himself and assigned all his claims and rights against Travelers to Jimenez and her husband, in return for a covenant not to execute the judgment against him. Pursuant to the stipulation, the state court entered a $600,000 judgment against Kiefer.

Jimenez next filed a citation to discover assets in state court against Travelers. In response, Travelers removed the case to federal court and filed an answer to the citation denying that it possessed any property of Kiefer, including unpaid insurance proceeds. Travelers took the position that it owed no coverage because Kiefer’s covenant not to execute rendered Kiefer not legally responsible for the damages.

Travelers then moved for summary judgment, which the district court granted, and the Jimenezes appealed.

Jurisdictional Issues

In an opinion by Judge Thomas L. Kirsch II, the 7th Circuit affirmed. He initially addressed the removability of the case to federal court.

The Jimenezes argued that removal was not proper because they were citizens of Illinois as was Kiefer, a named defendant in the citation proceeding, and he also did not consent to removal. Kirsch, however, agreed with the district court that Kiefer was a nominal defendant, since no relief was sought against him. Travelers, moreover, was a Connecticut citizen, and complete diversity therefore existed.

Even so, Kirsch observed that only independent lawsuits are regarded as removable, not ancillary or supplementary proceedings. The question therefore became whether the citation proceeding was “independent” or “supplemental.”

According to Kirsch, a citation proceeding can become an independent action where, as here, the cited party denies holding any assets of the judgment debtor and the court pursuant to 735 ILCS 5/2-1402(c)(6) authorizes the judgment creditor to maintain an action against the cited party to establish proof of indebtedness.

This was so, wrote Kirsch, even in the absence of an express claim for insurance proceeds or for breach of duty by the insurer. Once Travelers denied holding assets, the only thing for the district court to do was to adjudicate the dispute of whether Travelers in fact did hold assets. And that dispute raised new issues of fact and law, thus constituting an independent action.

The case therefore was removable.

Coverage Issues

Turning to the coverage issues, Kirsch wrote initially that federal courts can and do resolve coverage issues in the course of resolving citation proceedings and even in the absence of a turnover order or other claim. He further found that, despite the Jimenezes’ request for discovery on whether Travelers had breached its duty to settle, the discovery they claimed they needed was actually wholly within their control.

Regarding Travelers’ coverage obligations, the policy provided that Travelers need only indemnify Kiefer for, in the words of the policy, “damages … for which [he] becomes legally responsible.” Moreover, the Jimenezes did not challenge the district court’s findings that Travelers did not breach either its duty to defend or duty to settle.

Under these circumstances, Kirsch held that Travelers could hold Kiefer to the strict terms of the policy. Thus, even if Kiefer was technically harmed by the judgment the Jimenezes covenanted not to enforce, Travelers had no coverage obligation under the terms of the policy.

Key Points

  • A citation proceeding in state court may be removed to federal court as an “independent” proceeding where the respondent denies holding any assets of the debtor and the court is required to adjudicate whether, in fact, the respondent is holding such assets.
  • Where an insurer has not breached any duties under a policy, and the insured reaches a settlement with the claimant that includes a covenant by the claimant not to enforce the settlement against the insured, the settlement is not enforceable against the insurer.
  • Chicago

    Illinois 60603

    10 South LaSalle Street

    Chicago, Illinois 60603

    T: 312.855.1010 TF: 800.826.3505 F: 312.606.7777 Office Managing Partner: Dennis D. Fitzpatrick

  • New York

    New York 10005

    28 Liberty Street 39th Floor

    New York, New York 10005

    T: 212.805.3900 TF: 800.826.3505 F: 212.805.3939 Office Managing Partner: Carl M. Perri

  • Mission Viejo

    California 92691

    27285 Las Ramblas

    Suite 200

    Mission Viejo, California 92691

    T: 949.260.3100 TF: 800.826.3505 F: 949.260.3190 Office Managing Partner: Ian R. Feldman

  • Florham Park

    New Jersey 07932

    100 Campus Drive

    Florham Park, New Jersey 07932

    T: 973.410.4130 TF: 800.826.3505 F: 973.410.4169 Office Managing Partner: Carl M. Perri

  • Michigan City

    Indiana 46360

    200 Commerce Square

    Michigan City, Indiana 46360

    T: 219.262.6106 TF: 800.826.3505 F: 312.606.7777 Office Managing Partners: Paige M. Neel, Kimbley A. Kearney

  • Milwaukee

    Wisconsin 53202

    250 E. Wisconsin Avenue

    Suite 1800

    Milwaukee, Wisconsin 53202

    T: 414.279.5525 TF: 800.826.3505 F: 312.606.7777 Office Managing Partner: James M. Weck

  • Stamford

    Connecticut 06902

    68 Southfield Avenue

    2 Stamford Landing Suite 100

    Stamford, Connecticut 06902

    T: 203.921.0303 TF: 800.826.3505 F: 212.805.3939 Office Managing Partner: Matthew J. Van Dusen

  • Tampa

    Florida 33609

    4830 West Kennedy Boulevard, One Urban Center

    Suite 600

    Tampa, Florida 33609

    T: 813.509.2578 TF: 800.826.3505 F: 312.606.7777 Office Managing Partner: Dennis D. Fitzpatrick Co-Managing Partner: Kelly M. Vogt

  • San Francisco

    California 94111

    100 Pine Street

    Suite 1250

    San Francisco, California 94111

    T: 415.287.2744 TF: 800.826.3505 F: 949.260.3190 Office Managing Partner: Ian R. Feldman

  • Houston

    Texas 77019

    2929 Allen Parkway

    American General Center, Suite 200

    Houston, Texas 77019

    T: 346.229.4612 TF: 800.826.3505 F: 312.606.7777 Office Managing Partner: Ramy P. Elmasri

  • Dallas

    Texas 75201

    325 N. Saint Paul Street

    Suite 3100

    Dallas, Texas 75201

    T: 469.942.8635 TF: 800.826.3505 F: 312.606.7777 Office Managing Partner: Ramy P. Elmasri

  • Boca Raton

    Florida 33434

    7777 Glades Road

    Suite 405

    Boca Raton, Florida 33434

    T: 561.765.5305 TF: 800.826.3505 F: 312.606.7777 Office Managing Partner: Dennis D. Fitzpatrick Co-Managing Partner: Kelly M. Vogt