United States District Court, Central District of Illinois, Springfield Division
March 11, 1993
KENNETH E. HULTZ, D/B/A HULTZ STANDARD SERVICE, PLAINTIFF-COUNTERDEFENDANT,
FEDERATED MUTUAL INSURANCE COMPANY, DEFENDANT-COUNTERPLAINTIFF.
The opinion of the court was delivered by: Richard Mills, District Judge:
This cause is before the Court on the recommendation of
United States Magistrate Judge Charles H. Evans to dismiss
Count II of Plaintiff's amended complaint.
28 U.S.C. § 636(b)(1).
Section 636 allows any party to appeal from or object to a
magistrate's recommendation "[w]ithin 10 days after being
served with a copy."
The Magistrate entered his recommendation on January 14,
1993. No objections or modifications have been filed since that
time. Therefore, without objection to and upon consideration of
the Magistrate's findings and conclusions, the Court adopts
in toto the reasoning of the recommendation. See Video Views,
Inc. v. Studio 21, Ltd., 797 F.2d 538 (7th Cir. 1986) (failure
to file objections with the district judge constitutes a waiver
of all factual and legal issues).
Ergo, Defendant's motion to dismiss Count II of Plaintiff's
amended complaint (d/e 32) is ALLOWED WITH PREJUDICE.
This recommendation is being submitted pursuant to Rule 1.4,
(A)(7) of the Rules of the United States District Court for the
Central District of Illinois.
Plaintiff Kenneth E. Hultz, d/b/a Hultz Standard Service
("Hultz") filed a three-count complaint against Federated
Mutual Insurance Company ("Federated") seeking, in part,
insurance coverage. Count II in Hultz's initial complaint
alleged Federated's refusal to cover its claim is vexatious and
unreasonable under Ill.Rev.Stat. Ch. 73 § 767 and Hultz sought
remedies afforded by both common law and statutory law under
section 767. Federated moved to dismiss with prejudice pursuant
to Fed.R.Civ.P. 12(b)(6) arguing, in part, that Count II failed
to state a claim as Ill.Rev.Stat. Ch. 73 § 767 preempts such
common law actions. Federated's motion was allowed and Hultz
was given leave to amend Count II.
Hultz's amended Count II, contained in its First Amended
Complaint, alleges that Federated owed Hultz a duty of good
faith in resolving its claim and that Federated breached its
duty in the following respects:
"By failing to sufficiently investigate Hultz'
claim to determined [sic] that contamination was
not caused by a leak of kerosene tank.
By failing to determine that Hultz' claim was
properly made to its agent, thus causing a delay
of resolution of the claim."
Hultz seeks compensatory damages for this cause of action.
Federated again moved to dismiss Count II with prejudice
pursuant to Fed.R.Civ.P. 12(b)(6) based on its position that
Ill.Rev.Stat. Ch. 73, § 767 preempts such common law claims for
breach of the duty of good faith. This Motion to Dismiss (d/e
32) is pending before the Court for determination.
Ill.Rev.Stat. Ch. 73, § 767 provides:
"Attorney fees. (1) 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 amounts:
(a) 25% of the amount which the court or jury
finds such party is entitled to recover against
the company, exclusive of all costs;
(b) $25,000. . . .
It is Federated's position, and this Court agrees, that the
controlling case law has determined that section 767 does
preempt common law claims for compensatory damages, such as
those sought by Hultz against Federated in Count II of the
First Amended Complaint.
In 1988, the Seventh Circuit decided Kush v. American States
Ins. Co., 853 F.2d 1380 (1988) wherein the court affirmed
dismissal with prejudice of the plaintiff's cause of action
seeking compensatory damages based on conduct proscribed by
section 767. The court noted that several Illinois appellate
courts have found that section 767 preempts claims based on the
implied duty of good faith and fair dealing. Kush held that the
Illinois legislature, via section 767, preempted the field:
"Section 155  may not be perfect. It strikes
a balance between the individual insured party's
need for compensation and the broad societal
interest in avoiding excessive damage awards that
result in price increases to all policyholders,
perhaps making some insurance prohibitively
expensive for the average consumer. Kush may wish
the balance struck another way, but he should
address that argument to the legislature."
Id. at 1386.
Thereafter, in 1990, Judge Mihm of the Central District
decided York v. Globe Life & Accident Ins. Co., 734 F. Supp. 340
(C.D.Ill. 1990) holding that section 767 preempts common law
actions alleging breach of the duty of good faith. There, the
plaintiff sought both compensatory and punitive damages against
its insurer alleging the insurer breached its duty to deal in
good faith in the handling of plaintiff's claims.
In ruling in favor of the insurer and finding that section
767 preempts such claims, the York court noted that it is bound
by the Seventh Circuit's interpretation of Illinois law in
Kush. Id. at 343. The York court found Kush persuasive as
precedent as Kush considered Combs v. Insurance Co. of
Illinois, 146 Ill. App.3d 957, 100 Ill.Dec. 525, 497 N.E.2d 503
(1st Dist. 1986), which traced the history of section 767 and
determined that the legislature had, "clearly manifested its
intent to preempt any action which alleged nothing more than
conduct prescribed by section ." Id. at 345. Moreover,
York agreed with the Seventh Circuit's policy analysis in Kush
that the Illinois legislature made a determination to balance
an individual's need for compensation and the broad societal
interest in avoiding excessive awards which would result in
price increases to all policyholders making insurance
prohibitive, due to cost, to the consumer, Id. at 345.
In response to these decisions, Plaintiff Hultz argues that
because some Illinois appellate court districts have ruled that
section 767 does not preempt compensatory damages, while other
districts of the Illinois appellate court have ruled such
damages and claims are preempted, the Central District is bound
to follow the law of the Fourth District; the Illinois
appellate court district in which it sits. Plaintiff Hultz
cites to Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct.
817, 82 L.Ed. 1188 (1938) to support his argument. Moreover,
Plaintiff Hultz argues that since Kush, Judge Rovner in W.E.
O'Neil Constr. Co. v. National Union Fire Ins. Co. of
Pittsburgh, 721 F. Supp. 984 (N.D.Ill. 1989), did not follow
Kush and thus this Court need not follow Kush or York.
Plaintiff Hultz's arguments, however, are not well supported
by the law. For example, approximately seven months after York,
Judge Mihm issued Regent Ins. Co. v. Economy Preferred Ins.
Co., 749 F. Supp. 191 (C.D.Ill. 1990), which, although it does
not address the preemptive effect of section 767, expressly
confirms that the Central District is not bound to follow the
law of the appellate district in which it sits, but rather,
must follow the law as pronounced by the Seventh Circuit. Judge
"[One of the parties] asserts that a federal trial
court in a diversity case is bound to follow the
decisions of the appellate court in its own
district when the appellate courts diverge.
[T]his Court has found no support for that
proposition in Seventh Circuit law, and the
Zakarian [v. Prudential Insurance Company of
America, 652 F. Supp. 1126 (N.D.Ill. 1987)] court
does not cite any Seventh Circuit authority for
this proposition. . . . The cases cited in footnote
19 of the Zakarian opinion . . . do not cite
Seventh Circuit authority for the rigid approach
requiring a district court to follow the appellate
court in its own district when the state appellate
courts diverge." Id. at 193.
Accordingly, Judge Mihm concluded:
"[T]his Court will predict how it believes the
Illinois Supreme Court would rule on this issue
with due consideration to the relevant Illinois
Appellate Court decisions." Id. at 194.
Thus, Judge Mihm, a sitting Judge in the Central District,
has unequivocally found that when faced with an issue eliciting
a split of authority among the Illinois appellate courts, the
Court is not bound to follow the
law of the Illinois appellate court district in which it sits.
Instead, the Court must predict the manner in which the
Illinois Supreme Court would rule or follow the Seventh Circuit
if it has already made this prediction.
On the issue before this Court, the Seventh Circuit in
Kush has already found that claims for breach of the duty of
good faith are preempted by section 767. Thus, as a matter of
precedent, this Court is bound to follow the Seventh Circuit's
prediction of what the Illinois Supreme Court would decide.
This is solidified by Judge Mihm's ruling in York wherein Judge
"[T]his Court is bound by the Seventh Circuit's
interpretation of Illinois law." Id. at 343.
Moreover, in 1992, the Northern District of Illinois in
Bageanis v. American Bankers Life Assur. Co. of Florida,
783 F. Supp. 1141 (N.D.Ill. 1992) noted that even though it might
disagree with the Kush opinion, it had no choice but to follow
the Seventh Circuit decision on the exact issue before this
Court and stated:
"We disagree with the W.E. O'Neil court [wherein
Judge Rovner found that she was not bound by the
Seventh Circuit decision on this issue], believe
Judge Moran's reasoning in Barr II to be
persuasive, and accordingly find Kush controlling.
Although we are still inclined to agree with the
reasoning expressed in UNR Indus [v. Continental
Insurance Company, 607 F. Supp. 855 (N.D.Ill.
1984)]. . . . and Barr I . . . it is inescapable
that Kush is directly on point. That being so, we
are not at liberty to question or disagree with the
Seventh Circuit's decision. Only that court, the
United States or Illinois Supreme Court or the
Illinois legislature may properly do so under these
circumstances. We, therefore, conclude that we are
compelled to follow Kush." Id. at 1149.
Similarly, the court in Barr II (Barr Co. v. Safeco Ins. Co.
of America, 706 F. Supp. 616 (N.D.Ill. 1989)) noted the Kush was
"squarely on point" and stated,
"[Federal District Courts] are bound to follow
Seventh Circuit pronouncements of law, including
[the] prediction of what the Illinois Supreme
Court would rule." Id. at 618*fn1
Recently, in November of 1992, two other District Court
opinions have been issued each ruling that Section 767 preempts
common law claims for compensatory damages and each
acknowledging that they are bound to follow Kush. Beverly
Bancorporation, Inc. v. Continental Ins. Co., No. 92 C 4823,
1992 WL 345420 (N.D.Ill. Nov. 17, 1992); Capitol Indemnity
Corp. v. Tranel Developments, Inc., 92 C 20234, 1992 WL 332296
(N.D.Ill. Nov. 4, 1992).
Thus, the Seventh Circuit has decided the issue presently
before the Court. Judge Mihm in York has adopted the Seventh
Circuit decision on the exact issue pending before this Court.
Moreover, he recognized, via York and the Regent decision, that
he was bound to follow the law of the Seventh Circuit and that
he was not required to follow the state appellate court for the
district in which it sits, to the extent it deviates from the
Seventh Circuit pronouncement of what the Illinois Supreme
Court would do.
Moreover, even if Plaintiff Hultz's argument that this Court
is bound to follow the law of the Illinois appellate court
district in which it sits was correct, Plaintiff Hultz bases
his argument on a 1981 decision entitled Lynch v. Mid-America
Fire and Marine Ins. Co., 94 Ill. App.3d 21, 49 Ill.Dec. 567,
418 N.E.2d 421 (4th Dist. 1981), (cf. Judge Mills' concurring
opinion in Urfer v. Country Mut. Ins. Co., 60 Ill. App.3d 469,
17 Ill.Dec. 744, 376 N.E.2d 1073 (4th Dist. 1978)). Lynch,
however, only construed section 767 as it existed before its
1977 amendment. In fact, the Lynch court expressly stated "[w]e
express no opinion as to whether the present section 
preempts the field." Lynch, 94 Ill. App.3d at 26, 49 Ill.Dec.
at 571 and 572,
418 N.E.2d at 425 and 426. The Lynch opinion went so far as to
even use the amended statute to support its decision that the
pre-amended statute did not preempt certain claims. 94 Ill.
App.3d at 26, 49 Ill. Dec. at 571, 418 N.E.2d at 425. In the
case at bar, the issue is whether the post-1977 amended statute
preempts claims. Accordingly, Lynch does not even address the
statutory language at issue.
Accordingly, for the aforementioned reasons, it is
recommended that Federated Mutual Insurance Company's Motion to
Dismiss Count II of Plaintiff's First Amended Complaint (d/e
32) be granted with prejudice.
The parties are advised that any objection to this
RECOMMENDATION must be filed in writing with the Clerk of this
Court within ten (10) working days after service of this
RECOMMENDATION. See, 28 U.S.C. § 636(b)(1). Failure to
object will constitute a waiver of objections on appeal. Video
Views, Inc. v. Studio 21, Ltd., 797 F.2d 538 (7th Cir. 1986).
Enter this 11th day of January, 1993.