7th Cir. Bad Faith (IL)

$4.6M award reduced to $25k because plaintiff failed to show the outcome would have been better had the insurer defended

The Seventh Circuit Court of Appeals, in an opinion authored by Justice Easterbrook (joined by Bauer and Rovner), reduced a bad faith judgment from $4.6M plus interest to $25k plus interest.  The action was brought by a plaintiff injured in an auto accident who took an assignment to pursue Liberty Mutual Fire Insurance Company (“Liberty Mutual”) which had insured the vehicle that struck and injured her.  The plaintiff alleged that Liberty Mutual improperly refused to defend the driver of the car in the underlying state-court tort action that resulted in a $4.6M default judgment.

After admonishing the district court for entering an order that did not contain a recital of the relief granted, and for not questioning the possible lack of diversity in the case, the Seventh Circuit found that there was diversity, and based on the reasoning in the body of the underlying opinion, held that the district court intended to award $4.6M plus interest.   For those interested, there is an extended discussion of why 28 U.S.C §1332(c)(1), which defeats diversity jurisdiction in insurance “direct actions,” did not apply in this case.

The Seventh Circuit found that despite the fact that the insurer had conceded it had improperly refused to defend, it was nonetheless not responsible for the entire bad faith judgment.  The court reasoned that the limits of the policy were only $25,000 per person and plaintiff could not establish that defendant’s actions in refusing to defend caused any more than a $25,000 loss.  The court noted that the plaintiff had never even alleged bad faith.  However, even if she had, she needed to show that had Liberty Mutual provided a defense, it would have secured a better outcome.  The court said that Illinois law requires a plaintiff to show that there was bad faith and that it was the proximate cause of the award, or some part thereof.  The Seventh Circuit recited the facts of the underlying case – the car owner’s daughter denied giving the driver permission; the driver was 16 and driving on a restricted license after the 11 p.m. curfew and with too many passengers; she hit two parked cars at high speed; and was criminally convicted for her behavior – and concluded that no amount of lawyering would have resulted in a not guilty verdict.  Also, the court noted that since it was the injured plaintiff’s own attorney that had procured the default judgment, she could not in good faith question the amount awarded.  Finally, the court noted that the underlying lawsuit failed to contain any allegation that the insured actually gave consent to the driver to drive the vehicle as required for coverage under the terms of policy.

The Seventh Circuit reduced the bad faith award to $25k, the limit of the policy, and ordered the insurer to pay post-judgment interest on the award.  Hyland v. Liberty Mut. Fire Ins. Co., No. 17-2712 (7th Cir. Mar. 15, 2018).