Chandler v. American Fire and Casualty Company

NO. 4-06-0994 Filed 11/1/07
IN THE APPELLATE COURT
OF ILLINOIS
FOURTH DISTRICT
VERNA CHANDLER and JAMES E. CHANDLER, ) Appeal from
as Assignees of Otis Doherty, ) Circuit Court of
Plaintiffs-Appellants, ) Champaign County
v. ) No. 01L223
AMERICAN FIRE AND CASUALTY COMPANY of )
the OHIO CASUALTY GROUP OF INSURANCE ) Honorable
COMPANIES, ) John R. DeLaMar,
Defendant-Appellee. ) Judge Presiding.
_________________________________________________________________
JUSTICE KNECHT delivered the opinion of the court:
American Fire and Casualty Company (American Fire)
refused to defend Otis Doherty when Doherty was sued by Verna and
James Chandler for injuries received in an automobile accident.
Verna was driving the Chandlers' car when it collided with the
car driven by Doherty. Doherty had an automobile insurance
policy with American Fire. A default judgment was entered
against Doherty in excess of the policy limits on his insurance
policy. The Chandlers then sued American Fire to collect the
judgment. The Chandlers made a settlement demand to American
Fire for policy limits plus interest, which was refused. The
trial court granted summary judgment to the Chandlers. American
Fire appealed. Prior to filing appellate briefs, the Chandlers
made another settlement demand of American Fire, which was again
refused. We affirmed the trial court on appeal. The Chandlers
filed suit against American Fire for bad-faith failure to settle.
The trial court dismissed a count for punitive damages and later
granted a motion for summary judgment to American Fire.
The Chandlers appeal, contending (1) an insurer has a
good-faith duty to settle a judgment in excess of policy limits
upon a demand made after judgment; (2) they filed their action
within the applicable statute of limitations; and (3) their
complaint stated a cause of action for punitive damages. We
affirm.
I. BACKGROUND
This case began on November 15, 1988, when the Chan-
dlers filed a lawsuit against Doherty, claiming Verna had been
injured in an automobile accident with Doherty. American Fire
contended from the beginning Doherty was not an insured relative
to this claim because he was driving a replica fiberglass
Volkswagen-Bugati that was a nonscheduled auto on his policy.
American Fire refused all of Doherty's efforts to tender the
defense of this claim. On August 19, 1993, the Chandlers ob-
tained a $1,618,678 judgment against Doherty. American Fire
failed to defend Doherty in the action.
On December 16, 1993, counsel for Doherty demanded
American Fire pay the judgment. On March 2, 1994, American Fire
advised no payment would be made.
On October 4, 1994, Doherty assigned any rights he had
under the American Fire policy to the Chandlers. The assignment
did not relieve Doherty from liability, but the Chandlers prom-
ised to proceed against American Fire first. On August 21, 1995,
the Chandlers filed their amended complaint for citation and
affidavit for order of garnishment against American Fire. On
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February 14, 1996, American Fire answered the amended complaint.
On August 1, 1996, the Chandlers offer to settle the
entire judgment for the $300,000 policy limits plus interest. On
September 4, 1996, American Fire refused the settlement demand.
Both parties filed motions for summary judgment and the trial
court granted the Chandlers partial summary judgment on January
17, 1998, entering judgment for the $300,000 policy limits plus
interest at 9% on the sum of $1,618,678 from August 19, 1993, the
date the judgment was entered against Doherty.
American Fire appealed the January 1998 judgment. On
March 19, 1998, the Chandlers again offered to settle the entire
judgment for policy limits plus interest. American Fire again
refused to settle. On November 4, 1998, the trial court's
judgment was affirmed. Chandler v. Doherty, 299 Ill. App. 3d
797, 702 N.E.2d 634 (1998).
On June 29, 1999, American Fire filed with the trial
court a satisfaction of partial summary judgment indicating
payment to the Chandlers of policy limits plus interest for a
total of $1,117,836.92. The Chandlers moved to amend their
garnishment complaint to add a count alleging bad-faith failure
to settle. The trial court allowed leave to amend.
On September 20, 1999, the trial court heard arguments
on American Fire's objections to the Chandlers filing an amended
complaint for bad-faith failure to settle, and the court denied
the motion to amend. The Chandlers appealed. On June 2, 2000,
this court affirmed the trial court. Chandler v. Doherty, 314
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Ill. App. 3d 320, 731 N.E.2d 1007 (2000).
On August 23, 2000, Doherty assigned his rights to
pursue American Fire for bad-faith failure to settle to the
Chandlers. On September 4, 2001, the Chandlers filed a complaint
against American Fire for bad-faith failure to settle and a
second count for punitive damages, alleging willful and wanton
breach of American Fire's duty to settle.
On February 25, 2002, the trial court dismissed the
count for punitive damages, finding they could not be recovered
in an action for bad-faith failure to settle. On September 1,
2006, the court granted summary judgment to American Fire. On
October 18, 2006, the court denied the Chandlers' motion to
reconsider. This appeal followed.
II. ANALYSIS
A trial court's grant of summary judgment is subject to
a de novo review upon appeal. Outboard Marine Corp. v. Liberty
Mutual Insurance Co., 154 Ill. 2d 90, 102, 607 N.E.2d 1204, 1209
(1992).
The issues concerning the statute of limitations
question and the bad-faith failure to settle postjudgment are
intertwined. The relevant statute of limitations is found in
section 13-205 of the Code of Civil Procedure: "*** all civil
actions not otherwise provided for, shall be commenced within 5
years next after the cause of action accrued." 735 ILCS 5/13-205
(West 2000); see also Del Bianco v. American Motorists Insurance
Co., 73 Ill. App. 3d 743, 747, 392 N.E.2d 120, 124-25 (1979)
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(tort actions arising out of contractual obligation are governed
by statute of limitations of five years, relying on predecessor
statute to section 13-205). Any obligation American Fire had in
this case to settle the suit brought against Doherty would arise
from its contract of insurance with him. Any bad-faith failure
to settle would be a tort arising from this contractual obliga-
tion.
The Chandlers contend American Fire's bad-faith failure
to settle following either of their settlement demands made after
the entry of judgment against Doherty is the breach of duty that
triggered the running of the statute of limitations. The Chan-
dlers' first demand to settle was made on August 1, 1996, and
refused by American Fire on September 4, 1996. The Chandlers'
second settlement demand was made on March 19, 1998. The record
indicates the offer to settle was to expire on May 8, 1998. The
record does not contain a formal rejection of the offer although
the Chandlers pleaded in their complaint American Fire did not
accept the offer. Further, the record indicates on October 1,
2001, American Fire filed an appearance and on November 5, 2001,
a motion to dismiss. The Chandlers contend their complaint,
filed on September 4, 2001, was filed within the five-year
statute of limitations from either of their settlement demands.
American Fire argues a settlement demand must be made
prior to or during trial, before a verdict is reached on damages,
to trigger a bad-faith failure to settle claim. Thus, the
Chandlers had five years to file their complaint, i.e., from (1)
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August 19, 1993, when the judgment was entered against Doherty
for $1.6 million or (2) at the very latest, September 18, 1993,
when any appeal by Doherty of the judgment was required to have
been on file (see Supreme Court Rule 303(a)(1) (155 Ill. 2d R.
303(a)(1)). They missed the deadline by eight years.
The chronology of events in this case is not in dis-
pute. The accident that gave rise to the default judgment
occurred almost 19 years ago. The judgment was 14 years ago.
The Chandlers never made a settlement demand to American Fire
prior to entry of the $1.6 million judgment against Doherty.
Therefore, if, as the trial court found, a settlement demand must
be made prior the entry of judgment against an insured in order
to trigger a claim against an insurance company for bad-faith
failure to settle, the Chandlers' complaint against American Fire
is clearly barred by the statute of limitations. However, if a
cause of action can be stated against an insurance company for
bad-faith failure to settle when no settlement demand is made
prior to entry of judgment against an insured, but when a
postjudgment demand is made and rejected, the Chandlers' com-
plaint was timely filed.
Illinois courts have long recognized an insurer has a
duty to act in good faith in responding to settlement offers and
if this duty is breached by refusal to settle, the insurer may be
liable for the full amount of a judgment against a policyholder,
including any amount in excess of policy limits. Haddick v.
Valor Insurance, 198 Ill. 2d 409, 414, 763 N.E.2d 299, 303
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(2001); Cramer v. Insurance Exchange Agency, 174 Ill. 2d 513,
526, 675 N.E.2d 897, 903 (1996); Krutsinger v. Illinois Casualty
Co., 10 Ill. 2d 518, 527, 141 N.E.2d 16, 21 (1957).
The tort usually referred to as a breach of the "duty
to settle" arose from cases involving a policyholder, a liability
insurer, and a third party. In the usual circumstances, the
insurer has assumed the policyholder's defense under the policy.
The third party has sued the policyholder for an amount in excess
of the policy limits but has offered to settle for an amount
equal to or less than the policy limits. Cramer, 174 Ill. 2d at
525, 675 N.E.2d at 903. If such a settlement is accepted by the
insurer, the insured is not at risk for personal liability. The
insurer must take the insured's settlement interests into consid-
eration when there is a reasonable probability of (1) recovery in
excess of policy limits and (2) a finding liability against the
insured. Haddick, 198 Ill. 2d at 419, 763 N.E.2d at 304.
"The 'duty to settle' arises because the
policyholder has relinquished defense of the
suit to the insurer. The policyholder de-
pends upon the insurer to conduct the defense
properly. In these cases, the policyholder
has no contractual remedy because the policy
does not specifically define the liability
insurer's duty when responding to settlement
offers. The duty was imposed to deal with
the specific problem of claim settlement
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abuses by liability insurers where the poli-
cyholder has no contractual remedy." Cramer,
174 Ill. 2d at 526, 675 N.E.2d at 903.
The breach of duty to settle is not a contractual
remedy and does not arise at the time the parties enter into the
insurance contract. The duty of an insurer to settle "arises
when a claim has been made against the insured and there is a
reasonable probability of recovery in excess of policy limits and
a reasonable probability of a finding of liability against the
insured." Haddick, 198 Ill. 2d at 417, 763 N.E.2d at 304. The
duty does not arise until a third party demands settlement within
policy limits. Haddick, 198 Ill. 2d at 417, 763 N.E.2d at 305.
Because the tort of breach of duty to settle was
recognized to combat abuses by liability insurers where a settle-
ment offer within policy limits is made prior to trial, the
requirement of reasonable probability of both liability and
recovery in excess of policy limits has been attached to the
tort. The usual fact pattern where an insurer questions its
coverage is to either defend the insured under a reservation of
rights or file a declaratory judgment action to determine cover-
age. A duty to settle would usually arise as a result of a
pretrial settlement offer made to the insurer. The breach of the
insurer's duty to settle could occur only up to the time any
excess judgment is entered against the insured, at which time the
insurer can no longer accept the offer to settle.
Under the facts of this case, to trigger the duty to
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settle on the part of American Fire, a settlement demand should
have been made prior to entry of judgment against Doherty on
August 19, 1993. If such a settlement offer had been made and
rejected by American Fire, a breach of the duty to settle might
have occurred. Any claim for bad-faith failure to settle would
have arisen no later than August 19, 1993, and the statute of
limitations for filing suit on such a claim expired on August 19,
1998. The Chandlers' suit, filed September 4, 2001, is barred by
the statute of limitations.
The Chandlers argue the facts in this case are unique
and they should not be constrained by the "usual" fact pattern
which results in a breach of an insurer's duty to settle. They
contend an insurer who rejects an offer to settle within policy
limits after a judgment in excess of the policy limits has been
entered against the insured should also be subject to a claim of
a bad-faith failure to settle and the statute of limitations
should run from the date of the rejection of their first settle-
ment demand. American Fire rejected the Chandler's postjudgment
demand on September 4, 1996; and their suit filed on September 4,
2001, was filed on the last day before it would have been barred
by the statute of limitations.
In support of their argument, they cite Olympia Fields
Country Club v. Bankers Indemnity Insurance Co., 325 Ill. App.
649, 60 N.E.2d 896 (1945), apparently one of the few reported
cases in which a postjudgment settlement demand within policy
limits is part of the factual scenario. The Chandlers cite
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Olympia Fields for the proposition a postjudgment settlement
demand within policy limits that is rejected by an insurer can be
the basis for finding an insurer liable for breaching its duty to
settle and failing to settle in good faith. The facts in Olympia
Fields are unusual, as are the facts in this case, but we find
those unusual facts do not support the legal proposition the
Chandlers claim for Olympia Fields.
Olympia Fields Country Club (Club) had a liability
policy with Bankers Indemnity Insurance Company (Bankers) with
policy limits of $10,000. A patron of the Club sued the Club for
personal injuries she sustained while on Club grounds. Olympia
Fields, 325 Ill. App. at 651, 60 N.E.2d at 897. Bankers assumed
defense of the case but notified the Club the suit was seeking
damages in excess of the policy limits and invited the Club's
personal counsel to participate in the suit. He did so. At the
opening of the trial, the plaintiff's attorney offered to settle
the case for only $3,500. Bankers rejected the offer. During
the trial, the offer to settle was renewed but still rejected.
Olympia Fields, 325 Ill. App. at 654, 60 N.E.2d at 898. The Club
was found liable and judgment was entered in the amount of
$20,000. This time, plaintiff offered to settle for $8,000.
This offer was again rejected, and Bankers planned to appeal the
judgment, which was upheld on appeal. Olympia Fields, 325 Ill.
App. at 654, 60 N.E.2d at 898-99. The Club demanded Bankers pay
the $8,000 to settle the case; and when it was refused, the Club
paid the settlement itself and sued its insurer for both failure
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to settle for $3,500 and failure to settle for $8,000, recovering
judgment for $10,853.11 against Bankers, which appealed that
judgment also. Olympia Fields, 325 Ill. App. at 651, 656, 60
N.E.2d at 897, 899.
The gist of the Club's suit against Bankers was that
Bankers acted in bad faith in failing to accept the $3,500
settlement offer and the $8,000 settlement offer. Olympia
Fields, 325 Ill. App. at 660, 60 N.E.2d at 900. The appellate
court found this was a case of first impression in Illinois and
proceeded to review numerous cases from other jurisdictions.
Olympia Fields, 325 Ill. App. at 660-73, 60 N.E.2d 900-06. The
appellate court found the weight of authority supported the rule
an insurer could be held liable for failure to settle within
policy limits before or during trial if it acted in bad faith.
Olympia Fields, 325 Ill. App. at 673, 60 N.E.2d at 906. The
appellate court then found the trial court was correct in denying
Banker's motion for directed verdict. In so doing, it relied on
the following evidence to find the Club had made out a prima
facie case of Bankers failing to act in good faith in refusing
the $8,000 settlement offer: at the time Banker's refused the
$8,000 offer, its attorney, having heard the trial evidence and
with knowledge a $20,000 verdict had been entered, recommended
the offer be accepted and a $3,500 offer had been made both at
the opening of the trial and during the trial and rejected.
Olympia Fields, 325 Ill. App. at 675, 60 N.E.2d at 907.
In Olympia Fields, not only were two settlement demands
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made and rejected prior to judgment being entered, the appellate
court specifically relied upon those facts in finding the rejec-
tion of the settlement offer postjudgment was prima facie evi-
dence of bad-faith failure to settle. In this case, no settle-
ment offer was made prior to judgment being entered. Although
the Chandlers argued to the trial court it would have been a
futile gesture to have made such a demand given American Fire's
position it had no coverage, as the trial court noted, it would
have been an easy thing to do and would have brought the Chan-
dlers in line with the factual circumstances of the reported
cases and the requirements enunciated to support the tort of
breach of the duty to settle.
Under the unique facts of this case, the Chandlers have
failed to meet the requirements of the specially created tort of
breach of an insurer's duty to settle within policy limits: they
failed to make a settlement demand prior to entry of judgment in
the underlying liability suit. The statute of limitations began
to run when judgment was entered--and not at the time of their
postjudgment settlement demand. If a claim for bad-faith failure
to settle exists, it is barred by the statute of limitations.
The claim against American Fire for a bad-faith failure
to settle is time-barred. Consequently, the additional claim for
punitive damages based on allegations that American Fire will-
fully and wantonly breached its duty to settle is also time-
barred. Accordingly, we need not address the trial court's
dismissal of the count requesting punitive damages.
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III. CONCLUSION
For the foregoing reasons, we affirm the trial court's
judgment.
Affirmed.
TURNER and STEIGMANN, JJ., concur.
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