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KELLY v. STRATTON

November 22, 1982

J. ROBERT KELLY, PLAINTIFF,
v.
ALBERT JOHN STRATTON AND SQUADRON INSURANCE CO., LTD., DEFENDANTS.



The opinion of the court was delivered by: Prentice H. Marshall, District Judge.

MEMORANDUM OPINION

Plaintiff J. Robert Kelly was, through October 1979, a professional hockey player under contract with the Edmonton Oilers professional hockey club. On October 9, 1979, Edmonton loaned him to its minor league affiliate, the Cincinnati Stingers, reserving the right to recall him at any time. The day after reporting to the Stingers, Kelly injured his right hand and, he alleges, became permanently disabled as a hockey player. At the time, plaintiff alleges, he was the beneficiary of three insurance policies which covered the disability. The first is a policy issued to the National Hockey League ("NHL") under its collective bargaining agreement with the National Hockey League Players Association ("NHLPA"), which provides "career ending" disability insurance for every player under contract with an NHL team, in the amount of $100,000. The second policy is a group policy issued to the NHLPA and made available to all members of that association. Plaintiff claims that he was insured against career ending disability under this policy for $100,000. The third policy is similar to the second and has a face amount of $50,000 in a case of career ending disability. All three policies were issued by Lloyds of London. Defendant Albert J. Stratton is an underwriter with Lloyds who was named as a defendant by stipulation of the parties. Defendant Squadron Insurance Company ("Squadron"), plaintiff alleges, has assumed liability under the third policy described above to the extent of fifty percent of all liability under that policy.*fn1

As stated earlier, plaintiff asserts that his disability falls within the terms of all three policies. He alleges that he has "complied with each and every requirement" of the policies and is entitled to benefits thereunder. Complaint, count I ¶ 15; count II ¶ 28; count III ¶ 41; count IV ¶ 44. He alleges that defendants have failed and refused, without cause, to pay him the benefits which he claims are due, despite his compliance with the terms of the policies. Complaint, count I ¶ 16; count II ¶ 29; count II ¶ 42; count IV ¶ 44.

Counts I through III arise under the various policies and under Ill.Rev.Stat. ch. 73, § 767 (1979), which provides that in any action by or against an insurance company in which there is in issue the company's liability on a policy of insurance or for unreasonable delay in settling a claim, if it appears to the court that the company's action or delay is "vexatious and unreasonable," the court may allow as part of the taxable costs in the action reasonable attorney's fees and a statutory penalty not to exceed $5,000. In count IV, plaintiff incorporates by reference his earlier allegations and then states, in a conclusory fashion, that "[t]he failure and refusal of Defendants to pay as hereinbefore set forth was vexatious, improper, wilful, in bad faith and tortious, and was intended at all times to oppress and harm Plaintiff and to deprive him of benefits due him under the respective insurance policies." Complaint, count IV ¶ 45.*fn2 We have jurisdiction over the case under 28 U.S.C. § 1332(a) (1976).

Defendant Stratton has moved to dismiss count IV under Fed.R.Civ.P. 12(b)(6), alleging that Illinois law holds that punitive damages, as requested by plaintiff in count IV, are not recoverable in actions such as this one based on a breach of contract, and that in any case, plaintiff's conclusory allegations of bad faith are insufficient under Illinois law to state a claim upon which relief may be granted. For the reasons stated below, we deny defendant's motion.

Under Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), we must look to Illinois law in deciding the merits of defendant's motion. Under Illinois law, while punitive damages generally are not recoverable in actions for breach of contract, that rule has no application where the cause of action is premised upon a separate and independent tort. See Kelsay v. Motorola, Inc., 74 Ill.2d 172, 187, 23 Ill.Dec. 559, 566, 384 N.E.2d 353, 360 (1978). Thus, the issue we must examine is whether an insurer may be held liable in tort for its bad faith failure to pay a legitimate claim.

The Illinois Supreme Court has not addressed the question whether a cause of action exists for an insurer's bad faith conduct. The decisions of the various districts of the Illinois Appellate Court are in conflict. Ledingham v. Blue Cross Plan, 29 Ill. App.3d 339, 330 N.E.2d 540 (5th Dist. 1975), rev'd as to costs, 64 Ill.2d 338, 1 Ill.Dec. 75, 356 N.E.2d 75 (1976), holds that a cause of action exists for an insurer's bad faith refusal to make payments under a policy. In Ledingham, the court examined whether the relationship of insurer and policyholder gives rise to implied duties the breach of which would be tortious. The court reviewed several decisions from other states, particularly California, and held that such a duty existed. Id. at 348, 330 N.E.2d at 547. The court further held that where a plaintiff demonstrates that the insurer's conduct was outrageous, malicious, and/or threatening, punitive damages are available. Id. at 351-52, 330 N.E.2d at 549.

Debolt v. Mutual of Omaha, 56 Ill. App.3d 111, 13 Ill.Dec. 656, 371 N.E.2d 373 (3d Dist. 1978) rejected the Ledingham analysis. The court noted that the Illinois legislature had provided for recovery of punitive damages and attorney's fees by an insured where an insurance company's refusal to pay or honor its contract is unreasonable and vexatious. Id. at 115-16, 13 Ill.Dec. at 660, 371 N.E.2d at 377; see Ill.Rev.Stat. ch. 73, § 767 (1979). It stated that "[w]here the legislature has provided a remedy on a subject matter we are not only loath [sic] but in addition harbor serious doubts as to the desirability and wisdom of implementing or expanding the legislative remedy by judicial decree." 56 Ill. App.3d at 116, 13 Ill.Dec. at 660, 371 N.E.2d at 377. The court believed it significant that no such statute existed in California, the state whose courts had provided substantial support for the analysis in Ledingham. Id. at 117, 13 Ill.Dec. at 661, 371 N.E.2d at 378. Therefore, it affirmed the trial court's dismissal of the plaintiff's claim for compensatory and punitive damages based upon defendant's bad faith.

The First District of the Appellate Court followed Debolt in Tobolt v. Allstate Insurance Co., 75 Ill. App.3d 57, 68-71, 30 Ill.Dec. 824, 831-34, 393 N.E.2d 1171, 1178-81 (1st Dist. 1979). The Second District, in Hoffman v. Allstate Insurance Co., 85 Ill. App.3d 631, 40 Ill.Dec. 925, 407 N.E.2d 156 (2d Dist. 1980), while agreeing with Debolt and Tobolt that the statutory penalty provided in § 767 preempted a plaintiff's right to recover punitive damages for an insurer's breach of its duty of good faith and fair dealing, held that § 767 had not preempted a plaintiff's right to claim compensatory damages in tort. The court reasoned that § 767, on its face, provided only that a court could award the penalty provided in the statute as part of taxable costs, thus leaving open the possibility of a recovery of compensatory damages. Id. at 631, 40 Ill. Dec. at 928, 407 N.E.2d at 159.

The opinion in Ledingham bears no indication that the court in that case considered the effect of § 767 on a plaintiff's right to assert a common law claim for an insurer's bad faith. Indeed, it was not until 1977, two years after Ledingham was decided, that the Illinois General Assembly amended § 767 to provide for a statutory penalty in addition to an award of attorney's fees. Prior to the passage of P.A. 80-814 in 1977, § 767 provided only for an award of "reasonable attorney's fees" not to exceed $1000. See Ill.Rev.Stat. ch. 73, § 767 (1967). Of the appellate courts that have addressed the issue of the effect of § 767, all have held that the statute, to some extent, limits a plaintiff's right to recover in a bad faith case. However, under the approach adopted in Debolt and Tobolt, we would be required to dismiss count IV in its entirety, while under Hoffman we would have to strike only the punitive damages claim in that count. We must, therefore, determine which, if any, of these approaches to follow.*fn3

Our colleague, Judge Milton I. Shadur of this district, has developed a method to be used when intermediate appellate court decisions are in conflict and no state supreme court authority exists. In National Can Corp. v. Whittaker Corp., 505 F. Supp. 147, 148-49 n. 2 (N.D.Ill. 1981), he stated that Erie requires a federal court to decide issues of substantive law in the same way as would a state trial judge sitting in the same location. Thus, because this district lies in Cook County, Illinois, Judge Shadur concluded in National Can that he must decide substantive law questions as if he were sitting as the Circuit Court of Cook County and must, therefore, follow the decisions of the First District of the Illinois Appellate Court. See also, e.g., Slate Printing Co. v. Metro Envelope Co., 532 F. Supp. 431, 434 (N.D.Ill. 1982); Bonanno v. Potthoff, 527 F. Supp. 561, 563 (N.D.Ill. 1981); Instrumentalist Co. v. Marine Corps League, 509 F. Supp. 323, 339 (N.D.Ill. 1981).*fn4

We are not persuaded that the approach adopted in National Can comports with our responsibilities under Erie. First, it should be noted that the Eastern Division of the Northern District of Illinois is comprised not only of Cook County but also of DeKalb, DuPage, Grundy, Kane, Kendall, Lake, LaSalle, McHenry, and Will counties, all of which lie in districts other than the First District of the Illinois Appellate Court. Compare 28 U.S.C. § 93(a)(1) (1976 & Supp. IV 1980) with Ill.Rev.Stat. ch. 37, §§ 1.1-1.5 (1979). The complaint in this case does not allege plaintiff's county of residence, and therefore we do not know the Illinois appellate district in which plaintiff resides. Moreover, even were we able to determine the county of plaintiff's residence from the complaint, Illinois law permits a plaintiff in a case such as this one, where all defendants are nonresidents of Illinois, to bring his action in any county. Ill.Rev.Stat. ch. 110, § 2-102 (1982). Thus, the National Can approach is inconsistent with Erie in that it might require a federal court to apply a rule of decision that would not be used if plaintiff filed in state court. In fact, National Can would enable a defendant to forum-shop by removing to federal court actions, brought in non-Cook County areas of the Northern District of Illinois, in which it wants to avail itself of the law of the First District of the Illinois Appellate Court.

Cases such as Gates Rubber Co. v. USM Corp., 508 F.2d 603, 607 (7th Cir. 1975) and Warner v. Gregory, 415 F.2d 1345, 1346 (7th Cir. 1969), cert. denied, 397 U.S. 930, 90 S.Ct. 817, 25 L.Ed.2d 112 (1970) require us, we believe, to avoid the approach adopted in National Can. As stated by Professor Corbin in describing a federal court's task in applying state law:

    When the rights of a litigant are dependent
  upon the law of a particular state, the court of
  the forum must do its best (not its worst) to
  determine what that law is. It must use its
  judicial brains, not a pair of scissors and a
  paste pot. Our judicial ...

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