Court Opinion

ID: 6928026
Source: CourtListenerOpinion
Date Created: 2022-07-23 23:38:21.710743+00
Date Added: 2024-06-11T16:07:00.363169
License: Public Domain

COFFEY, Circuit Judge,
dissenting.
Fourteen years ago in August of 1979, Terrence Fahy was crushed by an asphalt roller manufactured by Dresser Industries. In the resulting product liability litigation, Fahy received a $3 million judgment against Dresser which, was ultimately affirmed by the Missouri Supreme Court. One million dollars was paid by Dresser’s primary insurer, the defendant Fidelity and Casualty Insurance Company (“Fidelity”), and the remaining $2 million were were paid by the plaintiff in the present action, Certain Underwriters at Lloyd’s (“Lloyd’s”). In the litigation before us Lloyd’s seeks to recover the $2 million it paid to Fahy from Fidelity for Fidelity’s failure to settle the claim within the primary policy limits. The majority frames the question in the case before us as “did Dresser or Fidelity have authority to control and settle the Fahy suit?” Op. at 543. I am of the opinion that it is irrelevant who had control of the suit because even if Fidelity had the sole authority to control the litigation and settle the lawsuit, it did not breach any duty owed to Dresser much less to Lloyd’s and thus cannot be liable for failure to settle the underlying litigation. Because the majority has chosen to decide the case on the issue of who had the contractual right to control the underlying litigation, it is appropriate to address this issue initially.
I. Who controlled the litigation?
The majority’s analysis of who controlled the litigation is accurate as far as it goes but fails to take into consideration what took place during the course of the product liability litigation. Although the primary insurance contract between Dresser and Fidelity imposed on Fidelity a “duty to defend,” that obligation may have been modified by a claims service contract entered into between Dresser and Underwriters Adjusting Company (“UAC”). The claims service contract authorized UAC to investigate all claims against Dresser and make settlements in those cases below Dresser’s $10,000 deductible in its primary policy but the claims service contract gave Dresser complete authority to control litigation or settlement of products liability claims. The district court found that the claims service contract modified the primary insurance contract and authorized Dresser to control litigation in product liability claims. The majority’s brief discussion explaining why the contract was not modified fails to take into consideration the subsequent actions of the parties. A contract modification alters a contract through introduction of new elements into the details of a contract and canceling others, while leaving the general purpose and effect of the contract intact. Chicago College of Osteopathic Medicine v. George A Fuller Co., 776 F.2d 198, 208 (7th Cir.1985). See also 6 Corbin on Contracts § 1293 (1962).1 Thus the conduct of the parties is relevant to determining whether a modification occurred.
A glaring omission in Lloyd’s argument is the failure to present us with any authority stating that Fidelity was prohibited from modifying its insurance contract with Dresser, or that Fidelity was prohibited from permitting Dresser to litigate the underlying products liability action through hiring independent counsel. Certainly Lloyd’s could very easily have written into its contract with Dresser that it was relying on Fidelity to control the litigation strategy or that any modification of the primary insurance contract (between Dresser and Fidelity) must meet the approval of Lloyd’s. It is equally disconcerting that the majority’s decision to remand the case will provide Lloyd’s with a *546second bite at the apple in a case where it failed to properly defend against the motion for summary judgment as evidenced by its refusal to file any affidavits or take any depositions. Above all, parties who have demonstrated a lack of diligence in prosecuting a claim certainly should not be granted a second opportunity before the district court in what may conceivably amount to prejudice to the successful litigant.
I also find unpersuasive Lloyds’ argument that there was a “secret agreement” between Dresser and Fidelity to conceal from Lloyd’s the claims service contract. What possible incentive would Fidelity have to form a secret agreement with Dresser that removed from Fidelity the ability to control litigation or settlement of a lawsuit in which Fidelity stood to be liable for $1 million in damages? Certainly Fidelity would not idly stand by and suffer a $1 million judgment if it thought Dresser should accept a settlement offer within the primary insurance coverage. Accordingly, I am of the opinion that the district court’s decision can and should be affirmed on the basis of contract modification, making a remand unnecessary because Fidelity had no contractual control over the litigation.
II. Fidelity owes no duty to Lloyd’s
Even if, as the majority maintains, Fidelity was in control of the litigation, Lloyd’s must establish that Fidelity owed Lloyd’s a duty and breached that duty in order to hold Fidelity liable. The only two possible means of recovery for Lloyd’s are under the equitable subrogation and direct duty doctrines.
A. Equitable Subrogation
“Equitable subrogation is a legal fiction which provides that a person who pays a third party’s debt is substituted or subrogat-ed to all the rights and remedies of that party.” Certain Underwriters of Lloyd’s v. General Accident Ins. Co., 909 F.2d 228, 232 (7th Cir.1990) (interpreting Indiana law). In other words, the excess insurer “ ‘stands in the shoes of the insured.’” Id. (quoting Commercial Union Assur. Cos. v. Safeway Stores, Inc., 26 Cal.3d 912, 164 Cal.Rptr. 709, 712, 610 P.2d 1038, 1041 (1980)). “A subro-gee, however, acquires no greater or lesser rights than those possessed by the subro-gor.” Id.; Dworak v. Tempel, 17 Ill.2d 181, 161 N.E.2d 258, 263 (1959) (“a person who, pursuant to a legal liability, has paid for a loss or injury resulting from the negligence or wrongful acts of another will be given the rights of the injured person against the wrongdoer”). When the insured refuses to settle based on a belief that it is not liable, the excess insurer cannot maintain an action against the primary insurer. See, e.g., Puritan Insurance Co. v. Canadian Universal Insurance Co., 775 F.2d 76, 80 (3rd Cir.1985).2 In Puritan, the insured refused to settle after being fully informed of developments in the case, consulted on theories of liability, and urged to settle by the excess carrier. The Third Circuit concluded that the insured would have no claim against the primary insurer because the insured directed the primary insurer not to settle, thus the excess insurer, who stood in the shoes of the insured, had no claim against the primary insurer. Id. Likewise in Certain Underwriters, this court concluded that “as a matter of law, [the insured’s] consent [to try a case] would bar [the excess insurer’s] recovery” against the primary insurer. Certain Underwriters, 909 F.2d at 233. Another way to look at the situation is that the primary insurer can assert any defense against the excess insurer as it would against the insured. See id. at 232. Thus, in the case before us, if Dresser had brought suit against Fidelity for failure to settle, Fidelity could have defended the suit arguing that Dresser not only consented to litigating the Fahy claim rather than settling it but also actively participated in the litigation decisions. Since Lloyd’s stands in the shoes of Dresser and has no greater rights against Fidelity than Dresser had, Fidelity’s consent defense is also valid against Lloyd’s. Therefore, *547Lloyd’s cannot prevail on an equitable subro-gation claim.
B. Direct Duty
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.
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) (“per-ceivpng] 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.”).
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
“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 *548the primary and excess insurers, the court does not believe the Illinois Supreme Court would impose a direct duty upon the primary insurer.”
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.
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
Dissent.

. Since Lloyd’s had no privity to the contract between Dresser and Fidelity, it cannot complain that such a modification took place. Lloyd’s only recourse would have been to specify in its contract with Dresser that Dresser could not control litigation of product liability claims. See Kent D. Syverud, The Duty to Settle, 76 VA. L.REV. 1113 (1990).

. In cases in which the insured lacks excess coverage and sues its primary carrier for failing to settle, courts have consistently held that the primary insurer is not liable for litigating a case of questionable liability. See, e.g., Ranger County Mutual Ins. Co. v. Guin, 723 S.W.2d 656, 658 (Tex. 1987); Kavanaugh v. Interstate Fire & Casualty Co., 35 Ill.App.3d 350, 342 N.E.2d 116 (1975); Eklund v. Safeco Ins. Co., 41 Colo.App. 96, 579 P.2d 1185 (1978).