Creation Supply, Inc. v. Selective Insurance Company of

995 F.3d 576

• Court: Court of Appeals for the Seventh Circuit
• Decided: April 26, 2021
• Docket: 20-2509
• Status: Published

Opinion

In the

United States Court of Appeals For the Seventh Circuit ____________________ No. 20-2509 CREATION SUPPLY, INC., Plaintiff-Appellee, v.

SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST, Defendant-Appellant. ____________________

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 14-cv-8856 — Charles P. Kocoras, Judge. ____________________

ARGUED JANUARY 14, 2021 — DECIDED APRIL 26, 2021 ____________________

Before RIPPLE, KANNE, and ROVNER, Circuit Judges. KANNE, Circuit Judge. This appeal is part of an ongoing, decade-long, three-lawsuit fight between an insurer, Selective Insurance Company of the Southeast, and its insured, Crea- tion Supply, Inc. (“CSI”), over who owed what when. The issue here, though, is a narrow question of statutory interpretation—whether the district court properly awarded 2 No. 20-2509

extracontractual damages to CSI under Section 155 of the Illi- nois Insurance Code. Section 155 permits an insured to seek extracontractual damages from an insurer in any case in which at least one of three issues remains undecided: (1) the insurer’s liability un- der the policy, (2) the amount of the loss payable under the policy, or (3) whether there was an unreasonable delay in set- tling a claim. None of these three threshold issues remains undecided here: (1) Selective’s liability under its policy with CSI was re- solved by the Illinois Appellate Court in 2015; (2) the amount of loss payable by Selective to CSI under the policy was deter- mined by the Illinois Appellate Court in 2017; and (3) CSI does not seek recovery for any unreasonable delay by Selective in settling CSI’s claim. In summary, none of CSI’s extracontrac- tual issues remains undecided. As a result, CSI cannot pursue Section 155 damages in this action. This result is admittedly atypical. Section 155 claims usu- ally proceed right alongside breach-of-contract claims, such as the other claim brought by CSI in this suit. But the lengthy history of this case breaks the mold. We therefore reverse the decision of the district court granting relief to CSI under Sec- tion 155. I. BACKGROUND CSI imports and sells writing markers. In 2012, a compet- itor sued CSI in Oregon federal court for allegedly selling copy-cat products. CSI turned to its insurer, Selective, for a defense. But Selective refused for what the district court here believed were dubious reasons. No. 20-2509 3

Selective then sued CSI in Illinois state court for a declara- tion that it did not owe CSI a duty to defend. While this Illi- nois action was pending, CSI settled the Oregon action in 2013 for $0 and an injunction requiring it to stop selling the alleg- edly counterfeit markers. The Illinois court granted summary judgment in favor of CSI after concluding that Selective did owe CSI a defense in the Oregon action. In 2015, that decision was affirmed by the Illinois Appellate Court, which also held in 2017 that Selective owed CSI the $195,000 it spent in the Oregon action from the time the action commenced until it settled. All other expenses fell outside the scope of the policy. CSI filed this federal action now on appeal while the Illi- nois state action was still ongoing. In this suit, CSI alleges in Count I that “Selective’s refusal to grant coverage to CSI and defend it under the Policy, and its failure to pay CSI’s fees and expenses in the Underlying Oregon Action for over one year after having been judicially determined to have a duty to de- fend CSI is vexatious and unreasonable in violation of Section 155 of the Illinois Insurance Code.” On this count, CSI seeks extracontractual damages including attorney fees and $60,000 in penalties. In Count II, CSI alleges that Selective breached its insur- ance contract with CSI. On this claim, Selective seeks to re- cover “all available damages for Selective’s breach of the con- tract, including, but not limited to, consequential damages,” such as “unnecessary legal fees and expenses [incurred] de- fending itself and seeking indemnification in the Underlying Oregon Action, and in pursuing payment from Selective.” 4 No. 20-2509

In 2017, the federal district court granted CSI partial sum- mary judgment, finding that Selective breached its insurance contract with CSI by failing to provide coverage and defend CSI in the Oregon action. The federal court left the issue of CSI’s contractual damages for a later trial. The federal district court then held a bench trial on CSI’s Section 155 claim in 2018. The district court found that Selec- tive’s refusal to defend CSI in the Oregon action or to supply insurance coverage to CSI was vexatious and unreasonable and thus warranted Section 155 damages of $2,846,049.34. The federal court directed entry of final judgment under Federal Rule of Civil Procedure 54(b) on CSI’s Section 155 claim. The breach-of-contract claim is still pending. Selective now appeals the federal district court’s Section 155 decision. On appeal, CSI filed a motion for sanctions against Selective under Federal Rule of Civil Procedure 38 for filing a frivolous appeal. II. ANALYSIS Following a bench trial, we review de novo the district court’s legal conclusions, such as the interpretation of Section 155. See Acheron Med. Supply, LLC v. Cook Med. Inc., 958 F.3d 637, 642 (7th Cir. 2020) (citing Rain v. Rolls-Royce Corp., 626 F.3d 372, 379 (7th Cir. 2010)). Section 155 “limits and refines recovery for the tort of vex- atious and unreasonable delay.” Mohr v. Dix Mut. Cnty. Fire Ins. Co., 493 N.E.2d 638, 643 (Ill. App. Ct. 1986) (citations omit- ted). It states in relevant part: In any action by or against a company wherein there is in issue [1] the liability of a company under a pol- icy or policies of insurance or [2] the amount of the No. 20-2509 5

loss payable thereunder, or [3] for an unreasonable delay in settling a claim, and it appears to the court that such action or delay is vexatious and unreason- able, the court may allow as part of the taxable costs in the action reasonable attorney fees [and] other costs. 215 Ill. Comp. Stat. 5/155 (2020). According to Illinois courts, “[t]he language of this section is entirely plain.” Neiman v. Econ. Preferred Ins. Co., 829 N.E.2d 907, 914 (Ill. App. Ct. 2005). Section 155 does not create a cause of action but rather “provides an extracontractual remedy for policyholders who have suffered unreasonable and vexatious conduct by insurers with respect to a claim under [a] policy.” Cramer v. Ins. Exch. Agency, 675 N.E.2d 897, 902 (Ill. 1996); ac- cord Hennessy Indus., Inc. v. Nat’l Union Fire Ins. Co. of Pitts- burgh, 770 F.3d 676, 679 (7th Cir. 2014) (holding that Section 155 “provides a remedy in a specified type of ‘action’ (case); it does not create a cause of action; it presupposes rather than authorizes a suit”). Indeed, “[t]he statute begins by stating that it applies to those insurance cases where one of three issues remains un- decided: [1] the liability of the insurer, [2] the amount owed under the policy, or [3] whether a delay in settling a claim has been unreasonable.” Neiman, 829 N.E.2d at 914. None of those three threshold issues remains undecided here. 1. Selective’s Liability Two Illinois cases make our decision on the first threshold issue quite straightforward. In Neiman, the Illinois Appellate Court held that the first potential issue did not permit the 6 No. 20-2509

Section 155 claim before it because an underlying judgment “already found that defendant, as the insurer, was liable un- der the policy to plaintiffs.” Id. Similarly, in Pryor v. United Equitable Insurance Co., the case could not fall under the first Section 155 category “because the liability of the insurer … w[as] determined during arbitra- tion.” 963 N.E.2d 299, 302 (Ill. App. Ct. 2011). As in Neiman and Pryor, Selective’s liability under the pol- icy was fully decided in 2015 when the Illinois Appellate Court held that the Oregon action “triggered Selective’s duty to defend Creation Supply.” CSI does not offer any argument suggesting otherwise. In- stead, CSI repeats many times that no authority—especially not our decision in Hennessey—requires Section 155 claims to be brought in the same action in which the duty to defend is decided. We agree. But one of the three threshold issues (of which liability under the policy is just one) must remain undecided. And this counterargument admits that Selective’s liability un- der the policy at issue was decided in 2015. 2. CSI’s Amount of Loss Payable Under the Policy Neiman and Pryor also provide guidance on whether the amount of loss payable under the policy remains undecided. In Neiman, the amount of loss payable was already decided by an underlying judgment that found that the defendant-in- surer “was liable under the policy to plaintiffs in the amount remaining thereunder: $8,740 plus costs.” 829 N.E.2d at 914. And in Pryor, “the amount owed under the policy w[as] de- termined during arbitration.” 963 N.E.2d at 302. No. 20-2509 7

We see no daylight between the case before us and Neiman and Pryor. CSI settled the Oregon action (which was the only action covered by the policy) for $0. Then, in 2017 the Illinois Appellate Court held that, under the policy, Selective owed $195,000 to CSI for expenses incurred in the Oregon action from the time it started until CSI settled it and terminated Se- lective’s obligations. To put a fine point on it, the Illinois Appellate Court de- fined the precise scope of CSI’s policy with Selective as fol- lows: The [Oregon action] plaintiffs and Creation Supply settled all their claims and counterclaims on July 29, 2013. The Oregon court dismissed the underlying lawsuit against Creation Supply on August 19, 2013 without prejudice pursuant to the settlement agree- ment. Therefore, as of August 19, 2013, the covered claims for intellectual property infringement fell out of the case through settlement, which precluded the possibility of a duty to indemnify after that date and ceased the duty to defend. Selective Ins. Co. of the Se. v. Creation Supply, Inc., 2017 IL App (1st) 161899-U, ¶ 58. Then, based on that definition of the policy’s scope, the Il- linois Appellate Court excluded from its award to CSI various costs that arose after the settlement because they were not covered by the policy. Thus, the only loss payable under the policy was the $195,000 that CSI spent in the Oregon action before reaching settlement—nothing more and nothing less. And that means there’s nothing left to decide about the amount that Selective owed to CSI under the policy. 8 No. 20-2509

What CSI seeks now are consequential damages that, as the district court aptly stated, are “the amount of loss payable by virtue of the breach of contract already found by the Court.” But that loss is not, as the district court held, the same as the amount owed under the policy. As stated, the Illinois Appellate Court already determined the amount due under the policy in 2017. CSI again does not directly refute this conclusion by point- ing to some undecided amount still due under the policy. In- stead, CSI sketches yet another straw man and argues that Se- lective is asking the court to hold that a request for consequen- tial damages, like the request here, precludes a Section 155 claim. Selective has not in fact made such an argument, and we agree with CSI that such a position would be incorrect. Con- sequential damages are perfectly permissible alongside a Sec- tion 155 claim. See Mohr, 493 N.E.2d at 643 (permitting a claim for consequential damages and a claim under Section 155 in the same action). And consequential damages may be recov- ered after an insurance contract is breached. Clark v. Standard Life & Acc. Ins. Co., 386 N.E.2d 890, 898 (Ill. App. Ct. 1979). But though permissible, the consequential damages at is- sue in this case are only those damages that arose outside of the policy’s purview; the Illinois Appellate Court already awarded all of the damages that arose under the policy. CSI also asserts, without elaboration, that it seeks “com- pensatory damages.” But we see nothing in the complaint that brings compensatory damages (which we assume means “the amount of loss payable under the policy”) into the case. No. 20-2509 9

Further, we don’t see how such damages could come into play, as they were already awarded by the Illinois Appellate Court. The district court seemed to agree as well by stating that its ruling on the Section 155 claim would “be followed by a trial for consequential damages and fees, if any, sustained by CSI due to Selective’s breach of its insurance contract.” In sum, any amount due to CSI under its policy with Se- lective has already been resolved and thus cannot support a Section 155 claim. 3. Selective’s Unreasonable Delay in Settling CSI’s Claim What’s left is the third threshold issue—whether Selective unreasonably delayed settling a claim. For this “portion of the statute to be operational, there must have been an unreason- able delay in the ‘settling of a claim,’” as opposed to a delay in paying a “judgment.” Neiman, 829 N.E.2d at 915. The Neiman court defined “claim” as a “[d]emand for money or property as of right, e.g. insurance claim.” Id. (alteration in original) (citing Claim, Black’s Law Dictionary 247 (6th ed. 1990)). And it defined “judgment” as “[t]he official and au- thentic decision of a court of justice upon the respective rights and claims of the parties to an action or suit therein litigated.” Id. (citing Judgment, Black’s Law Dictionary 841–42 (6th ed. 1990)). In that case, “the underlying cause was well beyond the point of a claim, or even of a settlement, when plaintiffs filed the section 155 suit. In fact, a judgment had already been en- tered on the underlying suit—on August 3, 2001, for a sum certain.” Id. “Accordingly, a ‘claim’ was no longer in existence, as necessitated by the statute, but, rather, a judgment had been instituted, foreclosing any remaining issues with respect 10 No. 20-2509

to the underlying cause.” Id. Thus, a “claim” no longer existed in the case before it, and a Section 155 action could not pro- ceed. The suit before us likewise does not seek damages for any unreasonable delay in settling a claim. Instead, as in Neiman, “the underlying cause [in the Oregon action i]s well beyond the point of a claim, or even of a settlement.” Id. It was put to bed by the 2013 settlement and by the Illinois Appellate Court’s 2015 and 2017 decisions regarding Selective’s liability and the amount due under the policy. So the only issue here is whether Selective unreasonably delayed paying the Illinois court’s judgment relating to fees, not whether it delayed set- tling an insurance claim made by CSI. In fact, CSI highlights its allegations that Selective failed to pay CSI’s fees and expenses in the Oregon action “after hav- ing been judicially determined to have a duty to defend” or “after the [Illinois] Appellate Court affirmed … that Selective owed CSI a duty to defend.” These allegations prove the point—Selective allegedly failed to timely pay on a judgment; it did not allegedly fail to timely settle a claim. CSI also made this point plain as day in its summary judg- ment briefing before the district court, which stated, “Selec- tive acted vexatiously and with delay after it was found to have a duty to defend. … On December 19, 2013, the Circuit Court found that Selective owed CSI, a duty to defend in the Oregon Action … . On January 7, 2014, CSI … asked to be paid under the December 19 Judgment” (emphasis added). *** Section 155 spells out in black and white that at least one of three threshold issues must remain undecided for a Section No. 20-2509 11

155 claim to stand. Because none of those issues remains un- decided here, CSI’s Section 155 claim cannot proceed. Never- theless, CSI raises the following unpersuasive counterargu- ments. To start, CSI recites over and over again that this is not a “stand-alone” Section 155 claim as Selective argues. This case instead involves two claims: one for Selective’s breach of con- tract and one under Section 155. And courts have often said that a Section 155 claim can be brought alongside a breach-of- contract claim. See, e.g., Cramer, 675 N.E.2d at 904 (“[I]n con- junction with a breach of contract action, section 155 provides the remedy to policyholders for insurer misconduct that does not rise to the level of a well-established tort.”); Keller v. State Farm Ins. Co., 536 N.E.2d 194, 198 (Ill. App. Ct. 1989) (permit- ting a Section 155 claim to proceed alongside a breach-of-con- tract claim). Thus, CSI argues that its Section 155 claim may proceed by virtue of its breach-of-contract claim. Most of the above argument is correct: CSI has not brought a “stand-alone” Section 155 claim; CSI has also brought a breach-of-contract claim; and Section 155 claims often accom- pany breach-of-contract claims, as noted in Cramer and Keller. But CSI’s conclusion—that its Section 155 claim may pro- ceed—is wrong. Why? Because it commits what logic books call the “fal- lacy of the undistributed middle.” See David Kelly, The Art of Reasoning 243 (3d ed. 1998) (“In a valid syllogism, the middle term must be distributed in at least one of the premises.”). 12 No. 20-2509

Think of CSI’s argument like this: 1. A Section 155 claim can accompany a breach-of-contract claim. 2. This case includes a breach-of-contract claim. 3. Therefore, a Section 155 claim can accompany this case. The problem is that the middle term—“breach-of-contract claim”—is “undistributed,” meaning it does not refer to all breach-of-contract claims. So the conclusion does not flow from the premises. Here’s an example that is easier to digest: 1. Markers come in boxes. 2. An egg carton is a box. 3. Therefore, markers come in egg cartons. But of course they don’t. Not all boxes carry markers. Just some, and egg cartons aren’t among them. So too, not all breach-of-contract claims permit an accom- panying Section 155 claim. Just those for which “one of three issues remains undecided: the liability of the insurer, the amount owed under the policy, or whether a delay in settling a claim has been unreasonable.” Neiman, 829 N.E.2d at 914. And the breach-of-contract claim in this case is not among them. CSI also points to what it says are two cases in which Illi- nois courts did exactly what CSI asks us to do today—ignore the statute and permit a Section 155 claim even in the absence of any undecided threshold issue. But neither case did that. First, in Estate of Price v. Universal Casualty Co., an arbitra- tor ordered the defendant-insurer to pay $20,000 plus costs and interest under an insurance policy to the plaintiffs. 750 No. 20-2509 13

N.E.2d 739 (Ill. App. Ct. 2001). The defendant refused to pay in full. Then, as the Illinois Appellate Court has explained, the plaintiff filed a complaint with two counts: to confirm the arbitration and thereby enter a formal judgment against the defendant, and to recover sec- tion 155 damages. Thus, the section 155 allegations went hand-in-hand with a demand for judgment against the defendant in the amount of the arbitra- tor’s award—a judgment that had yet to be declared. This situation, then, amounted to a delay in the set- tlement of a claim where the issue of liability had yet to be resolved. Because issues were still open, sec- tion 155 was applicable and remand was appropri- ate for a determination in this regard. Neiman, 829 N.E.2d at 916 (citing Price, 750 N.E.2d at 739). Similarly, in Siwek v. White, the plaintiffs brought their Sec- tion 155 claim in the same action in which they sought “to es- tablish insurance coverage for [an] accident.” 905 N.E.2d 278, 285 (Ill. App. Ct. 2009). So the insurer’s liability under the pol- icy was in issue and permitted the Section 155 claim. Last, CSI makes the colorable argument that its Section 155 claim must stand because the Illinois Circuit Court, in 2013, dismissed the claim without prejudice and stated that “CSI’s rights are expressly reserved to maintain its action against Se- lective in Federal Court … regarding claims of breach of con- tract and violation of Section 155.” The Illinois Circuit Court was not wrong at the time it made this reservation, which was long before Selective’s lia- bility and the amount owed under the policy were resolved. But now those issues have been resolved. And though it con- cerns us that CSI is unable to pursue an avenue for relief that 14 No. 20-2509

another court left open to it, Section 155 leaves us with no op- tions. III. CONCLUSION For the foregoing reasons, we REVERSE the decision of the district court and REMAND the case for the district court to dismiss CSI’s Section 155 claim and to carry out further pro- ceedings consistent with this opinion to resolve the remaining issue of breach-of-contract damages. Further, because this appeal has merit, CSI’s motion for sanctions under Federal Rule is Appellate Procedure 38 is DENIED.