State and federal courts in Illinois have arrived at a number of different conclusions with respect to the issue of whether § 155 preempts the common law tort claim based on an insurer's bad faith denial of coverage. The short answer, however, in this case is that § 155 preempts, at most, common law actions predicated on an insurer's failure to pay a claim by the insured for a loss suffered by the insured itself. It does not preempt common law actions based on unreasonable refusals to settle a third party's claim against the insured. See National Union Fire Ins. Co. v. Continental Illinois Corp., 673 F. Supp. 267, 271 (N.D.Ill. 1987) (Shadur, J.). See also Ranger Ins. Co. v. Home Indemnity Co., 714 F. Supp. 956, (N.D.Ill. 1989) (Aspen, J.); Verlan, Ltd. v. John L. Armitage & Co., 695 F. Supp. 955, 957-58 (N.D.Ill. 1988) (Conlon, J.). Thus O'Neil's claim for compensatory and punitive damages in tort based on National Union's alleged failure to contribute to a settlement is not preempted.
Insofar as O'Neil's bad faith tort claim seeks compensatory damages, an alternative ground for the Court's holding that the claim is not preempted is its opinion in Chicago HMO v. TransPacific Life Ins. Co., 622 F. Supp. 489 (N.D.Ill. 1985) (Rovner, J.), that § 155 preempts common law tort claims for punitive damages but not claims for compenstory damages. Section 155's preemptive effect has been the subject of continuing disagreement. A number of cases have held that § 155 preempts claims for both compensatory and punitive damages. See Impex Shrimp & Fish Co. v. Aetna Casualty & Surety Co., 686 F. Supp. 183 (N.D.Ill. 1985) (Grady, J.); Zakarian v. Prudential Ins. Co., 626 F. Supp. 420, 422 (N.D.Ill. 1984) (Grady, J.); Aabye v. Security-Connecticut Life Ins. Co., 586 F. Supp. 5 (N.D.Ill. 1984) (Aspen, J.); Abbott Laboratories v. Granite State Ins. Co., 573 F. Supp. 193 (N.D.Ill. 1983) (Shadur, J.); Shaw v. Equitable Life Assurance Soc., No. 82 C 1421 (Oct. 29, 1982) (Getzendanner, J.); Henke v. Travelers Ins. Co., No. 80 C 5068 (N.D.Ill. Oct. 21, 1981) (Moran, J.); Kinney v. St. Paul Mercury Ins. Co., 120 Ill. App. 3d 294, 458 N.E.2d 79, 75 Ill. Dec. 911 (1st Dist. 1983); Debolt v. Mutual of Omaha, 56 Ill. App. 3d 111, 371 N.E.2d 373, 13 Ill. Dec. 656 (3d Dist. 1978); Tobolt v. Allstate Ins. Co., 75 Ill. App. 3d 57, 70, 393 N.E.2d 1171, 1181, 30 Ill. Dec. 824, 834 (1st Dist. 1979); Hamilton v. Safeway Ins. Co., 104 Ill. App. 3d 353, 432 N.E.2d 996, 60 Ill. Dec. 97 (1st Dist. 1982). A few cases have held that § 155 does not preempt tort claims for either compensatory or punitive damages. See Roberts v. Western-Southern Life Ins. Co., 568 F. Supp. 536 (N.D.Ill. 1983) (Marshall, J.); Allianz Underwriters, Inc. v. Rusty Jones, Inc., No. 84 C 10860 (Aug. 6, 1985) (Holderman, J.). An increasing number of cases, including three decisions by judges who had previously held that all claims are preempted, have held that § 155 preempts claims for punitive damages but does not preempt claims for compensatory damages. See Chicago HMO, supra, 622 F. Supp. 489; Langendorf v. Travelers State Ins. Co., 625 F. Supp. 1103, 1107-08 (N.D.Ill. 1985) (Getzendanner, J.); American Dental Ass'n v. Hartford Steam Boiler Inspection and Ins. Co., 625 F. Supp. 364, 367-69 (N.D.Ill. 1985) (Plunkett, J.); Scheinfeld v. American Family Mutual Ins. Co., 624 F. Supp. 698, 701-03 (N.D.Ill. 1985) (Getzendanner, J.); Barr Co. v. Safeco Ins. Co., 583 F. Supp. 248, 255-56 (N.D.Ill. 1984) (Moran, J.); Raprager v. Allstate Ins. Co., 183 Ill. App. 3d 847, 539 N.E.2d 787, 132 Ill. Dec. 224 (2d Dist. 1989); Kohlmeier v. Shelter Ins. Co., 170 Ill. App. 3d 643, 656-57, 525 N.E.2d 94, 104, 121 Ill. Dec. 288, 298 (5th Dist. 1988); McCall v. Health Care Service Corp., 117 Ill. App. 3d 107, 452 N.E.2d 893, 72 Ill. Dec. 640 (4th Dist. 1983); Hoffman v. Allstate Ins. Co., 85 Ill. App. 3d 631, 407 N.E.2d 156, 40 Ill. Dec. 925 (2d Dist. 1980). Cf. Lynch v. Mid-America Fire & Marine Ins. Co., 94 Ill. App. 3d 21, 418 N.E.2d 421, 49 Ill. Dec. 567 (4th Dist. 1981) (superceded version of § 155 did not preempt claim for compensatory damages).
In 1988, the Seventh Circuit touched on this issue in Kush v. American States Ins. Co., 853 F.2d 1380 (7th Cir. 1988). The court noted that the First and the Third District Illinois Appellate Courts had held that § 155 preempted tort claims based on an implied duty of good faith fair dealing, and it noted a possible split with other districts. 853 F.2d at 1385. The court did not, however, distinguish between compensatory and punitive damages or discuss the cases recognizing such a distinction. Furthermore, the Kush court was not faced with a claim for bad faith denial of coverage, but rather with a claim for intentional infliction of emotional distress. Relying on Combs v. Insurance Co., 146 Ill. App. 3d 957, 497 N.E.2d 503, 100 Ill. Dec. 525 (1st Dist. 1986), the court held that the tort of intentional infliction of emotional distress was preempted by § 155. Id. The court also cited, in support, Langendorf, supra, where the district court had held that § 155 preempted actions for intentional infliction of emotional distress but did not preempt actions for compensatory damages based on a bad faith denial of coverage.
Judge Moran has concluded that Kush effectively overturned the line of cases in which district courts have held that § 155 does not preempt claims for compensatory damage. See Barr Co. v. Safeco Ins. Co., 706 F. Supp. 616 (N.D.Ill. 1989) (Moran, J.). This Court disagrees. First, the Seventh Circuit appeared to recognize a distinction between the torts of bad faith denial of coverage and intentional infliction of emotional distress; it recognized a split with respect to the former tort, which it did not resolve, and relied instead on precedents with respect to the latter tort, including Langendorf, which held that the preemptive effect differed with respect to the two torts. Second, the Seventh Circuit did not even address the differences between compensatory and punitive damages or the case law which held that the preemptive effect differed with respect to the two types of claims. Third, Kush was apparently decided without the benefit of Raprager, supra, and apparently without the benefit of Kohlmeier, supra, which was decided shortly before the decision in Kush. These decisions reflect an increasing acceptance in Illinois appellate courts of the argument that compensatory damages are not preempted by § 155. The Court finds, therefore, that Kush has not effectively overturned Chicago HMO and other cases which hold that § 155 preempts claims for punitive damages but not claims for compensatory damages. Accordingly, even assuming that losses based on an insurer's denial of coverage with respect to a third party's claim against an insured were covered by § 155, the Court would hold that the insured's claim for compensatory damages is not preempted.
B. Adequacy of Allegations
National Union argues that O'Neil's allegations in Count II fail to state a claim for two independent reasons. First, National Union contends that the tort of bad faith denial of insurance coverage does not allow recovery for an insured which is a commercial entity securing business insurance. In support of this proposition, National Union cites Impex, supra, 686 F. Supp. at 186. Impex reached this decision on the basis that nothing in the seminal case recognizing this tort, Ledingham v. Blue Cross Plan for Hospital Care of Hospital Service Corp., 29 Ill. App. 3d 339, 330 N.E. 2d 540 (5th Dist. 1975), rev'd on other grounds, 64 Ill. 2d 338, 356 N.E.2d 75, 1 Ill. Dec. 75 (1976), "supports an expansion of its holding to business-insurance relationships." 686 F. Supp. at 186. This Court finds no basis for denying such a distinction. Certainly Ledingham does not draw distinctions between different classes of plaintiffs. Furthermore, other cases recognizing the existence of this tort have involved commercial business plaintiffs. See, e.g., Verlan, supra, 695 F. Supp. 955; National Union, supra, 673 F. Supp. 267; American Dental Ass'n, supra, 625 F. Supp. 364; Chicago HMO, supra, 622 F. Supp. 489; Barr, supra, 583 F. Supp. 248.
Second, National Union argues, in its reply brief only, that O'Neil has failed to state a cause of action because it has not alleged that National Union knew that it was fully liable on the insurance contract. The Court initially notes that this argument was raised for the first time in defendant's reply brief, and that it does not directly respond to any argument raised in O'Neil's brief. On this basis, the Court need not consider the argument at all. However, the Court also finds that the argument fails on its merits. Although Langendorf, supra, holds that an element of the tort is that "the insurer must have known it was liable on the contract but nonetheless refused to pay," 625 F. Supp. at 1108, the cases which it cites for this proposition, Barr, supra, 583 F. Supp. at 259, and U.N.R., supra, 607 F. Supp. 855, are merely examples where such an allegation was made; those cases do not support an argument that such an allegation is essential in all instances. Without deciding whether such an allegation is always necessary, this Court finds that the allegations in O'Neil's complaint are sufficient in describing the insurer's state of mind. Thus, the complaint alleges, for example, that National Union acknowledged that the claim was in fact covered by the policy, never raised any defense of lack of notice or any other defense besides the date of the occurrence, and continued to deny coverage even after plaintiff demonstrated that the date of the occurrence was within the period covered by the policy. Accordingly, the Court denies National Union's motion to dismiss Count II for failure to state a claim.
VI. CONSUMER FRAUD
In Count III, O'Neil alleges a violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, Ill. Rev. Stat. ch. 121 1/2 §§ 261 et seq. Defendant raises three grounds in support of its motion to dismiss this count.
First, National Union argues that the complaint does not make the necessary allegation that there was fraud at the time of the sale of the insurance policy. On the contrary, Count III clearly alleges that National Union concealed from O'Neil a practice of avoiding prompt and complete payment of claims which it knew were due and owing and of delaying acknowledgment or denial of insurance coverage and improperly denying coverage for valid claims. National Union's first argument is therefore without merit.
Second, National Union argues that O'Neil is not a "consumer" for purposes of the Consumer Fraud Act. The Act defines "consumer" as "any person who purchases or contracts for the purchase of merchandise not for sale in the ordinary course of his trade or business but for his use or that of a member of his household." Ill. Rev. Stat. ch. 121 1/2 § 261(e). The Act further defines "person" as "any natural person or his legal representative, partnership, corporation (domestic and foreign), company, trust, business entity or association . . . ." Ill. Rev. Stat. ch. 121 1/2 § 261(c). The Act thus specifically applies to business corporations such as O'Neil. See Continental Grain Co. v. Pullman Standard, Inc., 690 F. Supp. 628, 633 (N.D.Ill. 1988) (Leinenweber, J.); Impex Shrimp & Fish Co. v. Aetna Casualty & Surety Co., 686 F. Supp. 183, 186 (N.D.Ill. 1985) (Grady, J.); First Comics, Inc. v. World Color Press, Inc., 672 F. Supp. 1064, 1067 (N.D.Ill. 1987) (Duff, J.); Jays Foods, Inc. v. Frito-Lay, Inc., 664 F. Supp. 364, 368 (N.D.Ill. 1987) (Moran, J.), aff'd without opinion, 860 F.2d 1082 (7th Cir. 1988), cert. denied, 484 U.S. 1014, 109 S. Ct. 1125, 103 L. Ed. 2d 188 (1989).
In support of its argument to the contrary, National Union cites National Union Fire Ins. Co. v. Continental Illinois Corp., 652 F. Supp. 858 (N.D.Ill. 1986) (Shadur, J.) and Huss v. Goldman, Sachs & Co., 635 F. Supp. 1227 (N.D.Ill. 1986) (Shadur, J.). Huss does not address the issue of who constitutes a "consumer," but merely cites Newman-Green, Inc. v. Alfonzo-Larrain R., 590 F. Supp. 1083, 1085-88 (N.D.Ill. 1984) (Shadur, J.) (discussed below), for the proposition that one-on-one misrepresentations and omissions are not covered by the Act. In National Union, Judge Shadur rejected a consumer fraud claim on two grounds. First, he held that plaintiff was not a "consumer" because it was a beneficiary, rather than the purchaser, of an insurance policy. That ground is inapplicable in the instant case. Second, relying on Newman-Green, supra, Judge Shadur held that the consumer fraud claim was defective because "it strains normal language usage to speak of an individual commercial purchaser . . . in a one on one (that is, separately negotiated) transaction as somehow being a 'consumer'." 652 F. Supp. at 861. The basis for this holding appears to be not that plaintiff was a business and not therefore a "consumer," but rather that plaintiff's allegations did not satisfy the "public injury" requirement which Newman-Green described and which this Court rejects as explained below. Thus neither of the cases cited by National Union in support of its argument that a commercial business is not a consumer stands for such a proposition, and the Court rejects defendant's argument.
Third, National Union argues that plaintiff has not made the necessary allegation of a public injury or of injury to consumers generally. There is a split in the case law on the issue of whether such a requirement exists. Cases finding such a requirement include Refco, Inc. v. Troika Vestment Limited, 702 F. Supp. 684, 690 (N.D.Ill. 1988) (Shadur, J.) (Act is intended to reach practices of type which affect consumers generally and is not an additional remedy to redress a purely private wrong); First Comics, supra, 672 F. Supp. 1064 (when the suit involves a private dispute between two businessmen, consumer injury is required); Maduff v. Life Ins. Co., 657 F. Supp. 437, 440 (N.D.Ill. 1987) (Bua, J.) (requiring allegation of a public injury or defect on consumer generally); Newman-Green, supra, 590 F. Supp. at 1087 ("plaintiff must show defendant has engaged in deceptive practices in promoting its goods or services to its market in general"); Century Universal Enterprises, Inc. v. Triana Development Corp., 158 Ill. App. 3d 182, 199, 510 N.E.2d 1260, 1269-70, 110 Ill. Dec. 229, 238-39 (2d Dist. 1987) (agreeing with Newman-Green); Frahm v. Urkovich, 113 Ill. App. 3d 580, 586, 447 N.E.2d 1007, 1011, 69 Ill. Dec. 572, 576 (1st Dist. 1983) (the Act is intended to reach practices which affect consumers generally and is not available as additional remedy to redress purely private wrong); Exchange National Bank v. Farm Bureau Life Ins. Co., 108 Ill. App. 3d 212, 215, 438 N.E.2d 1247, 1250, 63 Ill. Dec. 884, 887 (the Act "does not apply to every situation where . . . the only actual controversy is whether an isolated breach of contract occurred;" complaint must allege that the practices are "part of a pattern" of defendant's activities) (3d Dist. 1982).
Cases finding no such requirement, or that no such allegation is required where the plaintiff was itself the consumer (rather than, for instance, a competitor) include: Hometown Savings & Loan Ass'n v. Moseley Securities Corp., 703 F. Supp. 723, 726-27 (N.D.Ill. 1988) (Norgle, J.) ("no public injury or effect on consumers is necessary to bring an action within the purview of the Act"); Impex, supra, 686 F. Supp. at 187 ("as long as the plaintiff, whether a business entity or a person, is a consumer, it need only show personal injury caused by the fraudulent or deceptive acts"); Jays Foods, supra, 664 F. Supp. at 368-69 (where a suit is between competitors, plaintiff must show injury to consumers generally, but where plaintiff is itself a consumer, further public injury may not need to be shown); Haroco, Inc. v. American Nat'l Bank & Trust Co., 647 F. Supp. 1026, 1034-35 (N.D.Ill. 1986) (Decker, J.) (no public injury required); Barr, supra, 583 F. Supp. at 258 ("insurance contracts are matters of public policy, and misrepresentations made with regard to such contracts would be the type covered by the Act"); In re CLDC Mgmt. Corp., 18 Bankr. 797, 800 (Bankr. N.D.Ill. 1982); Warren v. LeMay, 142 Ill. App. 3d 550, 567-68, 491 N.E.2d 464, 474-75, 96 Ill. Dec. 418, 428-29 (5th Dist. 1986) (a single transaction is sufficient to establish a claim under the Act, citing cases); Duncavage v. Allen, 147 Ill. App. 3d 88, 497 N.E.2d 433, 441, 100 Ill. Dec. 455, 463 (1st Dist. 1986); Tague v. Molitor Motor Co., 139 Ill. App. 3d 313, 316, 487 N.E.2d 436, 437-38, 93 Ill. Dec. 769, 770-71 (5th Dist. 1985); M&W Gear Co. v. A W Dynamometer, Inc., 97 Ill. App. 3d 904, 913-14, 424 N.E.2d 356, 365, 53 Ill. Dec. 721, 732 (4th Dist. 1981).
This Court agrees with, and adopts, the reasoning of those cases which hold that no public injury or effect on consumers generally is required, at least in circumstances where the plaintiff itself is a consumer. Furthermore, even if there is such a public injury or effect on consumers requirement, O'Neil has met this requirement. O'Neil alleges that National Union has (1) "engaged in a practice of avoiding prompt and complete payment of claims which they knew were due and owing National Union insureds;" (2) "engaged in a practice of delaying acknowledgment or denial of insurance coverage and improperly denying coverage for valid claims as a means of forcing insureds to accept less coverage than National Union actually owed under its policies;" and (3) "misled O'Neil and other insureds into believing that National Union would promptly and fully defend and indemnify them for any covered loss within policy limits." Substantially similar allegations were held in Barr, supra, 583 F. Supp. at 257-58, to constitute "more than an isolated breach of contract" and thus to remove the claim from the public injury line of cases.
The Court having rejected each of National Union's three arguments with respect to Count III, the motion to dismiss that count is denied.
For the reasons described above, National Union's motion to dismiss the complaint is denied.
MEMORANDUM OPINION AND ORDER
The following addendum is hereby added to the Court's opinion of August 31, 1989 in this case:
In Part VI of this Opinion, the Court held that a plaintiff need not plead an injury to consumers generally in order to state a claim for violation of the Illinois Consumer Fraud and Deceptive Trade Practices Act. On September 19, 1989, the Seventh Circuit Court of Appeals decided First Comics, Inc. v. World Color Press, Inc., 884 F.2d 1033 which held in the context of an antitrust suit under the Robinson-Patman Act that the Illinois Consumer Fraud and Deceptive Trade Practices Act does require proof of injury to consumers generally. Although the facts of First Comics are different from those in this case, the principle announced by the Seventh Circuit is broad enough on its face to apply to this case. However broad First Comics may reach, however, it does not affect the result in this case because the Court in this case also found that plaintiff has complied with any requirement that it allege injury to consumers generally.