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06/10/87 Pedro Morel, v. Coronet Insurance Company

June 10, 1987

PEDRO MOREL, APPELLANT

v.

CORONET INSURANCE COMPANY, APPELLEE

EFFECTIVE JANUARY 1, 1984, PUBLIC ACT 83-588 AMENDED SECTION 143B TO REMOVE THE $500 LIMITATIONS FROM THE STATUTE. SEE ILL. RE

v.

STAT. 1985, CH. 73, PAR. 755B.



SUPREME COURT OF ILLINOIS

509 N.E.2d 996, 117 Ill. 2d 18, 109 Ill. Dec. 157 1987.IL.791

Appeal from the Appellate Court for the First District; heard in that court on appeal from the Circuit Court of Cook County, the Hon. David J. Shields, Judge, presiding.

APPELLATE Judges:

JUSTICE MILLER delivered the opinion of the court. JUSTICE GOLDENHERSH took no part in the consideration or decision of this case.

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE MILLER

Plaintiff, Pedro Morel, filed suit against his insurer, defendant Coronet Insurance Company, alleging that Coronet's deduction of attorney fees from funds recovered by Coronet on the plaintiff's behalf violated section 143b of the Illinois Insurance Code (Ill. Rev. Stat. 1981, ch. 73, par. 755b). Finding that the charges deducted by defendant Coronet were incurred expenses, which may be deducted by an insurer under section 143b, rather than administrative expenses, which cannot be deducted under the statute, the trial Judge granted the defendant's motion to dismiss the lawsuit. The appellate court affirmed the dismissal, finding that the attorney fees deducted by Coronet were incurred expenses under section 143b. (138 Ill. App. 3d 963). We allowed the plaintiff's petition for leave to appeal, pursuant to Rule 315 (103 Ill. 2d R. 315).

The record discloses that on February 3, 1979, the plaintiff was involved in an automobile accident, which resulted in damage to his vehicle. The defendant, Coronet Insurance, insured the plaintiff against property damage to his vehicle under a policy which apparently had a $250 deductible. (Plaintiff's complaint mentions a $200 deductible; all other references to the deductible place the amount at $250. That part of the insurance policy stating the deductible is not contained in the record.) Pursuant to the policy, the defendant reimbursed the plaintiff for the amount of damage to his vehicle, minus a $250 deductible.

The insurance policy subrogated the defendant to the plaintiff's right of recovery for the amount the company paid to the plaintiff under the policy; section 143b subrogated plaintiff's deductible to the defendant, provided that the defendant pay over to the plaintiff his pro rata share of the net recovery after defendant deducted its incurred expenses. The defendant insurer attempted to settle plaintiff's claim with the party causing the damage, but was unsuccessful. Subsequently, the defendant turned plaintiff's claim over to the law firm which handled most of the defendant's litigation and claims. An agreement between the defendant insurer and the law firm provided that the firm received an annual retainer fee from the defendant. The firm did not bill the defendant on an hourly or contingent fee basis and did not bill on a case-by-case basis; rather, the retainer fee was adjusted annually, based upon the total number of cases handled by the firm. The agreement between defendant and the law firm required the firm to handle all cases the defendant gave them. Counsel for the defendant stated that although the law firm's work did not consist exclusively of cases received from the defendant, the defendant's cases comprised 95 to 99% of the firm's business. Both the plaintiff and the defendant referred to the law firm as defendant's "house counsel"; at oral argument before this court, counsel for the defendant suggested that because the firm was an independent law firm whose members are not salaried employees of the defendant, the term "house counsel" was somewhat of a misnomer. The defendant, in its answers to the plaintiff's interrogatories, stated that the law firm acts as house counsel to the defendant; in contrast to the oral arguments of its counsel, however, the defendant's answers, which were filed with the circuit court, affirmatively state that "each of the attorneys employed by the firm receives a retainer or salary from Coronet Insurance Company." The defendant refused to disclose to plaintiff the amounts of defendant's payments to the firm.

The law firm retained by the defendant ultimately settled the case with the person who collided with the plaintiff, recovering $272.71, 80% of the original loss. The defendant insurer determined that an 80% pro rata share of plaintiff's $250 deductible was $200. The defendant then forwarded a check to the plaintiff in the amount of $133.34, which was two-thirds of the amount of the plaintiff's pro rata $200 share. The defendant stated that it was withholding $66.66, one-third of plaintiff's share of his deductible, as payment of attorney fees incident to the recovery. The plaintiff endorsed and presented for payment the check tendered by the insurer. Subsequently, while conferring with his attorneys on another matter, the plaintiff questioned the propriety of the defendant's retention of attorney fees from the recovery of his deductible. The present litigation ensued. Plaintiff brought his lawsuit individually and as a representative of all persons insured by Coronet from whom Coronet had deducted attorney fees from amounts recovered on behalf of the insureds.

At the time the defendant withheld one-third of the recovery of plaintiff's deductible, section 143b of the Illinois Insurance Code provided:

"Any insurance carrier whose payment to its insured is reduced by a deductible amount under a policy providing collision coverage is subrogated to its insured's entire collision loss claim including the deductible amount . . .. In claims for less than $500, if the deductible amount is included in the subrogated loss claim the insurance carrier shall pay the full pro rata deductible share to its insured out of the net recovery on the subrogated claim. In claims for less than $500, administrative expenses of the insurance carrier cannot be deducted from the gross recovery, and only incurred expenses of the carrier, such as attorney's fees, collection fees and adjuster's fees, may be deducted therefrom to determine the net recovery." (Ill. Rev. Stat. 1981, ch. 73, par. 755b.)

Contending that the fees paid to its house counsel were an incurred expense rather than an administrative expense under section 143b, defendant Coronet filed a motion to dismiss the plaintiff's amended complaint. The trial Judge received memoranda of law from the parties and heard oral arguments in support of and against the defendant's motion to dismiss. The trial Judge then ruled that the sums deducted by the defendant for attorney fees were incurred expenses, which could properly be deducted from the plaintiff's recovery under section 143b. Accordingly, the trial Judge granted the defendant's motion to dismiss under section 2-619(a)(9) of the Code of Civil Procedure. (Ill. Rev. Stat. 1983, ch. 110, par. 2-619(a)(9).) The appellate court affirmed the dismissal, concluding that the costs deducted from an insured's gross recovery were incurred expenses under section 143b.

The plaintiff contends that an insurer's annual retainer payments to a law firm acting as house counsel are administrative expenses, because the retainer fee exists regardless of whether the firm handles one particular case or another. The plaintiff submits that the fees the defendant pays to its retained law firm under the agreement bear no relationship to the time spent or work done on the plaintiff's subrogation claim or any other individual case. Rather, plaintiff argues, the one-third of his recovered deductible withheld by the defendant was an arbitrary figure entirely unrelated to the amount the defendant paid its attorneys for the plaintiff's case or other subrogation cases.

The defendant presented in the trial court an affidavit from one of the members of the law firm retained by the defendant. The affidavit states that the retainer fee the defendant pays to the firm is based upon the total volume of cases handled by the firm. Additionally, the affidavit explains that, in subrogation cases involving $500 or less, the amounts withheld by defendant from insured's recoveries have never been sufficient to compensate the defendant for the retainer fee the defendant pays the law firm for handling these cases. The affidavit does not disclose the amount of the retainer fee, or whether the law firm maintains records of time expended or results reached in particular cases. The affidavit similarly does not disclose whether the retainer fee paid to the firm by the defendant exceeds only the amounts ...


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