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CALIFORNIA UNION INS. CO. v. LIBERTY MUT. INS. CO.

March 28, 1996

CALIFORNIA UNION INSURANCE COMPANY, Plaintiff,
v.
LIBERTY MUTUAL INSURANCE COMPANY, Defendant.



The opinion of the court was delivered by: CASTILLO

 This case stems from a successful underlying suit by Robert Hauck for serious personal injuries against (among others) Central Telephone Company of Illinois ("CTI") and its parent company, Centel Corporation. Defendant Liberty Mutual Insurance Company was the primary insurance carrier for Centel. Plaintiff California Union Insurance Company provided excess insurance. Following a multimillion-dollar jury verdict for Hauck that required both insurance companies to contribute, California Union brought this action against Liberty Mutual, claiming that Liberty Mutual's negligent and bad faith refusal to settle the case within Liberty Mutual's policy limits had obligated California Union to pay the excess verdict. California Union and Liberty Mutual have filed cross-motions for summary judgment, which are the subject of this Order and Opinion.

 RELEVANT FACTS

 We begin by describing in some detail the course of the underlying litigation, because those events are at the heart of the question here: whether, as a matter of law, Liberty Mutual should have made greater efforts to settle the underlying case, and whether such efforts would have spared California Union from having to pay almost $ 4 million under its excess insurance policy. The following facts are gleaned from the parties' respective Local General Rule 12 statements of material facts and accompanying exhibits. *fn1"

 Hauck filed suit in 1987 against several defendants, including Commonwealth Edison, which provided electrical service to the property; the business that operated at the property; and the owner of that business. (LM's Am. 12(M) P 3 & Ex. B at 1-2.) Later that year, Hauck filed a second amended complaint adding Centel and CTI as defendants. *fn2" (Id. PP 3-4.) CTI provided the telephone service to the property where Hauck was injured, and CTI employees had performed work on the utility poles in the area. (Id. P 5 & Ex. B at 9-10.) All defendants cross-claimed against each other. (Id. P 20.)

 Hauck retained the Chicago law firm of Corboy & Demetrio. (CU's 12(M) P 7.) Thomas A. Demetrio of that firm represented him in settlement negotiations and ultimately tried the case. (Id. P 10.) Demetrio and his firm were (and are) known as very skilled plaintiffs' personal injury attorneys. During the spring of 1990, Demetrio obtained a new "high" jury verdict of more than $ 22 million in a personal injury case involving a quadriplegic plaintiff. (CU's Rule 12(N) response to LM's Am. 12(M) statement ("CU's 12(N) Resp.") Ex. LLL at LM01826. *fn3" ) This record replaced the previous high of over $ 16 million obtained by Demetrio and his partner Philip H. Corboy, Jr. in November 1988. (Id.) Hauck's initial settlement demand in 1988 was $ 37.5 million from all defendants. (CU's 12(M) P 32; LM's Am. 12(M) P 13.)

 Centel and CTI were insured by a number of insurers. (LM's Am. 12(M) P 7.) Liberty Mutual provided the primary coverage of $ 1 million as well as the first $ 1 million of excess coverage. (Id.) California Union provided the second layer of excess coverage in the amount of $ 4 million. (Id. P 8.) There were also several layers of excess insurers above California Union. (CU's 12(M) P 18.)

 As the primary insurer, Liberty Mutual defended Centel/CTI in the action brought by Hauck, retaining the law firm of Wildman, Harrold, Allen & Dixon for this defense. (Id. P 14.) Liberty Mutual's claims handlers for the matter were Barbara Standiford, who handled many of the day-to-day responsibilities as the case proceeded through discovery and to trial; Jack Bickford, to whom Standiford reported; and Kevin Racine in Liberty Mutual's home office, who received reports from Standiford and Bickford, provided direction, set reserves, and responded to settlement requests. (Id. PP 11-13.)

 Rebecca Gilman was the risk manager at Centel from 1987 to 1993 and, as such, was the primary liaison with Centel's defense counsel and insurers' representatives regarding the Hauck case. (Id. P 16; LM's Am. 12(M) P 10.) Gilman testified that there was no evidence to support the initial claims against CTI/Centel in the second amended complaint, which alleged that CTI had been negligent by relocating and/or disturbing the location of power lines and/or telephone poles too close to a structure. (LM's Am. 12(M) P 12 & Ex. A at 8.)

 The complaint was amended twice more before going to trial, however. (CU's 12(N) Resp. PP 3, 9, 12.) The fourth amended complaint included allegations that CTI had a duty to examine the premises when it was in the area and to warn the property owners of any sagging power lines. (CU's Rule 12(N)(3)(b) statement of additional facts requiring the denial of summary judgment ("CU's Add'l Facts") P 4.) The allegations regarding a general duty to warn concerned Gilman. (Id.) From the beginning, Liberty Mutual's attorneys consistently evaluated the case has having the potential for a jury verdict for Hauck between $ 10 million and $ 20 million, regardless of the liability of individual defendants. (CU's 12(M) P 23; CU's Add'l Facts P 9.)

 In January 1989, Liberty Mutual's defense attorneys wrote Liberty Mutual that liability remained uncertain at that time. (CU's 12(M) Ex. DDD.) One of the possible defense strategies, joining forces with the other co-defendants to present a united front against Hauck (or develop a cooperative strategy regarding settlement) appeared unlikely. (Id.) Defense counsel noted that the focus of the co-defendants seemed to be "attempting to deflect liability onto the telephone company." (Id.)

 California Union was notified by February 1989 that the liability from the Hauck matter could reach into California Union's layer of coverage. (LM's Am. 12(M) P 29.) Initially, California Union set a reserve of $ 500,000 for the claim. (Id. PP 33-34.) California Union also hired monitoring counsel, Conklin & Roadhouse, in the summer of 1989. (Id. P 30.) In his role as monitoring counsel, John Roadhouse watched the case, reviewed discovery and depositions (although he never attended depositions), and appeared at pre-trial conferences to represent California Union's interests. (LM's Am. 12(M) Ex. Q at 13, 28; CU's 12(M) Ex. CCC at 13-15.)

 In July 1989, defense attorneys prepared an analysis of the case which noted three theories of liability against CTI: (1) that CTI had at some point removed a guy wire from one of the utility poles (pole 1), allowing the power line to sag where it crossed the roof Hauck inspected; (2) that a guy wire CTI installed on another pole (pole 2) caused that pole to lean, which allowed the power line to sag; and (3) that CTI owed a general duty to the public to observe dangerous conditions such as the sagging power line when it was working in the area, and report them to someone--either the power company or the landowner. (LM's Am. 12(M) Ex. B at 12-19.) The first theory was being investigated, but at that point, there was no evidence establishing that a guy wire had ever existed on pole 1 or been removed by CTI. (Id. at 13-16.) An expert retained by CTI was able to refute the second theory. (Id. at 16.)

 As for the general duty theory, there was no Illinois case law that imposed such a duty on a telephone utility. (Id. at 18.) Nevertheless, the attorneys noted that the general duty argument had "jury appeal." (Id. at 17.) CTI had been working in the area several days prior to the accident. (Id. at 13.) The attorneys also noted other facts that could be used against CTI:

 
Employees from Central Telephone were at or near the property on numerous occasions over the years, both on routine service calls and on larger jobs. In 1967 and 1975, Central Telephone employees had to climb the power poles, including pole number 2, to perform their work. Because Central Telephone had its equipment on the same poles that housed electric power lines, the parties may contend that Central Telephone should have observed the condition of the poles and height of the power lines and Central Telephone should have reported this dangerous condition either to the customer or to Commonwealth Edison.
 
The Centel System Practices manual states, in effect, that Centel employees are required to report all "non-standard trouble conditions" to their supervisors. The supervisors, in turn, are to report the problem to the appropriate utility or other entity. . . . The plaintiff and co-defendants have expressed an enormous amount of interest in this document.

 (Id. at 17-18.) The attorneys noted, however, that CTI employees had not been instructed to perform general safety inspections of the service area, nor was it clear that the CTI workers who had been at the site in 1967 and 1975 would have been able to see the sagging line through the foliage surrounding pole 2. (Id. at 19.)

 About that time, Bickford wrote the home office that "we do feel from the evidence that they will probably not find us responsible for the leaning of the electrical wires," although he also felt that CTI was "highly unlikely to get a complete pass" on liability. (CU's 12(M) Ex. U.) Bickford noted that the verdict value was estimated in the $ 10 to $ 20 million range, and that CTI could possibly be found responsible for 50% of that, along with Commonwealth Edison. (Id.) Bickford also noted that the various defendants were fighting among themselves, each pointing the finger at the other in terms of liability, a situation that helped Hauck. (Id.)

 In a letter to Bickford in December 1989, James Dineen of Liberty Mutual's home office characterized the Hauck case as a "serious case with serious potential and with a very competent plaintiff's attorney." (Id. Ex. C.) On CTI's liability, he noted that "I still question our involvement but I have no doubt that a fact question can be made as to Centel's negligence." (Id.) Because of that and the "horrendous" nature of the plaintiff's injury, he felt that all of the defendants ought to "sit down, discuss the merits of each one's position, see what we think would be a fair settlement price, and then make recommendations based upon these discussions." (Id.)

 In the meantime, Liberty Mutual made effort to get rid of the "general duty" theory against CTI which it viewed as raising primarily legal rather than factual issues. (LM's Am. 12(M) Ex. C at LM03902.) Accordingly, CTI filed a motion for summary judgment, arguing that as a matter of law it had no duty under Illinois law to observe or notify anyone of the sagging power line. (CU's 12(M) P 22.) The motion was denied in January 1991 (id. Ex. S), leaving Liberty Mutual and CTI with the prospect of facing a jury on all of the theories advanced against them.

 On March 7, 1991, Standiford wrote Liberty Mutual's home office that CTI's co-defendants still showed no signs of cooperating in a joint defense strategy, and that in fact Commonwealth Edison continued to target CTI in an effort to shift the blame for the sagging power lines. (CU's 12(M) Ex. A.) Standiford believed that "our insured has a great deal of exposure," and specifically quantified CTI's exposure at 30%. (Id.) On the possibilities for settlement, Standiford noted that it was "difficult to state what the total settlement value is" the demand was still $ 37.5 million, and Hauck "has given no indication that [he is] interested in settlement and actually he has stated that they want this to go to a jury. . . . I seriously doubt that he will consider settlement for anything much less than 20 million." (Id.) Nevertheless, Standiford thought it would be a "good idea to see what we could possibly do to attempt settlement before the case goes to trial. I think that it would show good faith on behalf of Liberty to have attempted settlement in [a] case of this magnitude. . . . I think if settlement is going to be explored before trial, there is no doubt that Liberty will have to tender its policy limits of $ 1 million along with its excess policy of $ 1 million." (Id.) However, in May 1991 Standiford wrote CTI that Liberty Mutual had no plans to tender its $ 2 million policy limits toward settlement of the case. (Id. Ex. F.)

 Discovery efforts intensified as the fall 1991 trial date approached. On September 9, Liberty Mutual's attorneys reported deposition testimony by one of Hauck's experts that affected CTI's potential liability on the first theory (that CTI had removed a guy wire on pole 1 that allowed the power line to sag). (CU's 12(M) Supp. Ex. VVV.) The expert, a metallurgist, opined that tests showed conclusively that a guy wire had at one time been attached to the pole and had been removed in a manner consistent with an orderly, intentional removal. (Id.) The attorney noted that there was no evidence as ...


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