The United States Court of Appeals for the Seventh Circuit, in an opinion by Judge Kanne, interpreting §155 of the Illinois Insurance Code (bad faith), reversed the decision of the district court following a bench trial and instructed the lower court to dismiss the §155 claim in this “admittedly atypical” case.

Creation Supply, Inc. (“CSI”), a seller of writing markers, was sued by a competitor in Oregon for copyright infringement.  CSI tendered the case to Selective InsuranceCompany of Southeast, who refused coverage and filed a declaratory judgment action in Illinois against CSI.  While the Illinois case was pending, CSI settled the Oregon action for $0 and an injunction prohibiting further sales of certain markers.  In the declaratory judgment action, the court granted summary judgment for CSI, finding that Selective owed CSI a defense in the Oregon case.  CSI then filed the instant federal lawsuit against Selective.  The first count claimed that Selective violated §155 by refusing to grant coverage and defend CSI in the Oregon suit and by failing to pay CSI its fees and expenses after having lost the D.J. action.  The second count sought breach of contract and all damages flowing from the breach including consequential damages such as legal fees in pursuing Selective.  The federal district court held a bench trial on the §155 claim and found that the refusal to defend was vexatious and unreasonable and awarded damages in excess of $2.8 million.

On appeal, the Seventh Circuit reversed the entry of judgment in favor of CSI on the §155 claim.  The key language of §155 in dispute states: “In any action by or against a company wherein there is in issue [1] the liability of a company under a policy or policies of insurance or [2] the amount of the loss payable thereunder, or [3] for an unreasonable delay in settling a claim . . . .”  (Emphasis added).  Construing prior Illinois decisions on the subject, the court concluded that §155 relief may be obtained only when one or more of the three issues enumerated in the statute “remains undecided” in the case.  Because the liability of Selective, the amount payable, and whether the delay was unreasonable were decided in the prior cases, §155 damages could not be awarded in the federal court action.  The Seventh Circuit lamented the fact that in the Illinois declaratory action, the circuit court dismissed the §155 claim without prejudice and stated that “CSI’s rights are expressly reserved to maintain its action against Selective in Federal Court”.  Creation Supply, Inc. v. Selective Insurance Company of Southeast, No. 20-2509 (7th Cir. Apr. 26, 2021).