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Insurance Law

Neal, Gerber & Eisenberg LLP: Comparing Illinois versus California Bad Faith Law

Neal, Gerber & Eisenberg

By Jill Berkeley, Partner, Neal, Gerber & Eisenberg LLP

As policyholder counsel in Illinois, we often must explain to our colleagues in California why there is no "bad faith" cottage industry among the Illinois bar.  Taking the words right out of my mouth, a California court in a recent non-published case examined the differences between Illinois and California bad faith law.  In Scholle Corporation v. Agricultural Insurance Co., No. G044978 (Ct. App. 4th App. Dist. Div. 3 9/21/12), the court looked at whether to apply Illinois or California bad faith law.

In following California choice-of-law rules for tort actions, the court's first step was to examine whether California and Illinois law materially differ on whether the insured may state a tort claim for bad faith.  (Kearney v. Salomon Smith Barney, Inc. (2006) 39 Cal.4th 95, 107)  Here is what the court wrote:

California and Illinois law conflict on the availability of a tort claim for bad faith.  California recognizes a tort claim when an insurer unreasonably delays or withholds policy benefits owed to the insured.  (Major v. Western Home Ins. Co. (2009) 169 Cal.App.4th 1197, 1209-1210.)  The insured is entitled to present its bad faith claim to a jury and may recover tort damages, punitive damages, and attorney fees without any arbitrary limitation on the amount recoverable.  (Jordan v. Allstate Ins. Co. (2007) 148 Cal.App.4th 1062, 1073 (Jordan) [tort remedies, including punitive damages, recoverable on bad faith claim]; Essex Ins. Co. v. Five Star Dye House, Inc. (2006) 38 Cal.4th 1252, 1258 [attorney fees incurred to obtain policy benefits recoverable on bad faith claim]).

In contrast, Illinois does not allow a tort claim for bad faith.  (Cramer v. Ins. Exch. Agency (1996) 174 Ill. 2d 513, 527-528 (Cramer)).  Instead, Illinois enacted section 155, which provides "the court may allow as part of the taxable costs in the action reasonable attorney fees, other costs, plus [a penalty up to $60,000]" when an insurer denies, delays, or settles an insurance claim in a "vexatious and unreasonable" manner.  (215 Ill. Comp. Stat. 5/155; Cramer, at pp. 519-520.)

The court concludes, "a material difference clearly exists based on the difference in the type and amount of damages recoverable for an insurer's improper claims handling conduct, whether a jury or the court decides the claim, and the showing the insured must make to recover.  (Compare Jordan v. Allstate (2007), 148 Cal.App.4th 1062, 1073 and 215 Ill. Comp. Stat. 5/155.)"

The second step of the governmental interest approach required the court to examine each state's interest "in the application of its own law under the circumstances of the particular case."  (Kearney, supra, 39 Cal.4th at pp. 107-108.)

The court rejected the parties' argument that section 155 was enacted to protect insurers from excessive damage awards.

Illinois originally limited an insured to a contract claim when the insured sought to obtain policy benefits from its insurer.  In addition, Illinois enacted section 155 to allow insureds to recover their attorney fees so that lawsuits against insurers would be economically feasible, and later amended that statute to also allow insureds to recover a limited penalty from insurers.  (Cramer, supra, 174 Ill.2d at pp. 520-521.)  Illinois courts refuse to allow a common law tort recovery for bad faith because the Legislature already determined the appropriate relief for that conduct.  (Id. at pp. 527-528.)  Accordingly, Illinois's interest regarding its bad faith law is to protect insureds, not insurers.  (Uhlich Children's Advantage Network v. Nat'l Union Fire Co. (2010) 398 Ill.App.3d 710, 722-723; Estate of Price v. Universal Cas. Co. (2002) 334 Ill.App.3d 1010, 1016.)

I could not have said it any better.


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(Sign in with your ID to access the full text of the Lexis enhanced version of the Scholle Corp. v. Agricultural Insurance Co., 2012 Cal. App. Unpub. LEXIS 6892 (Cal. App. 4th Dist. Sept. 21, 2012) decision with core terms, case links, and Shepard's.)