IL Bad Faith Law / Asbestos

CA Bankruptcy Ct. orders CNA to pay IL §155 attorneys’ fees, expenses, prejudgment interest, maximum statutory penalty and policy limits.

The Bankruptcy Court for the Northern District of California awarded the Trustee of the CFB/WFB Liquidation Trust (the “Trust”) extra-contractual damages against Continental Casual Company (“Continental”) under Illinois Insurance Code 215 ILCS 5/155 for vexatious and unreasonable conduct due to its failure to provide coverage for asbestos claims.  The Trustee was represented by FrankGecker LLP, Chicago.

The Trustee filed a complaint against Continental seeking damages for breach of contract and declaratory relief regarding the interpretation of the Joint Chapter 11 Plan of debtors CFB Liquidating Corporation and WFB Liquidating Corporation (the “Plan” and “Debtors”), plus extra-contractual damages under §155.  The Debtors were defendants in numerous asbestos personal injury and wrongful death lawsuits. When the Debtors filed for bankruptcy in 2001, they settled with all of their solvent third party liability insurers, except for Continental.  The settlements were incorporated into the Plan and these insurers’ policy proceeds funded the Trust.  Continental did not enter a settlement, but rather agreed to provide coverage for the asbestos claims based on proposals submitted by the Trustee. Between May 2015 and September 2015, the Trustee submitted four proposals to Continental covering 249 claims with a liquidated value sufficient to exhaust Continental’s $2.5 million policy limits.  In each proposal, the Trustee asserted that Continental’s allocated percentage was 100% of each claim.  Continental filed a motion for summary judgment arguing that 100% was not a proper allocation under the Plan.  The court denied Continental’s motion and held that an “allocated percentage” of 100% is a valid allocation and also found that there was no basis to apply equitable contribution.  After losing the summary judgment motion, Continental acknowledged, under penalty of perjury and in open court, that it had lost and proposed that judgment should be entered against it for its coverage obligations.  Continental also argued that the §155 claim should be decided without a trial.

Section 155 provides an extra-contractual remedy for an insured whose insurer’s refusal to recognize liability and pay a claim under a policy is vexatious and unreasonable.  Under Illinois law, in deciding whether an insurer is liable under §155, the court is to consider the totality of the circumstances, including the insurer’s attitude, whether the insured was forced to sue to recover, and whether the insured was deprived of the use of its property. An award under §155 is not appropriate where there is “real, actual, genuine, and not feigned” dispute regarding coverage.

In response to the Trustee’s argument that Continental’s conduct was vexatious and unreasonable, Continental initially argued that an award under §155 was inappropriate because it had taken a legitimate position on the interpretation of the Plan and any delay was not unreasonable.  Shortly before the §155 hearing, Continental hired new counsel, who then turned around and sued the Trustee in state court arguing that “newly discovered evidence” determined that there was no coverage at all for the tendered claims.  After Continental filed multiple unsuccessful motions to delay the bankruptcy court proceedings, the court scheduled the §155 hearing and ordered supplemental briefing.  In the second round of briefing, in contrast to its first position, Continental argued that the §155 issues were not ripe because the coverage issues must first be resolved in state court and “newly discovered evidence” showed there is no coverage for any tendered claims.  The Trustee argued that judicial estoppel and equitable estoppel precluded Continental from changing its position on the coverage issue and that Continental’s “flurry of activity” in the case created unreasonable additional expense and additional unreasonable delay. The court agreed with the Trustee: “[Continental’s] current effort to rewrite this history compels a conclusion that it has vexatiously and unreasonably delayed paying the Tendered Claims.”

The court ruled that, in addition to Continental’s policy limits, the Trustee was entitled to recover (1) attorney’s fees for both FrankGecker LLP and local counsel, Cooper White & Cooper LLP; (2) the maximum penalty amount allowed under §155, $60,000; and (3) prejudgment interest of $202,371.96 plus $344.17 per day after August 10, 2017 until judgment entered. In re CFB Liquidating Corporation, f/k/a Chicago Fire Brick Co., No. 01-45483 (Bankr. N.D. Cal. Nov. 16, 2017).