No Conflict of Interest Despite Insured v. Insured Cross-Claim

By Don R. Sampen, published, Chicago Daily Law Bulletin, December 1, 2020

The U.S. District Court for the Northern District of Illinois recently held that no conflict of interest existed among insureds such as would require the insurer to permit the insureds to select their own independent counsel, despite the fact that certain insureds had filed cross-claims against other insureds in the underlying litigation.

The case is Consolidated Chassis Management LLC v. Northland Insurance Co., 2020 U.S. Dist. Lexis 197520 (N.D. Ill. Oct. 23). The insureds seeking independent counsel, Consolidated Chassis Management (CCM) and Chicago-Ohio Valley Consolidated Chassis Pool (COCP), were represented by Sullivan O’Malley LLC of Chicago. SmithAmundsen LLC of Chicago represented the insurer, Northland.

In 2018, the underlying plaintiff, Ryan Gilliam-Nault, brought suit against CCM, COCP, and two other parties — Midvest Transport Corporation, and Bakari Lambert — as the result of a traffic accident. CCM and COCP established and managed an intermodal chassis pool, and Midvest and Lambert were the owner and operator of the tractor-trailer involved in the accident.

All four underlying defendants were insureds or additional insureds of Northland. As a result, Northland agreed to defend them through Northland-appointed counsel. It agreed to do so initially under a reservation of rights, which it later withdrew.

CCM and COCP, however, objected to the counsel selected by Northland because of two alleged conflicts of interest. One was the fact that CCM and COCP had filed cross-claims for contribution against Midvest and Lambert. The second was the fact that the underlying plaintiff was seeking damages in excess of the $1 million limit of the Northland policy, thereby potentially leaving CCM and COCP open to exposure.

CCM and COCP brought this suit seeking a declaration that Northland was obligated to defend them through independent counsel they selected. They also sought reimbursement for defense costs they already expended by employment of other counsel and for sanctions under section 155 of the Illinois Insurance Code, 215 ILCS 5/155.

Analysis

On cross-motions for judgment on the pleadings, Judge Thomas M. Durkin found in favor of Northland. He initially observed that where an insurer and insured have a conflict of interest, the insured has a right under Illinois law to obtain independent counsel selected by the insured and paid for by the insurer.

As for whether CCM’s and COCP’s cross-claims against Midvest and Lambert would give rise to a conflict, Durkin relied mainly on two cases. One was Maryland Casualty Co. v. Peppers, 64 Ill.2d 187 (1976), where the underlying plaintiff alleged two theories of liability against the insured defendant, negligence and intentional conduct.

The court there found that a conflict existed by virtue of the insurer’s control of the defense. A conflict existed because if the evidence established mere negligence by the defendant, the insurer would owe coverage, but if the evidence were manipulated to establish intentional conduct, then the insurer could avoid coverage.

The other case was Murphy v. Urso, 88 Ill.2d 444 (1981), where the named-insured bus owner, and an additional-insured driver, were sued as the result of a traffic accident involving the bus. A conflict existed there because, if the evidence showed the driver had permission to drive the bus, coverage would extend for the driver, but if the evidence were manipulated to show that the driver did not have permission, then the driver would lack coverage.

Durkin then found that the cross-claims alleged by CCM and COCP did not give rise to a conflict under either Peppers or Murphy. They did not because the underlying Gilliam-Nault lawsuit did not allege two mutually exclusive theories of recovery, as in Peppers. And unlike in Murphy, the positions taken by all four defendants were largely aligned in seeking to place the blame for the accident on the underlying plaintiff.

With respect to the alleged conflict due to the underlying plaintiff’s claimed damages in excess of the policy limit, CCM and COCP relied on R.C. Wegman Construction Co. v. Admiral Insurance Co., 629 F.3d 724 (7th Cir. 2011). The 7h U.S. Circuit Court of Appeals there suggested that a “nontrivial probability” of an excess judgment in the underlying suit could give rise to a conflict.

Durkin, however, distinguished Wegman on the theory that the court there was mainly concerned about the situation where an insurer fails to notify the insured of — in Durkin’s words — “a known likelihood that the jury verdict will be significantly above the policy limit.”

Under those circumstances, according to Durkin, the insurer would be gambling with the insured’s money by going to trial. But here Durkin said CCM and COCP did not claim that Northland failed to notify them of an excess judgment or was somehow gambling with their money.

Durkin therefore concluded that no conflict existed, no basis existed for sanctions under section 155, Northland had no obligation to reimburse defense costs already incurred by CCM and COCP, and Northland was entitled to judgment.

Key points

• A claim for contribution by one insured underlying defendant against another such defendant does not give rise to a conflict where their interests remain largely aligned in their defense to the underlying plaintiff’s claims.
• An underlying plaintiff’s claim for damages in excess of the insurer’s policy limit does not give rise to a conflict of interest where the insurer notifies the insured of the potential for damages exceeding the limit and the circumstances are such that the insurer is not gambling with the insured’s money.