Insurer Ordered to Pay $2.8M in Bad Faith Damages 

The United States District Court for the Northern District of Illinois, in an opinion by Judge Charles P. Kocoras, applying Illinois law, ordered an insurer to pay $2.8 million in bad faith damages for seven years of defense and other expenses incurred by its insured in defending an underlying suit and seeking coverage from the insurer. Pursuant to 215 ILCS 5/155 (“Section 155”), the court found that the conduct of the insurer, Selective Insurance Co. of the Southeast (“Selective”), was “vexatious and unreasonable” when it declined coverage for its insured, Creation Supply, Inc. (“CSI”), for trade dress infringement. The declination was based, in part, on Selective’s own investigation into the merits of the underlying suit.

CSI was sued by Too Marker, Inc. in Oregon for trade dress infringement in 2012. Selective denied coverage, in part due to its own assessment of the merits of the underlying suit. CSI and Too Marker settled in 2013, with CSI incurring approximately $200,000 in defense costs. Meanwhile, CSI and Selective engaged in a protracted legal battle over Selective’s defense and indemnification obligations to CSI. Ultimately, in an action brought by CSI under Section 155, the District Court ruled in a bench trial that Selective’s actions were vexatious and unreasonable, and Selective owed CSI damaged under Section 155. 

Judge Kocoras held that the damages owed under Section 155 included not just the defense of the underlying suit, but all costs necessary to place “the insured in as good a position as he would have been had the insurer paid the value of the claim when requested.”  Thus, in addition to the original complaint filed in Oregon by Too Marker the following actions were all found to be relevant to Section 155 damages: Selective’s Illinois Declaratory Judgment Complaint; CSI’s Illinois case against Too Marker stemming from the Oregon case; CSI’s Illinois case against the supplier of the accused products in the Oregon action for implied warranty of noninfringement and indemnification; Selective’s appeal of the Illinois Circuit Court judgment that Selective had a duty to defend; and CSI’s Illinois defensive crossclaims against the supplier of the accused products in the Oregon action. 

Selective argued several theories to reduce the damages, including arguing (among other things) that the damages were disproportionate to the underlying defense costs, that the costs included were too broad, and that some of CSI’s litigation was unreasonable and unnecessary. The court rejected each argument and pointed out that Selective’s predicament was of its own making: it had tried “to fight CSI at virtually every turn,” thus making all of CSI’s litigation expenses necessary and reasonable. “If an insurance company was free to decide for itself whether an executive of an insured company was guilty of misconduct based merely on an allegation of a court-filed complaint, there would be precious few cases in which coverage would be offered under the terms of any insurance policy.” The court also relied on the fact that Section 155 damages are extra-contractual remedies, and are explicitly punitive in nature, in determining that the full $2.8 million was appropriate under Section 155.

The court also noted that part of the litigation battle between CSI and Selective remained open. CSI had prevailed on a breach of contract claim against Selective, and the damages portion of that trial was yet to be conducted. The court gave leave to CSI to supplement its bad faith damages with the legal fees incurred during that trial. Creation Supply, Inc. v. Selective Ins. Co. of the Southeast, 14 C 08856 (N.D. Ill. Nov. 12, 2019).