North American Elite Insurance v. Menard, Inc. ( 2022 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 21-1813
NORTH AMERICAN ELITE INSURANCE COMPANY,
Plaintiff-Appellant,
v.
MENARD, INC.,
Defendant-Appellee.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 19 C 6528—Sara L. Ellis, Judge.
____________________
ARGUED MARCH 30, 2022—DECIDED AUGUST 4, 2022
____________________
Before EASTERBROOK, WOOD, and HAMILTON, Circuit
Judges.
EASTERBROOK, Circuit Judge. Menard owns and operates a
chain of home improvement stores across the Midwest. On
August 10, 2016, an employee of the store in Morton Grove,
Illinois, hit a customer with a forklift. The customer brought
a negligence suit against Menard and its employee in state
court.
2 No. 21-1813
At the time, Menard carried two levels of personal injury
liability insurance. Menard is responsible for the first $2 mil-
lion per occurrence, which the parties call a self-insured re-
tention. After $2 million, the primary layer of insurance kicks
in and Greenwich Insurance Company covers up to $1 million
of liability. Liability exceeding $3 million (Menard’s responsi-
bility plus Greenwich’s coverage) falls under an umbrella pol-
icy with North American Elite Insurance Company (“North
American”), which covers additional liability up to $25 mil-
lion per occurrence.
The negligence suit did not go well for Menard. On the
first day of trial, the plaintiff offered to se]le for $1,985,000—
at the upper end of Menard’s responsibility. Menard’s law-
yers did not respond to the se]lement offer, even after North
American found out about it and urged them to accept. Just
before verdict, perhaps anticipating an adverse judgment,
Menard entered into a “high-low” se]lement agreement with
the plaintiff, promising to pay at least $500,000 regardless of
the verdict in exchange for capping its payout at $6 million.
The jury returned a $13 million verdict, which was reduced to
a $6 million se]lement under the agreement. North American
indemnified Menard for liability in excess of $3 million, while
reserving its right to seek reimbursement.
North American then brought this action against Menard
in federal court under the diversity jurisdiction. North Amer-
ican is incorporated in New Hampshire and has its principal
place of business in Missouri, while Menard is incorporated
in Wisconsin and has its principal place of business there.
North American contends that Menard violated its duties un-
der Illinois law by rejecting the se]lement offer and proceed-
ing to trial. The district court initially dismissed North
No. 21-1813 3
American’s claims of breach of contract. 491 F. Supp. 3d 333(N.D. Ill. Sep. 30, 2020). A few months later, the district court
dismissed North American’s remaining claims.
The parties argue over whether Menard’s “self-insured re-
tention” makes it an insurer. North American says yes and
contends that Menard therefore is subject to additional re-
sponsibilities. See, e.g., Cramer v. Insurance Exchange Agency,
174 Ill. 2d 513 (1996) (insurer can be sued in tort for failure to
se]le claim). North American’s argument derives from dic-
tum in Lexington Insurance Co. v. RLI Insurance Co., 949 F.3d
1015, 1018 (7th Cir. 2020): “in effect, the Self-Insured Retention
made [the insured] its own primary insurer up to $3 million
per occurrence, with both [insurance policies] providing
forms of excess insurance”. Lexington Insurance used an anal-
ogy to explain the relation among those litigants. It did not
say that a business assumes the legal responsibilities of an in-
surer by bearing some of its own liability. North American
has not cited any Illinois case that supports such a proposi-
tion; if anything, Illinois courts agree that self-insured parties
are not insurers. See Antiporek v. Hillside, 114 Ill. 2d 246 (1986)
(excluding “self-insurance” from statutory definition of insur-
ance “company”); State Farm Mutual Insurance Co. v. Du Page
County, 2011 Ill. App. LEXIS 638 (2d Dist. June 16, 2011) (reject-
ing subrogation of claims because self-insured county was not
“insurer” or “carrier”).
Insurance, by definition, involves mitigating or shifting
risk. Menard’s first $2 million in liability was its own respon-
sibility regardless of the circumstances—in other words, that
amount was not insured. Menard had a $2 million deductible.
See Nicor, Inc. v. Associated Electric & Gas Insurance Services
Ltd., 223 Ill. 2d 407, 413 (2006) (“the insurers’ obligation to
4 No. 21-1813
provide indemnification was subject to a self-insured reten-
tion (SIR), that is, a deductible”). Menard therefore cannot be
an insurer. If Lexington Insurance has anything to say about
cases like this, it’s that a self-insured retention can be difficult
to distinguish from any other form of deductible. See 949 F.3d
at 1022–23. But whatever we call Menard’s payment obliga-
tion, it is not insurance, and North American’s argument must
fail in the absence of supporting Illinois caselaw.
North American’s remaining theories depend on contrac-
tual language, and an examination of the relevant provisions
pre]y much decides this appeal. North American’s policy
contains a few relevant passages:
[North American] will have no duty to defend any “suit” against
[Menard]. [North American] will, however, have the right, but not
the duty, to participate in the defense of any “suit” and the inves-
tigation of any claim to which this policy may apply.
…
[Menard a]grees in writing to: (a) Cooperate with [North Ameri-
can] in the investigation, seRlement or defense of the “suit”; (b)
Immediately send [North American] copies of any … legal papers
received in connection with the “suit”; (c) Notify any other insurer
whose coverage is available to [Menard]; and (d) Cooperate with
[North American] with respect to coordinating other applicable
insurance … .
Now compare the more expansive duties that Menard takes
on in its agreement with Greenwich:
[Menard] shall exercise utmost good faith, diligence and pru-
dence to seRle all claims and “suits” within the Self-Insured Re-
tention … . In the event of a claim or “suit” which in our reasona-
ble judgment may result in payments … in excess of the Self-In-
sured Retention, we [Greenwich] shall have the right and the duty
to defend and may, at our sole discretion, assume control of the
defense or seRlement of such claim or “suit.”
No. 21-1813 5
North American did not exercise its right to participate in the
defense and does not argue that Menard failed to “cooperate”
during litigation. Instead, it suggests that Menard violated its
duties under the Greenwich agreement by rejecting the initial
se]lement offer.
The Greenwich policy requires Menard to act in good faith
during litigation and try to reach se]lements below $2 mil-
lion. But Menard owed that duty to Greenwich, not North
American. Contractual duties are not good as against the
world. See Brunswick Leasing Corp. v. Wisconsin Central, 136
F.3d 521, 530 (7th Cir. 1998) (discussing Illinois law); Robins
Dry Dock Repair Co. v. Flint, 275 U.S. 303, 307–08 (1927)
(Holmes, J.) (contract “imposed no immediate obligation
upon the petitioner to third persons”). If Greenwich believed
that Menard had violated the “good-faith effort to se]le” pro-
vision in its agreement, it could have refused to pay its $1 mil-
lion tier of the damages. North American, however, can no
more enforce Greenwich’s contractual rights than it can those
of Menard’s suppliers. Contracts are usually enforceable only
by the parties who agree to them, and North American has
(rightly) not argued that it is a third-party beneficiary of the
Greenwich–Menard policy. See, e.g., Quinn v. McGraw-Hill
Companies, Inc., 168 F.3d 331 (7th Cir. 1999).
North American insists that the duty of good faith and fair
dealing implied in all Illinois contracts required Menard to
give it the same consideration that Menard had promised to
Greenwich. Yet equating the two duties would disregard the
difference in the policies’ language. In exchange for different
premiums, Menard received different coverage and took on
different duties. The parties could have agreed to a “follow
form” provision that incorporates the same terms into both
6 No. 21-1813
primary and secondary layers of insurance. See, e.g., Wiscon-
sin Local Government Property Insurance Fund v. Lexington In-
surance Co., 840 F.3d 411, 415 (7th Cir. 2016). Instead, part of
Menard’s negotiations with North American involved reserv-
ing more control over its litigation strategy. Respect for the
parties’ agreements requires us to take seriously the different
bargains they consented to. Both of Menard’s policies refer-
ence se]lement and envisage future lawsuits, so North Amer-
ican also cannot argue that it is using good faith as a gap-filler.
Cf. Continental Bank, N.A. v. EvereO, 964 F.2d 701, 705 (7th Cir.
1992). The duty of good faith does not transmute North Amer-
ican’s actual insurance policy into one it would have pre-
ferred in hindsight.
Moving beyond the policies, North American takes our
decision in Twin City Fire Insurance Co. v. Country Mutual In-
surance Co., 23 F.3d 1175 (7th Cir. 1994), to suggest that
Menard violated a common-law duty to se]le and thus com-
mi]ed a tort. Twin City Fire itself concerned a primary and
secondary insurer that were not in contractual privity. The
opinion hypothesizes about our scenario—in which “the in-
sured wanted a trial, even though there was a danger, which
materialized, of a verdict in excess of the primary insurer’s
policy limit”—and concludes the remedy would be contrac-
tual, “depending on the terms of the policy.” Id. at 1180. The
policy here is clear. And even if it weren’t, Twin City Fire’s
speculation is irrelevant. The Illinois Supreme Court has since
considered whether the contractual duty of good faith creates
a general-purpose tort claim, and it said no. Voyles v. Sandia
Mortgage Corp., 196 Ill. 2d 288 (2001). As always, it is our duty
in diversity cases to apply state law. See Angel v. Bullington,
330 U.S. 183, 191–92 (1947); Seekins v. CHEP USA, 20 F.4th 345,
348 (7th Cir. 2021). If North American wants to challenge
No. 21-1813 7
Illinois law in this respect it is free to do so, just not in federal
court.
There is more we could say. North American did not exer-
cise its right to participate in the defense, which exposed it to
the risk that Menard would make litigating choices that it did
not like. Menard’s negotiation of a high-low se]lement agree-
ment with the plaintiff in the underlying trial shows that it
took some steps to limit its insurers’ eventual liability rather
than gambling with their money. Nor do we doubt that
Menard’s own payment obligations were ample motivation to
minimize any prospective damage award. But it suffices that
North American is not entitled to the benefit of someone else’s
bargain.
AFFIRMED