## In the



# U n ited S ta tes Co urt o f Ap p ea ls

F o rth eS e v e n th C ir cu it
N o. 08

- 1297 I OWAP HY S I CI ANS ’ C LINIC M ED I CALF OU ND A T I ON, doi ng business as I OWAH EALT HP HY S I CI ANS, P laint if f -A ppell ant, v.
P HY S I CI ANSI NS URANC E C OMPAN Y OF W ISCO NSIN , D efend a nt-A pp ellee.

A pp eal from the United S t ates Di strictC our t fo r the C entral D istricto f Illino is. No . 07 C4012

—Jo hn A . G orman, Magis trate Judge
.
A RG UE D S EP TE MBE R 15, 2008

— D ECIDED O CT OB ER 31, 2008

Befo re K ANN E , E VANS, a nd W I L L I A MS, C ircu it Judges . E VANS, Cir cu i tJudg e . T h e p l a i n t i ffi n th i s c a s e , th e I o wa P h ys icia n s’ C lin ic M ed ica l Fou n d at ion, w h i c h d oe s b u siness und er t h e nam e I owa H eal th Physi ci ans ( I H P), as ks us to pre dictthat the I l l i noi s Suprem e Court, i fco nfr onte d w i th the i ssue , w ou l d hol d that the to rto fbad f ai th in r efusi ng to se ttl e a cl ai m ato r w i thi n the pol i cy l i m i ts2 N o. 08

- 1297 ofa m edi calm al pract i ce insurance pol i cy extends t o a n on in su re d u n d er th e p olic y. B ec au se w e t h in k it is d ou btfu l th at t h e I ll inois high cou rt w ou ld go tha t far, w e r ej ect I H P’s appealand affi rm the dis tr i ct c ourtj ud gm ent di sm i ssing i ts com pla i nt. Because thi s ca se w as deci ded o n a m oti on f orj ud gm en t o n the pl ea di ng s, we accep t t he a l l eg at i o ns i n the c om p lain t a s t ru e a n d d ra w all rea so n ab le in fer e n c es in fav or of IH P
. Fo rseth v . Village o f Su ssex , 19 9 F
. 3d 363, 36 8 ( 7 th Ci r . 2 0 0 0 )
. He r e , the n, a r e the f a c t s . I HP runs a m ed ica l clin ic in G e n es eo , I llin ois , w h er e D r. R an d all M ul l i n wo r k s as a f ami l y do ct o r . W hi l e wor k i nga t th e cl i ni c, Dr. M ull i n tr eat ed Dennis Goetz, wh o needed anti m al ar i alther apy i n an ticipati on o fhi s t ri p to A fri ca. Tr ag i ca l l y, Dr
. M ul l i n’ s tr ea tmentwas i ne ffec tive a nd M r. Go e t z c o nt r a c t e d mal a r i a du r i ng hi s t r i p. To m ake m at t e r s wo r s e , Dr
. Mul l i n f a i l e d t o t i mel y di a g no se M r . Go et z’ s co ndi ti o n upo n h i s r etur n. M r . Go et z ev en tu
al l y di ed, and hi s wife filed sui t a gainst Dr. M ull i n f or hi s neg l i gent car e a nd ag ai nst I H P on a t h eo ry o f vi car i ous l i abi l i ty. Dr. M u ll i n w as prot ecte d by a m edi calm al pract i ce i nsuranc e pol i cy i ssued bythe Physi ci ans Insurance Com pany ofW i sco ns in ( PI C), wh i ch co ver ed hi s l i abi l i ty u p t o $ 1 mi l l i o n a n d p r o v i d e d f o rth e de fe n s e o fc l a i ms m ade ag ain st hi m . The pol i cy gave PI C contr olo ver D r. M u llin ’s d efe n se , w h ich m ea n t t h at D r. M u llinco u ld o nl y s et tl e a cl ai m i fPI C c o ns en te d i n wr i ting . I H P, who w as l i ste d as the pol i cyhol der o n thi s insurance contr act, pai d the pre m i um s o n beha lf o fDr. M ull i n asN o. 08

- 1297 3 part ofthe packag e use d to enti ce hi m i nto w or ki ng at th eircl i ni c. But thr oughout the pol i cy i t was r ei ter ate d th at cove rage d id not ex ten d to I H P. Poli cyh olders coul d pu rchas e insurance fro m PI C, but I H P decl i ned to d o so. I ns tead , it w as cove red by a com binat ion ofse lf

i nsurance and a se parat e co m m er c i ali nsurance pol i cy. Acco r di ng l y, I H P h i r ed i ts o wn at to r ne y t o r epr es en t i t in the Goetz case . F r o m th e b e g i n n i n g, th e c a s e di d n o tl o o kg o o d f o rI HP orDr. M ull i n. M any e xperts agr eed thatDr. M ull i n provi ded subst an d ar d car e t o M r. Goetz , and the dam age s i n the wro ng fulde ath s ui t th r ea te ne d t o b e l ar g e. The ec o no m i c damag e to M r . Go et z’ s wi do w and so n a l o ne w as est i m ate d at o verh al fa m i l l i on d ol l ar s. W hat’ s m or e, M r. Goetz suffer ed seve re p ai n bef or e pass i ng away. Both I H P a nd Dr
. M ul l i n ur g ed PI C t o s ettle t he c as e. The pla i nti ffo ffer ed to se ttl e the case fo r $900 , 000

—j ust b elo w th e p olic y lim it

— at l eas t tw i ce. B u t on bo th o ccasion s PI C si m plyi gnor ed the dem and. Shor tl y there

aft er , eve n th e d e f en se ’s e x p er t w itn es s a d m itt ed in h is dep osi ti on that Dr. M ull i n’s tr eat m ent devi ate d fr om the s tandard o fcar e. Thi s co ncessi on l ed t o M rs . Goetz wi th dr awi ng her $ 9 0 0 , 0 0 0 o f f e r a n d d emandi ng $1
. 5 m i l l i o n ins te ad. P I C e ve ntua l l y c o unt er ed wi tha $200 , 000 offer, w hich M rs. G oetz d idn ’t deign w orthy of a resp ons e, an d the ca se p roceed ed to tri a l. Th e j ury f ound D r. M ull i n and I H P l i abl e a nd awarded $3. 5 m i l l i on in d am ages. PIC p aid $1 m il li on, the li m it on Dr. M ulli n’s p olic y, an d IH P , up on ag re em en t w ith D r. M u llin, pa id the r est
.4 N o. 08

- 1297 IH P an d D r. M u llinth en jo i n e d forc es an d su ed P IC in the I l l i noi s co urts
. They c l ai m ed that PI C brea ched a duty o wed t o b o tho fthe m t o s et tl e th e cl ai m i n g o o d f ai th
. PI C rem ove d the ca se to federa lco urt, re sting on di ver si ty j ur i s di c t i o n. On c e b e f o r e the fe de r a lc o ur t, P I C f i l ed a m o ti o n fo rj ud gm en t o n the pl ea di ng s as t o b o thI H P a nd D r. M u llin . PIC firstarg u ed th at t h e d u ty to se tt le in goo d fa i th e x te n ds onl y t o Dr, M ull i n, wh o w as i nsured und erthe m al pract i ce pol i cy, notI H P, w h o w as excl ud ed fro m co ver age . PI C w ent o n to ar gue that s i nce I H P p aid th e j ud gm en t in exc ess of the p oli cy li m it, Dr. M u llinsu ffer ed n o d am ag es , d oo m in g h is c l a im as w ell. The j ud ge ( M agi str ate J ud ge J ohn A . G or m an si tting by conse nt) agr eed that PI C had no du ty to I H P but hel d that si nce Dr. M ull i n so ught d am ag es f ori nj ury to hi s r eputat i o n a nd f or em ot i o na ldi s t r e s s h i s c l a i m co ul d p r o c e e d. I H P as k e d th e j u d g e t o r e c o n s i d e rh i s d e c i s i o n o r, i n t he alt er n at ive , en te r a fin al jud gm en t a s t o IH P s o t h at it c ou ld im m ed iat ely ap p ea l t h e d ec isio n . F ED . R. C IV . P. 54 ( b)
. The mot i o n fo rr ec o ns i der at i on was de ni ed, b ut see i ng no re aso n to d elay I H P’s appeal, the j ud ge dir ecte d entr y o fa fi nalj ud gm en t as to I H P. I H P now appe al s. Dr
. M ul l i n’ s cl ai m a g ains t PI C r emai ns pe ndi ng i n the dist ri ct c ourt
. A n i nsurer’ s duty t o set tl e in go od f ai th o n behal fo fi ts i n s u re d , w h ich is w ell-s et tle d in Illin ois , Had d i c kv . Val or Ins. , 763 N .E .2d 29 9, 30 3 (Ill. 20 01 ); Cramer v. Ins. E xch. A gency, 6 75 N. E. 2d 89 7, 9 03 ( I l l
. 1 99 6) , a r i ses fr o m the cove nant o fgo od f ai th and f ai r de alin g im pli ed i n an i nsurance contr act. Thi s duty i s a nar ro w e x c ep ti on t o the I l l i noi s co urts ’ o ther w i se ste adfa st re fusalto r eco gni zeN o. 08

- 1297 5

ani nde pen den t to r t ar i singfr o m the b r ea cho fthi s co ntr ac tu al c ov en an t. Voyl e s v. Sa ndi a M or tgageCorp. , 751 N
. E.2 d 1 126, 1130

- 31 ( I l l
. 2001 )
. The para dig m ati c duty- toset tl e ca se i nvol ves thre e par ti es: the i nj ured t hi rd party; th e i ns ur ed, who i s bei ngs ue d; a nd the i ns ur er, who contr ol s the i ns u red’s defe nse. I fthe thi rd party s ues th e i ns ur ed f o ra n a m o untabo ve the po l i cyl i m i t an d se ek s a se tt l e m e n t a t t h e u p p er lim it of t h e p olic y, a confl i ct o fi nter est s a ri ses . In thi s s i tuati on, the i nsurer m ay be te m pte d to dec l i ne th e se tt l ement off er, no m att erhow goo d the d ea l is forthe i nsured, and go to tr i al
. I t m ake s n o differ ence to the insurer ’ s bo tto m l i ne wh etherthe case i s s ett l ed orth e j u ry aw ar ds ast ro no m i ca lda m ages; i n e i th ere ve nti t wi l lpa y o uto nl y the max i mum o n the po l i c y . And i f the c a s e g o e s t o t r i al , at l eas t there ’s a sh ot that they w i l lwin and pay no thi ng. The i nsured, o n the othe r hand , cal cul ate s the r i sks o f tr i aldi ffer en tly b ec au se he wi l lb e stuckpay i nga ny th i ng ab ov e th e po licy li m i t. C ram er, 6 75 N. E. 2d at9 03
. To com bat the t em ptati on t o i gnor e a n i nsure d ’ s inter est and to m ake s u re thatthe i ntent behi nd the i nsurance contra c t i s uphel d, I l l i noi s co urts have r eco gni zed that ani ns ur erha s a “duty t o a cti n g ood fai thi n r es po ndi ng to s et tl emento ffer s, ” an d i ftha t duty i s br ea ch ed th e i nsureri s o n the hookf orthe enti re j ud gm ent, r ega rdl ess of th e p olic y lim it. Id
. Thi s ca se , ho we ver, pr es en ts a pe r m ut at i o n o fthe par adi g m at i c duty -to-settle cas e. I t in vol ve s f o ur pa r t i e s : th e i nj u r e d th i r d p a r t y, th e i n s u r e d , t he insu r e r , and the p oli cyh older. I H P, the p oli cyh older, obt ain ed m edi calm al pract i ce insurance fro m PI C on6 N o. 08

- 1297 be ha l fo fDr
. M ul l i n. As the po l i cy ho l der, I H P pa i d the p rem i um s, b uto nl y Dr
. M ul l i n was i ns ur ed unde rthe p o l i c y . Af t e rhe rhu s b a n d d i e d , Mr s . G o e t z s u e d b o th I HP an d D r. M u llin
. P IC re fu se d to se tt le th e c as e, re su ltin g in a j udg m en t $2
. 5 m i l l i o n abo ve the po l i cyl i m i t. On th e short rec or d bef or e us today, ther e i s a pre ttygo od cas e to be m ade thatPI C ’s r efusalto se ttl e br eached i ts du ty to D r. M u l l i n . B u t t h at ’s n otth e is su e ra ise d by th is appeal
. Instea d, w e m ust dete rm i ne wh et h erPI C ow ed IH P , th e n on in su re d p olic yh old er , a d u ty to se tt le in go od faith. The I l l i noi s co urts have ye t t o deci de this questi on, so we m ust pre dictwh etherthe I l l i noi s hi gh cour t would s tret c h t h e duty to set tl e t o cove r the c ase bef or e us. Ze ni t h Ins . Co. v. Em ployers Ins . of Waus au , 14 1 F. 3d 300, 30 4 ( 7th Ci r. 19 98)
. I H P w oul d have the burden to c on vin c e t h e Illino is Su p re m e C ou rtth at th e d u ty t o s et tle sh o uld be ex pan ded an d c o ns eque nt l y c ar r i es the b ur de n b e f o r e u s , a s we s t a nd i n the s t a t e c o ur t ’ s s t e a d. V o yles , 75 1 N
. E.2 d at 1 132. Arg ui ngf o rthi s ex pan si o n, I H P em pha si ze s i ts c o ntr ac tu al r el at i o ns hi p wi thPI C a s a po l i cy ho l dera nd custo m er . Thi s e m phasi s, tho ugh, i s m i spl ac ed . Th e duty to se tt le is d e s i g n ed to p ro te c t t h e b ar ga inem b od ied in an ins u ra n c e c on tr ac t, n otsim p l y h o n or th e re lat ion sh ip b et w ee n c on tr ac tin g p ar tie s in ge n er al. C ram er, 675 N
. E.2 d at 903. I fa c on tractualr el ati onshi p w as al lthatwas needed, the cove nant o fgo od fa ith w oul d be e l evat ed to a g ener alto rtduty, and the I l l i noi s S up re m e Court has re p ea te d l y r e fu se d to go t h at far. See V o yles, 751 N
. E.2 d at 11 30 -31 ; C ram er, 675 N .E .2d at90 3; 7- Ele ve n, Inc . v . Dar, 75 7 N
. E. 2d 51 5, 5 23 ( I l l
. App. Ct
. 2 00 1)
. Af ter al l, theN o. 08

- 1297 7

co nt r ac tu alc o ve na nto fg o o d- f ai tha nd f ai rde al i ng, the foun d ation o fthe duty t o s et tl e, i s “u se d o nl y a s a co nst r uct i o n a i d in de te r m i ni ngthe i nt en t o fc o nt r ac ting parti es. ” Cra me r, 6 7 5 N. E. 2 da t90 3 ; see also V o yles , 75 1 N
. E.2 d at 1 131. H er e, the i ntent ofthe parti es i s cl ear

— I HP w as to be ex c lu d ed from co ve ra ge . I H P c ou ld h av e p aid th e hi g he rpr emi um s t o r ec ei ve c o ve r ag e fr o m PI C b ut ch o se no t to
. The duty t o s et tl e i s m ea ntt o p rotect the b a r g a i n e d

- f o ri n s u r a n c e c o v e r a g e , n o te xt en d i t
. An i nsurerwh o acts i n b ad f ai th m ay end up payi ng ab ove the c ontr acte d pol i cy l i m i ts but o nl y when d oin g so prot ects the i nsured’ s l egi ti m ate expect ati on o fco ver age un d er the p oli cy. W e d ou bt th at th e I llin o is high cou rt w oul d ex tend the du ty to set tl e t o gi ve I H P m or e than it bargained f or. W ha t’ s m o r e, the duty t o s et tl e i s p red i ca te d o n the “ins ur er ’ s ex cl us i ve c o nt r o lo ve rs et tl ementne g o ti at i o ns and defens e o fl i ti gat i on. ” Hadd ick, 76 3 N
. E.2 d at 3 03. W i tho utthi s c o nt r o l, n o c o nfl i c to fi nt e r e s ta r i s e s b ecause th e po l i cy ho l derc anpr o te cti ts el fdu rings et tl ement n eg ot iat ion s. Tw i n Ci ty Fi r eIns
. Co. v. Count ry M ut
. Ins . Co. , 23 F. 3d 1175 , 11 79 ( 7th Ci r. 19 94) ( noting tha t in I l l i nois th e d ut y t o settle i s “an i m p li ed correlati ve” of i ns ure r’s contr olo verthe defe nse)
. W hi l e PI C d i d c ontr ol Dr. M ull i n’s defe nse, i t had no equi val ent pow er over I H P. I H P had it s own l aw yerr epres enti ng i ts i nter est s and had an unfet ter ed abi l i ty to se ttl e. Dr. M ull i n m ay have been the focus ofthe w ro ngful- death sui t, a n d , a s IH P p oin ts ou t, a s et tle m en t w ith D r. M u llinco u ld h av e e x tin gu ish ed IH P ’s liab ility as w ell, A m er ican Nat’l B a nkan d Trust C o . v. Co lum bus-C un eo-C a b r i n i M ed. C enter,8 N o. 08

- 1297 609 N
. E.2 d 285, 289 (I l l
. 1992) (“[ A ] ny settl em ent b etween th e age n t an d th e p lain tiff m u st als o e x tin gu ish th e p rin c ipal ’ s v i car i ous l i abi l i ty) , but that didn’tta ke the l i ti gati o n o uto fI H P’ s ha nds
. I H P was a c o defenda nti n the ca se , an d i t co ul d ha ve g o tt en i ts el f o ff th e hook f or a bi g j ury ver dicti fi t s ett l ed the case with M rs . Goetz
. I H P con ten d s tha t ex p ectin g it to ant e up anyt hin g for a s e t t l e men t wo u l d b e u n f a i r, g i v e n th e I l l i n o i s S u p r e me C ou rt ’s re c o g n itio n th at a p rin c ip al w h o is v ica riou sly l i ab l e f o ri t s a g e nt ’ s n e g l i g e nc e i s “ b l a mel e s s . ” Am e r i ca n Nat ’ l Bank a nd Tru s tCo. , 6 09 N. E. 2d a t 28 9 ( r ec o g ni zing ri ght t o contr ibuti on a nd i m pli ed i nd em ni fi cati on f or v i c a r i o u s l y l i ab l e p r i n c i p a l s a g a i n s ta g e n t s )
. B u tb l a me is not t h e s a m e as l iabil ity. I H P, as the em p loyer ofDr. M ul l i n, o we d M r s . Go e t z a l e g a l du t y, the b r e a c h of whi chg ave r i se t o i ts l i ab i l i tyi n thi s ca se . W e se e no r ea so n wh y I HP c o u l d b e e x p e c t e d t o p a y a j u d g m en t butno t a se tt l ement
. I f IH P is b r i st l i ngb ec au se i t’ s o n the h oo k for w ro n gs it d id n ’t c om m it, th en it s c om p lain t is r ea l l y a g ains t Dr
. M ul l i n, no t PI C, a nd i t co ul d, de pen di ng on th e ex ac t n at u re of th eir rela tio n sh ip , po ss ibly p u rs u e c on tr ibu tio n or in d em n ifica tio n from D r. M u llin t o m i t iga te its inju ry . S e eF ai e rv . Amb r os e& Cu s hi n g, P. C. , 609 N
. E.2 d 315- 16 ( I l l
. 199 3); Am e r i ca n Nat’ l Bank a nd Tr u s tCo ., 60 9 N
. E.2 d at 2 90; 74 0 I LL . C OM P . S T AT . 10 0/2. I H P m ay have prefe rre d thatPI C sett l e the cas e, ther eby a v o i d i n g th e r i s k s i n v o l v e d wi t h c h a s i n g d o wn Dr
. M ul l i n’ s sh ar e o f th e co m m o n l i ab i l i ty, but th e p oi nt i s that I H P coul d have s et tle d too. I H P w ei ghed i ts op tio n s a n d ch os e t o p ro c ee d to a j u ry t r i a l
. It is u n like lyN o. 08

- 1297 9 that the I l l i noi s hi gh cou rt w oul d str etch the duty to s e t t l e t o c o mpe ns a t e I HP fo rthi s b e ttha twe ntb a d. A ccor dingl y, we A FFIRM the j ud gm ent o fthe dist ri ct cour t.

10- 31- 08