The opinion of the court was delivered by: MILTON I. SHADUR
In this diversity action Federal Insurance Company ("Federal") has filed a motion to dismiss Count III of the Complaint (a punitive damages claim) filed by KNS Companies, Inc. ("KNS") against Federal and three other insurance companies, in which KNS charges each insurer with having breached its policy or policies issued to provide KNS with comprehensive general liability coverage or excess liability coverage (each of the insurers wrote coverage for a different period or periods). All three codefendants have joined in Federal's motion, and KNS has filed a memorandum in response to Federal's, so that the matter is ripe for decision.
"Ripe for decision" may be somewhat of an overstatement, for although the litigants have briefed the issues they have also advised this Court of their joint belief:
1. that a complex choice of law question is presented at the outset (in that respect, they do agree that either Illinois or Indiana law will apply) and
2. that the resolution of that question very likely requires a factual inquiry (the center-of-gravity or "most significant contacts" approach that has been mandated by Illinois choice of law rules in contract cases).
Ordinarily that type of fact-oriented choice could not be made on a threshold Fed. R. Civ. P. ("Rule") 12(b)(6) motion, but the most recent submission by Federal's counsel suggests that the matter is capable of resolution now. Because the potential need for factual inquiry requires some further discussion and because it is a matter that may be reexamined later in the case without prejudice to the litigants, this opinion will first address the posture of the substantive law in both jurisdictions.
What is at issue in Count III is the ability of an insured to recover punitive damages from its insurer for a breach of the insurance contract where, as Count III P 43 alleges:
Defendants' actions and inaction with respect to the EPA Suit were undertaken in bad faith and constituted a willful breach of Defendants' duty to deal fairly and in good faith with KNS.
Federal urges that no such recovery is permitted under either Illinois or Indiana law, while KNS urges with equal vigor that both jurisdictions would allow such damages.
Dealing squarely with the type of allegation advanced here by KNS, Mijatovich v. Columbia Sav. & Loan Ass'n, 168 Ill. App. 3d 313, 316, 522 N.E.2d 728, 731, 119 Ill. Dec. 66 (1st Dist. 1988) teaches:
Even an allegation that a bank acted in bad faith in breaching an agreement with its customer is not sufficient to give rise to a punitive damages claim.
That holding is simply a specialized application of the general proposition that conduct amounting to a breach of contract cannot as such give rise to a punitive damages award unless that conduct also constitutes a specific, independent tort of the kind for which the law permits such damages ( Morrow v. L.A. Goldschmidt Assoc., Inc., 112 Ill. 2d 87, 95, 492 N.E.2d 181, 184, 96 Ill. Dec. 939 (1986) and cases cited there).
KNS insists that insurance companies are different--that under Illinois law they occupy a specially disfavored category, in which their duty to deal fairly with their insureds converts any bad-faith refusal to honor a claim into such an independent tort--citing for that purpose Ledingham v. Blue Cross Plan for Hosp. Care of Hosp. Serv. Corp., 29 Ill. App. 3d 339, 330 N.E.2d 540 (5th Dist. 1975).
But an examination of the relevant case law discloses that the status of Ledingham as reliable authority in that respect is more than questionable, even though the Illinois Supreme Court in Collins v. Reynard, 154 Ill. 2d 48, 51-52, 607 ...