No Conflict of Interest in Post-Judgment Insurer Dispute

May 20, 2020 / Writing and Speaking

By Don R. Sampen, published, Chicago Daily Law Bulletin, May 19, 2020

The 1st District Appellate Court recently held that a primary insurer did not create a conflict of interest with its insured when it undertook negotiations with an excess insurer over what counsel would represent the insured in the appeal of a trial court adverse judgment, thereby delaying the posting of an appeal bond and arguably putting the insured at risk.

The case is Joseph T. Ryerson & Son, Inc. v. Travelers Indemnity Company of America, 2020 IL App (1st) 182491 (April 7). The insured, Ryerson, was represented by Alan J. Martin of Chicago. Cassiday Schade LLP represented the insurer, Travelers.

Ryerson was named a defendant in two underlying cases. In one, the Champagne Metals suit, the complaint alleged antitrust and other claims, including one for interference with business or contractual relations, against Ryerson and others in the metal servicing industry. Ryerson tendered to Travelers, its insurer, on the ground that, in Ryerson’s view, the tortious interference count sought recovery for “personal injury” in the form an alleged disparagement of goods. Travelers declined the tender and refused to defend.

In the other underlying case, the Hoffman suit, Ryerson was sued on a vicarious liability theory for an automobile crash involving a tractor-trailer hauling products being shipped by Ryerson. In that case a $27 million judgment was entered against Ryerson on a joint-venture agency theory, as well as others. Following entry of judgment, a disagreement arose between Travelers, which had a $2 million limit, and Ryerson’s umbrella carrier, Illinois National, over the appointment of counsel for the appeal, the payment of post-judgment interest and related issues.

As a result, the time for Ryerson and other defendants to post an appeal bond had to be extended for several months until the disagreement was resolved. Ryerson claimed in the meantime it risked having its bank accounts frozen and ultimately had to hire separate counsel to ensure that the insurers fulfilled their obligations.

Ryerson further took the position that Travelers delayed turning over its $2 million limit to Illinois National, which would have allowed Illinois National to take control of the defense; that Travelers was protecting its own $2 million limit because it was concerned about a large book of business of insureds with agency issues similar to those that arose in Ryerson’s case; that Ryerson was left exposed; and that a conflict arose from these factors and the relation of the policy limit to Ryerson’s liability for the excess judgment.

Ryerson eventually brought this coverage action against Travelers based on its refusal to defend in the Champagne Metals suit and, as to the Hoffman suit, for a variety of claims including the failure to provide an effective defense, for bad faith under section 155 of the Insurance Code, 215 ILCS 5/155, and for violation of the Consumer Fraud Act. The trial court dismissed for failure to state a claim and Ryerson brought this appeal.

Champagne suit

In an opinion written by Justice James Fitzgerald Smith, the 1st District affirmed. He initially addressed the refusal to defend the underlying Champagne Metals suit. He observed that, to constitute a covered offense as a personal injury under Travelers’ policy, the underlying complaint had to allege a disparagement of the underlying plaintiff’s goods or services based on untrue statements.

The main allegations relied on by Ryerson were that Ryerson and other defendants expressed disapproval to aluminum mills about adding the underlying plaintiff as a distributor and that an officer of one of the defendants stated that the underlying plaintiff made a mistake in trying to get into the business. Smith found there was nothing alleged to have been untrue about these statements.

Ryerson further contended that a disparaging statement attributed to a Ryerson employee was made by a witness in a deposition. The Ryerson employee allegedly expressed the belief that the underlying plaintiff did not meet the distributor criteria.

Smith said the deposition testimony was not sufficient to give rise to a duty to defend. The statement was not alleged in the complaint, and the underlying plaintiff did not appear to claim it was disparaging. In addition, even though a court may consider information outside the complaint in deciding the duty to defend, doing so is the exception to the general rule that the duty to defend is determined from the allegations of the underlying complaint.

Hoffman suit

With respect to the Hoffman suit, Smith observed that an insurer typically has the right and duty to defend its insured, although a limited exception exists when a conflict of interest arises. To establish a conflict of interest here, Ryerson relied on language in Perma-Pipe, Inc. v. Liberty Surplus Insurance Corp., 38 F.Supp.3d 890 (N.D. Ill. 2014), and R.C. Wegman Construction Co. v. Admiral Insurance Co., 634 F.3d 371 (7th Cir. 2011), that the possibility of a verdict in excess of policy limits can give rise to a conflict of interest.

Smith disagreed, however, that Travelers had any conflict of interest. Travelers provided Ryerson with defense counsel at all stages of the litigation and appeal. The fact that Travelers may have had an interest in creating favorable precedent for its other insureds, moreover, did not negate the fact that Ryerson fully shared Travelers’ interests in prevailing on appeal.

Smith further said that Perma-Pipe and Wegman were federal cases not binding on the court. And, moreover, the mere possibility of a judgment in excess of the policy limit, alone, did not trigger a conflict of interest entitling the insured to independent counsel.

Also, by the time the alleged conflict arose, the verdict already exceeded the limits of the Travelers’ policy. So, according to Smith, this was not a situation where Travelers was “gambling” on reducing Ryerson’s damages without informing it that the verdict could exceed the policy limit. And the mere fact that the insurers had a dispute about their respective obligations did not amount to a breach of any contract.

The court therefore affirmed the dismissal in favor of Travelers.

Key points

While a court may consider information outside the complaint in deciding the duty to defend, doing so is the exception to the general rule that such duty is determined from the allegations of the underlying complaint.

The mere possibility of a judgment in excess of the policy limit alone does not trigger a conflict of interest entitling the insured to independent counsel.

No conflict of interest amounting to a breach of the duty to defend arises from a dispute between a primary and excess insurer occurring post-judgment and regarding issues relating to moving forward with the appeal, so long as the insured’s defense remains intact.

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