7th Cir. / Rule 26 Insurance Disclosures

No Independent Cause of Action for Deficient FRCP 26 Disclosures Even if Induced Settlement

The 7th Circuit, in an opinion written by Judge Brennan, reversed the district court and held that failure to disclose insurance coverage under Federal Rule of Civil Procedure 26 cannot give rise to a cause of action for negligent misrepresentation about available insurance coverage.

A fatal car accident in a construction zone led to a personal injury lawsuit against Southern Illinois Asphalt Company and E. T. Simonds Construction Company, the companies repaving the highway where the accident occurred.  The personal injury lawsuit settled, but the plaintiffs sued again, alleging the companies each misrepresented its insurance coverage.  The jury agreed with the plaintiffs and returned a verdict for over $8 million.  On appeal, the Seventh Circuit reversed the judgment and remanded for further proceedings.

In the first lawsuit, the plaintiffs alleged the two construction companies had created unreasonably dangerous conditions, failed to erect appropriate barricades, and not warned of dangers created by the repaving, causing the crash.  The defendants’ initial disclosures under Federal Rule of Civil Procedure 26 disclosed that the two companies were operating as a joint venture with a $1 million liability insurance policy; no policies were listed for the companies individually.  The plaintiffs’ attorney made a $1 million settlement demand of the joint venture.  The defendants agreed to the demand; and plaintiffs signed a release of all claims against the defendants individually and as a joint venture.

Four years later, the plaintiffs learned that each of the two construction companies carried its own separate liability policies.  The plaintiffs filed a second lawsuit alleging misrepresentation and fraud contending that the defendants violated Rule 26 by misrepresenting “the existence of liability insurance policies potentially available to pay for any judgment.”  The parties filed cross motions for summary judgment.  The district court granted plaintiffs’ motion in part, ruling as a matter of law that:  defendants’ failure to identify and provide their individual insurance policies with their initial disclosures or at any time before settlement violated Rule 26, and that the undisclosed individual policies would have afforded coverage for plaintiffs’ claims; and no joint venture agreement existed between the construction companies.  The district court also granted plaintiffs’ motion in limine, which precluded the defendants from presenting evidence that its attorney was not negligent and acted reasonably.

After settling with E. T. Simonds Construction Company, the plaintiffs went to trial solely on their claim that Southern Illinois Asphalt negligently misrepresented in its Rule 26 initial disclosure the existence of liability insurance policies potentially available to pay damages.  Based on the district court’s prior rulings, the only issues before the jury were whether Southern Illinois Asphalt’s attorney intended to induce plaintiffs to settle when he sent the disclosures and any resulting damages.  The jury returned a verdict for plaintiffs and assessed damages of more than $8 million.

On appeal, Southern Illinois Asphalt challenged that a negligent misrepresentation claim under Illinois law can be predicated on an incomplete discovery disclosure under Rule 26.  Under Illinois law, the sixth element of negligent misrepresentation is a duty on the party making the statement to communicate accurate information.  The district court concluded, and plaintiffs argued on appeal, that while the underlying cause of action is premised on Illinois state law, the duty of care is set by Federal Rule of Civil Procedure 26.  The Seventh Circuit disagreed: “Violation of the federal rules has not been policed by permitting them to serve as the duty component of a state law negligence claim.”  The Seventh Circuit found “it was legal error for the district court in the second lawsuit to allow plaintiffs’ negligence claim to proceed when it relied on a Federal Rule of Civil Procedure for a duty of care.”  Thus, according to the Seventh Circuit, violation of Rule 26 does not give right to a private cause of action for negligent misrepresentation.

Due to the number of errors before, during, and after the trial for the case, the Seventh Circuit reversed the district court’s judgment in its entirety and remanded the case for further proceedings consistent with the opinion.  Turubchuk v. Southern Illinois Asphalt Company, Inc., Case No. 18-3507 (7th Cir. Apr. 29, 2020).