APPEAL from the Circuit Court of Cook County; the Hon. ALLEN
HARTMAN, Judge, presiding.
MR. PRESIDING JUSTICE STAMOS DELIVERED THE OPINION OF THE COURT:
Plaintiffs, Michael Scroggins and Catherine Russo, brought this action to recover damages for injuries allegedly incurred when they were struck by an automobile. Counts I through III of plaintiffs' complaint named as defendants Anastasios Karabatsos, the driver of the vehicle, and Kyriakos Karabatsos, his father. Count IV of the complaint was directed against the individual defendants' insurer, defendant Allstate Insurance Company (Allstate); it sought damages for Allstate's allegedly wrongful refusal to negotiate in good faith with plaintiffs, as claimants against Allstate's insureds.
On Allstate's motion, the circuit court of Cook County dismissed count IV, finding that there was no just reason to delay enforcement of or appeal from the order. Plaintiffs appeal from this dismissal, contending that Allstate's alleged breach of its duty to negotiate in good faith with plaintiffs gives rise to a cause of action on their behalf.
In more detail, plaintiffs' complaint alleged that the driver of the vehicle which struck them was proceeding down a street when he saw someone he knew crossing the street in mid-block. The driver allegedly increased his speed and aimed his car at his acquaintance, not intending to hit her, but just "goofing off." However, when he swerved to avoid the pedestrian, he lost control of his vehicle and collided with plaintiffs, who were standing across the street. Counts I through III of the complaint alleged negligence and wilful and wanton conduct on the part of the driver and his father, for whom the driver was allegedly acting as agent.
Count IV of the complaint alleged that Allstate insured the driver and his father up to a liability limit of $50,000 per occurrence and $100,000 for more than one occurrence. Allstate acknowledged coverage, opened a claim file, and requested information regarding plaintiffs' special damages. Plaintiffs' attorneys eventually responded by requesting that Allstate review its file for the purpose of making a settlement offer. Plaintiffs enclosed copies of statements by the driver and the pedestrian. In addition, plaintiff Scroggins submitted "special damages items" amounting to approximately $1150, while those submitted by plaintiff Russo came to about $13,000. Plaintiffs demanded $25,000 for Scroggins and the policy limits of $50,000 for Russo. Plaintiffs asserted that based upon those facts, the witness' statements, and the medical reports and bills, all "reasonable minds of prudent insurers" would evaluate Russo's claim as exceeding the policy limits ($50,000) and Scroggins' claim as exceeding $1000. However, Allstate offered Russo only $20,000 and Scroggins only $1000. Plaintiffs essentially asserted that this constituted an intentional breach of duty on the part of Allstate to negotiate in good faith with plaintiffs, as claimants against Allstate's insureds. Plaintiffs alleged that they were damaged in that Scroggins was embarrassed because of his inability to pay medical expenses, plaintiffs were forced to file a lawsuit and incur the attendant expense, and plaintiffs had suffered great emotional and mental distress, whereupon plaintiffs sought compensatory and punitive damages.
1-3 The issue is whether, on the facts alleged, plaintiffs have stated a cause of action against Allstate. Because liability insurance policies ordinarily leave to the insurer the decision whether to settle a claim against the insured, it is generally held that this gives rise to a duty on the part of the insurer to give some consideration to the insured's interest in an action where recovery may otherwise exceed the policy limits. (See Annot., 60 A.L.R.3d 1190, 1192 (1974).) Accordingly, in Illinois there is imposed upon the insurer a duty, part of the implied-in-law duty of good faith and fair dealing arising out of the insurance relation, to give to the insured's interests consideration at least equal to that of its own in such a case. (Cernocky v. Indemnity Insurance Co. of North America (1966), 69 Ill. App.2d 196, 207, 216 N.E.2d 198; see Ballard v. Citizens Cas. Co. (7th Cir. 1952), 196 F.2d 96; Olympia Fields Country Club v. Bankers Indemnity Insurance Co. (1945), 325 Ill. App. 649, 60 N.E.2d 896.) If the insurance company instead commits conduct constituting fraud, negligence, or bad faith in refusing to settle a case within policy limits, it may be liable for the full amount of a judgment obtained against its insured, irrespective of its policy limits. (DeGraw v. State Security Insurance Co. (1976), 40 Ill. App.3d 26, 37-38, 351 N.E.2d 302; Cernocky v. Indemnity Insurance Co. of North America (1966), 69 Ill. App.2d 196, 204-08, 216 N.E.2d 198; see generally 44 Am.Jur.2d Insurance §§ 1530-32 (1969); 7A J. Appleman, Insurance Law and Practice §§ 4711-13 (1962); Keeton, Liability Insurance and Responsibility for Settlement, 67 Harv. L. Rev. 1136 (1954); other authorities collected in 6 Am. Jur. Proof of Facts 2d, at 248-50 (1975), at 25-26 (1978 supp.).) The fact of the entry of the excess judgment against the insured itself constitutes the damage that permits the insured to recover for breach of the duty owed. Wolfberg v. Prudence Mutual Casualty Co. (1968), 98 Ill. App.2d 190, 240 N.E.2d 176; see Annot., 63 A.L.R.3d 627 (1975).
4 Because the duty, though implied in law, arises out of the insurance contract relationship (Brown v. State Farm Mutual Automobile Insurance Association (1971), 1 Ill. App.3d 47, 50-51, 272 N.E.2d 261; Cernocky v. Indemnity Insurance Co. of North America (1966), 69 Ill. App.2d 196, 206-07, 216 N.E.2d 198), it is clear that the duty is owed to the insured, such that in appropriate circumstances constituting a breach of that duty, the insured may sue his insurer for damages resulting from the insurer's wrongful failure to settle a claim against him. (Annot., 60 A.L.R.3d 1190, 1192-93 (1974); see other authorities cited above.) However, the question arises whether, and under what circumstances, a third party injured by the insured may bring such an action against the insured's liability insurer. See generally Annot., 63 A.L.R.3d 677 (1975).
5 Where the insured's claim for wrongful failure to settle is assignable (see generally Annot., 12 A.L.R.3d 1158 (1967)), as in Illinois (Brown v. State Farm Mutual Automobile Insurance Association (1971), 1 Ill. App.3d 47, 272 N.E.2d 261), a third-party claimant who has obtained an excess judgment against the insured may acquire and prosecute the insured's claim by virtue of an assignment. (See Browning v. Heritage Insurance Co. (1975), 33 Ill. App.3d 943, 948, 338 N.E.2d 912; Smiley v. Manchester Insurance & Indemnity Co. (1973), 13 Ill. App.3d 809, 301 N.E.2d 19.) Similarly, depending upon the particular language of a jurisdiction's garnishment statute (see generally Annot., 60 A.L.R.3d 1190 (1974)), a judgment creditor of an insured may be able to bring a garnishment action against the insurer, although it has been held that such an action does not lie under the applicable statute in Illinois. (Powell v. Prudence Mutual Casualty Co. (1967), 88 Ill. App.2d 343, 232 N.E.2d 155.) In either case, it is clear that the claim asserted by the injured third party is predicated upon an alleged breach of the duty owed by the insurer to its insured. See Browning v. Heritage Insurance Co. (1975), 33 Ill. App.3d 943, 948, 338 N.E.2d 912; Powell v. Prudence Mutual Casualty Co. (1967), 88 Ill. App.2d 343, 232 N.E.2d 155.
6 In the instant case, however, plaintiffs are suing in their own right, as third-party claimants against the insured, for the insurer's allegedly wrongful refusal to settle their claim. Even assuming arguendo that they have adequately alleged a breach of the duty of good faith and fair dealing on the part of the insurer, that duty is one which the insurer owes to its insured, not to third parties. (Yelm v. Country Mutual Insurance Co. (1970), 123 Ill. App.2d 401, 404, 259 N.E.2d 83.) Yet it is elementary that in an action founded on a breach of duty, the plaintiff must allege facts showing a breach of a duty owed to him. (E.g., Browning v. Heritage Insurance Co. (1975), 33 Ill. App.3d 943, 947-48, 338 N.E.2d 912.) Thus, the rule in Illinois and nearly all jurisdictions is that in the absence of statutory or contractual language sanctioning a direct action, an injured third party has no action against the insurer for breach of the duty to exercise good faith or due care by virtue of his standing as judgment creditor of the insured. (Yelm v. Country Mutual Insurance Co. (1970), 123 Ill. App.2d 401, 259 N.E.2d 83; accord, e.g., Murphy v. Allstate Insurance Co. (1976), 17 Cal.3d 937, 941-42, 553 P.2d 584, 132 Cal.Rptr. 424; see Annot., 63 A.L.R.3d 677, 682, and cases cited at 686 (1975).) For the same reason, because the duty is intended to benefit the insured and not third parties, actions by injured claimants founded on third party beneficiary principles have not been permitted. E.g., Murphy v. Allstate Insurance Co. (1976), 17 Cal.3d 937, 943-44, 553 P.2d 584, 132 Cal.Rptr. 424; Bennett v. Slater (1972), 154 Ind. App. 67, 289 N.E.2d 144; Annot., 63 A.L.R.3d 677, 682-83, 701 et seq. (1975).
In addition to the absence of any duty owed to third parties by the insurer, courts> have relied on the absence of damages in refusing to permit direct actions against insurers by judgment creditors of the insured. (Yelm v. Country Mutual Insurance Co. (1970), 123 Ill. App.2d 401, 404, 259 N.E.2d 83; Bennett v. Slater (1972), 154 Ind. App. 67, 289 N.E.2d 144; Pringle v. Robertson (1970), 258 Or. 389, 393, 465 P.2d 223, adhered to on rehearing (1971), 258 Or. 394, 483 P.2d 814; other cases cited in Annot., 63 A.L.R.3d 677, 688-89 (1975).) As has often been noted, the injured claimant usually benefits from a wrongful refusal to settle, since instead of receiving an award near or below the policy limits, he stands to obtain a judgment exceeding policy coverage. E.g., Murphy v. Allstate Insurance Co. (1976), 17 Cal.3d 937, 941, 553 P.2d 584, 132 Cal.Rptr. 424.
7 If these principles apply to bar direct actions against insurers by third parties who have already obtained a judgment in excess of policy limits against the insured, they clearly apply to bar plaintiffs, who are at best potential judgment creditors, from bringing the instant action against Allstate. Indeed, since no excess judgment has yet been rendered against the insured, it remains speculative whether the alleged breach of duty will ever result in the injury that normally gives rise to an action for breach of the duty. (See generally Wolfberg v. Prudence Mutual Casualty Co. (1968), 98 Ill. App.2d 190, 240 N.E.2d 176.) Plaintiffs have cited, and we have found, no case in the country permitting a direct action against an insurer by a third-party claimant at this stage of litigation, in the absence of statutory or contractual sanction of such an action. Neither have plaintiffs shown that the necessity for such an action outweighs the potential difficulties Allstate has argued are likely to ensue, such as the possibility that insurers will effectively be coerced into settling where their liability has not and may never be established. If plaintiffs do recover an excess judgment against Allstate's insureds, and if they obtain by assignment any claim the insureds might have against Allstate, perhaps then they may have an action against Allstate. But under the case law discussed above, they clearly have no standing to bring such an action now.
The question remains whether the enactment of certain statutes in Illinois has created a duty which plaintiffs can presently enforce in their own right. In 1967, the General Assembly added section 154.1 to the Illinois Insurance Code (Ill. Rev. Stat. 1967, ch. 73, par. 766.1). That section authorized the Director of Insurance to investigate and hold hearings on improper claims practices by insurers. Upon a finding that an insurance company was "habitually and without just cause engaging in a general business practice of unreasonable delay or refusing to settle claims * * *, and that a proceeding * * * would be in the interest of the public," the Director was instructed to order the company to cease and desist and was empowered to suspend the company's certificate of authority for up to 30 days. In addition, at about the same time the General Assembly amended section 424 of the Illinois Insurance Code to define the same conduct as an unfair method of competition and an unfair and deceptive act or practice in the business of insurance. (Ill. Rev. Stat. 1967, ch. 73, par. 1031.) Upon the same findings that prohibited conduct had been committed and that a proceeding would be in the public interest (Ill. Rev. Stat. 1967, ch. 73, par. 1033), after hearing, the Director was directed to issue a cease-and-desist order.
In 1972, the General Assembly enacted additional provisions relating to improper claims practices. One new section of the Illinois Insurance Code, section 154.3, provided in part:
"Any of the following acts by a[n insurance] company, if committed without just cause and performed with such frequency as to indicate a general business ...