IN THE UNITED STATES DISTRICT COURT FOR THE

NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

STARSTONE INSURANCE SE, )

) Case No. 20 CV 2475

Plaintiff, )

)

v. ) Judge John Robert Blakey

)

CITY OF CHICAGO, )

)

Defendant. )

MEMORANDUM OPINION AND ORDER

This is an insurance dispute concerning Plaintiff and Counterclaim-Defendant 

Starstone Insurance’s coverage obligations under a “wrongful acts” policy it sold to 

the Defendant and Counterclaim-Plaintiff, the City of Chicago (“the City”). The 

parties dispute whether Starstone has an obligation to pay part of the City’s 

settlement in a civil rights action brought against the City and its police officers. 

Starstone filed a complaint seeking a declaratory judgment stating that it has “no 

obligation to fund any portion of the City’s settlement. . . .” [1] at ¶ 24. The City then 

brought a two-count counterclaim against Starstone, alleging breach of contract and 

violation of section 155 of the Illinois Insurance Code. [22] at 11–14. Starstone moves 

to dismiss the City’s Illinois Insurance Code claim pursuant to Federal Rule of Civil 

Procedure 12(b)(6). [25]. For the reasons stated below, this Court grants Starstone’s 

motion.

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I. The Counterclaim’s Allegations

Jacques Rivera was convicted of murder in 1990. [22] at ¶ 6. Upon his release 

in 2011, Rivera sued the City and multiple Chicago police officers for civil rights 

violations under 42 U.S.C. § 1983. Id. at ¶ 7. After a trial, a jury awarded Rivera 

$17 million in compensatory damages against the City and some of the officers, and 

$175,000 in punitive damages against certain officers; additionally, because Rivera 

prevailed, the trial court had the discretion to award him reasonable attorneys’ fees. 

Id. The City appealed, and the case went to mediation in the Seventh Circuit. Id. at 

¶ 8. Ultimately, the parties settled Rivera’s lawsuit for $18,750,000. Id. at ¶ 9.

Starstone issued an excess liability insurance policy to the City covering the 

period from December 31, 2010 to December 31, 2011. Id. at ¶ 10. The policy provided 

$5,000,000 in indemnification coverage excess of the City’s $15,000,000 retained 

limit. Id. Consistent (in its view) with this policy, the City informed Starstone that 

it would pay its retained limit of $15,000,000 and requested that Starstone pay the 

additional $3,750,000. Id. at ¶ 12. Starstone agreed to pay, but only if the City agreed 

to provide Starstone with a right of recoupment. Id. The City refused, claiming the 

policy did not expressly allow Starstone to condition payment on such a right. Id.

With the parties at an impasse, Starstone sued, seeking a declaratory 

judgment that it had “no obligation to fund any portion of the City’s settlement. . . .” 

[1] at ¶ 24. The City answered the complaint and brought a two-count counterclaim 

against Starstone. [22] at 11–14. Count I alleges that Starstone’s refusal to pay 

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$3,750,000 towards the Rivera settlement constitutes a breach of contract. Id. at 11–

12. Count II alleges that Starstone’s conduct violates section 155 of the Illinois 

Insurance Code, 215 ILCS 5/155. Id. at 12–14. In particular, the City alleges that 

Starstone’s failure and refusal to pay $3,750,000 toward the Rivera Settlement was 

“vexatious and unreasonable” because Starstone “had no reasonable basis in law or 

fact to deny the City’s request for payment.” Id. at ¶ 24. The City also alleges that 

Starstone’s attempt to condition its payment on receipt of an agreement from the City 

to provide a right to recoupment was vexatious and unreasonable because it imposed 

an extra-contractual term on the City in exchange for paying what the policy obliged 

Starstone to pay. Id. at ¶ 25. 

Starstone moves to dismiss count II. [25].

II. Legal Standard

A motion to dismiss under Fed. R. Civ. P. 12(b)(6) “challenges the sufficiency 

of the complaint for failure to state a claim upon which relief may be granted.” Gen.

Elec. Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1080 (7th Cir. 1997). A 

counterclaim is subject to the same legal standard as a complaint. See Cozzi Iron & 

Metal Inc. v. U.S. Office Equipment, Inc., 250 F.3d 570, 574 (7th Cir. 2001). Thus, in 

deciding the motion, this Court must construe the counterclaim in the light most 

favorable to the pleading party, accept as true all well-pleaded facts, and draw 

reasonable inferences in the pleading party’s favor. Yeftich v. Navistar, Inc., 722 F.3d 

911, 915 (7th Cir. 2013). The Court need not, however, accept statements of law. Id.

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To survive a motion to dismiss, the pleading must contain “sufficient factual 

matter” to state a facially plausible claim to relief. Ashcroft v. Iqbal, 556 U.S. 662, 

678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim is 

facially plausible where the plaintiff alleges sufficient facts for “the court to draw the 

reasonable inference” that the defendant committed the alleged misconduct. Id. 

III. Analysis

Starstone argues that this Court should dismiss the City’s section 155 claim 

because the City’s allegations demonstrate a bona fide dispute concerning the policy. 

[25] ¶ 4. The City responds that the question of whether there is a bona fide coverage 

dispute is not the relevant issue at the motion to dismiss stage. [30] at 7–8. Rather, 

the City met the pleading standard, it argues, by setting forth the factual basis for 

the loss, laying out the relevant policy language, and alleging that Starstone

baselessly denied coverage. Id.

Section 155 of the Illinois Insurance Code provides “an extracontractual 

remedy to policy-holders whose insurer’s refusal to recognize liability and pay a claim 

under a policy is vexatious and unreasonable.” Phillips v. Prudential Ins. Co. of Am., 

714 F.3d 1017, 1023 (7th Cir. 2013) (quoting Cramer v. Ins. Exch. Agency, 675 N.E.2d 

897, 900 (Ill. 1996)). Courts consider the totality of the circumstances when 

determining if conduct merits section 155 sanctions. TKK USA, Inc. v. Safety Nat’l 

Cas. Corp., 727 F.3d 782, 793 (7th Cir. 2013) (citing Statewide Ins. Co. v. Houston 

Gen. Ins. Co., 920 N.E.2d 611, 624 (Ill. App. 2009)). Sanctions under section 155 

require “evidence . . . that the insurer’s behavior was willful and without reasonable 

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cause.” Citizens First Nat'l Bank v. Cincinnati Ins. Co., 200 F.3d 1102, 1110 (7th Cir. 

2000). “[A]n insurer’s conduct is not vexatious and unreasonable if: (1) there is a bona 

fide dispute concerning the scope and application of insurance coverage; (2) the 

insurer asserts a legitimate policy defense; (3) the claim presents a genuine legal or 

factual issue regarding coverage; or (4) the insurer takes a reasonable legal position 

on an unsettled issue of law.” Id. (internal citations omitted). 

The City alleges that Starstone unreasonably and vexatiously conditioned its 

payment of the $3,750,000 insurance claim on the City agreeing to an 

extracontractual demand. [22] at 13, ¶ 25. But even viewed in the light most 

favorable to the City, the City’s allegations fail to raise a facially plausible section

155 claim. The existence of a bona fide dispute between the parties about the 

insurance policy’s scope and application, and about Starstone’s ability to condition its 

payment on potential recoupment, undermines the City’s claim that Starstone’s 

behavior was vexatious and unreasonable. 

Based upon the language of the parties’ contract, this Court does not find 

Starstone’s position unreasonable. The policy obligates Starstone to pay “the 

ultimate net loss, in excess of the retained limit, that the insured becomes legally 

obligated to pay by reason of liability imposed by law or assumed under an insured 

contract because of bodily injury or property damage arising out of an occurrence 

during the Policy Period.” [22-2] at 6. The policy provides that the “defense of any 

claim or suit to which this Policy applies is [the City’s] obligation” and requires the 

City to “pay all costs of claim or suit investigation, litigation, and legal expenses 

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which can be directly allocated to a specific claim or suit.” Id. at 7. The policy 

absolves Starstone of any obligation “to assume charge of the investigation, 

settlement or defense of any claim made, suit brought or proceeding instituted 

against [the City].” Id. Based upon these provisions, Starstone acted neither 

unreasonably nor vexatiously in attempting to avoid paying attorneys’ fees and costs. 

Nor does Starstone’s attempt to condition payment on a right to recoup 

constitute vexatious or unreasonable conduct. An insurer does not act vexatiously or 

unreasonably where it “takes a reasonable legal position on an unsettled issue of 

law.” Citizens First Nat’l Bank, 200 F.3d at 1110 (internal citations omitted). 

Whether insurers may condition indemnification on a right to recoup remains an open 

legal question. Although the City’s argument that Starstone may not invoke a right 

to recoup might hold sway had Starstone conditioned a defense on a right to recoup, 

the argument fails as to indemnification. Illinois law unequivocally prohibits 

insurers from claiming an extracontractual right to recoup defense costs, even if the 

insurer pays under a reservation of rights and a court later determines that no 

defense was owed. Gen. Agents Ins. Co. of Am., Inc. v. Midwest Sporting Goods Co., 

828 N.E.2d 1092, 1104 (Ill. 2005). In General Agents, the Illinois Supreme Court

reasoned that allowing the insurer to reserve the right to recoup defense costs would 

leave the insured with a Hobson’s choice between accepting the insurer’s condition or 

losing its right to a defense. Gen. Agents, 828 N.E.2d at 1102. Thus, Insurance 

companies may recoup defense costs only if the policy language explicitly provides for 

that right. Id. But that rule does not apply in the indemnification context. “Once 

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the insured has incurred liability as a result of the underlying claim, an insurer’s

duty to indemnify arises only if ‘the insured’s activity and the resulting loss or 

damage actually fall within the . . . policy’s coverage.’” Allied Prop. & Cas. Ins. Co., 

850 F.3d at 847 (quoting Traveler’s Ins. Co. v. Eljer Mfg., Inc., 757 N.E.2d 481, 492

(Ill. 2001)). Although an insurer presents the choice between accepting the insurer’s 

condition or losing its right to immediate indemnification, the insured does not 

effectively waive its right to indemnification altogether if it declines the insurer’s 

condition. Rather, declining the condition simply delays payment pending 

clarification on the policy language and applicable law. Moreover, the Illinois 

Supreme Court opined that insurers cannot reserve the right to recoup defense costs 

because, by defending the underlying action, the insurer is actually protecting itself 

from a future adverse judgment. Gen. Agents, 828 N.E.2d at 1103. In contrast, 

indemnification totals are final at the time of the claim, so the insurer derives no 

monetary benefit from paying the claim while reserving a right to recoupment. 

Conditioning indemnification on a right to recoup is neither contrary to settled law, 

nor unreasonable. Thus, the City’s claim that Starstone violated section 155 by 

conditioning indemnification on recoupment fails.

Moreover, under Illinois law, an insurer’s decision to deny coverage is not 

vexatious and unreasonable if the challenged conduct arises from a bona fide dispute 

concerning a policy’s scope or coverage. Citizens First Nat’l Bank, 200 F.3d at 1110

(internal citations omitted). Although the City does not plead the existence of a 

genuine dispute between the parties concerning the insurance contract, reading the 

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pleadings together with the insurance contract itself, which the City attached to its 

answer and counterclaim, demonstrates such a dispute. As the City correctly notes, 

this Court may not decide the merits of the parties’ dispute at this stage; but the City 

must nonetheless present sufficient facts for this Court to plausibly conclude that 

Starstone’s conduct did not stem from a bona fide dispute. Iqbal, 556 U.S. at 678 

(quoting Twombly, 550 U.S. at 570). And it has failed to plead such facts. 

In fact, as the complaint and counterclaim make clear, there exists a bona fide

dispute between the parties as to whether Starstone may determine coverage by 

apportioning the Rivera Settlement between covered liabilities and non-covered 

costs. Compare [1] at ¶ 21 with [22] at ¶¶ 24–25. Starstone contends that the Rivera 

Settlement included $5,600,000 in attorney’s fees, an uncovered expense category 

under the insurance policy. [1] at ¶ 21–22; see [22-2] at § 5, ¶ W. Once the City 

subtracts the attorney’s fees from the total settlement, the remaining coverable 

settlement falls within the City’s retained limit. [1] at ¶¶ 21–22. The City’s 

allegations are silent on the nature of the Rivera Settlement, and implicitly dispute 

that the policy allows any apportionment between “the ultimate net loss” (covered) 

and the “costs of claim or suit investigation, litigation, and legal expenses which can 

be directly allocated to a specific claim or suit” (uncovered). [22] at ¶¶ 14–17, 24–25.

But based upon the plain language of the policy (attached to the counterclaim) an 

argument in favor of such apportionment is not unreasonable (whether or not it 

ultimately proves successful). 

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Based upon the parties’ bona fide policy interpretation dispute, and because 

the right to recoup is not precluded in the indemnification context, the City cannot

plausibly allege that Starstone’s behavior was vexatious and unreasonable, as 

required to win on its section 155 claim. Accordingly, the Court grants Starstone’s 

motion to dismiss this claim. 

IV. Conclusion

For the reasons explained above, this Court grants Starstone’s motion [25] and 

dismisses count II of the City’s counterclaim for failure to state a claim.

Dated: March 22, 2020 Entered:

____________________________

John Robert Blakey

United States District Judge

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