In the

United States Court of Appeals

For the Seventh Circuit

No. 08-1297

IOWA PHYSICIANS’ CLINIC MEDICAL FOUNDATION,

doing business as IOWA HEALTH PHYSICIANS,

Plaintiff -Appellant,

v.

PHYSICIANS INSURANCE COMPANY OF WISCONSIN,

 Defendant-Appellee.

Appeal from the United States District Court

for the Central District of Illinois.

No. 07 C 4012—John A. Gorman, Magistrate Judge.

ARGUED SEPTEMBER 15, 2008—DECIDED OCTOBER 31, 2008

Before KANNE, EVANS, and WILLIAMS, Circuit Judges.

EVANS, Circuit Judge. The plaintiff in this case, the Iowa

Physicians’ Clinic Medical Foundation, which does business under the name Iowa Health Physicians (IHP), asks

us to predict that the Illinois Supreme Court, if confronted

with the issue, would hold that the tort of bad faith

in refusing to settle a claim at or within the policy limits
2 No. 08-1297

of a medical malpractice insurance policy extends to a

noninsured under the policy. Because we think it is

doubtful that the Illinois high court would go that far,

we reject IHP’s appeal and affirm the district court judgment dismissing its complaint.

Because this case was decided on a motion for judgment on the pleadings, we accept the allegations in the

complaint as true and draw all reasonable inferences in

favor of IHP. Forseth v. Village of Sussex, 199 F.3d 363, 368

(7th Cir. 2000). Here, then, are the facts. IHP runs a

medical clinic in Geneseo, Illinois, where Dr. Randall

Mullin works as a family doctor. While working at the

clinic, Dr. Mullin treated Dennis Goetz, who needed

antimalarial therapy in anticipation of his trip to Africa.

Tragically, Dr. Mullin’s treatment was ineffective and

Mr. Goetz contracted malaria during his trip. To make

matters worse, Dr. Mullin failed to timely diagnose

Mr. Goetz’s condition upon his return. Mr. Goetz eventually died, and his wife filed suit against Dr. Mullin for

his negligent care and against IHP on a theory of

vicarious liability.

Dr. Mullin was protected by a medical malpractice

insurance policy issued by the Physicians Insurance

Company of Wisconsin (PIC), which covered his liability

up to $1 million and provided for the defense of claims

made against him. The policy gave PIC control over

Dr. Mullin’s defense, which meant that Dr. Mullin could

only settle a claim if PIC consented in writing. IHP, who

was listed as the policyholder on this insurance

contract, paid the premiums on behalf of Dr. Mullin as
No. 08-1297 3

part of the package used to entice him into working at

their clinic. But throughout the policy it was reiterated

that coverage did not extend to IHP. Policyholders

could purchase insurance from PIC, but IHP declined to

do so. Instead, it was covered by a combination of selfinsurance and a separate commercial insurance policy.

Accordingly, IHP hired its own attorney to represent

it in the Goetz case.

From the beginning, the case did not look good for IHP

or Dr. Mullin. Many experts agreed that Dr. Mullin provided substandard care to Mr. Goetz, and the damages

in the wrongful death suit threatened to be large. The

economic damage to Mr. Goetz’s widow and son alone

was estimated at over half a million dollars. What’s more,

Mr. Goetz suffered severe pain before passing away. Both

IHP and Dr. Mullin urged PIC to settle the case. The

plaintiff offered to settle the case for $900,000—just

below the policy limit—at least twice. But on both occasions PIC simply ignored the demand. Shortly thereafter, even the defense’s expert witness admitted in his

deposition that Dr. Mullin’s treatment deviated from

the standard of care. This concession led to Mrs. Goetz

withdrawing her $900,000 offer and demanding

$1.5 million instead. PIC eventually countered with a

$200,000 offer, which Mrs. Goetz didn’t deign worthy of a

response, and the case proceeded to trial. The jury

found Dr. Mullin and IHP liable and awarded $3.5 million

in damages. PIC paid $1 million, the limit on Dr. Mullin’s

policy, and IHP, upon agreement with Dr. Mullin, paid

the rest.
4 No. 08-1297

IHP and Dr. Mullin then joined forces and sued PIC in

the Illinois courts. They claimed that PIC breached a duty

owed to both of them to settle the claim in good faith.

PIC removed the case to federal court, resting on diversity

jurisdiction. Once before the federal court, PIC filed a

motion for judgment on the pleadings as to both IHP and

Dr. Mullin. PIC first argued that the duty to settle in

good faith extends only to Dr, Mullin, who was insured

under the malpractice policy, not IHP, who was

excluded from coverage. PIC went on to argue that since

IHP paid the judgment in excess of the policy limit, Dr.

Mullin suffered no damages, dooming his claim as well.

The judge (Magistrate Judge John A. Gorman sitting by

consent) agreed that PIC had no duty to IHP but held that

since Dr. Mullin sought damages for injury to his reputation and for emotional distress his claim could proceed.

IHP asked the judge to reconsider his decision or, in the

alternative, enter a final judgment as to IHP so that it

could immediately appeal the decision. FED. R. CIV. P.

54(b). The motion for reconsideration was denied, but

seeing no reason to delay IHP’s appeal, the judge

directed entry of a final judgment as to IHP. IHP now

appeals. Dr. Mullin’s claim against PIC remains pending

in the district court.

An insurer’s duty to settle in good faith on behalf of its

insured, which is well-settled in Illinois, Haddick v. Valor

Ins., 763 N.E.2d 299, 303 (Ill. 2001); Cramer v. Ins. Exch.

Agency, 675 N.E.2d 897, 903 (Ill. 1996), arises from the

covenant of good faith and fair dealing implied in an

insurance contract. This duty is a narrow exception to

the Illinois courts’ otherwise steadfast refusal to recognize
No. 08-1297 5

an independent tort arising from the breach of this contractual covenant. Voyles v. Sandia Mortgage Corp., 751

N.E.2d 1126, 1130-31 (Ill. 2001). The paradigmatic duty-tosettle case involves three parties: the injured third party;

the insured, who is being sued; and the insurer, who

controls the insured’s defense. If the third party sues

the insured for an amount above the policy limit and

seeks a settlement at the upper limit of the policy, a

conflict of interests arises. In this situation, the insurer

may be tempted to decline the settlement offer, no

matter how good the deal is for the insured, and go to

trial. It makes no difference to the insurer’s bottom

line whether the case is settled or the jury awards astronomical damages; in either event it will pay out only the

maximum on the policy. And if the case goes to trial, at

least there’s a shot that they will win and pay nothing.

The insured, on the other hand, calculates the risks of

trial differently because he will be stuck paying anything

above the policy limit. Cramer, 675 N.E.2d at 903. To

combat the temptation to ignore an insured’s interest

and to make sure that the intent behind the insurance

contract is upheld, Illinois courts have recognized that

an insurer has a “duty to act in good faith in responding

to settlement offers,” and if that duty is breached the

insurer is on the hook for the entire judgment, regardless

of the policy limit. Id.

This case, however, presents a permutation of the

paradigmatic duty-to-settle case. It involves four

parties: the injured third party, the insured, the

insurer, and the policyholder. IHP, the policyholder,

obtained medical malpractice insurance from PIC on
6 No. 08-1297

behalf of Dr. Mullin. As the policyholder, IHP paid the

premiums, but only Dr. Mullin was insured under the

policy. After her husband died, Mrs. Goetz sued both IHP

and Dr. Mullin. PIC refused to settle the case, resulting in

a judgment $2.5 million above the policy limit. On the

short record before us today, there is a pretty good case

to be made that PIC’s refusal to settle breached its duty

to Dr. Mullin. But that’s not the issue raised by this

appeal. Instead, we must determine whether PIC owed

IHP, the noninsured policyholder, a duty to settle in

good faith. The Illinois courts have yet to decide this

question, so we must predict whether the Illinois high

court would stretch the duty to settle to cover the case

before us. Zenith Ins. Co. v. Employers Ins. of Wausau, 141

F.3d 300, 304 (7th Cir. 1998). IHP would have the burden to

convince the Illinois Supreme Court that the duty to settle

should be expanded and consequently carries the

burden before us, as we stand in the state court’s stead.

Voyles, 751 N.E.2d at 1132.

Arguing for this expansion, IHP emphasizes its contractual relationship with PIC as a policyholder and

customer. This emphasis, though, is misplaced. The duty

to settle is designed to protect the bargain embodied in

an insurance contract, not simply honor the relationship

between contracting parties in general. Cramer, 675 N.E.2d

at 903. If a contractual relationship was all that was

needed, the covenant of good faith would be elevated to

a general tort duty, and the Illinois Supreme Court has

repeatedly refused to go that far. See Voyles, 751 N.E.2d

at 1130-31; Cramer, 675 N.E.2d at 903; 7-Eleven, Inc. v. Dar,

757 N.E.2d 515, 523 (Ill. App. Ct. 2001). After all, the
No. 08-1297 7

contractual covenant of good-faith and fair dealing, the

foundation of the duty to settle, is “used only as a construction aid in determining the intent of contracting

parties.” Cramer, 675 N.E.2d at 903; see also Voyles, 751

N.E.2d at 1131. Here, the intent of the parties is clear—IHP

was to be excluded from coverage. IHP could have paid

the higher premiums to receive coverage from PIC but

chose not to. The duty to settle is meant to protect the

bargained-for insurance coverage, not extend it. An

insurer who acts in bad faith may end up paying above

the contracted policy limits but only when doing so

protects the insured’s legitimate expectation of coverage

under the policy. We doubt that the Illinois high court

would extend the duty to settle to give IHP more than

it bargained for.

What’s more, the duty to settle is predicated on the

“insurer’s exclusive control over settlement negotiations

and defense of litigation.” Haddick, 763 N.E.2d at 303.

Without this control, no conflict of interest arises because

the policyholder can protect itself during settlement

negotiations. Twin City Fire Ins. Co. v. Country Mut. Ins. Co.,

23 F.3d 1175, 1179 (7th Cir. 1994) (noting that in Illinois

the duty to settle is “an implied correlative” of insurer’s

control over the defense). While PIC did control

Dr. Mullin’s defense, it had no equivalent power over

IHP. IHP had its own lawyer representing its interests

and had an unfettered ability to settle. Dr. Mullin may

have been the focus of the wrongful-death suit, and, as

IHP points out, a settlement with Dr. Mullin could

have extinguished IHP’s liability as well, American Nat’l

Bank and Trust Co. v. Columbus-Cuneo-Cabrini Med. Center,
8 No. 08-1297

609 N.E.2d 285, 289 (Ill. 1992) (“[A]ny settlement between

the agent and the plaintiff must also extinguish the principal’s vicarious liability), but that didn’t take the litigation out of IHP’s hands. IHP was a codefendant in the

case, and it could have gotten itself off the hook for a

big jury verdict if it settled the case with Mrs. Goetz.

IHP contends that expecting it to ante up anything for a

settlement would be unfair, given the Illinois Supreme

Court’s recognition that a principal who is vicariously

liable for its agent’s negligence is “blameless.” American

Nat’l Bank and Trust Co., 609 N.E.2d at 289 (recognizing

right to contribution and implied indemnification for

vicariously liable principals against agents). But blame

is not the same as liability. IHP, as the employer of Dr.

Mullin, owed Mrs. Goetz a legal duty, the breach of

which gave rise to its liability in this case. We see no

reason why IHP could be expected to pay a judgment

but not a settlement. If IHP is bristling because it’s on the

hook for wrongs it didn’t commit, then its complaint is

really against Dr. Mullin, not PIC, and it could, depending

on the exact nature of their relationship, possibly

pursue contribution or indemnification from Dr. Mullin

to mitigate its injury. See Faier v. Ambrose & Cushing, P.C.,

609 N.E.2d 315-16 (Ill. 1993); American Nat’l Bank and

Trust Co., 609 N.E.2d at 290; 740 ILL. COMP. STAT. 100/2.

IHP may have preferred that PIC settle the case, thereby

avoiding the risks involved with chasing down

Dr. Mullin’s share of the common liability, but the point

is that IHP could have settled too. IHP weighed its

options and chose to proceed to a jury trial. It is unlikely
No. 08-1297 9

that the Illinois high court would stretch the duty to

settle to compensate IHP for this bet that went bad.

Accordingly, we AFFIRM the judgment of the district

court.

10-31-08