Illinois Insurance Law Seminar
Illinois State Bar Association: Insurance Law Section Council
Moderator George Leynaud
Chicago 10/09/06
Collinsville 11/09/06

Causes of Action Against Insurers
Scott A. Blumenshine © Copyright 2006
Law Offices of Meyer and Blumenshine

Review of policyholder actions against insurers. Highlight of statutes and significant cases which identify, delineate and discuss theories of recovery. Materials include citation to statutory and case law.

Suing insurance companies in the Land of Lincoln, State Farm, Allstate, Kemper, Safeway, Founders and others

In an insurance contract, an insured pays money to an insurer now in exchange for the insurers' promise that they will protect the insured in the future.

What is the insured buying?

What is the insurer's motivation to pay?

What are the insured's options when the insurer does not pay?

1. Declaratory Judgment

   735 ILCS 5/2 701

   (a) ...The court may, in cases of actual controversy, make binding declarations of rights, having the force of final judgments, whether or not any consequential relief is or could be claimed, including the determination, at the instance of anyone interested in the controversy, of the construction of any ......contract or other written instrument, and a declaration of the rights of the parties interested.

   (b) Declarations of rights, as herein provided for, may be obtained by means of a pleading seeking that relief alone, or as incident to or part of a complaint, counterclaim or other pleading seeking other relief as well, and if a declaration of rights is the only relief asked, the case may be set for early hearing as in the case of a motion.

2. Breach of Contract
   1. Actual damages - policy benefits

      eg. vehicle theft = vehicle value or replacement cost
      home damage = cost to repair

      
      
      
   2. Consequential damages - foreseeable damages

      remember Hadley v Baxendale - forseeability
      eg. vehicle theft = transportation costs
      home damage = rental housing costs during repair attorneys fees, litigation costs

   Clark v. Standard Life & Accident Insurance Co. 68 Ill.App.3d 977, 386 N.E.2d 890

   Contracts of insurance are to be judged by the same legal principles as any other contract. (See, e. g., Rivota v. Kaplan (1977), 49 Ill.App.3d 910, 7 Ill.Dec. 176, 364 N.E.2d 337.) In Illinois, when a breach of contract, without more, is alleged, the injured party is to be put in as good a position as he would have been had the contract been fully performed. (Kalal v. Goldblatt Brothers, Inc. (1977), 53 Ill.App.3d 109, 112, 11 Ill.Dec. 120, 122, 368 N.E.2d 671, 673.) And where, as here, it is claimed that an insurer has refused to comply with the provisions of an insurance policy, the measure of damages is usually limited to the contractual amount. (See J. A. Appleman and J. Appleman (1968), 16 Insurance Law and Practice § 8881 at 634.) In select cases, consequential damages may be recovered when they "were reasonably foreseeable and were within the contemplation of the parties at the time the contract was executed" (Kalal at 113, 11 Ill.Dec. at 123, 368 N.E.2d at 674), arising out of special circumstances communicated and known to both parties. See, e. g., Asher v. Reliance Insurance Co. (N.D.Cal.1970), 308 F.Supp. 847; Mitchell v. Intermountain Casualty Co. (1961), 69 N.M. 150, 364 P.2d 856; See also 16 Appleman (1978 pocket part) § 8881 at 303; R. Faletti, Breach, Repudiation and Damages in Contract Litigation Legal and Economic Theory, 1954 U. of Ill.L.F. 615, 632-36.

3. Bad Faith (breach of implied covenant of good faith and fair dealing)
   
   
   1. Failure to Pay

      1) Insurance Code Section 155
      ie. Unreasonable and Vexatious Delay

      (215 ILCS 5/155) (from Ch. 73, par. 767) Sec. 155. Attorney fees. (1) In any action by or against a company wherein there is in issue the liability of a company on a policy or policies of insurance or the amount of the loss payable thereunder, or for an unreasonable delay in settling a claim, and it appears to the court that such action or delay is vexatious and unreasonable, the court may allow as part of the taxable costs in the action reasonable attorney fees, other costs, plus an amount not to exceed any one of the following amounts:
      
      (a) 60% of the amount which the court or jury finds such party is entitled to recover against the company, exclusive of all costs;
      (b) $60,000;
      (c) the excess of the amount which the court or jury finds such party is entitled to recover, exclusive of costs, over the amount, if any, which the company offered to pay in settlement of the claim prior to the action.

      Pursuant to section 155, the court may allow a plaintiff to recover reasonable attorney fees, other costs and a penalty if an insurer's actions or delay in settling a claim is vexatious and unreasonable. 215 ILCS 5/155 (West 1998). These recoverable costs are an "extracontractual remedy intended to make suits by policyholders economically feasible and punish insurance companies for misconduct." McGee v. State Farm Fire & Casualty Co., 315 Ill. App. 3d 673, 681, 734 N.E.2d 144, 151 (2000), citing Cramer, 174 Ill. 2d 513, 675 N.E.2d 682. The relevant inquiry underlying a section 155 claim is "whether an insurer's conduct is vexatious and unreasonable." McGee, 315 Ill. App. 3d at 681, 734 N.E.2d at 151. We will not reverse a trial court's finding regarding whether an insurer's conduct is vexatious and unreasonable absent an abuse of discretion. McGee, 315 Ill. App. 3d at 681, 734 N.E.2d at 151.

   2. Tortious Conduct

      Illinois Supreme Court - Cramer v Farmers

      "We hold that section 155 does not preempt a separate and independent tort action involving insurer misconduct."

      "Section 155 was enacted in 1937, as part of a major revision of the Illinois Insurance Code. In its original version, known as section 767, it allowed an award of attorney fees, up to a maximum of $500, if an insurer's refusal to pay a claim was "vexatious and without reasonable cause." Ill.Rev.Stat.1937, ch. 73, par. 767. Under the statute, a plaintiff could seek limited attorney fees, in addition to an action to recover the policy proceeds. Before the statute was enacted, a plaintiff could not seek an award of attorney fees, regardless of the bad faith of the insurer. The purpose of the statute was to provide a remedy for insurer misconduct:

      "Although some companies are very liberal in the payment of claims, this is by no means true of all. In the absence of any allowance of attorneys' fees, the holder of a small policy may see practically his whole claim wiped out by expenses if the company compels him to resort to court action, although the refusal to pay the claim is based upon the flimsiest sort of a pretext. The strict limit on the amount allowable makes the section significant only for small claims. It should prove wholesome in its effect upon companies unreasonably withholding payment of such claims. It is doubtful if there are many judges who would allow such fees when the defense was bona fide although deemed inadequate." H. Havinghurst, Some Aspects of the Illinois Insurance Code, 32 Ill. L.Rev. 391, 405 (1937).

      Since 1937, the statute has been amended several times...

      Before the statute was enacted, a policyholder's only recourse was to seek a breach of contract action to receive the policy proceeds. Attorney fees and punitive damages are generally not available in breach of contract actions. Section 155 created a limited statutory exception to this rule. It was intended to make suits by policyholders economically feasible and to punish insurers. UNR Industries, Inc., 607 F.Supp. at 866. By enacting and amending the statute, the legislature has expanded plaintiff's relief to include reasonable attorney fees, costs, and a limited penalty, in addition to a breach of contract action to recover the amount due under the policy. The legislature has steadily amended the statute to allow an increasingly greater recovery for unreasonable and vexatious insurer misconduct."

      The statute was amended effective January 2004, in part through the efforts of the ISBA and members of the Insurance Law Section Council, to provide penalties up to $60,000.00, or 60% of the amount at issue.

   3. Failure to settle

      1) Actual damages - full verdict amount

      2) Punitive damages O'Neill v Gallant

4. Consumer Fraud and Deceptive Practices Act - 815 ILCS 505/2
   
   
   1. Scope of the Consumer Fraud Act

      Section 2 of the Consumer Fraud Act provides that "deceptive acts or practices *** or the concealment, suppression or omission of any material fact, with intent that others rely upon the concealment, suppression or omission of such material fact *** in the conduct of any trade or commerce are hereby declared unlawful ***." 815 ILCS 505/2 (West 1998). Section 10a(a) of the Act authorizes private causes of action for practices proscribed by section 2.

      Section 10a(a) states, in pertinent part: "Any person who suffers actual damage as a result of a violation of [the] Act committed by any other person may bring an action against such person." 815 ILCS 505/10a(a) (West 1998). To prove a private cause of action under section 10a(a) of the Act, a plaintiff must establish: (1) a deceptive act or practice by the defendant, (2) the defendant's intent that the plaintiff rely on the deception, (3) the occurrence of the deception in the course of conduct involving trade or commerce, and (4) actual damage to the plaintiff (5) proximately caused by the deception. Oliveira, 201 Ill. 2d at 149.

   2. Burden of Proof - Avery v State Farm (Il Sp Ct)

      "The Consumer Fraud Act does not expressly provide the standard of proof required to succeed in a private cause of action. However, as noted, the Act is to be liberally construed to effect its purpose, which is to provide broader protection to consumers than an action for common law fraud.

      Accordingly, based on the liberal intent of the legislature behind the Act, and based on the fact that the Act does not expressly require a greater standard of proof, the appellate court has held that the appropriate standard of proof for a statutory fraud claim is preponderance of the evidence. See Cuculich v. Thomson Consumer Electronics, Inc., 317 Ill. App. 3d 709, 717-18 (2000); Malooley v. Alice, 251 Ill. App. 3d 51, 56 (1993)."

      In this case, the appellate court agreed with this reasoning and conclusion. 321 Ill. App. 3d at 291. We do likewise and so hold. Cases requiring a clear and convincing standard of proof (see, e.g., General Motors Acceptance Corp. v. Grissom, 150 Ill. App. 3d 62, 65 (1986); Munjal v. Baird & Warner, Inc., 138 Ill. App. 3d 172, 183 (1985)) are overruled on this point."

   3. Young v Allstate - tort claims preempted by Section 155?

      "Allstate further responds that the Consumer Fraud Act claim is preempted by section 155. Allstate contends that the Consumer Fraud Act should not apply to simple breach of contract claims. Golembiewski v. Hallberg Insurance Agency, Inc., 262 Ill. App. 3d 1082, 1093, 635 N.E.2d 452, 460 (1994). Allstate claims that the Consumer Fraud Act establishes a cause of action sounding in tort; however, plaintiffs' claim is premised on a breach of an insurance contract. Allstate contends that a separate tort theory is unnecessary in this case because a contractual remedy is available pursuant to statute. Allstate contends that any tort-based theory of recovery under the Consumer Fraud Act is preempted by section 155.

      We conclude that section 155 preempts plaintiffs' Consumer Fraud Act claim. We recognize that "an insurer's conduct may give rise to both a breach of contract action and a separate and independent tort action." Cramer, 174 Ill. 2d at 528, 675 N.E.2d 904. A plaintiff may bring an independent tort action for insurer misconduct if the plaintiff alleges and proves the elements of the separate tort. Cramer, 174 Ill. 2d at 528, 675 N.E.2d 904. Allegations of an insurer's bad faith or unreasonable and vexatious conduct do not alone constitute a tort. Cramer, 174 Ill. 2d at 528, 675 N.E.2d 897. The supreme court held in Cramer that "irrespective of a statutory remedy, the existence of a contractual remedy would have made the tort theory unnecessary." Voyles v. Sandia Mortgage Corp., 196 Ill. 2d 288, 297, 751 N.E.2d 1126, 1132 (2001), citing Cramer, 174 Ill. 2d 513, 675 N.E.2d 897. In the instant case, plaintiffs brought a breach of contract claim alleging Allstate refused to tender the amount due under the insurance contract. Based on Cramer, a separate tort claim is not necessary and is inapplicable in the present case because a contractual remedy is available to plaintiffs."

5. Estoppel, Waiver, Mend the Hold

   Alternative theories binding insurers to prior statements or conduct.

   Illinois Improper Claims Practices Act - no private cause of action, but violation of Act properly considered as evidence of breach of standard of care.

   (215 ILCS 5/154.5) (from Ch. 73, par. 766.5)
   Sec. 154.5. Improper Claims Practices) It is an improper claims practice for any domestic, foreign or alien company transacting business in this State to commit any of the acts contained in Section 154.6 if:
   (a) it is committed knowingly in violation of this Act or any rules promulgated hereunder; or
   (b) It has been committed with such frequency to indicate a persistent tendency to engage in that type of conduct.
   (Source: P.A. 80 926.)

   (215 ILCS 5/154.6) (from Ch. 73, par. 766.6)
   Sec. 154.6. Acts constituting improper claims practice. Any of the following acts by a company, if committed without just cause and in violation of Section 154.5, constitutes an improper claims practice:
   (a) Knowingly misrepresenting to claimants and insureds relevant facts or policy provisions relating to coverages at issue;
   (b) Failing to acknowledge with reasonable promptness pertinent communications with respect to claims arising under its policies;
   (c) Failing to adopt and implement reasonable standards for the prompt investigations and settlement of claims arising under its policies;
   (d) Not attempting in good faith to effectuate prompt, fair and equitable settlement of claims submitted in which liability has become reasonably clear;
   (e) Compelling policyholders to institute suits to recover amounts due under its policies by offering substantially less than the amounts ultimately recovered in suits brought by them;
   (f) Engaging in activity which results in a disproportionate number of meritorious complaints against the insurer received by the Insurance Department;
   (g) Engaging in activity which results in a disproportionate number of lawsuits to be filed against the insurer or its insureds by claimants;
   (h) Refusing to pay claims without conducting a reasonable investigation based on all available information;
   (i) Failing to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed;
   (j) Attempting to settle a claim for less than the amount to which a reasonable person would believe the claimant was entitled, by reference to written or printed advertising material accompanying or made part of an application or establishing unreasonable caps or limits on paint or materials when estimating vehicle repairs;
   (k) Attempting to settle claims on the basis of an application which was altered without notice to, or knowledge or consent of, the insured;
   (l) Making a claims payment to a policyholder or beneficiary omitting the coverage under which each payment is being made;
   (m) Delaying the investigation or payment of claims by requiring an insured, a claimant, or the physicians of either to submit a preliminary claim report and then requiring subsequent submission of formal proof of loss forms, resulting in the duplication of verification;
   (n) Failing in the case of the denial of a claim or the offer of a compromise settlement to promptly provide a reasonable and accurate explanation of the basis in the insurance policy or applicable law for such denial or compromise settlement;
   (o) Failing to provide forms necessary to present claims within 15 working days of a request with such explanations as are necessary to use them effectively;
   (p) Failing to adopt and implement reasonable standards to verify that a repairer designated by the insurance company to provide an estimate, perform repairs, or engage in any other service in connection with an insured loss on a vehicle is duly licensed under Section 5 301 of the Illinois Vehicle Code;
   (q) Failing to provide as a persistent tendency a notification on any written estimate prepared by an insurance company in connection with an insured loss that Illinois law requires that vehicle repairers must be licensed in accordance with Section 5 301 of the Illinois Vehicle Code;
   (r) Engaging in any other acts which are in substance equivalent to any of the foregoing.
   (Source: P.A. 90 340, eff. 8 8 97.)

   TITLE 50: INSURANCE

   CHAPTER I: DEPARTMENT OF INSURANCE
   PART 919 IMPROPER CLAIMS PRACTICE
   SECTION 919.50 REQUIRED PRACTICES FOR ALL INSURANCE COMPANIES

   Section 919.50 Required Practices for all Insurance Companies

   a) The company shall affirm or deny liability on claims within a reasonable time and shall offer payment within 30 days after affirmation of liability, if the amount of the claim is determined and not in dispute. For those portions of the claim which are not in dispute and for which the payee is known, the company shall tender payment within said 30 days.

   1) On first party claims if a settlement of a claim is less than the amount claimed, or if the claim is denied, the company shall provide to the insured a reasonable written explanation of the basis of the lower offer or denial within 30 days after the investigation and determination of liability is completed. This explanation shall clearly set forth the policy definition, limitation, exclusion or condition upon which denial was based. Notice of Availability of the Department of Insurance shall accompany this explanation.

   2) Within 30 days after the initial determination of liability is made, if the claim is denied, the company shall provide the third party a reasonable written explanation of the basis of the denial.

   b) No company shall deny a claim upon information obtained in a telephone conversation or personal interview with any source unless such telephone conversation or personal interview is documented in the claim file.

   c) The company's standards for claims processing shall be such that notice of claim and proofs of loss submitted against one policy issued by that company shall fulfill the insured's obligation under any and all similar policies issued by that company and specifically identified by the insured to said company to the same degree that the same form would be required under any similar policy. If additional information is required to fulfill the insured's obligation under other similar policies, the company may request the additional information. When it is apparent to the company that additional benefits would be payable under an insured's policy upon receipt of additional proofs of loss from the insured, the company shall communicate to and cooperate with the insured in determining the extent of the company's additional liability.

   (STITLE 50: INSURANCE
   CHAPTER I: DEPARTMENT OF INSURANCE
   PART 919 IMPROPER CLAIMS PRACTICE
   SECTION 919.90 IMPROPER PRACTICES OR PROCEDURES - PROPERTY AND CASUALTY COMPANIES

   Section 919.90 Improper Practices or Procedures - Property and Casualty Companies

   a) A claim shall not be denied on the basis of failure to exhibit property unless there is documentation of breach of the policy provisions in the claim file.

   b) No company shall make any statement, written or oral, requiring a liability claimant to complete a proof of loss form, accident description, or release of claim for damages, which indicates that the claimant's rights may be impaired if such forms are not completed within a specified time, unless such statement is given for the purpose of notifying the claimant of the provisions of the statute of limitations.

   c) No company shall advise liability claimants to make claims under their own policies in cases where liability is reasonably clear.

   d) No company shall fail to effect settlement on first party claims on the basis that responsibility for payment should be assumed by other persons or insurers.

   e) No company issuing a motor vehicle insurance policy covering damages to a motor vehicle shall abandon the salvage of a motor vehicle to a towing service and/or storage yard service in lieu of the towing and storage charges, without the agreed permission of the towing service or storage yard service.

   f) No company shall deny a claim for storage charges on actual cash value fire and extended coverage losses when the personal property limits have been exhausted, if coverage exists under additional living expense.

   (Source: Amended at 13 Ill. Reg. 1204, effective January 11, 1989)
   (Source: Amended at 28 Ill. Reg. 9253, effective July 1, 2004)

If your insured client has a case, bring it.