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ABBOTT LABORATORIES v. GRANITE STATE INS. CO.

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


September 14, 1983

ABBOTT LABORATORIES, ET AL., PLAINTIFFS,
v.
GRANITE STATE INSURANCE CO., DEFENDANT.

The opinion of the court was delivered by: Shadur, District Judge.

MEMORANDUM OPINION AND ORDER

Abbott Laboratories and Abbott Laboratories International Company (collectively "Abbott" in the singular) has brought this four-count diversity action challenging the refusal by its insurer, Granite State Insurance Company ("Granite"), to indemnify Abbott for certain insured losses:

    1. Count I is a contractual claim for the amount
  due on the insurance policy.

    2. Count II is based on Illinois Insurance Code §
  155 ("Section 155"), Ill.Rev.Stat. ch. 73, § 767,
  which permits certain extraordinary costs to be taxed
  against an insurer that vexatiously and unreasonably
  refuses to pay: attorneys' fees plus an additional
  amount not to exceed any of the three ceiling amounts
  prescribed in Section 155.

    3. Count III purports to be a tort claim seeking
  compensatory and punitive damages for Granite's
  wilful refusal to pay — a breach of its duty of
  good faith and fair dealing towards insureds.

    4. Count IV characterizes Granite's assertedly
  vexatious and unreasonable refusal to pay as an
  "improper claims practice" proscribed by Illinois
  Insurance Code § 154.6 ("Section 154.6"),
  Ill.Rev.Stat. ch. 73, § 766.6, and seeks
  punitive damages under that provision.

Granite has now moved to dismiss Counts III and IV for failure to state a claim. For the reasons stated in this memorandum opinion and order, its motion is granted.

Count III

Granite contends Section 155*fn1 has displaced the common law tort remedy for vexatious delay asserted in Count III. As this Court explained in Evaluation Systems, Inc. v. Aetna Life Insurance Co., 555 F. Supp. 116, 120 (N.D.Ill. 1982), the Illinois Appellate Courts are sharply divided on that issue:

  Without even addressing the preemptive implications
  of the statutory remedy, the Fifth District Appellate
  Court recognized

  an independent tort action against insurers for
  breach of their implied duty of good faith and fair
  dealing. Ledingham v. Blue Cross Plan for Hospital
  Care, 29 Ill. App.3d 339, 330 N.E.2d 540 (5th Dist.
  1975). Ledingham has had a mixed reception in the
  other Illinois Appellate districts. Both the First
  and Third Districts have disapproved of Ledingham,
  concluding the original Section 155 foreclosed any
  judicial enhancement (via common law tort remedy) of
  recovery for vexatious delay. Tobolt v. Allstate
  Insurance Co., 75 Ill. App.3d 57, [30 Ill.Dec. 824],
  393 N.E.2d 1171 (1st Dist. 1979); Debolt v. Mutual of
  Omaha, 56 Ill. App.3d 111, [13 Ill.Dec. 656],
  371 N.E.2d 373 (3d Dist. 1978). Tobolt also found the
  1977 amendment to Section 155 (its current version)
  also manifested a legislative intent to preempt the
  field. However the Fourth District has endorsed the
  availability of Ledingham's tort remedy in cases to
  which the amended Section 155 cannot be retroactively
  applied (it has not yet ruled whether the present
  Section 155 has preemptive effect). Lynch v.
  Mid-America Fire & Marine, 94 Ill. App.3d 21, [49
  Ill.Dec. 567], 418 N.E.2d 421 (4th Dist. 1981). And
  the Second District has said a tort remedy for
  compensatory damages may lie despite Section 155.
  Hoffman v. Allstate Insurance Co., 85 Ill. App.3d 631,
  [40 Ill.Dec. 925], 407 N.E.2d 156 (2d Dist. 1980).

Employing the "Supreme Court-predictive" approach to the Erie problem posed by that split of authority, this Court's colleague Judge Marshall recently concluded Section 155 did not preempt the Ledingham tort. Kelly v. Stratton, 552 F. Supp. 641 (N.D.Ill. 1982). However, for the reasons expounded at length in Commercial Discount Corp. v. King, 552 F. Supp. 841, 847-52 (N.D.Ill. 1982), this Court perceives its Erie obligations differently. In this Court's view Erie (as amplified in Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021, 85 L.Ed. 1477 (1941)) demands adherence to the Illinois "internal" choice of law rule that binds a state trial court to the decisions of the Appellate Court in its own district when the Appellate Courts diverge. In this case, this Court sits in the same position as a Cook County Circuit Judge in the First Appellate District, for the Illinois venue statute (Ill.Rev.Stat. ch. 110, § 2-101) would have permitted Abbott to sue Granite (a foreign corporation) in Cook County.*fn2 Consequently the position taken by the First Appellate District in Tobolt is dispositive here: Section 155 preempts any tort remedy for vexatious and unreasonable refusal to pay insurance proceeds. Count III must therefore be dismissed.

Count IV

Tobolt, 75 Ill. App.3d at 71, 30 Ill.Dec. at 834, 393 N.E.2d at 1181 also spells the demise of Count IV by refusing to find any private right of action for violations of Section 154.6:

  Plaintiffs cite the provisions of section 154.6 and
  its predecessor (Ill.Rev.Stat. 1977, ch. 73, par.
  766.6), defining an improper claims practice as

      (d) not attempting in good faith to effectuate
    prompt, fair and equitable settlement of claims
    submitted in which liability has become reasonably
    clear,

  as showing that the legislature by it has expressly
  ratified the cause of action [for the insurer's
  breach of its duty to deal in good faith with its
  insureds]. We disagree. That section is a definition
  section. It provides no remedy. Section 155 does.

No other Illinois appellate court appears to have addressed the issue. Under Erie principles that should settle the matter in Granite's favor.

Abbott nonetheless urges an implied right of action is maintainable under Sawyer Realty Group, Inc. v. Jarvis Corp., 89 Ill.2d 379, 59 Ill.Dec. 905, 432 N.E.2d 849 (1982). On the contrary, proper analysis of the Sawyer standard governing judicial recognition of an implied right of action fortifies Tobolt and defeats Abbott (89 Ill.2d at 386, 59 Ill.Dec. at 908, 432 N.E.2d at 852; emphasis added, citations omitted):

  It is clear that it is not necessary to show a
  specific legislative intent to create a private right
  of action. If there is no indication that the
  remedies available are only those the legislature
  expressed in the Act, then where it is consistent
  with the underlying purpose of the Act and
  necessary to achieve the aim of the legislation, a
  private right of action can be implied. . . . The
  court looks to the totality of circumstances in
  endeavoring to discover legislative intent.

No doubt authorizing private suits under Section 154.6 would be "consistent with" its underlying purpose of protecting insureds. But a private remedy is scarcely "necessary" to further that purpose. As Tobolt indicated, insureds can resort to Section 155 to redress any injury flowing from the insurer's vexatious refusal to pay. Section 155's ceilings on the penalty (a form of punitive damages) assessed for vexatious conduct reflect the Illinois General Assembly's judgment as to the necessary insurer's incentive to refrain from such conduct. If anything, such limitations on punitive damages militate against a finding of legislative intent to permit private actions under Section 154.6, for those constraints would otherwise be rendered nugatory.*fn3 Finally, Illinois Insurance Code § 154.8, Ill.Rev.Stat. ch. 73, § 766.8, empowers the Illinois Director of Insurance to issue cease and desist orders to any insurer who commits any "improper claims practice" enumerated in Section 154.6.

Conclusion

Granite's motion to dismiss Counts III and IV is granted.

Appendix

Debates begin to grow tiresome even to the debaters (let alone the audience) whenever the debaters begin to repeat themselves.[fn1a] But so long as the ongoing efforts to eliminate (or to impose significant curbs on) federal diversity jurisdiction do not bear fruit, definition of the federal courts' proper role in diversity cases remains highly important. And when so ordinarily thoughtful a jurist as this Court's colleague Prentice Marshall can fall victim to what this Court sees as flawed analysis in this area, this Court may perhaps be pardoned a further brief response. This Appendix will not deal chapter and verse with Judge Marshall's Roberts opinion, for a few salient points (supplementing this Court's Commercial Discount discussion) should suffice.

As a preliminary matter, this Court is of course keenly mindful that Erie v. Tompkins may forcefully be argued to undercut the Supremacy Clause. It does reduce the independent judging function of federal courts (including the Supreme Court) in diversity cases — the obligation to decide "cases" and "controversies" — to the task of slavish adherence to state court doctrine.[fn2a] But because this Court "writ[es] on the shores of Lake Michigan rather than the banks of the Potomac,"[fn3a] Erie and its progeny must be followed. What does that mean to the litigant?

Any proper response to that inquiry requires answering just why federal courts are obliged under Erie to apply state substantive law in disputes between diversity-of-citizenship adversaries. Erie itself supplies the answer (304 U.S. at 74-75, 58 S.Ct. at 820-821):

  Diversity of citizenship jurisdiction was conferred
  in order to prevent apprehended discrimination in
  state courts against those not citizens of the State.
  Swift v. Tyson introduced grave discrimination by
  non-citizens against citizens. It made rights enjoyed
  under the unwritten "general law" vary according to
  whether enforcement was sought in the state or in the
  federal court; and the privilege of selecting the
  court in which the right should be determined was
  conferred upon the non-citizen. Thus, the doctrine
  rendered impossible equal protection of the law. In
  attempting to promote uniformity of law throughout
  the United States, the doctrine had prevented
  uniformity in the administration of the law of the
  State.

Accord, Guaranty Trust Co. v. York, 326 U.S. 99, 109, 65 S.Ct. 1464, 1470, 89 L.Ed. 2079 (1945):

  The nub of the policy that underlies Erie R. Co. v.
  Tompkins is that for the same transaction the
  accident of a suit by a non-resident litigant in a
  federal court instead of in a State court a block
  away should not lead to a substantially different
  result.

Exactly the same idea was put succinctly in Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021, 85 L.Ed. 1477 (1941) (treating choice-of-law rules as substantive, not procedural, for Erie purposes):

  Otherwise, the accident of diversity of citizenship
  would constantly disturb equal administration of
  justice in coordinate state and federal courts
  sitting side by side.

If that concept of "equal administration of justice" is to have any meaning at all, it must mean the diversity plaintiff or defendant in the federal court system is required to be placed in as near a position as possible to the state court plaintiff or defendant asserting a like claim or defense.

From that perspective the most curious, and most troublesome, aspect of Roberts lies in Judge Marshall's total failure to discuss the Thorpe-Garcia dichotomy,*fn4 which under Erie and Klaxon is just as binding on us as any other Illinois choice-of-law, or other substantive law, rule. By what right may we federal judges ignore that clear and binding directive as to which Appellate Court decision to follow in case of conflict? Or is Judge Marshall somehow exercising the "predictive" approach sub silentio and deciding, despite any contrary indications from any Illinois appellate court at any level, that the Illinois Supreme Court would disapprove the rules enunciated in Thorpe and Garcia?

That really ought to end the debate before it begins. It is really not this Court's doctrine, but that of the Illinois courts, with which Judge Marshall's analysis quarrels. And one of the restraints Erie imposes is to make such a federal quarrel with state rules of law (in this case choice-of-law rules) impermissible. Nonetheless, because Roberts has other doctrinal disabilities, this Appendix will proceed to touch on a few.

For the vast majority of Illinois litigants the trial court (the Circuit Court) is the court of last resort. For the remaining small minority the Illinois Appellate Court is almost always the end of the litigation road. Only a comparative handful of cases finds its way to decision by the Illinois Supreme Court.*fn5 Indeed even in the series of Illinois Appellate Court cases that has generated the specific split among Appellate Districts triggering Roberts and this decision — though all five Districts have spoken to the issue and despite extensive law review comment highlighting the problem*fn6 — more than four years have elapsed since the split of authority first manifested itself, without the Illinois Supreme Court having settled the issue. In the meantime, if the experience in the federal courts is any indication,*fn7 many litigants have had their rights determined under the present regime. And for those in the state court system, the "present regime" is precisely parallel to what a comparable litigant would receive in this Court, not in Judge Marshall's.

Roberts posits a few hypotheticals to buttress its result. Those examples illustrate the possibility, in the Illinois system, that future appellate courts may differ with the existing appellate authority that, under Illinois internal choice-of-law rules,*fn8 the Illinois trial courts must follow.*fn9 That possibility of course exists (though neither Judge Marshall nor this Court is omniscient, so that his acting on that possibility poses a separate risk — if he is wrong in his prediction — that the federal litigant may get a different brand of justice than the Illinois courts would in fact deliver, not only at the trial court level commensurate with our own but at the Illinois Appellate Court level as well!*fn10). But even granting the possibility of a future difference, what Judge Marshall's approach does is to apply to every present suitor in a diversity conflict-of-authority situation a wholly different set of rules than the identical suitor would get in the state system. And that disparate treatment is given solely because — on the false assumption that all cases go all the way to the top of the state judicial ladder — the occasional litigant might obtain a different result under the approach this Court follows (adhering as it does to the Illinois rules governing precedential value).*fn11

That universalist approach, exemplified by Roberts, is the essence of forum-shopping. It is at war with the reason Erie overturned a century of practice under Swift v. Tyson. That is why Judge Marshall is simply wrong in saying (Roberts, 568 F. Supp. at 539):

  [W]e 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."

That is not at all a premise, but rather a conclusion — one dictated by the force of Erie and the mandate it gives to follow the Thorpe-Garcia rules.

Of course it is stifling for a free-spirited federal judge to be relegated to the position of a sounding board for state law — for the federal judiciary to be imprisoned by what we may view as the state law's inadequacies or injustices. However neither that subliminal level of impatience nor the kind of hypotheticals posed by Judge Marshall provides a warrant for indulging in the Roberts "solution."


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