Court Cannot Impose a Duty to Settle on Policyholder With a SIR

The United States Court of Appeals for the Seventh Circuit, in an opinion written by Judge Easterbrook, applying Illinois law, affirmed the district court’s dismissal of North American Elite Insurance Company’s (“North American”) claims for breach of contract, holding that the insured, Menard, Inc. (“Menard”), did not breach its duty to settle or its duty of good faith and fair dealing by denying an initial settlement offer and proceeding to trial.

Menard self-insured up to $2M of damages per its insurance agreement with North American. An additional $1M of damages was covered by Greenwich Insurance Company (“Greenwich”). North American’s umbrella policy covered Menard’s potential liability in excess of $3M and up to $25M. Under Menard’s agreement with Greenwich, it had a duty to settle in “utmost good faith,” and Greenwich retained a right and duty to defend. However, Menard’s agreement with North American did not state that Menard had a duty to settle, and instead stated that North American retained “the right, but not the duty” to defend.

North American alleged that Menard breached its duty to settle by denying an initial settlement offer of $2M in an earlier negligence suit. The resulting judgment was $13M, and North American indemnified Menard for the $10M in excess of the policy’s lower limit of $3M.

North American argued that Menard acted as an insurer by self-insuring the first $2M of damages. Therefore, by refusing to accept the initial settlement agreement, Menard breached its duty to settle. The appellate court reasoned that self-insured parties do not act as insurers, and. as such, they do not have a duty to settle. Since the first $2M of damages was Menard’s responsibility alone, it was not acting as an insurer. Thus, because Menard did not have a duty to settle, it could not have breached it.

North American also argued that Menard’s refusal to settle breached its implied duty of good faith and fair dealing under Illinois law, invoking the language of Menard’s insurance agreement with Greenwich. However, the appellate court explained that since North American was not a party to that contract, it could not reap the benefits of any duties Menard owed to Greenwich and not North American. Additionally, provisions in Menard’s insurance agreement with North American discussed potential settlement while conspicuously omitting any duty to settle. Thus, the implied duty of good faith and fair dealing cannot preempt the language of the actual policy agreement. Finally, North American alleged that Menard committed a general tort by refusing to settle, but the appellate court stated that under Illinois law, no such all-purpose tort exists. Therefore, the appellate court agreed with the district court and affirmed the dismissal of North American’s claims for breach of contract. N. Am. Elite Ins. Co. v. Menard, Inc., 43 F.4th 691 (7th Cir. Aug. 4, 2022).