SNR Denton on Santa’s Best Craft, L.L.C. v Zurich American Insurance Co.: Insurer May Reasonably Dispute Independent Counsel’s Fees Without Risking Estoppel

SNR Denton on Santa’s Best Craft, L.L.C. v Zurich American Insurance Co.: Insurer May Reasonably Dispute Independent Counsel’s Fees Without Risking Estoppel

William Barker   By William T. Barker, Partner, SNR Denton

An Illinois insurer that breaches its duty to defend may be estopped to assert coverage defenses to the duty to indemnify.  In Santa’s Best Craft, L.L.C. v Zurich American Insurance Co., the insured denied that the insurer was entitled to question the fees of its independent counsel and asserted that any underpayment of independent counsel’s fees constituted a breach.  The Appellate Court disagreed on both counts. This commentary analyzes the decision and its implications.

The court summarily dismissed the argument that an insured’s defense costs are per se reasonable, noting the finding that some of the defense costs here were unreasonable. The commentary summarizes the circuit court proceedings on attorneys’ fees as follows:

Various motions in the circuit court were converted into a petition for attorneys fees.  The fees claimed by Santa’s Best totaled $4,076,397.29.  The court found only $3,611,841 reasonable.  Of that, Zurich had paid $790,016 and St. Paul $1,285,690.80, leaving $1,536,134.20 unpaid.  Zurich was ordered to pay $271,017.90 immediately while the court considered coverage for $1,265,116.30 in expenses for defending Monogram.  Ultimately, it found these not covered.

In the circumstances, the court found no breach of the duty to defend and no basis for an estoppel.

The court also concluded that Zurich had no duty to fund the settlement of the claim, because Zurich was not controlling the defense.  The commentary argues that this reasoning was questionable:

While there are indeed Supreme Court cases that seem to say that, but only as part of general discussions of the duty to settle in cases concerned with other issues.  But those statements are dicta.  The better analysis suggests that it is the insurer’s contractually reserved control over settlement that is the foundation of the duty to settle.

Nonetheless, the commentary concludes that the result reached was correct on other grounds.

Lexis.com subscribers can access the complete commentary, SNR Denton on Santa’s Best Craft, L.L.C. v Zurich American Insurance Co.: Insurer May Reasonably Dispute Independent Counsel’s Fees Without Risking Estoppel. Additional fees may be incurred. (approx. 7 pages)

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Lexis.com subscribers can access the Lexis enhanced version of the decision with summary, headnotes, and Shepard’s, Santa's Best Craft, L.L.C. v. Zurich Am. Ins. Co., 941 N.E.2d 291 (Ill. App. Ct. 1st Dist. 2010).

Non subscribers can access the free unenhanced version of the opinion available from lexisONE Free Case law, Santa's Best Craft, L.L.C. v. Zurich Am. Ins. Co., 941 N.E.2d 291 (Ill. App. Ct. 1st Dist. 2010).

 Gavel and Law Books

William T. Barker is a partner in the Chicago office of SNR Denton, L.L.P., with a nationwide practice representing insurers in complex litigation, including matters relating to coverage, claims handling, sales practices, risk classification and selection, agent relationships, and regulatory matters. He is a member of the Editorial Board of the New Appleman on Insurance Law Library Edition and a Consulting Author of the New Appleman Insurance Law Practice Guide. He has published over 100 articles and speaks frequently on insurance and litigation subjects. He was a Contributing Editor and then Editor of Bad Faith Law Report until that publication merged with Insurance Litigation Reporter, where he is currently Senior Contributing Editor and Editorial Board Director. He has been described as the leading lawyer commentator on the connections between procedure and insurance. See Charles Silver & Kent Syverud, The Professional Responsibilities of Insurance Defense Lawyers, 45 Duke L.J. 255, 257 n.4 (1995). Mr. Barker is a member of the American Law Institute. Mr. Barker is the co- author of New Appleman Insurance Bad Faith Litigation, Second Edition.

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Comments

David Gauntlett
  • 05-23-2011

      This commentary responds to the April 4, 2011 article by William Barker.  That article properly concludes that the duty to settle and the duty to defend are independent.  It misstates that the duty to settle may not arise where claims are potentially covered as of the date of the settlement.  The insurer's duty of good faith and fair dealing, emanating from its duty to defend, requires it to consider all reasonable settlement offers within its policy limits.  Under Illinois law, where an insurer has reserved its rights to deny indemnity, creating a conflict which entitles the insured to retain independent counsel at the insurer's expense, it cannot avoid addressing settlement proposals that such counsel bring to its attention in requesting its funding of a reasonable settlement.

      No case authority in Illinois so delimits the duty to settle so as to absolve an insurer from participation where it is not in control of the settlement because independent counsel is negotiating it for the benefit of the insured.  While it may object that it is not given sufficient information to evaluate a settlement proposal, this is a far cry from removing it from any responsibility for addressing settlement offers provided to it.  n1.

      Although Mr. Barker's article does not address the issue directly, what a covered claim must be under Illinois law to trigger a defense duty is not limited to actual coverage but encompasses potential coverage despite the questionable ruling of the court. n2

      In explaining why the actual coverage standard could be satisfied by a showing of potential liability where the underlying action had not yet been adjudicated, the Seventh Circuit, applying Illinois law, adopted a "primary focus" test. n3

      n1 Haddick ex rel. Griffith v. Valor Insurance, 198 Ill. 2d 409, 414-15 (2001) does not address circumstances where independent counsel seeks insurer participation in settlement after providing it evidence of potential exposure both within its policy limits and in excess of them and requesting funding where a potentially covered case is at issue.

      n2 Santa's Best Craft, LLC v. St. Paul Fire & Marine Ins. Co., 611 F.3d 339, 350-51th Cir. (Ill.) 2010) ("In [Federal Ins. Co. v. Binney & Smith, Inc., 913 N.E.2d 43 (Ill. App. Ct. (1st Dist.) 2009)], an Illinois appellate court confirmed that an insurer must reimburse an insured for its settlement expenses when the settlement was made in 'reasonable anticipation of liability' for damage covered by the insurer's policies, U.S. Gypsum Co. v. Admiral Ins. Co., 268 Ill.App.3d 598, 205 Ill.Dec. 619, 643 N.E.2d 1226, 1244 (1994), and the settlement's primary focus was a claim covered under the insurer's policy, see Commonwealth Edison v. Nat'l Union Fire of Pittsburg, Pa., 323 Ill.App.3d 970, 256 Ill.Dec. 675, 752 N.E.2d 555, 565 (2001). . . . Edison explains that an insured is not required to apportion its liability for different claims because that would either require the coverage litigation to be a retrial of the merits of the insured's underlying lawsuit and/or would discourage settlement because the insured would essentially have to prove its own liability for the underlying conduct even if it had not made that concession in arriving at a settlement.").

      n3 611 F.3d at 351-52 ("Consistent with the Illinois policy that a coverage action should not require the insureds to conclusively establish their own liability in the interest of promoting settlement, we think the proper inquiry is whether the claims were not even potentially covered by the insurance policy. . . . Consequently, our prediction is that Illinois courts, in cases in which it is possible that none of the settlement was attributable to the dismissal of claims for damage covered by the insurer's policy, would evaluate whether a 'primary focus' of the claims that were settled was a potentially covered loss (burden on the insured).  Conversely, if it can be established that the claims were not even potentially covered (burden on the insurer), then the insurer is not required to reimburse the settlement.").

Anonymous
Anonymous
  • 06-02-2011

I'm not sure that Mr. Gauntlett and I are disagreeing with one another. My commentary expressly agrees with him that the insurer's relinquishment of control of the defense should not excuse the insurer from considering and acting upon demands for settlement of covered claims. Nor do I deny that, when the suit includes both a claim that, if established, would be covered and a noncovered claim, there may be an obligation to settle the covered claim even if it is unclear that that claim will succeed.

My point is that, if no covered claim is among those remaining in the action, there can be no obligation to settle. In Santa's Best, the court determined that there was no coverage because none of the claims involved advertising injury. The implication would be that there was never a duty to defend. But Zurich had promised to pay reasonable defense costs and apparently never disputed its liability to do so.