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United States District Court, Northern District of Illinois, E.D

July 29, 1983


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


These cases present the question whether an insured person or entity may under Illinois common law maintain a claim against an insurer for its bad faith conduct in handling a claim under an insurance policy. We are invited to reconsider our recent holding in Kelly v. Stratton, 552 F. Supp. 641 (N.D.Ill. 1982), that such a common law cause of action exists.

An Illinois statute, Ill.Rev.Stat. ch. 73, § 767 (1981), provides for an award of attorney's fees, costs, and a limited penalty upon a showing that an insurer acted vexatiously and unreasonably in connection with an insurance claim.*fn1 Some districts of the Illinois Appellate Court have interpreted the most recent version of § 767 as precluding any common law recovery based upon an insurer's bad faith. See Hamilton v. Safeway Insurance Co., 104 Ill. App.3d 353, 60 Ill.Dec. 97, 432 N.E.2d 996 (1st Dist. 1982); Tobolt v. Allstate Insurance Co., 75 Ill. App.3d 57, 30 Ill.Dec. 824, 393 N.E.2d 1171 (1st Dist. 1979).*fn2 These cases rejected Ledingham v. Blue Cross Plan, 29 Ill. App. 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), which held that an independent cause of action existed. Another court, in Hoffman v. Allstate Insurance Co., 85 Ill. App.3d 631, 40 Ill.Dec. 925, 407 N.E.2d 156 (2d Dist. 1980), while holding that § 767 barred a common law punitive damages claim against an insurer, held that the statute did not limit recovery of common law compensatory damages.

Given the lack of an Illinois Supreme Court ruling on the effect of § 767 and the divergent appellate holdings, the issue we faced in Kelly presented difficult questions of determination of state law under Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). The defendant in No. 82 C 6789 has challenged our application of Erie as well as our substantive holding in Kelly. In addition, a recent opinion by our colleague, Judge Milton I. Shadur, provides an extensive critique of our Erie analysis in Kelly. Commercial Discount Corp. v. King, 552 F. Supp. 841, 847-52 (N.D.Ill. 1982). These factors militate in favor of a second look at these issues.*fn3


The first question is the effect of the various Illinois intermediate appellate decisions concerning § 767. In Kelly, we held that while the appellate court decisions provided "data" for our determination of state law, they were not controlling. Kelly, 552 F. Supp. at 644-45. Rather, we held that we were required to determine how the Illinois Supreme Court would decide the issue. In doing so, we expressed our disagreement with Judge Shadur's analysis of the Erie issue. See, 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, 329 (N.D.Ill. 1981); National Can Corp. v. Whittaker Corp., 505 F. Supp. 147, 148-49 n. 2 (N.D.Ill. 1981). In those cases, as in Commercial Discount, Judge Shadur held that a court of this district, in determining state law, must act as a state trial court. Where the various Illinois appellate districts are in conflict, Judge Shadur further held, a judge of the Northern District of Illinois must apply the law of the First District of the Illinois Appellate Court, the appellate district in which this federal district court sits. In Commercial Discount, he noted that were a case to be presented in which the proper Illinois venue was other than the First District, then the law of the district of proper venue must be applied. Commercial Discount, 552 F. Supp. at 850.*fn4

It is true, as Judge Shadur suggests, that we must avoid applying a rule that would permit a litigant to forum shop by choosing to bring his action in federal court if he found the law of the relevant state appellate district unfavorable, hoping to find a more sympathetic ear on the federal bench. See Bernhardt v. Polygraphic Co. of America, Inc., 350 U.S. 198, 203-04, 76 S.Ct. 273, 276-77, 100 L.Ed. 199 (1956); Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021, 85 L.Ed. 1477 (1941). However, we think that Commercial Discount begins with an erroneous premise: that a federal court sitting in diversity jurisdiction "must decide substantive questions . . . in the same way that a state trial judge counterpart sitting at the same location would." Commercial Discount, 552 F. Supp. at 847 (quoting National Can Corp. v. Whittaker Corp., 505 F. Supp. 147, 148 n. 2 (N.D.Ill. 1981)) (emphasis supplied). The error of this premise affects the remainder of the Commercial Discount analysis.

The proposition that we must act as state trial judges stems from a misapprehension of the commands of Erie and its progeny. Erie requires a federal court to apply the substantive law of the forum state; we take this to mean that we must apply the law that ultimately would be applied were the case to be litigated in the state courts. While intermediate appellate decisions exert upon us a high degree of persuasive force, and while they may be binding upon state trial courts, the law we must apply is that which the state supreme court would apply.*fn5 In a given case we may choose to follow an intermediate appellate ruling, but we may not end our analysis of state law with mere citation to such rulings where we are persuaded that the state supreme court would rule otherwise. See generally In re Air Crash Disaster Near Chicago, Illinois on May 25, 1979, 701 F.2d 1189, 1196-98 (7th Cir. 1983) (Appeal of American Airlines, Inc.).

The policy behind this principle is Erie's concern with avoiding forum shopping between state and federal courts. Applying the law that the state supreme court would follow is necessary if we are to avoid creating an incentive for such forum shopping. The "state trial court" approach creates an incentive for forum shopping in that it requires the federal courts to give more weight to state intermediate appellate decisions than they would be given in the state system. This may be illustrated by three examples.

In a case in which no supreme court decision exists and the appellate district of proper state venue has not yet taken a position on an issue, Commercial Discount would require a federal court to follow the law as declared by the other appellate districts. Commercial Discount, 552 F. Supp. at 848 (citing People v. Thorpe, 52 Ill. App.3d 576, 579, 10 Ill.Dec. 351, 354, 367 N.E.2d 960, 963 (2d Dist. 1977) and Garcia v. Hynes & Howes Real Estate, Inc., 29 Ill. App.3d 479, 482, 331 N.E.2d 634, 636 (3d Dist. 1975)). However, the very fact that the various Illinois appellate districts sometimes conflict on an issue of law indicates the problem inherent in the state trial court approach. The appellate districts, it appears, do not consider each others' decisions binding; rather, they regard them as persuasive authority only. Thus, if a litigant filed suit in a state court in the First District and the only intermediate appellate decision on a pertinent issue was from the Fourth District, while the trial court presumably would follow the Fourth District ruling, on appeal the First District would not necessarily do so, if it found persuasive reasons to do otherwise. In such a case, if diversity of citizenship existed, the litigant favored by the Fourth District rule could file the case in federal court (or remove it, if there was diversity of citizenship, in the case of a non-Illinois defendant) and thereby obtain "insurance" that the favorable rule of law would be applied and upheld on appeal, were Commercial Discount to apply.

The same is true even where "First District law" exists. The First District has five divisions. It appears that the different divisions do not consider themselves bound by the holdings of other divisions. See, e.g., Bonnano v. Potthoff, 527 F. Supp. 561, 563-64 (N.D.Ill. 1981) (Shadur, J.) (discussing conflicting holdings of Third and Fifth Divisions on issue of date of accrual of cause of action); Commercial Discount, 552 F. Supp. at 843-45 (discussing apparent difference in decisions in different divisions on question of effect of failure to give notice of sale of repossessed goods).*fn6

To note an example of recent origin, a controversy existed within the First District over the question whether a prosecutor must justify his or her use, within a particular case, of peremptory challenges to exclude minority group members from a jury. Compare People v. Gosberry, 109 Ill. App.3d 674, 65 Ill.Dec. 99, 440 N.E.2d 954 (1st Dist., 3d Div. 1982) and People v. Payne, 106 Ill. App.3d 1034, 62 Ill.Dec. 744, 436 N.E.2d 1046 (1st Dist., 3d Div. 1982) with People v. Newsome, 110 Ill. App.3d 1043, 66 Ill.Dec. 708, 443 N.E.2d 634 (1st Dist., 2d Div. 1982) and People v. Teague, 108 Ill. App.3d 891, 64 Ill.Dec. 401, 439 N.E.2d 1066 (1st Dist., 1st Div. 1982). Because one division does not consider itself bound by the others' holdings,*fn7 application of the "law" of the First District where not all divisions have spoken may result in a litigant obtaining a result that would not obtain were the case to be litigated in state court.*fn8 Commercial Discount, therefore, permits a diversity litigant in whose favor the non-unanimous but not as yet uncontradicted rule runs to obtain "insurance" by bringing the case in federal court or removing it there.

The third type of forum shopping permitted by Commercial Discount is somewhat more subtle. The doctrine of that case requires federal courts to give more weight to state appellate decisions than the rendering courts themselves would give them. The "state law" that Erie requires us to follow also includes the power of a state court to reexamine its earlier holdings based upon "data" not considered in the earlier decision; Erie, we think, permits a federal court to exercise the same authority. As two noted commentators have stated,

    Unless a federal court is allowed this much
  freedom and flexibility, the Erie doctrine simply
  would have substituted one kind of forum-shopping
  for another. The lawyer whose case was dependent
  on an ancient or shaky state court decision that
  might no longer be followed within the state
  would have a strong incentive to bring the suit
  in or remove it to federal court, hoping that the
  state decision

  could not be impeached under the mechanical
  application of existing state precedents that the
  Erie doctrine was once thought to require.
  Moreover, to give state court decisions more
  binding effect than they would have in the state
  court system would undermine the ability of the
  federal courts to ensure that the outcome of the
  litigation be substantially the same as it would
  be if tried in a state court and subjected to
  that system's appellate process.

19 C. Wright, A. Miller & Cooper, Federal Practice and Procedure § 4507 at 89-91 (1982) (emphasis supplied).*fn9

Thus, Commercial Discount does permit forum-shopping of a sort, in that a federal court is required to give state intermediate appellate precedent more weight than it would carry in other state appellate tribunals and even in the rendering panel itself. These are "uncertaint[ies] already present in state law." Commercial Discount, 552 F. Supp. at 852 (emphasis in original). The view we espoused in Kelly — application in all cases of the "Supreme Court predictive" approach — has the disadvantage of being something less than a bright line, easily applicable rule.*fn10 It is, however, faithful to Erie and its progeny.*fn11

In addition to its potential for encouraging forum shopping, Commercial Discount will, at least in some cases, give rise to a waste of litigants' and courts' resources. Where a state appellate court has ignored a critically important "datum" of state law — in Kelly v. Stratton, certain doctrines of statutory construction — and has reached a result that is incorrect even as a matter of state law, Commercial Discount would require us to follow the appellate court ruling and reach a similarly erroneous result, despite the existence of persuasive reasons for believing that the state supreme court would not so hold.*fn12 As Judge Shadur presumably would not require a federal appellate court to act as a state trial court (because the two are not "counterparts"), the result is to require the district court to commit error and leave it to the court of appeals to correct the error.*fn13 So read, Commercial Discount elevates form over substance and promotes the needless expenditure of courts' and litigants' resources.*fn14 We do not find in Erie or its progeny the rigidity that Commercial Discount appears to require.

The principles of Illinois stare decisis to which we have made reference must be recognized by a federal diversity court if it is to avoid the forum shopping potential recognized by Wright and Miller in the quoted passage. Again, the central principle is that we must give appellate court holdings their due where the supreme court has not spoken, but we must not give them more than their due. This will require resort to the "Supreme Court predictive approach," but to do otherwise would be to ignore the policy of Erie and its progeny. That policy is the avoidance of forum shopping. When we apply the law that ultimately would be applied were the case litigated in state court, we are fully faithful to Erie. By contrast, to act as a state trial court, following intermediate appellate decisions that are erroneous as a matter of state law, not only would violate the policy of Erie, but would also elevate form over substance, as the court of appeals, assuming the role of its state counterpart, would apply the correct rule of state law.*fn15

Erie requires us, in all cases, to apply the rule of law that the state supreme court would follow. Despite our rejection of the state trial court approach, however, we are not cast adrift without a rudder. Several general rules exist to guide our construction of state law.

One such rule is that a federal court should not attempt "dramatic innovation" in state law. Murphy v. White Hen Pantry Co., 691 F.2d 350, 355 (7th Cir. 1982). See also Lamb v. Briggs Manufacturing Co., 700 F.2d 1092, 1096 (7th Cir. 1983).*fn16 This appears to be a corollary of the rule that a federal court may not "substantially affect the enforcement of the right as given by the State." Guaranty Trust Co. v. York, 326 U.S. 99, 109, 65 S.Ct. 1464, 1470, 89 L.Ed. 2079 (1945).

Another set of guideposts is set forth in McKenna v. Ortho Pharmaceutical Corp., 622 F.2d 657 (7th Cir.), cert. denied, 449 U.S. 976, 101 S.Ct. 387, 66 L.Ed.2d 237 (1980):

  An accurate forecast of [a state's] law, as it
  would be expressed by its highest court, requires
  an examination of all relevant sources of that
  state's law in order to isolate those factors
  that would inform its decision. The primary
  course that must be analyzed, of course, is the
  decisional law of the [state] [s]upreme [c]ourt.
  In the absence of authority directly on point,
  decisions by that court in analogous cases
  provide useful indications of the court's
  probable disposition of a particular question of
  law. . . . [R]elevant state precedents must be
  scrutinized with an eye toward the broad policies
  that informed those adjudications, and to the
  doctrinal trends which they evince.

    Considered dicta by the state's highest court
  may also provide a federal court with reliable
  indicia of how the state tribunal might rule on a
  particular question. . . . [However,] [a]s
  Professor Charles Alan Wright has written, "much
  depends on the character of the dictum." Of
  somewhat less importance to a prognostication of
  what the highest state court will do are
  decisions of lower state courts and other federal
  courts. Such decisions should be accorded "proper
  regard" of course, but not conclusive effect.

Id. at 662 (footnotes omitted).*fn17

In addition, it is clear that we may not disregard intermediate state appellate decisions in determining state law. See, e.g., West v. A.T. & T. Co., 311 U.S. 223, 237, 61 S.Ct. 179, 183, 85 L.Ed. 139 (1940). See also Commissioner of Internal Revenue v. Estate of Bosch, 387 U.S. 456, 465, 87 S.Ct. 1776, 1782, 18 L.Ed.2d 886 (1967). Many of the cases cited at n. 5 supra repeat that proposition; some go on to state that such decisions are to be given "presumptive" weight. See, e.g., National Surety Corp. v. Midland Bank, 551 F.2d 21, 30 (3d Cir. 1977). Indeed, if every state appellate court to address an issue has reached the same conclusion, we would be remiss if we did not give those decisions a heavily presumptive weight. Cf. Mitchell v. Young Refining Corp., 517 F.2d 1036, 1040 n. 3 (5th Cir. 1975) (federal court must follow rule supported by "overwhelming weight of authority" from state courts). However, when following these guidelines, if we determine by our examination of state law that the intermediate appellate decisions were reached without consideration of a critically important datum of state law such that we are persuaded that the state supreme court would rule differently, our duty is not to apply the majority appellate rule mechanically but rather to follow the course the state supreme court would take.*fn18

The approach we advocate does not have the advantage of being a bright line rule. However, a federal court cannot avoid, at least in some cases, gazing into a crystal ball. While it is true that Erie requires us to parrot state law rather than determine the "better rule," we must avoid the danger of "giving `a state court decision a more binding effect than would a state court of that state under similar circumstances.'" McKenna v. Ortho Pharmaceutical Corp., 622 F.2d 657, 662 (3d Cir.) (quoting 1A J. Moore, Moore's Federal Practice ¶ 0.301 at 3077 (2d ed. 1979)), cert. denied, 449 U.S. 976, 101 S.Ct. 387, 66 L.Ed.2d 237 (1980). Commercial Discount, despite its bright line advantage,*fn19 may result in doing just that and thus may betray the policy of Erie.


We must next apply these general rules to the cases at bar. First, we will briefly describe the present cases.


Roberts v. Western-Southern Life Insurance Co., (No. 82 C 6789) was removed from the Circuit Court of Cook County. Plaintiffs, two minor children and their mother, allege that they are the beneficiaries of three life insurance policies taken out by their father and husband. Mr. Roberts was killed in February 1981, allegedly while attempting to defend himself from a person wielding a gun. Plaintiffs allege that they complied with all conditions precedent to recovery on the policies but that the insurers refused to pay, without reasonable cause. The company denied coverage under an exclusion relating to death while committing or attempting to commit a felony. Plaintiffs request recovery on the policies and unspecified "compensatory and punitive damages."

Union National Bank of Chicago v. United States Fire Insurance Co., (No. 82 C 5628) was filed in this court. Defendants are alleged to be incorporated and to have their principal places of business in states other than Illinois. As best we can tell, had the case been filed in state court, it could have been brought in any Illinois county. See Ill.Rev.Stat. ch. 110, § 2-101 (1981). The plaintiffs are both banks that purchased insurance policies to protect themselves against losses resulting from having extended credit, acquired, sold, delivered, given value, or assumed liability on the faith of any security, document, or instrument that proves to have been counterfeited, lost, stolen, or altered, or that carries forged signatures. They claim they filed timely and proper claims under the policies but that defendants refused to pay. Plaintiffs claim in counts 2 and 4 that defendants' conduct violated certain standards set forth in Illinois statutes for the settlement of claims, including the lack of a good faith attempt to settle and the absence of reasonable standards for the payment of claims. They also allege that defendants' conduct was "willful and malicious." They request compensatory relief amounting to the sums due on the policies, punitive damages, prejudgment interest, and attorneys's fees.

In Roberts, defendants have moved to strike plaintiffs' punitive damages claims. In Union National Bank, defendants have moved to dismiss the counts containing the punitive damages claims.


As was implicit in Kelly v. Stratton, the question whether the Illinois Supreme Court would recognize a common law cause of action for damages based on an insurer's bad faith conduct is actually composed of two sub-questions. The first is that of the preclusive effect of Ill.Rev.Stat. ch. 73, § 767 (1981). If we determine that the legislature did not intend § 767 to limit the courts' common law authority, we must then determine whether the supreme court would recognize the common law tort. We will address these questions in turn.


The earliest version of § 767 was enacted in 1937. It provided that upon a court's determination that an insurer's refusal to pay a claim, or its suit to cancel a policy, was "vexatious and without reasonable cause," it could award a prevailing insured person "reasonable attorney's fees, as a part of the taxable costs in the action and in addition to all other costs," not to exceed a specified sum.*fn20 In 1967, the legislature amended § 767, increasing the amount of attorney's fees a court could award.*fn21

In 1977, the legislature again amended the statute to its current version, which provides that the court may award the insured reasonable attorney's fees and a separate amount, not to exceed certain specified sums.*fn22 The legislature also changed slightly the wording of the finding needed to make the award, from "vexatious and without reasonable cause" to "vexatious and unreasonable." Ill.Rev.Stat. ch. 73, § 767 (1981).

Defendants first argue that the 1937 statute operated to preclude the courts' authority to recognize a common law bad faith tort. They read the 1967 and 1977 amendments as merely changing the amounts awardable under the statute and thus as retaining whatever preclusive effect the 1937 statute had. We do not agree with either of these arguments.

In 1937, and indeed in 1967, no Illinois court had yet recognized that an insured could maintain a lawsuit against an insurer for its bad faith handling of a first party insurance claim.*fn23 Defendants argue that because the legislature wrote on a clean slate in 1937, the remedy provided by the statute must be considered exclusive. See Hall v. Gillins, 13 Ill.2d 26, 147 N.E.2d 352 (1958) (recovery for wrongful death limited to maximum specified in Illinois Wrongful Death Act); Cunningham v. Brown, 22 Ill.2d 23, 174 N.E.2d 153 (1961) (recovery against tavern owners for injuries caused by intoxicated persons limited to Illinois Dramshop Act).

The present case differs from Hall and Cunningham, and not merely in degree. Both of those cases rejected common law actions seeking greater relief than the maximum allowed by statute where the elements of the common law action and the elements of damages recoverable were substantially similar to those of the statutory actions. Because there was an identity between the two actions, it was thought unreasonable to hold that the legislature intended the courts to permit recovery of amounts greater than those the legislature had concluded were justified for exactly the same conduct, and for the same "items" of damages. See Hall, 13 Ill.2d at 31-32, 147 N.E.2d at 355-56; Cunningham, 22 Ill.2d at 30, 174 N.E.2d at 157.*fn24 While the Illinois legislature in 1937 created a right that did not exist at common law,*fn25 that right, unlike those examined in Hall and Cunningham, was not substantially identical or "coincidental . . . except as to recoverable damages," Cunningham, 22 Ill.2d at 30, 174 N.E.2d at 157, with the common law right sought by plaintiffs here. In particular, the right created by the statute left completely open an entire class of damages — compensation for harm caused by an insurer's bad faith conduct — that may be recovered under the common law tort. See Fletcher v. Western National Life Insurance Co., 10 Cal.App.3d 376, 402-03, 89 Cal.Rptr. 78, 93-94 (1970) (plaintiff in bad faith case may recover economic losses as well as punitive damages).

In Lynch v. Mid-America Fire and Marine Insurance Co., 94 Ill. App.3d 21, 49 Ill.Dec. 567, 418 N.E.2d 421 (4th Dist. 1981), the court regarded the pre-1977 statute as merely granting the court authority to award attorneys' fees as an element of costs generally not permitted by Illinois common law, and not as evincing an intent "to cover the field of awarding compensation for bad faith or vexatious dealing by insurers." Id. at 25, 49 Ill.Dec. at 571, 418 N.E.2d at 425.*fn26 A statute that provided only for an award of a limited amount of attorney's fees cannot be considered to evince a legislative intent to provide a limited yet complete remedy (the Hall v. Gillins rationale) for an insurer's bad faith conduct. Awards of attorney's fees may deter, but they do not compensate for actual injury. The pre-1977 statute simply did not address the question of compensatory damages. In our judgment, before the 1977 amendment, § 767 did not preclude Illinois courts from recognizing a common law tort claim for an insurer's bad faith conduct.*fn27

We turn next to the effect of the 1977 amendment. In determining the legislature's intent in 1977, we do not find Hall v. Gillins and Cunningham v. Brown controlling. In 1977, the legislature was no longer writing on a clean slate, for in 1975, Ledingham had been decided and as of 1977 had not been contradicted. Thus, in 1977, an Illinois appellate-level court had recognized a common law right of recovery based on an insurer's bad faith conduct,*fn28 and no court had yet considered the preclusive effect, if any, of § 767. In these circumstances, Hall v. Gillins does not control because the "common law," such as it was in 1977, had recognized a right to recover in the Ledingham situation.*fn29 See Wright v. Central Du Page Hospital Assn., 63 Ill.2d 313, 326-27, 347 N.E.2d 736, 742 (1976).

Like the pre-1977 statute, the post-1977 statute aims at something different than the common law tort and does so in a different manner than the common law action. As we will discuss infra, the statute permits a penalty — punitive damages — to be awarded on a showing of "vexatious and unreasonable" conduct, probably an objective standard, see Evaluation Systems, Inc. v. Aetna Life Insurance Co., 555 F. Supp. 116, 120-21 (N.D.Ill. 1982), while under Illinois common law, punitive damages may be awarded only where the defendant has acted with fraud, actual malice, violence, oppression, or with such gross negligence as to indicate a wanton disregard of the rights of others. See Kelsay v. Motorola, Inc., 74 Ill.2d 172, 186, 23 Ill.Dec. 559, 565, 384 N.E.2d 353, 359 (1978). Moreover, an award can be made under § 767 even absent a showing of actual injury which would justify an award of compensatory damages in tort. Thus, the statute creates a standard for recovery that is easier to satisfy than that under the common law tort. Smith v. Metropolitan Life Insurance Co., 550 F. Supp. 896 (N.D.Ill. 1982), in which the court stated that the recovery permitted by § 767 and the common law tort of bad faith are "totally duplicative," id. at 900, is, in our view, incorrect.

In addition, the court in Smith suggested that the "compensatory damages" still available under the Tobolt view of § 767 — recovery on the insurance policy, attorney's fees, and costs — duplicate those available under the common law tort. However, in a common law action, other compensatory damages may be available, for example, other pecuniary losses caused by the insurer's conduct. See generally Fletcher v. Western National Life Insurance Co., 10 Cal.App.3d 376, 402-03, 89 Cal.Rptr. 78, 93-94 (1970). Even after the 1977 amendment, § 767 does not address such compensatory relief. For these reasons, the recovery permitted under the statute is significantly different from that allowed under the tort recognized in Ledingham. Thus, a conclusion that § 767 permits the same type of recovery as would be allowed under the common law tort, while merely limiting the amount, as in Hall v. Gillins, is incorrect.

To determine the legislature's intent when it amended § 767, we look first to the language of the statute. See, e.g., Potts v. Industrial Commission, 83 Ill.2d 48, 51, 46 Ill.Dec. 172, 174, 413 N.E.2d 1285, 1287 (1960). While the language of the current § 767 clearly creates a right to recover attorney's fees and a penalty, it nowhere declares or suggests that the statute is the exclusive remedy for injuries caused by an insurer's bad faith conduct.*fn30 Moreover, it is clear that when the legislature wishes to declare that a statutory remedy is to be exclusive, it knows how to make its intention known. See, e.g., Ill.Rev.Stat. ch. 48, § 138.5(a) (1981) (worker's compensation) ("No common law or statutory right to recover damages from the employer . . . for injury or death sustained by an employee while engaged in his line of duty . . ., other than the compensation herein provided, is available. . . .").

In addition, even apart from what we have termed the "legislative history" of the 1977 amendment, upon which Kelly v. Stratton was in large part based, established tools of statutory construction would require us to construe the statute so as not to cover the field. Ledingham was, as of 1977, binding on all Illinois trial courts. See Commercial Discount, 552 F. Supp. 841, 848 (citing People v. Thorpe, 52 Ill. App.3d 576, 579, 10 Ill.Dec. 351, 354, 367 N.E.2d 960, 963 (2d Dist. 1977); Garcia v. Hynes & Howes Real Estate, Inc., 29 Ill. App.3d 479, 482, 331 N.E.2d 634, 636 (3d Dist. 1975)). Although the doctrine was not at that time firmly established, for example through supreme court approval, it was nevertheless the "common law" of Illinois.*fn31 As a general rule, statutes in derogation of the common law are strictly construed in favor of those sought to be subjected to their operation, here an insured who would have had, under Ledingham, a common law action in tort. See Barthel v. Illinois Central Gulf R. Co., 74 Ill.2d 213, 220, 23 Ill. Dec. 529, 533, 384 N.E.2d 323, 327 (1978); Summers v. Summers, 40 Ill.2d 338, 342, 239 N.E.2d 795, 798 (1968). Because the language of § 767 bears no indication that the remedy provided there is to be exclusive, it should not be read as precluding the common law remedies of insured persons.

The circumstances surrounding the adoption of the 1977 amendment provide further support for this conclusion. In Kelly we noted that during final consideration of the amendments, the floor manager in the Illinois House of Representatives noted that the bill had "[come] out of the Insurance Laws Study Commission," and that the original version had been amended "to conform with some of the problems that the industry had." Kelly v. Stratton, 552 F. Supp. at 647. Because of the reference to the Insurance Laws Study Commission, we looked to the Commission's 1977 report ("Final Report"). The key statement in the Final Report's discussion of the amendment was that the Commission had "thought that the insurance industry might have taken the opportunity to establish statutory limits on the amount of punitive damages. This was not done." Kelly, 552 F. Supp. at 648 (quoting Final Report at 19). The Final Report, which refers to developments in California law concerning "bad faith" cases, provides further support for the proposition that Ledingham-type innovations in the law were known to the legislature when it enacted the 1977 amendment to § 767. The Final Report is thus relevant as helping to explain the contemporaneous conditions and existing circumstances surrounding the 1977 amendment. See Richter v. Collinsville Township, 97 Ill. App.3d 801, 807, 53 Ill.Dec. 165, 170, 423 N.E.2d 549, 554 (5th Dist. 1981).

Given our discussion of the applicable Illinois doctrines of statutory construction, we need not refer to the Final Report to support the conclusion that § 767 does not evince a preclusive intent. In any event, Western-Southern's arguments that we should not consider the report fall short of the mark.

Western-Southern's main argument is based on the affidavit of former State Representative Bernard E. Epton ("Epton"), prepared for the purposes of this case. Epton was a member of the general assembly from 1969 through 1983, a member of the House Insurance Committee, and chairman of the Insurance Laws Study Commission ("Commission") from 1971 through 1983. He signed the Final Report, along with the other Commission members. In his affidavit ("Epton Aff."), he states that he, industry representatives, and other members of the Commission were of the view that § 767, both before and after the 1977 amendment, "provided the sole source of recovery in Illinois by a first party insurance claimant" for an insurer's bad faith conduct in handling a claim. Epton Aff. ¶ 6 at 5. Epton terms this an "expressed understanding." Id. We wonder where it was "expressed"; it certainly was not in the Final Report or the statute. In any event, the opinions of individual legislators as to the meaning of legislation do not appear to be relevant under Illinois law, nor does the action of any lobby involved in the passage of legislation. See Eddy v. Morgan, 216 Ill. 437, 75 N.E. 174 (1905). Moreover, our reliance on the Final Report is based on its indication of the contemporaneous conditions surrounding the passage of the amendment to § 767, and as such it is far more reliable than Epton's after-the-fact post hoc recollection of those conditions.*fn32 As a general rule, post-passage remarks of legislators "are of negligible value in ascertaining the intent of [the legislature] in passing [the statute]." Skelton v. General Motors Corp., 660 F.2d 311, 319 n. 17 (7th Cir. 1981) (federal law) (citing Blanchette v. Connecticut General Insurance Corp., 419 U.S. 102, 132, 95 S.Ct. 335, 353, 42 L.Ed.2d 320 (1974)), cert. denied, 456 U.S. 974, 102 S.Ct. 2238, 72 L.Ed.2d 848 (1983).*fn33

Epton also asserts that the insurance industry was behind the bill, as evidenced by the nearly unanimous votes of both houses of the legislature.*fn34 This, he contends, indicates a consensus that the bill, as amended, "struck an acceptable balance between affording a first party insurance claimant a limited and statutory right to recover a punitive amount from a first party insurer on the one hand and setting a maximum recovery limit for such punitive recovery on the other hand." Epton Aff. ¶ 6 at 4-5. Under Eddy v. Morgan and Skelton, Epton's interpretation of the vote does not appear relevant. As we have noted, the legislature is clearly able to make statutory remedies expressly exclusive when it wishes to do so. If such a "consensus" actually existed, we wonder why it was not inserted into the statute or at least reflected in the legislative history. In any event, one need not disagree with Epton's conclusion to deny it any great weight. While the legislature may have intended to limit the penalties recoverable under the statute, it did not intend to limit an insured's common law remedies.*fn35 Epton's affidavit does not detract from the weight of the Final Report.*fn36

  We must next consider the Illinois decisions concerning the
post-1977 statute. Hoffman v. Allstate Insurance Co., 85 Ill. App.3d 631,
40 Ill.Dec. 925, 407 N.E.2d 156 (2d Dist. 1980),
holds that § 767 bars a common law claim for punitive damages
but leaves open recovery of compensatory damages. Tobolt v.
Allstate Insurance Co., 75 Ill. App.3d 57, 30 Ill.Dec. 824,
393 N.E.2d 1171 (1st Dist. 1979) may be read to hold that the
post-1977 statute precludes any common law recovery based on an
insurer's bad faith. Hamilton v. Safeway Insurance Co.,
104 Ill. App.3d 353, 60 Ill.Dec. 97, 432 N.E.2d 996 (1st Dist.
1982), Smith v. Metropolitan Life Insurance Co., 550 F. Supp. 896
 (N.D.Ill. 1982), and Strader v. Union Hall, Inc.,
486 F. Supp. 159 (N.D.Ill. 1980) are in accord with Tobolt but add
little to the analysis. As noted earlier, Tobolt relies heavily
on Debolt v. Mutual of Omaha, 56 Ill. App.3d 111, 13 Ill.Dec.
656, 371 N.E.2d 373 (3d Dist. 1978), and thus its persuasive
impact is undercut by our previous holding, supra at nn. 2, 26,
that Lynch v. Mid-America Fire and Marine Insurance Co.,
94 Ill. App.3d 21, 49 Ill.Dec. 567, 418 N.E.2d 421 (4th Dist.
1981), not Debolt, correctly stated Illinois law.*fn37

None of these cases considered the contemporaneous conditions surrounding the passage of the 1977 amendment to § 767, nor did they consider the doctrines of statutory construction to which we have adverted. We think that the Illinois Supreme Court, were it to consider the impact of § 767, would base its decision on these well-settled doctrines. See Kelly v. Stratton, 552 F. Supp. at 648.

We cannot draw from § 767 legislative intent to limit recovery of compensatory or even punitive damages under common law. It is at least as likely that it meant to create a penalty that an insured could recover with a showing less than that needed to recover punitive damages under common law and that could be recovered even absent a showing justifying an award of compensatory damages. By doing so, however, the legislature did not necessarily mean to preclude recovery of a common law award, in a proper case. In light of the doctrines of statutory construction referred to earlier, this is, in our view, the correct reading of the statute. Following the "Supreme Court predictive approach" to the Erie question presented here, we think that the Illinois Supreme Court would read the statute as we have.*fn38


Our holding that § 767 was not meant to cover the field of compensation for an insurer's bad faith conduct does not end the inquiry. In order to decide the present motions, we must go on to consider whether the Illinois Supreme Court would follow Ledingham and recognize a common law "bad faith claims practices" tort. We look first to the intermediate Illinois appellate decisions on the issue.

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), followed California law and held that an insurer owes its insured an implied-in-law duty of good faith and fair dealing, the breach of which gives rise to a cause of action in tort. Debolt v. Mutual of Omaha, 56 Ill. App.3d 111, 13 Ill.Dec. 656, 371 N.E.2d 373 (3d Dist. 1978), which relied primarily on the supposed preclusive effect of § 767, criticized Ledingham. Lynch v. Mid-America Fire & Marine Insurance Co., 94 Ill. App.3d 21, 49 Ill.Dec. 567, 418 N.E.2d 421 (4th Dist. 1981), followed Ledingham as to the existence of the common law tort. Hoffman v. Allstate Insurance Co., 85 Ill. App.3d 631, 40 Ill.Dec. 925, 407 N.E.2d 156 (2d Dist. 1980), implicitly recognized that a common law bad faith action could be maintained.*fn39 The other Illinois and federal cases concerning § 767 rely upon the preclusive effect of the statute and do not address the underlying rationale of Ledingham and "bad faith" cases from other states.

In Kelsay v. Motorola, Inc., 74 Ill.2d 172, 23 Ill.Dec. 559, 384 N.E.2d 353 (1978), the supreme court noted that the general rule against awarding punitive damages in breach of contract actions "ha[s] no application where . . . the cause of action is premised upon a separate and independent tort." Id. at 187, 23 Ill.Dec. at 566, 384 N.E.2d at 360.*fn40 Ledingham recognized just such a tort in the insurance claims context.

  Ledingham is emphatically not "an isolated deviation from the
strong current of precedents — a derelict on the waters of the
law." Lambert v. California, 355 U.S. 225, 232, 78 S.Ct. 240,
245, 2 L.Ed.2d 228 (1957) (Frankfurter, J., dissenting). A
canvass of decisions in other jurisdictions shows that the tort
of bad faith claims practices has won widespread (albeit far
from universal) acceptance.*fn41 The justification for

the tort is set forth in Egan v. Mutual of Omaha Insurance Co.,
24 Cal.3d 809, 169 Cal.Rptr. 691, 620 P.2d 141 (1979):

   . . the law implies in every contract a
  covenant of good faith and fair dealing. The
  implied promise requires each contracting party
  to refrain from doing anything to injure the
  right of the other to receive the benefits of the

  . . . [an] insurer, when determining whether to
  settle a claim [within a third-party liability
  insurance policy], must give at least as much
  consideration to the welfare of its insured as it
  gives to its own interests.

    The implied covenant imposes obligations not
  only as to claims by a third party but also as to
  those by an insured. In both contexts the
  obligations of the insurer are merely two
  different aspects of the same duty. When the
  insurer unreasonably and in bad faith withholds
  payment of the claim of its insured, it is
  subject to liability in tort. For the insurer to
  fulfill its obligation not to impair the right of
  the insured to receive the benefits of the
  agreement, it again must give at least as much
  consideration to the latter's interests as it
  does to its own.

    The insured in a contract like the one before
  us does not seek to obtain a commercial advantage
  by purchasing the policy — rather,

  he seeks protection against calamity.

  The special relationship between the insurer and
  the insured illustrates the public policy
  considerations that may support exemplary damages
  in cases such as this.

    As one commentary has noted, "The insurers'
  obligations are . . . rooted in their status as
  purveyors of a vital service labeled quasi-public
  in nature. Suppliers of services affected with a
  public interest must take the public's interest
  seriously, where necessary placing it before
  their interest in maximizing gains and limiting
  disbursements . . ." The obligations of good
  faith and fair dealing encompass qualities of
  decency and humanity inherent in the
  responsibilities of a fiduciary. Insurers hold
  themselves out as fiduciaries, and with the
  public's trust must go private responsibility
  consonant with that trust. Furthermore, the
  relationship of insurer and insured is inherently
  unbalanced; the adhesive nature of insurance
  contracts places the insurer in a superior
  bargaining position.

Id. at 818-19, 820, 169 Cal.Rptr. at 695, 696, 620 P.2d at 145, 146, (citations omitted).

Ledingham, like the California cases on which it relied, was based in part upon an extension to the first-party insurance context of the duty of good faith developed in third-party insurance "duty to settle" cases, see generally Conway v. Country Casualty Insurance Co., 92 Ill.2d 388, 399, 65 Ill.Dec. 934, 442 N.E.2d 245 (1982). Debolt criticized this aspect of Ledingham, noting that in third-party insurance cases, the insurer has the right to complete control over the negotiation and litigation of claims against the insured, a situation that does not obtain in the first-party context, in which the insured may at any time maintain an action for breach of contract. Debolt, 56 Ill. App.3d at 115, 13 Ill.Dec. at 660, 371 N.E.2d at 377. This distinction was rejected by our Court of Appeals construing Indiana law, in Craft v. Economy Fire & Casualty Co., 572 F.2d 565 (7th Cir. 1978):

  It does not necessarily follow [in the
  first-party insurance context] that the insurer
  is completely free of any obligation of good
  faith and fair dealing to its insured, since the
  latter duty is based on the reasonable
  expectations of the insured and the unequal
  bargaining positions of the contractants, rather
  than the insurance company's "control" of the

Id. at 569 (citation omitted).*fn42

Illinois recognizes the "public service" nature of the insurance business, and the unequal bargaining positions of insurer and insured, by way of its statutory scheme governing insurers. For example, Ill.Rev. Stat. ch. 73, § 766.6 (1981) sets forth an extensive list of "improper claims practices" the commission of which may give rise to administrative action by the state department of insurance.*fn43 See also, e.g., Ill.Rev. Stat. ch. 73, § 767.9 (1981) (requiring "policyholder security deposit accounts" to protect policyholders against insurer's insolvency); Ill.Rev.Stat. ch. 110, § 2-209(a)(4) (long-arm provision applying to those "contracting to insure any person, property or risk located within this State"); id. § 2-103(e) (action against insurer incorporated or doing business in Illinois may be brought in any county in which a plaintiff resides).

We think that the Illinois Supreme Court, were it faced with the issue, would follow the California line of cases and hold that an insured may maintain a cause of action in tort against an insurer that has acted in bad faith or dealt unfairly with the insured.*fn44 It would also hold, we believe, that the existence of the limited remedy permitted by Ill.Rev.Stat. ch. 73, § 767 (1981) does not preclude or weigh against recognition of such a tort remedy.*fn45 Neither of these holdings works a "dramatic expansion" in state law, for, as we have noted, the Illinois courts have split both on the preclusive effect of § 767 and on the availability of a "bad faith" tort cause of action apart from any question of preemption.*fn46

The contours of the "bad faith" tort may be briefly sketched out.*fn47 While punitive damages may be available in some cases, they clearly are not available in all cases. Under Illinois law, punitive damages may be awarded only where the defendant has acted in a fraudulent, malicious, wanton, or oppressive manner. Kelsay v. Motorola, Inc., 74 Ill.2d 172, 178, 23 Ill.Dec. 559, 565, 384 N.E.2d 353, 359 (1978). In determining whether punitive damages are available in a given case, one must look at the defendant's motive, purpose, and state of mind. See Allabastro v. Cummins, 90 Ill. App.3d 394, 400, 45 Ill.Dec. 753, 757, 413 N.E.2d 86, 90 (1st Dist. 1980). It may also be appropriate in certain cases to consider the relative bargaining strengths of the parties. In contrast, in order to establish liability for compensatory damages in a "bad faith" case, the standard is similar, though not identical, to that under § 767: "unreasonable" conduct, or conduct "without reasonable cause." See Smith v. Metropolitan Life Insurance Co., 550 F. Supp. 896, 900 (N.D.Ill. 1982). Where, for example, the insurer has denied a claim based on a good faith dispute as to coverage, the insured's bad faith claim will fail. See, e.g., Vernon Fire & Casualty Insurance Co. v. Sharp, 264 Ind. 599, 349 N.E.2d 173, 184 (1976); State Farm General Insurance Co. v. Clifton, 86 N.M. 757, 527 P.2d 798 (1974). In the contrasting circumstances presented in these two cases it is inappropriate for us to say more regarding the dimensions of plaintiffs' claims until they are developed by discovery and trial.


For the reasons expressed above, the motion to dismiss No. 82 C 6789 is denied, and the motion to dismiss counts 2 and 4 of the complaint in No. 82 C 5628 is denied. Defendants are ordered to answer in 14 days. Discovery/trial scheduled heretofore established to stand.

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