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RUSH PRESBYTERIAN ST. LUKE'S MED. CTR. v. SAFECO I

May 16, 1989

RUSH PRESBYTERIAN ST. LUKE'S MEDICAL CENTER, Plaintiff,
v.
SAFECO INSURANCE COMPANY OF AMERICA, et al., Defendants. WINDOWMASTER CORPORATION, a Florida corporation, et al., Plaintiffs, v. MORSE/DIESEL, INC., a Delaware corporation, et al., Defendants



The opinion of the court was delivered by: DUFF

 BRIAN BARNETT DUFF, UNITED STATES DISTRICT JUDGE

 In advance of trial a number of parties to this complex dispute over a construction project have filed motions seeking to pare the issues. The court will begin with motions to dismiss claims under Rule 12(b) (6), Fed.R.Civ.P., then advance to the motions for summary judgment under Rule 56. The court will provide facts only when pertinent to resolution of a motion.

 Safeco's Motion to Dismiss

 Safeco Insurance Company of America seeks to dismiss Counts 3 and 5 of the Third Amended Complaint of Windowmaster Corporation and Nathan and Bernice Walberg (hereinafter "Windowmaster"). Safeco provided a surety bond on behalf of Windowmaster Corporation which ran in favor of Morse/Diesel, Inc. This bond covered Windowmaster's subcontract work on construction of a new hospital wing at Rush Presbyterian St. Luke's Medical Center. Safeco issued its bond in return for premiums and an indemnification agreement from Windowmaster.

 In Count 3 Windowmaster contends that Safeco breached the indemnity agreement by failing to raise Windowmaster's defenses against Morse/Diesel when the latter declared a default and made a claim under the bond. *fn1" Windowmaster asserts that this failure amounted to a breach of Safeco's contractual duty of good faith. This court discussed this duty under Illinois law in an earlier opinion. See Windowmaster Corporation v. Morse/Diesel, Inc., 722 F. Supp. 1532, 1988 U.S. Dist. LEXIS 14921 (N.D. Ill. 1988). Safeco claims, however, that Count 3 fails to allege a cause of action consistent with the theory outlined in that earlier opinion. Safeco argues that, according to the decisions rendered in Hartford Acc. and Indem. Co. v. Millis Roofing, 11 Mass. App. Ct. 998, 418 N.E.2d 645 (1981), and Elmore v. Morrison Assur. Co., Inc., 502 So. 2d 378 (Ala. 1987), Windowmaster can claim a breach of the duty of good faith only if it alleges dishonest or spiteful purposes, conscious doing of a wrong, or self-interested motives on the part of Safeco.

 While Safeco may have characterized the law of Massachusetts and Alabama accurately, such is not the law of Illinois, which this court (as noted in its earlier opinion) applies to the dispute over the indemnity agreement. As the appellate court held in Cernocky v. Indemnity Ins. Co. of N. America, 69 Ill. App. 2d 196, 205, 216 N.E.2d 198, 203 (1966), "negligence or bad faith is the Illinois standard of conduct to be applied to the facts in determining whether the insurer" -- and, as noted in this court's earlier opinion, a surety -- "is liable beyond the policy limits for failing to settle the case. The 'fraud' standard is not required." The Cernocky court was clear that negligence and bad faith are synonymous in this context. "The words 'good faith' and 'bad faith' are not particular words of art as used here. They mean either being faithful or unfaithful to the duty or obligation that is owed." Id. at 205-06.

 Illinois thus requires only a showing of negligence in actions alleging the breach of a surety's duty of good faith toward its insured, where the insured is obligated to indemnify the surety. Even if Illinois were to adopt the standard suggested by Safeco, however, Count 3 would still survive Safeco's motion to dismiss. In paras. 29-31 of the Third Amended Complaint, Windowmaster alleges that Safeco knew Windowmaster had performed properly under its subcontract with Morse/Diesel, despite Morse/Diesel's declaration to the contrary. Nevertheless, Safeco proceeded to assume Windowmaster's duties toward Morse/Diesel and agreed to complete the Rush project -- a decision which Windowmaster claims was unnecessary, costly, and one taken in derogation of Windowmaster's rights under its indemnity contract with Safeco. Windowmaster also claims that Safeco made knowing misrepresentations in order to obtain Windowmaster's cooperation in its scheme. Id. at para. 45. This court thus denies Safeco's motion to dismiss Windowmaster's Count 3.

 Safeco's attack on Windowmaster's Count 5 is more successful. In Count 5, Windowmaster claims that Safeco committed the Illinois tort of fraud and misrepresentation. Under Illinois law, a plaintiff claiming this tort must allege that (1) the defendant made a false statement of material fact, as opposed to a statement of opinion; (2) the defendant knew or believed the statement to be false; (3) the plaintiff reasonably believed in and relied upon the statement; (4) the defendant made the statement for the purpose of inducing the plaintiff to act; and (5) the plaintiff's reliance on the statement caused him damage. See Glazewski v. Coronet Insurance Co., 108 Ill. 2d 243, 249, 483 N.E.2d 1263, 1266, 91 Ill. Dec. 628 (1985); Richmond v. Blair, 142 Ill. App. 3d 251, 255, 488 N.E.2d 563, 566, 94 Ill. Dec. 564 (1985).

 In its Third Amended Complaint, Windowmaster alleges that Safeco represented to Windowmaster that it had "fully analyzed" the status of the Rush project, Morse/Diesel's allegations against Windowmaster, and Windowmaster's allegations against Morse/Diesel prior to entering into a July 16, 1981 agreement with Morse/Diesel to remedy Windowmaster's alleged default. See Third Amended Complaint at paras. 42-44. Safeco argues that its declaration that it had "fully analyzed" these matters was a statement of opinion, not fact. The distinction in Illinois law between facts and opinions is quite metaphysical, but it is not totally lacking in practicality. The court in Oltmer v. Zamora, 94 Ill. App. 3d 651, 653-54, 418 N.E.2d 506, 508, 49 Ill. Dec. 652 (1981), relied on a portion of the Restatement (Second) of Torts ยง 539 (1965) to guide it in its consideration of the distinction:

 
(1) A statement of opinion as to facts not disclosed and not otherwise known to the recipient may, if it is reasonable to do so, be interpreted by him as an implied statement
 
(a) that the facts known to the maker are not incompatible with his opinion; or
 
(b) that he knows facts sufficient to justify him in forming it.
 
(2) In determining whether a statement of opinion may reasonably be so interpreted, the recipient's belief as to whether the maker has an adverse interest is important.

 Taking the allegations of the Third Amended Complaint in light of this analysis, the court concludes for purposes of this motion that paras. 42-44 could be statements of fact, or at least are statements that could imply facts. A statement that one has "fully analyzed" a problem could be an opinion as to the amount of effort expended in analysis. It could also imply, however, that the declarant has not discovered facts which would preclude one from believing that such analysis was full. The latter interpretation could obtain in this dispute. Moreover, Windowmaster had no reason to suspect that Safeco's interests were adverse to its own, especially in light of Safeco's duty under Illinois law to make Windowmaster's interests paramount. See Windowmaster, Mem. Op. at 6-7. This makes the possibility that facts are imbedded in Safeco's representation even greater. See Oltmer, 94 Ill. App. 3d at 655 (undisclosed adverse interest can turn advice into a statement of fact for purposes of the tort of misrepresentation).

 The court thus concludes that Windowmaster has alleged the first element of the Illinois tort of misrepresentation sufficiently. Windowmaster alleges further that Safeco knew that its representations were false, that Windowmaster relied on these representations in the reasonable belief that they were true, and that Safeco made them in order to induce Windowmaster to cooperate with Safeco pursuant to the July 16, 1981 letter agreement. See Third Amended Complaint, paras. 45-47. Nevertheless, Windowmaster has failed to allege the fifth element of the tort. That element is injury resulting from the induced conduct. Windowmaster attempts to allege five harms stemming from its decision to cooperate with Safeco pursuant to the July 16 letter agreement. Windowmaster states:

 
As a result of the described . . . misrepresentations Windowmaster and the Walbergs have suffered or will suffer damages which include but are not limited to the following:
 
a. A sum in excess of $ 400,000.00 for sums due it under its subcontract for work substantially ...

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