Cramer v. Insurance Exchange Agency

JUSTICE FREEMAN, specially concurring:

I agree with the majority that summary judgment was proper based on the fact that the plaintiffs suit was barred by the insurance policy’s limitations provision. I cannot agree with the majority’s reasoning regarding the preemptive scope of section 155, or the present status in Illinois of the tort of insurer bad faith and unfair dealing. Based on my examination of section 155, and a host of state and federal decisions, I am convinced that the tort of bad faith and unfair dealing is long established in Illinois and should remain so, section 155 notwithstanding.

Moreover, I believe it is unfortunate that the majority has seen fit to render a decision in this area, a decision arguably adverse to the interests of small policyholders, without the benefit of substantial briefs from that quarter. I note that the plaintiffs pro se appellate brief consists of a single letter to this court merely arguing that his claim for fraud be allowed so as to deter insurers from engaging in deceptive and vexatious conduct in settling claims.

Ironically, that misfortune only highlights why a tort cause of action for insurer bad faith is necessary-even in the realm of first-party coverage claims. Insureds are often at a bargaining disadvantage with their insurers. Thus, insurers have been found to fail to adequately investigate claims or deny claims without adequate supporting evidence; fail to evaluate claims objectively, interpreting policy provisions in an arbitrary and unreasonable manner; make unreasonably low settlement offers; rely on minor misrepresentations in the insurance application or where their agents knowingly complete false applications; or exert coercion designed to compel compromise of a claim. See Emerson v. American Bankers Insurance Co., 223 Ill. App. 3d 929, 936 (1992), citing Annot., 33 A.L.R.4th 579 (1984).

That said, I turn to the majority’s reasoning. The majority concludes that section 155 does not preempt a separate and independent tort involving insurer misconduct such as fraud. 174 Ill. 2d at 519, 528. The majority finds that a first-party claim alleging insurer bad faith and unfair dealing is not within that category. "Mere allegations of bad faith or unreasonable and vexatious conduct, without more, however, do not constitute such a tort.” 174 Ill. 2d at 528. One problem with this reasoning, however, is that, contrary to the majority’s view of the issue, a claim for third-party insurer bad faith and unfair dealing does not come within this category, either. Contrary to the majority’s statements, third-party coverage claims for bad faith are based, like first-party claims, on an implied duty arising from the insurance contract. See Olympia Fields Country Club v. Bankers Indemnity Insurance Co., 325 Ill. App. 649, 662 (1945); Cernocky v. Indemnity Insurance Co. of North America, 69 Ill. App. 2d 196, 206 (1966); Scroggins v. Allstate Insurance Co., 74 Ill. App. 3d 1027 (1979); Twin City Fire Insurance Co. v. Country Mutual Insurance Co., 23 F.3d 1175, 1178 (7th Cir. 1994) ("that duty [good faith] is founded on the insurance contract itself’).

Furthermore, it is simply not true, as the majority asserts, that the good-faith "principle” is used only as a construction aid in determining the intent of contracting parties. 174 Ill. 2d at 524. It is well established that an insurance contract is one of adhesion. To that extent, the relationship of insured and insurer has elements reflective of a fiduciary relationship, and also bears the obligations attendant to that relationship. It is therefore incorrect for the majority to contend that good faith is no more than an aid to construal of a contract.

As such, third-party bad-faith claims are no more separate and independent tort actions than are such claims in the first-party context. Moreover, this court has recognized that an insurer has an implied duty to act in good faith towards insureds with regard to settlement. Krutsinger v. Illinois Casualty Co., 10 Ill. 2d 518, 527-28 (1957). Notably, Ledingham v. Blue Cross Plan for Hospital Care of Hospital Service Corp., 29 Ill. App. 3d 339 (1975), relied on the existence of this same implied-in-law duty of good faith and fair dealing in the context of a first-party coverage claim. This court then later approvingly cited Ledingham for the proposition that the same conduct may both breach a contract as well as constitute a separate and independent tort. Kelsay v. Motorola, Inc., 74 Ill. 2d 172, 187 (1978).

Thus, the distinction that the majority seeks to draw between bad-faith claims in the first-party context and those in the third-party context does not withstand scrutiny. If bad-faith claims must fall in one area, because they are essentially creatures of contract, so must they fall in the other area. We thus swiftly approach the "slippery slope.”

Furthermore, section 155, entitled "Attorney fees,” speaks primarily to what statutory remedies are recoverable under the provision. The provision’s language presumes the existence of either a coverage dispute, whether first or third party, a claims payment dispute, a loss payable dispute, or a delay in claims settlement. 215 ILCS 5/155 (West 1994). Such claims can encompass more than a breach of the insurance contract, and indeed, the provision is applied in fact to a broad range of claims against the insurer. See W.E. O’Neil Construction Co. v. National Union Fire Insurance Co., 721 F. Supp. 984 (N.D. Ill. 1989) (refusal to contribute to settlement); Keepes v. Doctors Convalescent Center, Inc., 89 Ill. App. 2d 36 (1967) (refusal to pay insured’s creditors); Phillips v. Inter-Insurance Exchange of the Chicago Motor Club, 91 Ill. App. 3d 198 (1980) (auto liability insurer’s refusal to stack med pay coverage).

Consequently, I believe the preemptive scope of section 155 is more appropriately distinguishable on the basis of the statutory remedies it provides, rather than on whether the conduct is independently based in tort or contract. Thus, I adhere to that increasing trend of majority opinions which hold that section 155 preempts attorney fees and punitive damages, but not compensatory damages. W.E. O’Neil Construction Co., 721 F. Supp. at 998 ; Chicago HMO v. Trans Pacific Life Insurance Co., 622 F. Supp. 489 (N.D. Ill. 1985); Calcagno v. Personalcare Health Management, Inc., 207 Ill. App. 3d 493 (1991); Kohlmeier v. Shelter Insurance Co., 170 Ill. App. 3d 643 (1988); McCall v. Health Care Service Corp., 117 Ill. App. 3d 107 (1983); Lynch v. Mid-America Fire & Marine Insurance Co., 94 Ill. App. 3d 21 (1981); Hoffman v. Allstate Insurance Co., 85 Ill. App. 3d 631 (1980); Schienfield v. American Family Mutual Insurance Co., 624 F. Supp. (N.D. Ill. 1985); American Dental Ass’n v. Hartford Steam Boiler Inspection & Insurance Co., 625 F. Supp. 364 (N.D. Ill. 1985); UNR Industries, Inc. v. Continental Insurance Co., 607 F. Supp. 855 (N.D. Ill. 1984); see also Kaniuk v. Safeco Insurance Co., 142 Ill. App. 3d 1070 (1986) (leaving question open as to compensatory damages); Debolt v. Mutual of Omaha, 56 Ill. App. 3d 111 (1978) (same).

In general, several factors support these decisions. For one, as mentioned, section 155 specifically addresses attorney fees, costs of the action, and limited penalties. No mention is made in the provision of any compensatory remedies and, indeed, the provision is premised on the very existence of a "core” action against an insurer. See UNR Industries, 607 F. Supp. at 866 (language expressed belies intention to address problem of compensating insured for damages sustained). Further, this core action is not limited in terms of its legal basis, but only in terms of the factual nature of the alleged insurer misconduct. Second, it was not until 1977, two years following the Ledingham decision, that the legislature amended the statute to include specific limited penalties in addition to attorney fees. Thus, it may also be wrong to discount Ledingham, which only expanded bad-faith recovery beyond third-party coverage claims to punitive damages in the area of first-party coverage claims, for failing to mention section 155. See Kinney v. St. Paul Mercury Insurance Co., 120 Ill. App. 3d 294, 298 (1983). At the time that Ledingham was decided, section 155 did not include penalties per se and, thus, the provision posed no potential conflict with and was, therefore, inapplicable to the Ledingham analysis. See Emerson, 223 Ill. App. 3d at 935 ; but see American Dental, 625 F. Supp. at 368 (provision was at least punitive in nature at enactment). Additionally, I note that many of the cases which later discounted Ledingham suffer from inconsistencies in their own approach (see UNR Industries, 607 F. Supp. at 867 ), or they either simply cite precedent without engaging in analysis.

Also, close examination of the legislative history of section 155 reveals that there was no legislative intent that the provision cover compensatory claims. See UNR Industries, 607 F. Supp. 855 . Furthermore, the Hall! Cunningham preemption analogy relied on by the majority does not diminish the strength of these several factors because subsequent authorities have shown that that preemption analogy is incomplete. See Barr Co. v. Safeco Insurance Co. of America, 583 F. Supp. 248, 255 (N.D. Ill. 1984).

Finally, even the majority recognizes the utility of a bad-faith tort cause of ,action in the realm of third-party coverage. 174 Ill. 2d at 525-26. Insureds may be exposed to damages beyond the value of their contract, and for which, otherwise, they may not recover. I am not at all convinced, as is apparently the majority, that the same reasoning fails to hold sway within the context of first-party coverages simply because an insured there can sue for proceeds due under the policy and seek attorney fees and penalties for insurer misconduct limited to $25,000. I can easily conceive of scenarios where, for instance, a small homeowner insured places trust in his first-party coverage property insurer to his detriment at a cost far beyond contract compensatory damages and the provision’s limited statutory penalties. It makes no sense, in terms of the balance of society’s interests, that a small policy insured may have sufficient remedies in one instance, but not in the other.

As a final matter, I would hold, contrary to the majority’s reasoning, that the suit limitation clause here applies to bar plaintiffs attempted fraud action. The clause refers to actions against the insured and is not limited only to actions upon the policy. As a result, this alleged action, whether sounding in fraud, contract, or bad faith, does not survive the bar.