In a decision issued on Thursday, June 18, 2020, the Illinois First District Appellate Court further illustrated the distinction between proving a claim is covered under an insurance policy and proving entitlement to damages for an insurer’s bad faith denial of coverage.  In this lawsuit*, the insurer, Liberty International Underwriters Insurance, denied coverage for a claim under a Directors and Officers (“D&O”) policy issued to a company called Nine Group.  Liberty claimed the transaction at issue in the claim fell outside of the effective dates of the policy, and therefore denied coverage. 

Nine Group filed claims for breach of contract against Liberty, as well as a claim for bad faith under §155 of the Illinois Insurance Code. This law provides an extra-contractual remedy to an insured that encounters unnecessary difficulties when an insurer withholds policy benefits.  The trial court denied cross-motions for summary judgment on the breach of contract claim, but granted summary judgment on the bad faith claim, dismissing plaintiff’s §155 action.  Plaintiff then appealed the dismissal of the §155 claim. 

That the §155 claim was dismissed, but the breach of contract claim remained alive demonstrates the different standards of proof for breach of contract insurance claims and bad faith claims under Illinois law.  The court may ultimately find that the claim at issue was covered under the policy and therefore find the insurer breached the contract by denying the claim. Still, because there was, according to the court, a bona fide dispute as to whether the claim fell under the coverage of the policy, no §155 claim could be maintained. 

Key Takeaways from this Illinois Bad Faith Insurance Lawsuit

This case demonstrates that proving that an insurance company acted in bad faith requires something more than merely failing to pay the claim.  Just because an insurance company incorrectly denies a claim does not mean a court will automatically hold them liable for bad faith.  Under Illinois law, a policyholder must prove more than that the insurance company was wrong in denying the claim to recover damages beyond the policy. 

The insured must demonstrate how, in denying the claim, the insurer’s conduct was “vexatious and unreasonable.”  An insurer’s investigation may be imperfect, but as long as there is a legitimate or arguable reason for refusing to pay the claim, the bad faith claim will likely fail. 

Examples of “Vexatious and Unreasonable” Conduct

When deciding whether an insurance company’s conduct is vexatious and unreasonable, in addition to whether a bona fide dispute exists, Illinois courts have also considered:

  1. The insurer’s attitude;
  2. Whether the insured was forced to file suit to recover;
  3. Whether the insured was deprived of the use of its property;
  4. The extent of the insurance company’s evaluation and investigation of the claim; and
  5. The adequacy of communications.

However, where there is a bona fide dispute over coverage, a delay in settling a claim may not give rise to damages for bad faith under §155.  I discuss vexatious and unreasonable conduct under the Illinois Bad Faith Statute in more detail here

In this lawsuit, the “key question” of whether the insurer’s conduct was vexatious and unreasonable was decided by the appellate court. The appellate court noted that “[a]n insurer is not liable for a violation of section 155 when it takes a reasonable but erroneous position on its coverage obligations where its position is at least arguable.” It also stated that “[w]here there is a bona fide dispute concerning coverage, the assessment of costs and statutory sanctions is inappropriate, even if the court later rejects the insurer’s position.” 

The court found that while coverage under the policy remained an open question, there was at least a bona fide dispute as to coverage for the claim against Nine Group. Therefore, Liberty did not act unreasonably and vexatiously. 

*Nine Group II v. Liberty Int’l Underwriters, Inc., 2020 IL App (1st) 190320.

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