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08/13/87 Robert Nicholson, v. St. Anne Lanes

August 13, 1987





512 N.E.2d 127, 158 Ill. App. 3d 838, 111 Ill. Dec. 223 1987.IL.1174

Appeal from the Circuit Court of Kankakee County; the Hon. Patrick M. Burns, Judge, presiding.


PRESIDING JUSTICE BARRY delivered the opinion of the court. HEIPLE and SCOTT, JJ., concur.


The Illinois Insurance Guaranty Fund (hereafter, Fund) appeals from two orders of the circuit court of Kankakee County, one compelling St. Anne Lanes, Inc., defendant, to assign to plaintiff its purported "bad faith" cause of action against its insolvent insurer and against the Fund as successor to the insurer and the other one granting plaintiff's motion to strike the appearance of the Fund.

This appeal had its inception in a personal injury suit brought by plaintiff Robert Nicholson against St. Anne Lanes, Inc., owner of a bowling alley where plaintiff, a customer, was injured when he slipped and fell on a bar of soap in defendant's rest room. Before the trial commenced in October of 1981, defendant's insurer, Proprietors Insurance Company, had been placed in liquidation and the Illinois Guaranty Fund became obligated on the claim. Plaintiff obtained a judgment of $779,400 against defendant corporation, and we affirmed that judgment on appeal in Nicholson v. St. Anne Lanes, Inc. (1985), 136 Ill. App. 3d 664, 483 N.E.2d 291.

While the appeal was pending, a garnishment summons was filed against the Fund, and after the appeal on the merits was concluded, the Fund tendered the statutory limits of its liability, $150,000, in order to satisfy the garnishment order. A few days later, plaintiff served a citation to discover assets on defendant St. Anne Lanes, Inc., and at a hearing on the citation, the testimony indicated that St. Anne Lanes had no assets or claims other than a potential claim against its insurer and its successor for a bad-faith failure to settle.

The trial court ordered St. Anne Lanes to assign the cause of action to plaintiff over the objection of the Fund. A short time later the court approved a substitution of attorneys for the Fund. The new attorneys filed a motion to vacate the assignment order, and plaintiff then filed a motion to strike the Funds appearance in the case on the ground that the Fund was not a party to the lawsuit and had not filed a petition to intervene. The trial court granted the motion to strike the Fund's appearance. This appeal followed.

Under Illinois law, an insurance company may become liable for the entire judgment recovered against its insured, irrespective of policy limits, if its conduct constitutes fraud, negligence, or bad faith. (E.g., Cernocky v. Indemnity Insurance Co. of North America (1966), 69 Ill. App. 2d 196, 216 N.E.2d 198.) Therefore, where, as here, the judgment exceeded the policy limits and the defendant is insolvent, a bad-faith cause of action may be the defendant's only asset of value to the plaintiff.

The Fund contends that the order compelling St. Anne Lanes, Inc., to assign its alleged bad-faith cause of action to plaintiff is contrary to Illinois public policy in that it encourages and invites a sort of court-approved champerty and maintenance. (See Ill. Rev. Stat. 1985, ch. 13, par. 22.) The Fund relies upon Roundtree v. Barringer (1981), 92 Ill. App. 3d 903, 416 N.E.2d 675, where the court refused to order the assignment of a bad-faith claim on the ground that the courts should not encourage litigation by allowing some third party to determine whether a lawsuit should be brought.

We find more persuasive the holding to the contrary in Phelan v. State Farm Mutual Automobile Insurance Co. (1983), 114 Ill. App. 3d 96, 448 N.E.2d 579, where the court ruled that the law of Illinois does not prevent a trial court from ordering the assignment to the plaintiff of a bad-faith claim against the insurer of the judgment debtor. In reaching this result, the court expressly rejected the reasoning of Roundtree and held that the mere possibility of collusive conduct is not a valid basis for denying a right of action. Collusive conduct could be raised as a defense where appropriate. The court also observed: "As a practical matter, an injured plaintiff is in a better position to determine whether an action for bad faith may lie against a defendant's insurer since it is the plaintiff who conducts settlement negotiations with defendant's insurer." 114 Ill. App. 3d 96, 102, 448 N.E.2d 579.

Phelan is in accord with an earlier case, Brown v. State Farm Mutual Automobile Insurance Association (1971), 1 Ill. App. 3d 47, 272 N.E.2d 261, where the court reviewed cases from other States and held that a cause of action for bad-faith failure to settle a claim can be assigned to the insured's judgment creditor. In determining that the cause of action was assignable, the court said:

"The right of action in the insured, if any exists, arises out of the fact that by contract the insurer takes charge of the defense of the litigation, and of possible settlement. . . . By reason of its assumption of control of the litigation, the insurance company undertakes a duty to treat the insured fairly. When the suit is in excess of the policy the insurer may, by deciding to continue litigation, expose the insured to a far greater risk ...

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