The Journal of The DuPage County Bar Association

Back Issues > Vol. 28 (2015-16)

Does Illinois Recognize A Cause Of Action For Bad Faith Against An Insurer?
By Christine McTigue

The phrase “bad faith” is inevitably mentioned in a contentious dispute involving an insurance policy. But does a cause of action for bad faith exist in Illinois? If so, who is entitled to recover and what are the damages that can be awarded? A complete discussion would be beyond the scope of this short article, but below are some guidelines regarding bad faith actions in Illinois.

The Analysis Starts With Section 155. Prior to the enactment of section 155 of the Insurance Code, 215 ILCS 5/155, an insured’s only remedy to recover policy proceeds was to file a breach of contract action against its insurer.1 Section 155, which provides an additional remedy if an insurer’s conduct is vexatious and unreasonable, provides: 1. In any action by or against a company wherein there is in issue the liability of a company on a policy or policies of insurance or the amount of the loss payable thereunder, or for an unreasonable delay in settling a claim, and it appears to the court that such action or delay is vexatious and unreasonable, the court may allow as part of the taxable costs in the action reasonable attorney fees, other costs, plus an amount not to exceed any one of the following amounts:

A. 60% of the amount which the court or jury finds such party is entitled to recover against the company, exclusive of all costs;
B. $60,000;
C. The excess of the amount which the court or jury finds such party is entitled to recover, exclusive of costs, over the amount, if any, which the company offered to pay in settlement of the claim prior to the action...2

The remedies provided in section 155 are only available to the insured or its assignee.3 An injured person is not entitled to seek section 155 relief against a defendant’s insurance company.4 An insured can seek relief under section 155 in a first-party coverage case, such as uninsured motorist benefits or a property loss claim.5 The insured can also seek section 155 relief in a case in which the insurer fails to defend the insured under a liability policy.6 If no benefits are owed under the policy, however, an insurer cannot be liable under section 155.7

It is well-settled that a bona fide dispute as to coverage is a defense to a section 155 claim.8 “Bona fide” is defined as real, actual, genuine and not feigned.9 When an insurer reasonably relies upon evidence sufficient to form a bona fide defense, the insurer has not acted unreasonably or vexatiously.10 Furthermore, an insurer is not liable under section 155 if it litigates and loses the issue of coverage.11 As examples of coverage disputes that are not bona fide, one court found that a bona fide defense to coverage did not exist because of “clear” precedent against the insurer.12 Another court found a bona fide dispute did not exist because there was no evidence to support the insurer’s defense that the insured committed fraud.13

The key question in a section 155 dispute is whether the insurer’s conduct was unreasonable and vexatious.14 The totality of the circumstances is considered. Neither the length of time, the amount of money involved, nor any other single factor is dispositive.15 The court can consider the insurer’s attitude, whether the insured was forced to file suit to recover, and whether the insured was deprived of the use of its property.16 The holdings of the cases involving section 155 are as different as the facts presented. For example, in a case involving uninsured motorist benefits, the court found that a section 155 violation existed where the insurer moved to stay the arbitration; refused to pay the award requiring the plaintiff to file suit; and failed to appeal or pay the judgment within 30 days, forcing the plaintiff to file a collection proceeding.17

In another case, the insured died in a car accident that occurred a few days before paying a delinquent premium on her life insurance policy. The beneficiary was her minor daughter. After initially denying the claim due to confusion as to whether the policy had lapsed, the insurer agreed to pay the claim if a trust was established for the minor beneficiary. The minor’s attorney refused payment and filed suit. The appellate court affirmed the trial court’s judgment in favor of the insurer on the section 155 claim.18

The damages recoverable as enumerated in section 155 are reasonable attorney fees, other costs, plus an amount not to exceed any one of the following amounts: 60% of the amount which the court or jury finds such party is entitled to recover against the company, exclusive of all costs; $60,000; or the excess of the amount which the court or jury finds such party is entitled to recover, exclusive of costs, over the amount, if any, which the company offered to pay in settlement of the claim prior to the action.19

In addition, if the insured was required to file a declaratory judgment action to seek relief under section 155, the insured can recover attorney fees incurred in both the underlying case and the declaratory action.20 This is contrary to the usual rule that an insured cannot recover attorney fees incurred in prosecuting or defending a declaratory judgment action.21 There are two important lessons to learn about section 155. The first is that a bona fide dispute as to coverage is a defense. Courts have consistently followed this rule. A defense to coverage is bona fide even if the insurer is ultimately not successful. The second lesson is that an insurer’s conduct must be vexatious and unreasonable to support a claim for relief. Mere delay in payment of a claim is not enough to warrant section 155 penalties.

An Insurer’s Bad Faith Failure To Settle Within Policy Limits. The insurer’s duty to defend arises from that obligation as stated in an insurance policy.22 Pursuant to this duty to defend, the defense of the case and settlement negotiations are in the insurer’s hands.23 An insurer’s “duty to settle” arises because of the insurer’s exclusive control over settlement negotiations and defense of litigation.24 An insurance company, therefore, has a duty to act in good faith in responding to settlement offers.25 This duty exists because the insured has no contractual remedy under the policy if the insurer declines to settle and an excess judgment is entered against the insured.26

The duty to settle arises where there is a reasonable probability of recovery in excess of the policy limits and a reasonable likelihood of a finding of liability against the insured.27 On the other hand, if the settlement demand exceeds the policy limits, no claim for bad faith exists.28 If the insurer breaches the duty to settle, it may be liable for the entire judgment entered against the insured, including any amount in excess of the policy limits.29 The Illinois Supreme Court outlined the cause of action for bad faith failure to settle in Haddick v. Valor Insurance.30

The plaintiff must allege facts sufficient to establish the existence of a duty to settle in good faith. This duty arises once a third-party claimant has made a settlement demand within policy limits and at the time of the demand, there is a reasonable probability of recovery in excess of policy limits and a reasonable probability of a finding of liability against the insured. Whether this duty was breached is a question of fact.31 As to the “reasonable probability” standard, the insured must plead facts that demonstrate liability was probable, as opposed to merely possible.32 One court has gone so far as to enumerate seven factors to be considered in a bad faith failure to settle claim: advice of the insurer’s adjusters, refusal to negotiate, advice of defense counsel, communication with the insured, inadequate investigation and defense, substantial prospect of an adverse verdict, and a potential damage award in excess of policy limits.33 This court also held that punitive damages are recoverable in a failure to settle case.34

The Cramer Decision And Common Law Bad Faith—Does It Exist? Notwithstanding the above remedies, the question remains whether Illinois recognizes a common law cause of action for bad faith by an insured against an insurer. In Cramer v.Insurance Exchange Agency,35 the Illinois Supreme Court declined to recognize such a tort.

Steven Cramer purchased a homeowner’s policy from Economy Fire and Casualty. He filed a theft claim. Economy claimed that it canceled the policy before the loss occurred. Cramer filed suit alleging that he never received notice of the cancellation and that Economy used the cancellation to defraud him of his coverage. The circuit court certified the question for review whether section 155 preempts a common law fraud action for denying a claim. The supreme court held that section 155 does not preempt a separate and independent tort action involving insurer misconduct but the tort of bad faith is not a separate and independent tort that is recognized in Illinois.36

The court first discussed the remedy provided by section 155. Prior to its enactment, an insured’s only recourse to receive policy proceeds was to file a breach of contract action, in which punitive damages and attorney fees are not available. Section 155 created a limited exception to this rule. The legislature recognized that a contractual remedy may not be sufficient and enacted section 155 to provide an extracontractual remedy for insurer misconduct that is vexatious and unreasonable. Section 155 provides the remedy to policyholders for insurer misconduct that does not rise to the level of a well-established tort.37 The court went on to state that to allow a bad faith action would transform many breach of contract actions into tort actions and would encourage plaintiffs to sue in tort to avoid suit limitation clauses and the cap on section 155’s remedies. The court concluded that an insurer’s conduct may give rise to both a breach of contract and separate tort action. However, mere allegations of bad faith or unreasonable and vexatious conduct without more do not constitute such a tort. In cases where a plaintiff alleges and proves the elements of a separate tort, such as common law fraud, such an action may be brought.38

An issue that has arisen after Cramer is whether section 155 preempts a claim under the Illinois Consumer Fraud and Deceptive Business Practices Act. The courts are split, not as a question of law but based upon the facts of the particular case. One court has held that section 155 did not preempt a consumer fraud act claim because the plaintiff pled a claim separate and apart from a breach of contract claim against the insurer.39 On the other hand, another court held that the consumer fraud claim was preempted because the plaintiff had a contractual remedy.40 Yet another court held that the consumer fraud act claim was preempted because the insurer’s conduct was not deceptive or unfair.41

If the insured cannot maintain a bad faith claim against its insurer, can an injured claimant maintain an action for bad faith against the tortfeasor’s insurer? The answer is no, for two reasons. First, the public policy of this State precludes the injured party from maintaining a direct action against an insurer prior to a judgment being entered against the insured.42 Second, the duty of good faith extends to the insured, not to an injured third party.43

Conclusion. Illinois does not recognize a common law cause of action for bad faith against insurance companies. Illinois does, however, recognize “bad faith” remedies in a variety of situations, but these remedies are limited to an insured’s recovery against its insurer, either under section 155, for failure to settle, or another well-established tort remedy.

1. Cramer v. Insurance Exchange Agency, 174 Ill.2d 513, 519, 675 N.E.2d 897 (1996).
2. 215 ILCS 5/155(1).
3. Garcia v. Lovellette, 265 Ill.App.3d 724, 728, 639 N.E.2d 935 (2d Dist. 1994).
4. Yassin v. Certified Grocers of Illinois, Inc., 133 Ill.2d 458, 466, 551 N.E.2d 1319 (1990).
5. Estate of Price v. Universal Cas. Co., 322 Ill.App.3d 514, 750 N.E.2d 739 (1st Dist. 2000); Valdovinos
v. Gallant Ins. Co., 314 Ill.App.3d 1018, 733 N.E.2d 886 (2d Dist. 2000).
6. Statewide Ins. Co. v. Houston General Ins. Co., 397 Ill.App.3d 410, 920 N.E.2d 611 (1st Dist. 2009); ThoseCertain Underwriters at Lloyd’s v. Professional Underwriters Agency, Inc., 364 Ill.App.3d 975, 848 N.E.2d 597 (2d Dist. 2006).
7. Johnson Press of America, Inc. v. Northern Ins. Co. of New York, 339 Ill.App.3d 864 (1st Dist. 2003).
8. Golden Rule Ins. Co. v. Schwartz, 203 Ill.2d 456, 786 N.E.2d 1010 (2003).
9. American States Ins. Co. v. CFM Const. Co., 398 Ill.App.3d 994, 1003 (2d Dist. 2010).
10. Illinois Founders Ins. Co. v. Williams, 2015 IL App (1st) 122481 ¶31 N.E.3d 311.
11. Mobil Oil Corp. v. Maryland Cas. Co., 288 Ill.App.3d 743, 751-52 (1st Dist. 1997).
12. Janes v. Western States Ins. Co., 335 Ill.App.3d 1109, 783 N.E.2d 37 (5th Dist. 2001).
13. Myrda v. Coronet Ins. Co., 221 Ill.App.3d 482, 582 N.E.2d 274 (2d Dist. 1991).
14. John T. Doyle Trust v. Country Mut. Ins. Co., 2014 IL App (2d) 121238 ¶28, 8 N.E.3d 490.
15. Rosalind Franklin Univ. of Medicine v. Lexington Ins. Co., 2014 IL App (1st) 113755 ¶110, 8 N.E.3d 20.
16. Cook ex rel. Cook v. AAA Life Ins. Co., 2014 IL App (1st) 123700 ¶48, 13 N.E.3d 20.
17. Estate of Price v. Universal Cas. Co., 322 Ill.App.3d 514, 750 N.E.2d 739 (1st Dist. 2000).
18. Cook ex rel. Cook v. AAA Life Ins. Co., 2014 IL App (1st) 123700, 13 N.E.3d 20.
19. 215 ILCS 5/155(1).
20. Statewide Ins. Co. v. Houston General Ins. Co., 397 Ill.App.3d 410, 920 N.E.2d 611 (1st Dist. 2009).
21. Westchester Fire Ins. Co. v. G. Heileman Brewing Co., 321 Ill.App.3d 622, 637, 747 N.E.2d 955 (1st Dist. 2001).
22. Allstate Ins. Co. v. Amato, 372 Ill.App.3d 139, 865 N.E.2d 516 (1st Dist. 2007).
23. SwedishAmerican Hosp. Ass’n of Rockford v. Illinois State Medical, 395 Ill.App.3d 80, 102, 916 N.E.2d 80 (2d Dist. 2009).
24. Haddick ex rel. Griffith v. Valor Ins., 198 Ill.2d 409, 414-15, 763 N.E.2d 299 (2001).
25. Haddick, 198 Ill.2d at 414.
26. Haddick, 198 Ill.2d at 415.
27. SwedishAmerican Hosp. Ass’n of Rockford v. Illinois State Medical, 395 Ill.App.3d 80 (2d Dist. 2009 (2d Dist. 2009).
28. J ohn Crane, Inc. v. Admiral Ins. Co., 2013 IL App (1st) 1093240-B ¶35, 991 N.E.2d 474 (emphasis added).
29. Haddick v. Valor Ins., 198 Ill.2d at 414 (emphasis added).
30. 198 Ill.2d 409, 414-15, 763 N.E.2d 299 (2001).
31. Haddick, 198 Ill.2d at 419.
32. Powell v. American Service Ins. Co., 2014 IL App (1st) 123643 ¶36, 7 N.E.3d 11.
33. O’Neill v. Gallant Ins. Co., 329 Ill.App.3d 1166, 1172-75, 769 N.E.2d 100 (5th Dist. 2002).
34. O’Neill v. Gallant Ins. Co., 329 Ill.App.3d 1166, 769 N.E.2d 100 (5th Dist. 2002).
35. 174 Ill.2d 513, 675 N.E.2d 897 (1996).
36. Cramer, 174 Ill.2d at 518.
37. Cramer, 174 Ill.2d at 526.
38. Cramer, 174 Ill.2d at 527.
39. Burress-Taylor v. American Sec. Ins. Co., 2012 IL App (1st) 110554, 980 N.E.2d 679.
40. Young v. Allstate Ins. Co., 351 Ill.App.3d 151, 812 N.E.2d 741 (1st Dist. 2004).
41. Cook ex rel. Cook v. AAA Life Ins. Co., 2014 IL App (1st) 123700, 13 N.E.3d 20.
42. Richardson v. Economy Fire and Cas. Co., 109 Ill.2d 41, 485 N.E.2d 327 (1985); Marchlik v.Coronet Ins. Co., 40 Ill.2d 327, 239 N.E.2d 799 (1968).
43. Scroggins v. Allstate Ins. Co., 74 Ill.App.3d 1027, 1036, 393 N.E.2d 718 (1st Dist. 1979).

Christine McTigue has her office in Wheaton. She concentrates her practice in civil appellate law and insurance coverage matters. Christine is on the panel of neutral commercial arbitrators for the American Arbitration Association, and is a court-certified mediator for the law divisions of DuPage and Cook counties. She received her Bachelor of Arts, magna cum laude, from the University of Minnesota and her J.D. from Loyola University of Chicago.

 
 
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