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Lexington Insurance Co. v. Horace Mann Insurance Co.

United States Court of Appeals, Seventh Circuit

June 29, 2017

Lexington Insurance Company, Plaintiff/Counter-Defendant-Appellee,
Horace Mann Insurance Company, Defendant/Counter-Plaintiff/Third-Party Plaintiff-Appellant,
Aon Risk Insurance Services West, Inc., Third-Party Defendant-Appellee.

          Argued December 7, 2016

          Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 11 CV 2352 - Charles R. Norgle, Judge.

          Before Bauer and Flaum, Circuit Judges, and Shadid, District Judge. [*]

          Flaum, Circuit Judge.

         Christopher Drake was involved in a car accident with another driver, who offered to settle the matter with Drake's automobile insurer, Horace Mann Insurance Company. The offer expired before Horace Mann accepted it, however, and the driver sued Drake and sent a letter to Drake's lawyer suggesting that Horace Mann had handled the matter in bad faith. Believing that this letter constituted a "claim" against Horace Mann for extra-contractual damages-and that this "claim" had accrued before the start date of Horace Mann's own insurance policy with Lexington Insurance Company-Lexington sought a judicial declaration that it had no duty to indemnify Horace Mann under that policy. Horace Mann counterclaimed for breach of contract and declaratory judgment, and requested (pursuant to an Illinois statute) additional damages for "vexatious and unreasonable" claims-handling. Horace Mann also filed a third-party complaint against its insurance broker, Aon Risk Insurance Services West, for negligence in reporting the extra-contractual "claim" to Lexington. The district court resolved Lexington's complaint, in Horace Mann's favor, at summary judgment, but awarded judgment to Lexington and Aon on Horace Mann's claims under Federal Rule of Civil Procedure 50(a). Horace Mann appeals the Rule 50(a) decisions, and for the following reasons, we affirm.

         I. Background

         A. The Litigation Against Drake

         In May 2008, Christopher Drake's truck collided with Joseph Burley's motorcycle in Tampa, Florida. Burley was seriously injured in the crash, and the following month, Burley's lawyer sent a letter to Drake's insurer, Horace Mann, in which Burley offered to settle his claims against Drake for $25, 000 (the limit of Drake's insurance policy). The letter stated that Burley's offer would remain open for twenty days. Horace Mann responded that it could not make any payments until it had received Burley's medical records, but as Burley's lawyer did not provide those records, the twenty-day window closed without a settlement.

         In August 2008, Burley's attorney sent a follow-up letter to Horace Mann, notifying the insurance company that Burley was pursuing his claims against Drake in the Florida courts. The insurer then attempted to resolve the matter by sending to Burley's lawyer, on multiple occasions, a check for $25, 000. Burley refused to settle, however, and he never cashed the checks. Employees at Horace Mann began to suspect that Burley's lawyer had been trying to set up the insurance company for a claim of bad-faith conduct-which, if successful, could expose the insurer to liability beyond the coverage limits of Drake's policy. See Stephen S. Ashley, Bad Faith Actions Liability & Damages §§ 3:6, 8:3 (2d ed. 2016).

         The Burley v. Drake litigation continued, and two years later, on September 14, 2010, Burley's lawyer sent Drake's counsel a letter concerning an upcoming mediation session:

We have scheduled the mediation of this case [for later this year]....Obviously, the only way [Drake] is going to obtain any relief from the judgment that certainly will be obtained in this case, is if the [insurance] carrier agrees to acknowledge their extra-contractual exposure and "open" their limits.
... If [the carrier has] an extra-contractual lawyer looking into this matter, please let me know the name of that person and I will deal with them directly. If not, please relay my message that we intend to discuss the extra-contractual aspects of this case that, if acknowledged, would give your client assurance of financial relief.

         Drake's attorney forwarded this letter to Horace Mann, and Horace Mann sent to the mediation session a claims adjuster for extra-contractual-liability claims. The claims adjuster was authorized to offer no more than $200, 000 in settlement, however, and Burley would accept no less than $8 million, so the parties concluded the session without reaching an agreement.

         B. Horace Mann's Policy with Lexington

         In August 2010, Horace Mann had in place a professional-liability insurance policy issued by Lexington. That policy, which had a one-year effective period beginning on September 28, 2009, obligated Lexington to pay Horace Mann's losses arising from errors committed by Horace Mann in serving its clients. On August 20, 2010, Horace Mann e-mailed its insurance broker, Aon, about notifying Lexington of the Burley litigation. Aon responded:

We don't have [a] record of this matter. Apparently, [the Burley suit was] filed in 2008 .... If that's the case, we would have a late noticing issue .... Let us know how you would like us to proceed.

         Horace Mann replied that it would like Aon to "[p]lease proceed in reporting" the matter to Lexington; but Aon stated that it would need a copy of the Burley complaint before doing so, and asked Horace Mann to send one over. Three days later, on August 23, Horace Mann explained in a follow-up e-mail that it was working on getting copies of the complaint, and reiterated its request that Aon "proceed in reporting" the suit to the insurance carrier. Aon in turn asked if it would be acceptable to notice the suit once Aon had received the complaint, and Horace Mann agreed that that would be fine. Horace Mann eventually forwarded the complaint to Aon on September 21, once more asking that Aon submit the matter to Lexington for review. On September 24, however, a Horace Mann employee e-mailed Aon to indicate that she had "d[one] a little more digging, " and that there were no "written" extra-contractual allegations; accordingly, wrote the employee, Horace Mann "wish[ed] to withdraw this claim." Aon did as the employee asked, and did not submit anything to Lexington at that time.

         On December 17, 2010-two days after the unsuccessful mediation session with Burley-Horace Mann again instructed Aon to provide Lexington with notice of the Burley suit. (Lexington had in the meantime renewed Horace Mann's policy, which now had a one-year effective date beginning September 28, 2010.) Aon did so, by letter, on January 11, 2011. The January 11 letter stated that Horace Mann was giving notice of a "potential" professional-liability claim based on the Burley matter, which Horace Mann expected to give rise to an actual "claim" against that insurance company. Attached to the letter was a memorandum summarizing the underlying events and prior communications between Horace Mann and Burley's counsel.

         On February 4, 2011, a Florida jury returned a $17 million verdict against Drake in the Burley action. Horace Mann informed Lexington of the verdict, and transferred to Lexington the Burley claim file and related documents, including the September 2010 letter from Burley's lawyer. Burley's counsel then sent to Horace Mann a message on March 3, 2011, in which the attorney stated:

Following our conversation last night, I had a chance to talk to my client about settling this case....I told you last night that our initial offer to settle this case would be the face value of the judgment, or $17 million. I have confirmed that my client is willing to negotiate from that ...

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