Illinois – $7M Bad Faith Settlement Not Covered Due to Insufficient Notice and Voluntary Payment

District Court directs verdict against Horace Mann and in favor of professional liability insurer

An Illinois federal court, applying Illinois law, issued a directed verdict that the insured, Horace Mann Insurance Company (“Horace Mann”), an automobile insurance provider, did not satisfy the notice requirement under its professional liability insurance policy issued by Lexington Insurance Company (“Lexington”).    Because the notice requirement was a condition precedent to coverage, the court held that Lexington did not have a duty to indemnify Horace Mann for a $7 million settlement Horace Mann executed in April 2011 after originally failing to settle the claim for its policy limits of $25,000.

The coverage dispute arose from a car accident between Christopher Drake (“Drake”), who had an auto policy with Horace Mann, and Joseph Burley (“Burley”).  Burley was severely injured in the accident.  Horace Mann received a written offer from Burley’s attorney to settle the claim for the bodily injury limits of Drake’s Horace Mann policy.  The claim was not settled.  On August 14, 2008 Horace Mann received a copy of the lawsuit.  A jury returned a $17 million dollar verdict in favor of Burley.  On March 3, 2011, after the verdict, but while post-trial motions and appeal was pending, Horace Mann received an email from Burley’s attorney which proposed settlement and threatened “bad faith litigation.” Horace Mann then settled with Burley for $7 million.  Horace Mann looked to Lexington to cover the $7 million settlement under Horace Mann’s E&O policy with Lexington.

The dispute between the parties hinges on the definition of a “Claim.”   Under the policy, Lexington agreed to “pay the Loss of the Insured arising from a Claim first made against the Insured during the Policy Period and reported in writing to the Company during the Policy Period … for any actual or alleged Wrongful Act of the Insured in the rendering of or failure to render Professional Services.”  The policy defines a “Claim” as:  “1. A written demand for monetary damages; or 2. A judicial, administrative, arbitration, or other alternative dispute proceeding in which monetary damages are sought. “  For Lexington to have a duty to indemnify Horace Mann, Horace Mann had to notify Lexington in writing of a Claim made against it “as soon as practicable.”  The policy provided for written notice if the insured believed a Claim might arise, even if a Claim had not yet been filed.

On January 11, 2011, Horace Mann’s insurance broker sent a letter on behalf of Horace Mann to Lexington “to comply with the Policy’s notice provisions outlined in Section 9, Notice of a Potential Claim.”’  Lexington then set up a case file for Horace Mann with the first note written on January 13, 2011 stating “Potential E AND O Claim.”  After receiving the entire Burley litigation case file from Horace Mann, Lexington noted on March 8, 2011 that “it appeared that there was a problem with notice.” Lexington sought a determination that it had no duty to indemnify Horace Mann.

The district court first determined that the written demand that Horace Mann received from Burley’s counsel on March 3, 2011 constituted a “Claim” under the policy and triggered the corresponding contractual duty for Horace Mann to inform Lexington about the Claim.  Horace Mann then argued that oral notice of the March 3, 2011 Claim was sufficient because Lexington had already received written notice of the potential claim on January 11, 2011.  There was no dispute that oral notice was given on March 7th; however, the court held that oral notice did not satisfy the specific notice requirements under the policy.  According to the court, under Illinois law, notice provisions are strictly enforced and that prejudice is not required to eliminate a coverage obligation.  The court also found Lexington did not have a coverage obligation to Horace Mann because Horace Mann did not receive written consent from Lexington prior to settling the claim.   Lastly, the court determined that even though Horace Mann communicated with Lexington via email about the Burley case between March 3, 2011 and the April 7, 2011 date of settlement, a reasonable jury would not be able to find any of the communications rose to the level of notice required under the policy.  The court held: “Because Horace Mann settled its case with Burley before it provided Lexington with contractually compliant Notice, the Court finds that Lexington has no duty to indemnify Horace Mann.”   Lexington Ins. Co. v. Horace Mann Ins. Co.  No. 11 CV 2352 (May 13, 2016).

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