IL App. (2nd Dist.) / Bad Faith

Section 155 sanctions award upheld for insurer’s delay in settling property damage claim

The Illinois appellate court for the Second District, in an opinion written by Justice Burke, held that the circuit court did not abuse its discretion in finding an insurer’s delay in settling property damage claims was unreasonable, vexatious, and deserving of sanctions under 215 ILCS 5/155.  The insurer neither provided a written denial nor completed its investigation and determination of liability.  Moreover, the appellate court found that a dispute over the scope of coverage and the reasonable cost of rebuilding did not excuse the insurer’s lengthy delay and failure to provide an estimate.

Szechwan Garden was a tenant that operated a restaurant in a commercial building owned by Charter Properties, Inc.  (“Charter”).  Rockford Mutual Insurance Company (“Rockford”) insured both Szechwan Garden and Charter.  The building partially collapsed, and Charter submitted a claim to Rockford for the loss of the building and for loss of business income.  Rockford made a few payments to Charter, but then notified Charter that the claims would be “held in abeyance” pending the completion of Rockford’s inspection and investigation.  Rockford rejected the statement of proof of loss as premature because the rebuild was not complete.  Rockford then removed the adjuster from the project without completing a final estimate of loss.  Charter, on its own behalf and as assignee of Szechwan Garden, sued Rockford for breach of contract and unreasonable and vexatious delay in settling the first party claims under Section 155.

Rockford stipulated that the policies covered the collapse, but the parties disagreed over the amount of liability.  Ultimately, a jury found that Rockford breached the insurance contracts and the circuit court judge held that Rockford acted in bad faith under Section 155.  Section 155 provides that an insured may collect attorney fees and costs where an insurer creates a “vexatious and unreasonable” delay in settling a claim.  The circuit court found that Charter encountered unnecessary difficulties from Rockford’s withholding of policy benefits.  In addition to lost rental income and building loss, the circuit court awarded Charter $27,692 for “other costs,” $48,784 for attorney fees, and $30,697 in penalties under Section 155.  The court also awarded $24,148 in interest.

Rockford appealed.  After determining that the abuse of discretion standard was appropriate, the appellate court upheld the trial court’s ruling.  Charter’s expert testified that despite the parties’ disagreement over the cost of the project, Rockford needed to estimate the damages and propose a settlement amount.  According to the Illinois Administrative Code, an insurer must affirm or deny liability on a claim within a reasonable time and must offer payment within 30 days after affirmation of liability for the portions of the claim that are not in dispute.  The insurer must also provide an insured a reasonable written explanation of the basis of a lower offer or denial within 30 days after the insurer’s investigation and determination of liability is completed.  The appellate court found Rockford’s failure to provide a written explanation or a denial and its failure to complete the investigation and determination of liability was evidence to support the Section 155 claim.

Rockford contended that Section 155 sanctions did not apply because there was a bona fide dispute over the scope of coverage and the reasonable cost of rebuilding.  The appellate court disagreed and found that the long duration of the negotiations and Rockford’s stalling tactics supported the trial court’s decision.  “If insurance claims were commonly handled as [Rockford] did this one, an insured would be compelled to repair the damage without knowing the extent to which the insurer would cover the cost.”  The appellate court remanded to the circuit court to assess and award reasonable attorney fees and costs that Charter incurred in defending the posttrial motion and appeal.

Justice McLaren concurred with the opinion finding that while the outcome of the case was correct, the proper standard of review regarding whether there was a bona fide dispute was whether the ruling was manifestly erroneous.  Charter Props. v. Rockford Mut. Ins. Co., 2018 IL App (2d) 170637 (Nov. 8, 2018).