United States District Court, N.D. Illinois, Eastern Division
Harleysville Lake States Insurance Co., Plaintiff/Counterdefendant,
Lancor Equities, Ltd., et al., Defendants/Counterplaintiffs.
MEMORANDUM OPINION AND ORDER
GERALDINE SOAT BROWN, Magistrate Judge.
Before the court are Defendants'/Counterplaintiffs' Lancor Equities, Ltd. and Western Properties LP's Motion to Compel (Defs.' Mot. [dkt 95]) and Plaintiff's/Counterdefendant's Motion to Strike the Affidavit of Charles M. Miller (Pl.'s Mot. [dkt 102]). For the reasons set forth below, the motion to compel is granted in part and denied in part, and the motion to strike is denied.
Plaintiff/Counterdefendant Harleysville Lake States Insurance Company ("Harleysville") brought this action pursuant to 28 U.S.C. § 2201, seeking a declaration that the commercial property insurance policy it issued to Lancor Equities, Ltd. and Western Properties, LP (collectively, "Lancor") does not cover loss and damage resulting from a fire on December 29, 2012. (Pl.'s Compl. ¶ 1.) [Dkt 1.] Harleysville claims that the building's sprinkler system had been rendered inoperative months before the fire and never repaired. ( Id. ¶ 8.) Harleysville denied Lancor's claim based on an "Increased Hazard" exclusion in the policy: "We' do not pay for loss occurring while the hazard has been materially increased by any means within your' knowledge or your' control." ( Id. ¶ 16 (quoting policy).)
After denying Lancor's motion to dismiss (Mem. Opinion and Order, Feb. 18, 2014 [dkt 64]), the District Judge ordered fact discovery to be completed by October 6, 2014 (Order, May 6, 2014 [dkt 78]). Lancor then filed its answer and counterclaims, including a counterclaim seeking taxable costs and attorneys' fees and a $60, 000 penalty pursuant to Illinois Insurance Code § 155, which provides in part:
In any action by or against a company wherein... 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 [a penalty.]
215 Ill. Comp. Stat. § 5/155(1). (Defs.' Answer and Ctrclm.) [Dkt 82.] Harleysville moved to bifurcate or stay proceedings on Lancor's counterclaim because, it argued, Lancor is ineligible for § 155 relief until it has been established that Lancor is entitled to coverage under the policy. (Pl.'s Mem. in Support of Mot. to Bifurcate at 2-3.) [Dkt 92.] The District Judge denied Harleysville's motion to bifurcate or stay proceedings on the § 155 claim. (Order Denying Mot. to Bifurcate.) [Dkt 94.] The parties then jointly sought to extend discovery by 30 days. (Joint Mot. Enlargement of Time.) [Dkt 99.] The District Judge granted the motion and ordered all fact discovery to be completed by November 7, 2014. (Order, Sept. 11, 2014.) [Dkt 101.]
Lancor served 18 document requests, and Harleysville objected to many of them. (Defs.' Mot., Corrected Ex. A.) [Dkt 120.] Lancor then filed the present motion seeking an order compelling Harleysville to produce additional documents. As described below, the parties have resolved a number of the initial disputes but some disputes remain.
SCOPE OF DISCOVERY
"Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party's claim or defense...." Fed.R.Civ.P. 26(b)(1). Discovery, though broad, is not unlimited. A court must, on a motion or on its own, limit the frequency or extent of discovery if it determines that:
(i) the discovery sought is unreasonably cumulative or duplicative, or can be obtained from some other source that is more convenient, less burdensome, or less expensive;
(ii) the party seeking discovery has had ample opportunity to obtain the information by discovery in the action; or
(iii) the burden or expense of the proposed discovery outweighs its likely benefit, considering the needs of the case, the amount in controversy, the parties' resources, the importance of the issues at stake in the action, and the importance of the discovery in resolving the issues.
Fed. R. Civ. P. 26(b)(2)(C).
Looking at the claims in this case, Harleysville's complaint is a straightforward insurance coverage declaratory judgment action. Lancor's counterclaim under § 155 is a request for a statutory remedy that is contingent on the result of the declaratory action. If Harleysville is correct that there is no coverage for Lancor's claim, Lancor's § 155 claim will necessarily fail. Because Lancor argues that its discovery requests are necessary for its § 155 claim ( see, e.g., Defs.' Reply at 5 [dkt 109]), it is important to review the nature of that claim.
Section 155 is "a limited statutory exception" to the rule that attorneys' fees and punitive damages are not generally available in breach of contract actions. Cramer v. Insurance Exchange Agency, 675 N.E.2d 897, 901 (Ill. 1996). It was created by the Illinois General Assembly to deal with the situation where "the holder of a small policy may practically see his whole claim wiped out by expenses if the [insurance] company compels him to resort to court action, although the refusal to pay the claim is based upon the flimsiest sort of pretext." H. Havinghurst, Some Aspects of the Illinois Insurance Code, 32 U. Ill. L. Rev. 391, 405 (1937), quoted in Cramer, 675 N.E.2d at 901. It is not a "prevailing party" provision. To recover under § 155, Lancor must not only prevail on the coverage issue, it must show that Harleysville's actions or its denial of coverage were "vexatious or unreasonable."
An insurer's actions are not vexatious and unreasonable if "(1) there is a bona fide dispute concerning the scope and application of insurance coverage; (2) the insurer asserts a legitimate policy defense; (3) the claim presents a genuine legal or factual issue regarding coverage; or (4) the insurer takes a reasonable legal position on an unsettled issue of law."
TKK USA, Inc. v. Safety Nat'l Casualty Corp., 727 F.3d 782, 793 (7th Cir. 2013) (quoting Citizens First Nat'l Bank of Princeton v. Cincinnati Ins. Co., 200 F.3d 1102, 1110 (7th Cir. 2000).)
A § 155 claim is not the equivalent of a separate claim in contract or tort for an insurer's bad faith refusal to pay insurance benefits, which Illinois does not recognize except in the context of an insurer's failure to act in good faith in response to settlement demands. Cramer, 675 N.E.2d at 903-04. Where the insurer has denied coverage, the insured is limited to a breach of contract action with the additional remedy created by the legislature in § 155. Id. at 904. "The fact that a policyholder cannot recover as much as he could in tort arises from the fact that contract law imposes limitations on recovery." Id. To the extent that Lancor's arguments rely on cases from other states that allow a separate bad faith claim or upon Illinois cases that predate the Illinois Supreme Court's decision in Cramer, those cases do not reflect current Illinois law.
Whether to award a remedy under § 155 is a factual determination decided within the court's discretion. West Bend Mut. Ins. v. Norton, 940 N.E.2d 1176, 1179 (Ill.App. 2010); Draper v. Stamps, No. 1-13-1408, 2014 WL 4101202 (Ill.App. Aug. 19, 2014) (collecting cases). Both sides in this case agreed at a hearing on Lancor's motion that the § 155 claim will be decided by the court, not by a jury. In deciding whether to award § 155 relief, the court considers "the totality of the circumstances, including the insurer's attitude, whether the insured was forced to sue to recover, and whether the insured was deprived of the use of his or her property." American States Ins. Co., v. CFM Constr. Co., 923 N.E.2d 299, 308 (Ill.App. 2010). As that case illustrates, the "totality of the circumstances" refers to the circumstances of the dispute between the insured and the insurer. Id. at 308-09. Because a § 155 remedy is not awarded where there is a bona fide dispute concerning coverage, "Illinois courts routinely ...