only, such offer to remain open for two weeks only. Karon advised
American Home that in light of Dykema's potential exposure to a
multi-million dollar verdict, "efforts [should] be made to
extricate Dykema for an amount up to the $750,000 demand."
American Home did not respond to either Karon's advice or the
settlement offer prior to its expiration date.
The Barker plaintiffs renewed the settlement offer on August
16, 1982. Karon once again wrote to Conklin and Adler reiterating
its belief that settlement should be pursued.
At Dykema's request, Karon pursued negotiations with the Barker
plaintiffs. The claims were finally settled for the amount of
$612,500. American Home contributed $306,250 towards the
settlement without prejudice to its right to contest coverage.
Northbrook, by virtue of a loan receipt agreement with Dykema,
contributed an additional $306,250. Dykema was granted leave by
the trial court in Barker to pay one-half of Karon's fees (upon
refusal to do so by American Home) without prejudice to its right
to seek reimbursement.
A. Choice of Law.
The Court's jurisdiction in this matter is founded upon
28 U.S.C. § 1332. In such a diversity action, the Court is required
to apply the law of the state in which the Court sits, including
the forum state's choice-of-law rules. Klaxon v. Stentor Electric
Manufacturing Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477
(1941). Conflict rules are examined, however, only when a
difference in law will make a difference to the resolution of an
issue. International Administrators, Inc. v. Life Insurance Co.
of North America, 753 F.2d 1373, 1376 n. 4 (7th Cir. 1985). On
issues about which there is no disagreement among the contact
states, a federal court will apply the law of the forum state.
Id. Finally, the choice-of-law inquiry must be made for each
issue separately. Id.
The Court will first determine which law controls the dispute
between American Home and Dykema. Under Illinois law, the factors
that determine which law should be applied to insurance contract
disputes are the location of the subject matter, the place of
delivery of the contract, the domicile of the insured or of the
insurer, the place of the last act to give rise to a valid
contract, the place of performance, or other place bearing a
relationship to the general contract. Hofeld v. Nationwide Life
Insurance Co., 59 Ill.2d 522, 528, 322 N.E.2d 454 (1975) (citing
12 Appleman, Insurance Law and Practice sec. 7074 (1943)).
Here, Dykema is a Michigan partnership engaged in the practice
of law, primarily in Michigan. American Home is a New York
corporation with its principal place of business in New York. The
last act to give rise to the insurance contract between American
Home and Dykema was the countersignature by American Home's
agent, which took place in Michigan. In short, Michigan would
appear to be the state with the most significant stake in the
resolution of the insurance coverage dispute.
Nevertheless, American Home has argued that since the public
policy of Illinois would preclude coverage of Dykema for the
unlawful conduct alleged by the Barker plaintiffs, then this
Court must apply Illinois law. More particularly, American Home
argues that because (1) the Barker complaint sought punitive
damages, and (2) the settlement sum of $612,500 did not specify
whether the payment represented compensatory or punitive damages,
then the Illinois policy prohibiting insurance coverage for
punitive damages precludes Dykema's coverage for its liability in
the Barker lawsuit.
American Home's reliance on this Illinois public policy is
misplaced. Illinois public policy has little or no bearing on
this lawsuit. Except for the fact that Northbrook's principal
place of business is in Illinois, Illinois has no stake
whatsoever in the outcome of this case. See International
Administrators, Inc. v. Life Insurance Co. of North America, 753
F.2d at 1377 n. 4 ("Even if the Illinois policy [according
insurance company a statutory privilege] is
a strong one, it is hard to see why Illinois policy comes into
the picture at all."); Aetna Casualty & Surety Co. v. Enright,
258 So.2d 472 (Fla.App. 1972) (Florida public policy did not
apply where insurance policy in dispute was issued to a New York
resident in New York).
Moreover, American Home has offered no evidence to show that
the Barker settlement figure included a sum for punitive damages.
In the absence of such a showing, Illinois' policy prohibiting
insurance coverage for punitive damages should play no part in
the determination of whether and to what extent Dykema was
covered under the American Home policy. Cf. Space Conditioning,
Inc. v. Insurance Co. of North America, 294 F. Supp. 1290, 1296
(E.D.Mich. 1968) aff'd 419 F.2d 836 (6th Cir. 1970) (the fact
that verdict against the insured was a general one and may have
included damages not covered by insurance policy was no defense
to action against the insurer by insured for wrongfully refusing
defense of the initial action).
Finally, American Home has misapplied the Illinois policy. In
Beaver v. Country Mutual Insurance Co., 95 Ill.App.3d 1122, 51
Ill.Dec. 500, 420 N.E.2d 1058 (5th Dist. 1981), the Illinois
appellate court held that Illinois public policy prohibits
insurance for punitive damages arising out of one's own conduct.
The Illinois court specifically noted, however, that the holding
in Beaver did not affect the earlier ruling in Scott v. Instant
Parking, Inc., 105 Ill.App.2d 133, 245 N.E.2d 124 (1st Dist.
1969). In Scott the court held that an employer may insure itself
against vicarious liability for punitive damages assessed against
it as a result of its employee's wrongful conduct. The Beaver
court explained the rationale behind Scott:
"In these cases a factor not always focused upon, yet
of crucial importance, is the point that if the
employer did not participate in the wrong, the policy
of preventing the wrongdoer from escaping the
penalties for his wrong is inapplicable."
95 Ill.App.3d at 1125, 51 Ill.Dec. 500,