Opinion ID: 629181
Heading Depth: 2
Heading Rank: 2

Heading: Direct Duty

Text: 22 As an alternative basis for recovery, Lloyd's contends that Fidelity owed Lloyd's a duty to exercise good faith in its handling of the Fahy litigation. Lloyd's argues that Fidelity breached its direct duty to the excess insurer by failing to accept Fahy's settlement offer which exposed Lloyd's to liability above the primary policy limit of $1 million. 23 Direct duty liability to excess insurers is a controversial subject in insurance law. While nearly all states recognize a duty of good faith and fair dealing between primary insurers and insureds, due to the lack of a contractual relationship between the excess insurer and the primary insurer, courts are reluctant to impose on primary insurers an independent direct duty liability to excess insurers. See, e.g., Puritan, 775 F.2d at 80; American Centennial Ins. Co. v. Canal Ins. Co., 843 S.W.2d 480, 483 (Tex.1992); Walbrook Ins. Co. v. Unarco Indust., Nos. 90C5111, 9011519, 1992 WL 159266, at  1-2, 1992 U.S. Dist. LEXIS 9447 at  9 (N.D.Ill. June 23, 1992); Great Southwest Fire Ins. Co. v. CNA Ins. Cos., 557 So.2d 966, 969 (La.1990); Commercial Union Assur. Cos. v. Safeway Stores, Inc., 26 Cal.3d 912, 164 Cal.Rptr. 709, 714, 610 P.2d 1038, 1043 (1980); Allstate Ins. Co. v. Reserve Ins. Co., 116 N.H. 806, 373 A.2d 339, 340 (1976) (perceiv[ing] no relationship between the two insurers which ... impose[d] directly upon [the primary insurer] a duty to exercise due care in regard to [the excess insurer]); The Duty to Settle, 76 VA.L.REV. at 1205 (Duty-to-settle liability to excess insurers promotes settlement of tort actions against insureds, but its costs include increasingly 'internecine' litigation among the insurance companies that share potential liability for large risks.). 24 In its opinion, the majority states [t]he availability of direct duty recovery may depend on which state's law applies. Op. at 544. I disagree for [c]onflicts rules are appealed to only when a difference in law will make a difference to the outcome. International Adm'rs, Inc. v. Life Ins. Co. of North Am., 753 F.2d 1373, 1376 n. 4 (7th Cir.1985). I am not persuaded that we need to remand this case for a determination of which state's law applies because Lloyd's cannot prevail under the law of any of the states with significant contacts to the litigation (Illinois, Missouri and Texas). Neither Texas nor Missouri have ever adopted the doctrine of direct duty nor has any Illinois state court accepted the doctrine. The only hope Lloyd's has of prevailing is under Illinois law based on the two federal district court opinions that have applied the direct duty doctrine. See Ranger Ins. Co. v. Home Indem. Co., 714 F.Supp. 956, 961 (N.D.Ill.1989) (We believe that the Illinois Supreme Court would impose such a duty and allow an excess carrier to bring suit in its own right to remedy a breach of that duty); accord American Centennial Ins. Co. v. American Home Assur. Co., 729 F.Supp. 1228, 1231 (N.D.Ill.1990). A more recent opinion from a federal district court in Illinois, however, expressly rejected the idea that the Illinois Supreme court would adopt the direct duty doctrine. Walbrook Ins. Co. v. Unarco Indust., Inc., Nos. 90C5111, 9011519, 1992 WL 159266, at  3, 1992 U.S. Dist. LEXIS 9447 at  9 (N.D.Ill. June 23, 1992) ([i]n the absence of a relationship, contractual or otherwise, between the primary and excess insurers, the court does not believe the Illinois Supreme Court would impose a direct duty upon the primary insurer ) (emphasis added). In Walbrook, the court rejected the excess insurer's argument that a primary insurer owes an excess insurer a direct duty of good faith. The excess insurer in Walbrook made the very argument that Lloyd's makes before us, i.e., it was reasonably foreseeable that the excess insurer would suffer harm from the primary insurer's failure to settle a claim within policy limits. The court held 25 Foreseeability of harm will not always result in a direct duty of good faith to third parties. In this case, the excess insurers could have contracted with the insured for protection; for example, they could have required the insured to get the excess insurers' approval before settling with the primary insurer. In the absence of a relationship, contractual or otherwise, between the primary and excess insurers, the court does not believe the Illinois Supreme Court would impose a direct duty upon the primary insurer. 26 Id. Based on Ranger, American Centennial and Walbrook, the best that can be said for Lloyd's direct duty claim under Illinois law is that it is uncertain. However, even if we assume for the sake of argument that Fidelity owes Lloyd's a direct duty of good faith under Illinois law, Ranger and American Centennial clearly state that the duty owed to an excess insurer does not exceed the duty Fidelity owed to the insured Dresser. In Ranger, the court declared [a]s long as the scope of the duty is appropriately defined, the primary carrier is not held to a standard of care that it did not already owe to the insured. Ranger, 714 F.Supp. at 961 (emphasis added). In American Centennial, the court stated imposing this duty on a primary liability carrier in favor of an excess liability carrier will place no additional burden on a primary carrier since a primary carrier indisputably owes an identical duty to its insured if there is no excess coverage applicable to a particular claim against the insured. American Centennial Ins., 729 F.Supp. at 1232 (emphasis added). In other words, even under a direct duty theory, Fidelity owed Lloyd's no greater duty than it owed Dresser. Because Dresser maintained that the asphalt roller was not defective and refused all settlement offers, Fidelity cannot be liable to Lloyd's (who has no greater rights against Fidelity than Dresser would) for failure to settle the case within the primary policy limits. Ranger and American Centennial make clear that even under Illinois law Fidelity did not breach a duty to Lloyd's because it did not breach a duty to Dresser who directed that the case proceed to trial rather than accepting a settlement. See supra at 546-47 (discussing equitable subrogation). Neither Ranger nor American Centennial extend the direct duty doctrine to the level that Lloyd's asks of this court. Lloyd's seeks to impose liability on a primary insurer (Fidelity) who permitted its client to litigate rather than settle a product liability claim. Lloyd's has failed to cite any authority from any court holding that the primary insurer is liable to the excess insurer for failing to settle if the insured believes that it is not liable in the underlying litigation and decides to take a case to trial. 27 There is no factual dispute regarding Dresser's unequivocal decision to proceed to trial and refusal to settle, thus I fail to see how Fidelity can be found liable for breaching a duty owed to Lloyd's to settle within the primary policy limits. I am of the opinion that recovery is not possible for Lloyd's under equitable subrogation or under direct duty in any of the contact states, thus our remand to the district court would seem to be merely a perfunctory exercise. Howland v. Kilquist, 833 F.2d 639, 646 (7th Cir.1987) (it would be an exercise in futility and a waste of judicial resources to remand this cause). Because I am of the opinion that we should affirm the district court, I respectfully 28 DISSENT.