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Chicago & Eastern Ill. R.r. v. Reserve Ins.

OPINION FILED MAY 29, 1981.

CHICAGO & EASTERN ILLINOIS RAILROAD COMPANY ET AL., PLAINTIFFS-APPELLEES,

v.

RESERVE INSURANCE COMPANY ET AL., DEFENDANTS-APPELLANTS.



APPEAL from the Circuit Court of Cook County; the Hon. JOSEPH M. WOSIK, Judge, presiding.

MR. JUSTICE LORENZ DELIVERED THE OPINION OF THE COURT:

Rehearing denied September 16, 1981.

Plaintiff, Chicago & Eastern Illinois Railroad Co. (C & E), filed a complaint for declaratory judgment which prayed for a declaration that the railroad did not breach the provisions of its insurance policies and thus, that the defendants (Lexington Insurance Co., Midland Insurance Co., California Union Insurance Co., Signal Insurance Co., Yosemite Insurance Co., and Northwestern Fire Insurance Co. of Pennsylvania) are not entitled to reimbursement of $2,375,000 which the insurers paid to help settle a personal injury action which had been brought against their insured — the C & E. The complaint also sought a declaration that the insurers were obligated to pay the railroad for the attorneys' fees and expenses incurred in defending against the personal injury claim. Judgment was entered declaring that: (1) the railroad did not breach its insurance policies, and (2) the insurers were obligated to pay C & E $73,688.36 as reimbursement for litigation expenses.

The controlling issues on appeal are (a) whether it was an abuse of discretion for the trial court to grant declaratory judgment, and (b) whether the insurers were obligated to provide a defense in the personal injury case.

The underlying tort action arose on January 11, 1975, at about 9:45 p.m., when a C & E train collided with a car driven by William Jordan, Jr., and turned Jordan, an 18-year-old college student, into a quadriplegic with paralyzed vocal cords.

Each of C & E's insurance policies provides that:

"The Assured shall be responsible for the settlement or defense of any claim made or suit brought or proceeding instituted against the Assured which no other insurer is obligated to defend. The Assured shall use due diligence and prudence to settle all such claims and suits which in the exercise of sound judgment should be settled, provided, however, that the Assured shall make no settlement for any sum in excess of the retained limit without approval of the Underwriters. When in the judgment of Underwriters an occurrence may involve damages in excess of the retained limit or deductible or the limit of other insurance, Underwriters may elect at any time to participate with the Assured and any other insurer in the investigation, settlement and defense of all claims and suits in connection therewith." (Emphasis added.)

Jordan's initial complaint sought $5,000,000 from C & E and its engineer based on negligence. C & E's house counsel entered an appearance on behalf of the railroad and its employee. The alleged damages exceeded the railroad's $500,000 deductible, and an attorney retained by the insurers entered an additional appearance.

The collision occurred in Chicago at the 97th Street crossing of tracks owned by the Chicago and Western Indiana R.R. Co. (C & W). Pretrial discovery revealed that there had been 13 other collisions between trains and motor vehicles at the 97th Street crossing in the prior 5 years. Not only was the C & W aware of these prior collisions, but it received repeated complaints about the dangerousness of the crossing, and was aware of newspaper articles about the problem. One of Jordan's expert witnesses reported that the crossing violated several regulations and standards and was one of the most dangerous he ever studied. Because of a restricted view, motorists could easily mistake a train light for a street light. And, although flashing lights and gates were necessary to protect the public, the only safety devices at the crossing to warn motorists of approaching trains were non-reflectorized crossbucks. Discovery also revealed that one of the 13 other collisions included an accident which occurred two weeks before the January 11 collision and involved the same engineer who was operating the train that crushed William Jordan, Jr. Moreover, on the 11th, when the train was backing up at 25 m.p.h., the C & E engineer saw a car in front of Jordan's cross the tracks, and he allegedly called out to the conductor, "Did we get him?"

Based on this newly revealed evidence, Jordan filed an amended complaint seeking $5,000,000 in compensatory and $5,000,000 in punitive damages, based on negligence and wilful and wanton misconduct, from both the C & E and C & W railroads, and from various railroad employees.

Under an 1890 trackage agreement, the C & E was obligated to indemnify the C & W for all claims against the C & W which arose out of C & E's use of C & W tracks. Since the C & E insurance policies provided that the insurers would indemnify C & W for all sums which the railroad became legally obligated to pay as damages because of personal injury, it was possible that the action against C & W was within the coverage of the C & E policies. But the insurers began to question whether they would be obligated to provide indemnification for an award of punitive damages against either railroad. It became apparent to the parties that there was a potential conflict of interests between the C & E and its insurers. The basis for the conflict is that if the insurers were not liable for an award of punitive damages, and they controlled C & E's defense in the Jordan case, the insurers could benefit — at the expense of the insured — from a verdict that the railroads were guilty of wilful and wanton misconduct, but not guilty of negligence. (The converse conflict of interests is the concern of the present action: if the insured controls the defense and there is a judgment for the tort plaintiff, the insured would benefit from a verdict finding it guilty of misconduct which is clearly within the policy coverage, that is, guilty of negligence, but not guilty of wilful and wanton misconduct.) Because the insurers had a potential conflict of interests, the attorney they retained withdrew his appearance, though the insurers reserved their contractual rights to approve any settlement in excess of the retention limit.

A new attorney was retained by the railroads to defend them and their employees. Just before the Jordan trial was scheduled to start, the new defense attorney reached an agreement with Jordan's attorney in which Jordan dismissed C & W and dropped the wilful and wanton count against C & E. In return, the C & E agreed to admit its liability for negligence, although liability was not admitted on behalf of the C & E employees. They were kept in the case as defendants, but it was agreed that the jury would not be informed that the employees were parties to the case.

The insurers raise the following contentions: The purpose of this deal was to eliminate the possibility that there would be an award which might not be covered by C & E's insurance policies. The reason for keeping the C & E employees in the case, as the only party defendants who denied liability, was to permit Jordan's attorney to introduce evidence of misconduct which would be immaterial to a case where the sole question was the amount of damages.

According to the insurers, there would have been an award of punitive damages if the wilful and wanton counts went to a jury with all the available evidence of misconduct. Thus, the insurers conclude that the effect of the agreement with Jordan's attorney would have been to produce a ...


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