United States District Court, Northern District of Illinois, E.D
September 25, 1985
ROBERT A. SCHEINFELD, PLAINTIFF,
AMERICAN FAMILY MUTUAL INSURANCE COMPANY, DEFENDANT.
The opinion of the court was delivered by: Getzendanner, District Judge:
MEMORANDUM OPINION AND ORDER
This action on a casualty insurance contract, coupled with a
claim for defamation and tortious breach of a duty to act fairly
and in good faith, is before the court on a motion to dismiss
Count IV of Plaintiff's Amended Complaint. Jurisdiction is
predicated on the basis of diversity under 28 U.S.C. § 1332.
Plaintiff Robert Scheinfeld is alleged to be a Texas resident,
and defendant American Family Mutual Insurance Company is alleged
to have been organized under Wisconsin law and to have its
principal place of business there. It is apparent from the relief
sought that the amount in controversy satisfies the
jurisdictional requirement, though this is not expressly stated.
For the reasons stated below, the court grants the motion.
For purposes of the present motion, the facts alleged in
plaintiff's complaint are taken as true. In Count I, plaintiff
alleges that on or about December 1982, American Family issued a
two-year "Businessowners Package Policy" of insurance on
Scheinfeld's business property. Plaintiff further alleges that on
December 31, 1983, Scheinfeld's business office in Chicago,
Illinois was burglarized, resulting in loss of property and
business income; that these losses were insured against by
that Scheinfeld performed all conditions precedent to performance
of American Family's policy obligations; and that American Family
breached the insurance contract by knowingly, willfully, and
intentionally failing to pay the claim despite Scheinfeld's
demands. Count I closes with a prayer for more than $17,983 in
property and income loss, plus interest, costs, and attorney's
Count II repeats the allegations of Count I, adding that
American Family's "delay in responding" and "refusal to pay"
constitutes "unreasonable and vexatious action within the meaning
of" section 155 of the Illinois Insurance Code, Ill.Rev.Stat.,
ch. 73, ¶ 767. That section reads, in pertinent part:
In any action by or against a company wherein there
is in issue the liability of a company on a policy or
policies of insurance or the amount of the loss
payable thereunder, or for an unreasonable delay in
settling a claim, and it appears to the court that
such action or delay is vexatious and unreasonable,
the court may allow as part of the taxable costs in
the action reasonable attorney fees, other costs,
plus an amount not to exceed any one of the following
(a) 25% of the amount which the Court or jury finds
such party is entitled to recover against the
company, exclusive of all costs:
(c) the excess of the amount which the court or
jury finds such party is entitled to recover,
exclusive of costs, over the amount if any, which the
company offered to pay in settlement of the claim
prior to the action.
Count II closes with a prayer for $17,983 plus interest, costs,
and attorney's fees, as well as $10,000 "pursuant to" ¶ 767.
Count III repeats the allegations of the first two counts,
adding that after Scheinfeld filed his policy claim, American
Family employees, with reckless disregard for the truth, made
defamatory statements about Scheinfeld, including statements that
his community reputation was not good and that he was stealing
goods and services from others. In Count III, plaintiff further
alleges that American Family's statements damaged Scheinfeld's
community reputation, resulting in lost business, expenditures to
defend himself, and severe mental distress. Count III closes with
a prayer for special, actual, and general damages, plus punitive
damages in excess of $75,000, costs, and attorney's fees.
After being granted leave, Scheinfeld amended his complaint by
adding a fourth count to allege a tortious breach of a "duty of
good faith and fair dealing." Count IV repeats most of the
allegations of Count I, including the allegation that American
Family "knowingly, willfully and intentionally fail[ed] to pay
plaintiff's claim." Count IV then alleges that "[t]he actions of
[American Family] and its employees in its investigation and
denial of plaintiff's claim have been wilful, reckless, unfair
and in bad faith" as a direct and proximate result of which
Scheinfeld "has been injured." Count IV closes with a prayer for
$17,983 plus interest and costs, in addition to more than
$100,000 in compensatory and more than $500,000 in punitive
damages. The basis of American Family's motion to dismiss is that
Count IV fails to state a cause of action under applicable
Illinois law and that, even if such a claim is stated, Illinois
law would limit Scheinfeld's damages to those recoverable under
his contract of insurance and section 155 of the Illinois
A motion to dismiss for failure to state a claim should be
granted only if it appears "beyond doubt that the plaintiff can
prove no set of facts in support of his claim which would entitle
him to relief." Haines v. Kerner, 404 U.S. 519, 520-21, 92 S.Ct.
594, 596, 30 L.Ed.2d 652 (1972) (quoting Conley v. Gibson,
355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957). In
deciding the motion, the court must presume all factual
allegations of the complaint to be true and make all reasonable
inferences in favor of the non-movant. 2A J. Moore, Moore's
Federal Practice, ¶ 12.07[2.-5] (2d ed. 1985). Nonetheless,
unsupported by any factual assertions will not withstand a motion
to dismiss." Briscoe v. LaHue, 663 F.2d 713, 723 (7th Cir. 1981),
aff'd, 460 U.S. 325, 103 S.Ct. 1108, 75 L.Ed.2d 96 (1983).
Because jurisdiction in this case rests solely on diversity of
citizenship, the rule of Erie Railroad v. Tompkins, 304 U.S. 64,
58 S.Ct. 817, 82 L.Ed. 1188 (1938) requires the court to apply
state substantive law, which in this case is the law of Illinois.
American Family has argued that any recovery by Scheinfeld
under a duty of good faith and fair dealing is limited to that
allowed by section 155 of the Illinois Insurance Code,
Ill.Rev.Stat., ch. 73, ¶ 767. In an earlier case, this court
found the statutory remedies under section 155 to preempt any
common-law recovery for an alleged breach of the duty of good
faith and fair dealing in an insurer's conduct towards its
insured. Shaw v. Equitable Life Assurance Society, No. 82 C 1421
(N.D.Ill. Oct. 29, 1982). Since then, two other judges of this
district who had similarly held reconsidered the issue and have
held that section 155 preempts punitive but not compensatory
damages for cases alleging such a tort. UNR Industries, Inc. v.
Continental Insurance Co., 607 F. Supp. 855 (N.D.Ill. 1984) (Hart,
J.); Barr Co. v. Safeco Insurance Co., 583 F. Supp. 248 (N.D.Ill.
1984) (Moran, J.). Two other judges apparently adhere to the view
that section 155 preempts all tort claims against an insurer
predicated on a tortious refusal to pay. Aabye v.
Security-Connecticut Life Insurance Co., 586 F. Supp. 5 (N.D.Ill.
1984) (Aspen, J.); Abbott Laboratories v. Granite State Insurance
Co., 573 F. Supp. 193 (N.D.Ill. 1983) (Shadur, J.). One judge has
declined to find that section 155 preempts any common-law
remedies in tort at all. Roberts v. Western-Southern Life
Insurance Co., 568 F. Supp. 536 (N.D.Ill. 1983) (Marshall, J.).
As noted by Judge Hart in UNR, 607 F. Supp. at 865, every
Illinois Appellate Court addressing the issue has agreed that §
155 of the Illinois Insurance Code preempts a punitive damage
award for an insurer's bad faith and unfair dealing in refusing
to settle a claim. Fisher v. Fidelity & Deposit Co. of Maryland,
125 Ill.App.3d 632, 80 Ill.Dec. 880, 466 N.E.2d 332 (5th Dist.
1984); Kinney v. St. Paul Mercury Insurance Co., 120 Ill. App.3d 294,
75 Ill.Dec. 911, 458 N.E.2d 79 (1st Dist. 1983); McCall v.
Health Care Service Corp., 117 Ill.App.3d 107, 72 Ill.Dec. 640,
452 N.E.2d 893 (4th Dist. 1983); Hoffman v. Allstate Insurance
Co., 85 Ill.App.3d 631, 40 Ill.Dec. 925, 407 N.E.2d 156 (2d Dist.
1980); Debolt v. Mutual of Omaha, 56 Ill.App.3d 111, 13 Ill.Dec.
656, 371 N.E.2d 373 (3d Dist. 1978). Under this court's Erie
obligations, the uniform result adopted by these decision cannot
be disregarded absent "persuasive data that the highest court of
the state would decide otherwise." West v. AT & T, 311 U.S. 223,
237, 61 S.Ct. 179, 183, 85 L.Ed. 139 (1940), quoted in UNR, 607
F. Supp. at 865-66. While plaintiff has made some cogent arguments
about the full availability of common-law remedies for an
insurer's bad faith conduct, none of those arguments are
sufficiently persuasive to overcome the combined weight of the
In contrast to the uniform rule regarding the preemption of
punitive damages, the Illinois Appellate Courts, along with the
federal courts from this district, are split as to whether
section 155 preempts a plaintiff's right to claim compensatory
damages from an insurer's willful breach of bad faith and fair
dealing. See UNR, 607 F. Supp. at 866-68; Barr, 583 F. Supp. at
256; Hoffman, 40 Ill.Dec. 659, 407 N.E.2d at 159; McCall, 70
Ill.Dec. at 643, 452 N.E.2d at 896 (4th Dist. 1983) (all holding
that section 155 does not preempt compensatory damages). Cf.
Fisher, 80 Ill.Dec. at 887, 466 N.E.2d at 339 (holding that
section 155 preempts punitive damages recovery without discussing
compensatory damages). While other appellate panels have
consistently held that section 155 preempts all tort recovery,
see UNR, 607 F. Supp. at 867 (citing cases), those cases generally
do not distinguish between compensatory and punitive damages, and
appear to grow out of a situation where the compensatory damages
sought were no different than those recoverable on the insurance
contract. The court finds the analyses of Judge Hart and Judge
Moran in UNR and Barr, respectively, to be persuasive and holds
that section 155 does not preempt compensatory damages from an
insurer's bad faith actions in all cases. The question then is
whether the plaintiff has stated a claim in tort for such
compensatory damages here.
An Illinois court in 1975 first recognized such an independent
cause of action in tort based on an insurer's breach of the duty
of good faith and fair dealing toward its insured. Ledingham v.
Blue Cross Plan for Hospital Care of Hospital Service Corp.,
29 Ill. App.3d 339, 350, 330 N.E.2d 540 (5th Dist. 1975), rev'd on
other grounds, 64 Ill.2d 338, 1 Ill.Dec. 75, 356 N.E.2d 75
(1976). Basing its opinion chiefly on a line of California cases,
the Ledingham court stated that in unusual cases breach of
contract can constitute an independent willful tort, and held
that one such case involves breach of the duty implied by law for
each party to an insurance contract to act in good faith and to
deal fairly with the other. 330 N.E.2d at 548. Although finding
no bad faith on the facts, the Court noted that such a claim
could be stated where a plaintiff alleges
threatened and actual bad faith refusals to make
payments under the policy, maliciously employed by
defendants in concert with false and threatening
communications directed to the policyholder for the
purposes of causing him to surrender his policy or
disadvantageously settle a nonexistent dispute. . . .
330 N.E.2d at 549 (quoting from Fletcher v. Western National Life
Insurance Co., 10 Cal.App.3d 376, 401, 89 Cal.Rptr. 78, 93
Although Ledingham has been criticized in other Illinois
appellate districts for its failure to address the possible
preemptive effects of the Illinois Insurance Code, see, e.g.,
Tobolt v. Allstate Insurance Co., 75 Ill.App.3d 57, 30 Ill.Dec.
824, 832-33, 393 N.E.2d 1171, 1179-80 (1st Dist. 1979), the
Illinois Supreme Court has cited Ledingham as authority for the
proposition that conduct that breaches a contract may constitute
an independent tort. See Kelsay v. Motorola, Inc., 74 Ill.2d 172,
187, 23 Ill.Dec. 559, 566, 384 N.E.2d 353, 360 (1978). The tort
of an insurer's bad faith conduct towards an insured, as opposed
to the availability of common-law recovery for the tort, has been
recognized in at least four of the five appellate districts of
Illinois, including the First District in which this court sits.
See, e.g., Pekin Insurance Co. v. Home Insurance Co.,
134 Ill. App.3d 31, 89 Ill.Dec. 72, 479 N.E.2d 1078 (1st Dist. 1985).
As the Pekin court declared, "It is well established that an
insurer has a duty to exercise good faith and to deal fairly with
all parties an insured by its policies. . . . Further, an insurer
who breaches this duty will be liable for the tort of bad faith."
479 N.E.2d at 1080.
Despite the Pekin court's characterization of this duty as
"well established," the decision in Ledingham relied mostly on
case law from outside Illinois, and Ledingham rarely has been
applied due to the uniform case law which holds section 155 of
the Insurance Code to preempt punitive damage awards for an
insurer's unreasonable and vexatious conduct. Indeed, many of the
Illinois cases can be read as simply assuming the existence of
the tort for purposes of discussing the preemption issue.
A further problem with Ledingham is the obscurity of its
underlying rationale. As pointed out in Debolt v. Mutual of
Omaha, 56 Ill.App.3d 111, 13 Ill.Dec. 656, 660, 371 N.E.2d 373,
377 (3d Dist. 1978), the reviewing court in Ledingham relied on
law enunciated in the "duty to settle" cases which arise when an
insurer is "granted by contract the right to complete control
over the negotiation and litigation of claims against its
insured." Where an insurer in bad faith ignores the interest of
its insured in avoiding a judgment beyond the excess of the
policy limits, the insured suffers monetary damages "not
recoverable in an action on the contract" and is therefore
allowed to recover those damages for "breach of an implied duty
of good faith." 371 N.E.2d at 377, 13 Ill.Dec. at 660. The Debolt
court found this line of cases inapplicable where an insured
attempts to predicate a tort upon an insurer's simple refusal to
pay, however unjustified, since the insured in such situations
can maintain an action on the contract at any time to obtain the
benefits owed. Id.
Even those courts following Ledingham have recognized the tort
of an insurer's bad faith conduct only in exceptional
circumstances. According to Pekin, an Illinois court "will only
recognize a bad faith claim when an insurer has acted in a
vexatious, unreasonable, or outrageous manner towards its insured
parties." Pekin, 89 Ill.Dec. at 74, 479 N.E.2d at 1080. Faced
with a punitive damages allegation that "defendant has wilfully
and wrongfully breached its fiduciary duties . . . by
deliberately and wrongfully" denying coverage, an earlier panel
of Illinois appellate judges has written: "This is insufficient
to allege anything more than a breach of contract. Most refusals
to conform to a contract are deliberate: if recovery is allowed,
they obviously are wrongful. The plaintiff has not alleged
outrageous conduct. . . ." Florsheim v. Travelers Indemnity Co.,
75 Ill.App.3d 298, 310, 30 Ill.Dec. 876, 886, 393 N.E.2d 1223,
1233 (1st Dist. 1979). The only case outside the "duty to settle"
context where a bad faith claim has succeeded is Hoffman v.
Allstate Insurance Co., 85 Ill.App.2d 631, 40 Ill.Dec. 925,
407 N.E.2d 156 (2d Dist. 1980), where an insurer took possession of
plaintiff's damaged car, towed it to an unknown location,
informed plaintiff that the car was a total loss but then
spuriously deducted from the plaintiff's recovery expenses for
bringing the car up to retail standards. When plaintiff asked to
view the car for the purpose of having it appraised, the insurer
refused to reveal its location. The court found these allegations
sufficient to withstand a motion to dismiss.
The present Count IV alleges merely that American Family's
"actions . . . in its investigation and denial of plaintiff's
claim have been wilful, reckless, unfair and in bad faith and in
breach of [its] duty to act fairly and in good faith. The term
"wilful" may be considered equivalent to "deliberate," the term
"reckless" is conclusory, and the allegations of "unfair" and
"bad faith" actions simply mirror the name of the tort. All are
unsupported by any allegation of fact to give them meaning other
than a reference to American Family's "actions . . . in its
investigation and denial" of plaintiff's claim. Investigation
would normally occur after any insurance policy claim is made,
and denial is precisely what gives rise to an action on the
contract in the first place.
As noted by this court in a similar case, while malice itself
may be "averred generally" in a complaint, Fed.R.Civ.P. 9(b), an
allegation of specific conduct constituting the tort of bad-faith
breach of contract must accompany a malice averment. Shaw v.
Equitable Life Assurance Society, No. 82 C 1421 (N.D.Ill. Oct.
29, 1982) (order granting motion to strike). Sheer bad faith,
without some accompanying vexatious or outrageous conduct which
inflicts damages not recoverable in a contract action, has never
been held under Illinois law to constitute the tort of bad-faith
breach of contract by an insurer. At the very least, a plaintiff
should allege that the insurer must have known that it was liable
on the contract but nonetheless refused to pay, and also have
known that the insured would suffer substantial damage from the
refusal. See Barr, 583 F. Supp. at 259; Urfer v. Country Mutual
Insurance Co., 60 Ill.App.3d 469, 17 Ill.Dec. 744,
376 N.E.2d 1073 (4th Dist. 1978). Scheinfeld has not alleged either of these
Scheinfeld's Count IV is more laconic than the conclusory
allegations of bad faith upheld against a 12(b)(6) motion in
Kelly v. Stratton, 552 F. Supp. 641, 643 (N.D.Ill. 1982), and
certainly briefer than those in Barr, 583 F. Supp. at 259, or UNR,
607 F. Supp. at 858, both of which involved alleged
misrepresentation. Count IV similarly falls far short of the
extensively alleged misdeeds contemplated by the Ledingham court
when it first enunciated the tort of bad faith conduct towards an
insured. 330 N.E.2d at 549.
Construing all inferences in Scheinfeld's favor, American
Family's unspecified "actions" could also be taken to refer to
the allegations regarding defamation from Count III. Scheinfeld
has not incorporated those allegations into Count IV, however,
and appears to base his tort claim solely on American Family's
bad faith "investigation and denial" of his claim. While American
Family's post-denial behavior in defaming Scheinfeld might
satisfy the element of outrageous conduct for stating a tort
claim based on an insurer's bad faith conduct, any bad faith
claim based on defamation would merely duplicate the recovery
already requested in Count III and unnecessarily complicate
issues. Since the tort requires "outrageous" conduct, adding such
a count would not appear to lighten Scheinfeld's burden of proof
in Count III, and the obscure nature of the duty would pose
numerous problems in formulating coherent jury instructions. If
plaintiff uncovers legal authority or can allege specific facts
which would support compensatory damages beyond those already
sought, plaintiff may seek leave to amend.
Accordingly, the motion to dismiss Count IV of plaintiff's
amended complaint is granted.
It is so ordered.
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