In the
United States Court of Appeals
For the Seventh Circuit
No. 09-2022
R.G. W EGMAN C ONSTRUCTION C OMPANY,
Plaintiff-Appellant,
v.
A DMIRAL INSURANCE C OMPANY and B RIAN B UDRIK,
Defendants-Appellees.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 08 C 6479—James B. Zagel, Judge.
A RGUED S EPTEMBER 13, 2010—D ECIDED JANUARY 14, 2011
Before E ASTERBROOK, Chief Judge, and P OSNER and
T INDER, Circuit Judges.
P OSNER, Circuit Judge. The defendant insurance com-
pany, Admiral, issued a liability insurance policy that
provided a $1 million ceiling on coverage for a single
occurrence (that is, an event that would trigger cover-
age). While the policy was in effect, Brian Budrik, a
worker at a construction site managed by Wegman Con-
2 No. 09-2022
struction Company, was injured in a fall and sued
Wegman (an “additional insured” on the policy, which
had been issued to Budrik’s employer), along with other
potentially liable entities, for negligence. The case went
to trial, Budrik prevailed, and a judgment for a little
more than $2 million was entered against Wegman.
Wegman then filed the present suit in an Illinois state
court against Admiral, claiming that Wegman would not
have been liable for damages in excess of the $1 million
policy limit had Admiral discharged the implied con-
tractual duty of good faith that insurance companies owe
their insureds.
As we explained in Twin City Fire Ins. Co. v. Country
Mutual Ins. Co., 23 F.3d 1175, 1179 (1994), applying
Illinois law, a correlative to the standard provision
that authorizes a liability insurer to control the defense
of a claim against the insured is “the duty not to
gamble with the insured’s money by forgoing rea-
sonable opportunities to settle a claim on terms that
will protect the insured against an excess judgment.
Were it not for this duty, a duty fairly implied in the
insurance contract, in a case in which a claim could be
settled at or near the policy limit, yet there was a good
although not certain chance that it could be beaten at
trial, the insurance company would be sorely tempted to
take the case to trial. For that would place it in a ‘Heads
I win, tails you lose,’ position. Suppose the claim was for
$2 million, the policy limit was $1 million, the plaintiff
was willing to settle for this amount, but the defendant’s
insurer believed that if the case was tried the plaintiff
would have a 50 percent chance of winning $2 million
No. 09-2022 3
and a 50 percent chance of losing. The insurer’s incentive
would be to refuse to settle, since if it lost the trial it
would be no worse off than if it settled—in either case it
would have to pay $1 million—but if it won it would
have saved itself $1 million” (citations omitted). See also
Haddick ex rel. Griffith v. Valor Ins., 763 N.E.2d 299, 303-04
(Ill. 2001); Founders Ins. Co. v. Shaikh, 937 N.E.2d 1186, 1191-
92 (Ill. App. 2010); O’Neill v. Gallant Ins. Co., 769 N.E.2d
100, 109-10 (Ill. App. 2002).
Admiral removed the case to federal district court
under the federal diversity jurisdiction and filed a
motion to dismiss, which the district court granted,
precipitating this appeal.
Before turning to the merits (which are governed by
Illinois law), we take up a procedural hiccup relating to
the existence of federal jurisdiction. After removal,
Wegman was permitted to amend its complaint to add
Budrik, the accident victim, as a defendant. Why Wegman
did this is unclear, since it said in its motion to amend,
and continues to insist, that it seeks no relief from
Budrik, whom it describes as a “nominal” defendant.
How could it seek relief against him? Budrik did not
injure Wegman!
Budrik, like Wegman, is a citizen of Illinois, so if he’s
really a defendant the requirement of complete diversity
of citizenship is not satisfied. But a party isn’t permitted
to destroy federal diversity jurisdiction by naming as a
defendant someone against whom he does not seek
relief. See Walden v. Skinner, 101 U.S. 577, 589 (1879).
Otherwise Wegman could have forced the case to be
4 No. 09-2022
remanded to the state court by naming Rod Blagojevich,
or any other Illinois citizen, as a “nominal” defendant. It
would be different if Budrik were an indispensable
party, which is to say a party in whose absence the
suit could not proceed. E.g., American National Bank &
Trust Co. v. Bailey, 750 F.2d 577, 582 (7th Cir. 1984); Mattel,
Inc. v. Bryant, 446 F.3d 1011, 1013-14 (9th Cir. 2006);
Salt Lake Tribune Publishing Co. v. AT&T Corp., 320 F.3d
1081, 1095-97 (10th Cir. 2003). He is not.
It is true that Budrik, unlike Blagojevich, may have a
practical interest in this suit because he is a judgment
creditor of Wegman, having yet to be paid the judg-
ment entered against Wegman, which is broke; probably
he’ll never be paid unless Wegman replenishes its
coffers by winning this suit. That might be a basis for
Budrik’s intervening in this litigation, Rosquist v. Soo
Line R.R., 692 F.2d 1107, 1110 (7th Cir. 1982); Yates v.
Transamerica Ins. Co., 928 F.2d 199, 200 (6th Cir. 1991);
Travelers Indemnity Co. v. Dingwell, 884 F.2d 629, 637 (1st
Cir. 1989), but if so it would be intervention on the
plaintiff side of the litigation, and so would not destroy
diversity. Anyway Budrik has not sought to intervene,
and has made no appearance either in the district court
or in this court.
As there was no basis for adding Budrik as a party,
we dismiss him from the case and move on to the merits.
The complaint alleges the following facts, which we
take as true for purposes of reviewing the district
judge’s grant of Admiral’s motion to dismiss. Wegman
had been sued by Budrik in 2003, two years after his
No. 09-2022 5
injury. Admiral exercised the option granted it by the
insurance policy to defend the Budrik suit at its ex-
pense; thus, the complaint explains, Admiral “accepted
Wegman’s defense” and “controlled” the defense. The
complaint goes on to allege that “no later than May 2005
(at the time [that Budrik’s] deposition [in his tort case]
was conducted), [Admiral] knew” that Budrik had sus-
tained serious injuries that had required a lumbar
fusion, had experienced “substantial pain and suffering
for an extended period of time,” had “sustained
permanent physical disabilities,” had been “unable to
perform construction work” since the accident, had “sus-
tained substantial loss of income and was likely to
sustain substantial loss of income in the future,” and “had
incurred and would incur substantial medical expenses.”
Admiral also knew, “as early as May 2005 and no later
than April 2007,” that Budrik was demanding “almost
$6,000,000” to settle the suit; as a result Admiral “knew
that the Budrik Lawsuit presented a realistic possibility
of a potential loss to Wegman . . . in excess of the Admiral
Policy limits.” Admiral failed to warn Wegman of this
possibility. Had it done so, Wegman would have
sought and obtained indemnity from its excess in-
surer—the policy limit in its excess policy was $10 million.
A prudent insured notifies its excess insurer of any
nontrivial claim.
Wegman, the complaint continues, “did not realize that
the Lawsuit presented a realistic possibility of a loss
in excess of the Admiral Policy limits until [Septem-
ber 2007,] a few days before the trial of the Budrik Lawsuit
when a Wegman executive was casually discussing the
6 No. 09-2022
Budrik Lawsuit with a relative who happened to be an
attorney.” Wegman promptly notified its excess
insurer, but the excess insurer refused coverage on the
ground that it had not received timely notice. Wegman
also hired a new lawyer to handle its defense against
Budrik’s suit—and has since sued that lawyer. But the
present suit is only against Admiral, for failing to notify
Wegman of the possibility of an excess judgment in
time for Wegman to have invoked its excess coverage.
Neither the briefs nor the complaint, nor for that matter
the insurance policy, judicial opinions, or treatises on
insurance law, tell us much about how situations of the
sort presented by this case are handled by insurance
companies. We learned a little more at the oral argument
and from our own research. See Michael J. Haverson,
“Litigating the Insurance Coverage Case—A Carrier’s
Expectations of Its Counsel,” For the Defense, May 2009,
pp. 49, 53, www.haversonconsulting.com/my_web_site/
Presentations_Articles_files/DRI%20Carrier%20Exp.pdf
(visited Dec. 23, 2010); James M. Fischer, “Insurer or
Policyholder Control of the Defense and the Duty To
Fund Settlements,” 2 Nevada L.J. 1 (2002); Ellen S. Pryor
& Charles Silver, “Defense Lawyers’ Professional Re-
sponsibilities: Part I—Excess Exposure Cases,” 78 Tex. L.
Rev. 599, 645-55, 657 (2000); Douglas R. Richmond, “Walk-
ing the Tightrope: The Tripartite Relationship Between
Insurer, Insured, and Insurance Defense Counsel,” 73 Neb.
L. Rev. 265 (1994); Karon O. Bowdre, “Conflicts of
Interest Between Insurer and Insured: Ethical Traps
for the Unsuspecting Defense Counsel,” 17 Am. J. Trial
Advocacy 101, 139-41 (1993). The situation in question is
No. 09-2022 7
the emergence of a potential conflict of interest between
insurer and insured in the midst of a suit in which the
insured is represented by a lawyer procured and paid
for by the insurer.
At the outset—and in fact in this case at the out-
set—usually neither insurance company nor insured
has reason to believe that the insured’s liability to the
victim of the tort for which the insured is being sued
will result in a judgment (if the case goes to trial) in
excess of the policy limit. That means that as a practical
matter the insured has no interest in the litigation; he
is not paying for his attorney and will lose nothing if he
loses the suit, if we set to one side possible concerns
with loss of reputation or with the insurer’s upping his
premiums for future coverage.
If the insurance policy entitles the insurer to “defend
the insured,” the insurer will either designate an in-house
lawyer to represent the insured or, as in this case, hire
a lawyer from a defense firm to which the insurer
refers such matters. Because only the insurer, on the
defense side of the case, has (or at this stage is believed
to have) a financial stake in the case, the lawyer will
report to the insurer on the progress of the litigation, as
well as (or possibly instead of) to his client. An insur-
ance adjuster employed by the insurance company will
be monitoring the lawyer carefully, both because the
company is paying his fee (or salary, if he’s in-house) and,
more important, because it will be liable for any settle-
ment or judgment up to the policy limit. Thus “the in-
surer’s duty to defend includes the right to assume
8 No. 09-2022
control of the litigation . . . to allow insurers to protect
their financial interest in the outcome of litigation and
to minimize unwarranted liability claims. Giving the
insurer exclusive control over litigation against the
insured safeguards the orderly and proper disbursement
of large sums of money involved in the insurance busi-
ness.” Nandorf, Inc. v. CNA Ins. Cos., 479 N.E.2d 988, 991
(Ill. App. 1985); see also Stoneridge Development Co. v.
Essex Ins. Co., 888 N.E.2d 633, 644 (Ill. App. 2008). By virtue
of that control, however, the insurer’s duty to the
insured includes not only “the hiring of competent coun-
sel” but also “keeping abreast of progress and status of
litigation in order that it may act intelligently and in
good faith on settlement offers.” 4 Couch on Insurance
§ 202:17 (3d ed. 2007).
So it is likely that in May 2005, when Budrik was de-
posed, Admiral learned forthwith from the lawyer
whom it had hired to represent Wegman of the extent
of the injuries to which Budrik testified in his deposition,
and thus knew that if the case went to trial, or was
settled, the judgment or the settlement might well exceed
$1 million. This likelihood created a conflict of interest
by throwing the interests of Admiral and Wegman out
of alignment. Suppose Admiral thought that if Budrik’s
case went to trial there was a 90 percent chance of a
judgment no greater than $500,000 and a 10 percent
chance of a judgment of $2 million (to simplify, we
ignore other possibilities). Then the maximum expected
cost to Admiral of trial would have been $550,000 (.90 x
$500,000 + .10 x $1,000,000, the policy limit), and so (ig-
noring litigation expenses) Admiral would not want
No. 09-2022 9
to settle for any higher figure. But Wegman would
be facing an expected cost of $100,000 (.10 x ($2,000,000 –
$1,000,000)), and no benefit, from a trial.
These numbers are hypothetical, but at the oral argu-
ment Admiral’s lawyer confessed that his client had
been gambling on minimizing its liability at the expense,
if necessary, of Wegman. Under Illinois law Wegman
would, if found to be no more than 25 percent re-
sponsible for Budrik’s injury, be liable only for 25 percent
of Budrik’s damages, 735 ILCS 5/2-1117, and, since there
were other defendants, the lawyer thought he had a
good shot at such a result. But in the event, the jury
found Wegman 27 percent responsible, which under
Illinois law made it jointly liable for the entire damages.
Thus, Admiral had hoped to get away with having to
pay only half the policy limit (.25 x $2 million = .50 x
$1 million), but at the risk that a judgment would be
imposed on Wegman that far exceeded that limit.
Such gambling with an insured’s money is a breach of
fiduciary duty. Cramer v. Ins. Exchange Agency, 675 N.E.2d
897, 903 (Ill. 1996); LaRotunda v. Royal Globe Ins. Co., 408
N.E.2d 928, 935-36 (Ill. App. 1980); Transport Ins. Co. v.
Post Express Co., 138 F.3d 1189, 1192-93 (7th Cir. 1998)
(Illinois law); Twin City Fire Ins. Co. v. Country Mutual Ins.
Co., supra, 23 F.3d at 1179 (same); Magnum Foods, Inc. v.
Continental Casualty Co., 36 F.3d 1491, 1504 (10th Cir.
1994). At oral argument Admiral’s lawyer came close
to denying the existence of the duty by saying that
“simply by reason of the nature of the demand [the refer-
ence is to Budrik’s demand for a $6 million settlement],
10 No. 09-2022
an insurance company cannot be charged with knowl-
edge of probability of an excess verdict, because
routinely plaintiffs make excess demands.”
When a potential conflict of interest between insured
and insurer arises, the insurance company’s duty of good
faith requires it to notify the insured. The usual conflict
of interest involves the insurance company’s denying
coverage, as in such cases as Royal Ins. Co. v. Process
Design Associates., Inc., 582 N.E.2d 1234, 1239 (Ill. App.
1991), but the principle is the same when the conflict
arises from the relation of the policy limit to the insured’s
potential liability, as in Mobil Oil Corp. v. Maryland
Casualty Co., 681 N.E.2d 552, 561-62 (Ill. App. 1997), and
Hamilton v. State Farm Mutual Auto. Ins. Co., 511 P.2d 1020,
1022-24 (Wash App. 1973), affirmed, 523 P.2d 193 (Wash.
1974). Once notified by the insurer of the conflict, the
insured has the option of hiring a new lawyer, one whose
loyalty will be exclusively to him. E.g., Maryland Casualty
Co. v. Peppers, 355 N.E.2d 24, 30-31 (Ill. 1976); Illinois
Masonic Medical Center v. Turegum Ins. Co., 522 N.E.2d
611, 613 (Ill. App. 1988). If he exercises that option, the
insurance company will be obligated to reimburse the
reasonable expense of the new lawyer. E.g., id.; Insurance
Co. of State of Pennsylvania v. Protective Ins. Co., 592 N.E.2d
117, 123 (Ill. App. 1992). Had Wegman hired a new
lawyer upon being promptly informed of the conflict
back in May 2005, that lawyer would have tried to negoti-
ate a settlement with Budrik that would not exceed
the policy limit; and if the settlement was reasonable
given the risk of an excess judgment, Admiral would be
No. 09-2022 11
obligated to pay. Myoda Computer Center, Inc. v. American
Family Mutual Ins. Co., 909 N.E.2d 214, 220-21 (Ill. App.
2009); Commonwealth Edison Co. v. National Union Fire Ins.
Co. of Pittsburgh, 752 N.E.2d 555, 566-67 (Ill. App. 2001).
And since Wegman had excess insurance, notification to
it of the risk of an excess judgment would have enabled
it to notify its excess insurer promptly, in order to
preserve the protection that the excess coverage pro-
vided. General Casualty Co. of Illinois v. Juhl, 669 N.E.2d
1211, 1214 (Ill. App. 1996); Hartford Accident & Indemnity
Co. v. Rush-Presbyterian-St. Luke’s Medical Center, 595
N.E.2d 1311, 1316 (Ill. App. 1992); Highlands Ins. Co. v.
Lewis Rail Service Co., 10 F.3d 1247, 1249-50 (7th Cir. 1993)
(Illinois law).
The insurer’s duty of good faith is not onerous. When
the company is handling the defense of a suit against
its insured at its own cost and initially believes there’s
no danger of an excess judgment against the insured,
it has every incentive to monitor the progress of the
litigation closely, for realistically it is the sole defendant.
And monitoring the litigation places the insurer in a
good position to learn about a conflict of interest if and
when one arises. At that point, given the duty of good
faith, it is strongly motivated to notify the insured of
the conflict immediately lest it find itself liable not only
for the excess judgment but also for punitive damages,
which are awarded for egregious breaches of good faith.
E.g., O’Neill v. Gallant Ins. Co., supra, 769 N.E.2d at 109-12;
Twin City Fire Ins. Co. v. Country Mutual Ins. Co., supra,
23 F.3d at 1179-80 (Illinois law).
12 No. 09-2022
Often notice proves costless to the insurance company.
Rather than change lawyers in midstream and perhaps
have a dispute with the insurer over whether the new
lawyer’s fee is “reasonable” and hence chargeable to
the insurer, the insured is quite likely to take his chances
on staying with his insurer-appointed lawyer, Pryor &
Silver, supra, 78 Tex. L. Rev. at 662-63, and so decide
to waive the conflict of interest, relying on the fact that
the lawyer “remains bound, . . . both ethically and legally,
to protect the interests of the insured in the defense of
the tort claim. The latter obligation is separate and
distinct from the insurer’s duty to inform the insured of
its position, and is not waived, as defendant’s argument
suggests, by mere acquiescence to the conduct of the
insurer.” Cowan v. Ins. Co. of North America, 318 N.E.2d
315, 326 (Ill. App. 1974). The insurance company can
satisfy its duty of good faith at the price of a phone call.
Admiral’s main argument is that an insurance
company has no duty to notify the insured of a potential
conflict of interest, only of an actual one, and that no
conflict arises until settlement negotiations begin or the
insured demands that the insurance company try to
settle the case. Admiral attempts to bolster the argu-
ment by claiming that until then the insurer has no duty
of notice to the insured because it would be unethical
for it to interfere with the lawyer’s representation of the
insured because an insurance company isn’t allowed
to practice law.
Admiral misunderstands “conflict of interest.” The term
doesn’t mean that the conflicted party is engaged in
No. 09-2022 13
conduct harmful to another party. It means that their
interests are divergent, which creates a potential
for such harm. The conflict in this case arose when
Admiral learned that an excess judgment (and therefore
a settlement in excess of the policy limits, as judgment
prospects guide settlement) was a nontrivial probability
in Budrik’s suit. Admiral’s contention that it would
have been practicing law had it notified Wegman of the
risk of excess liability is ridiculous. What is true is that,
had Admiral notified Wegman of the risk and as a
result Wegman had hired its own lawyer, Admiral could
not have interfered with Wegman’s relation with that
lawyer. Brocato v. Prairie State Farmers Ins. Ass’n, 520
N.E.2d 1200, 1203 (Ill. App. 1988), on which Admiral
relies heavily, as did the district court, says that the
insurer has no “right to control or supervise the actual
conduct of any litigation.” But the insurer had agreed
merely to pay the insured’s attorney, rather than handle
the defense. See also Stevenson v. State Farm Fire & Casualty
Co., 628 N.E.2d 810, 811-12 (Ill. App. 1993); Transport Ins.
Co. v. Post Express Co., supra, 138 F.3d at 1193 (Illinois law).
Controlling the defense, Admiral had a duty to warn
Wegman when that control created a conflict of interest.
Wegman’s complaint is less clear than it could be. It
doesn’t actually allege that it didn’t learn until days
before the trial that Budrik’s injuries were so serious
that a judgment in excess of $1 million was in the
cards—only that it failed to “realize” until then that it
faced such a danger. If it knew everything Admiral
should have told it but didn’t tell it, and knew all that
in time to have triggered its excess coverage, and it just
14 No. 09-2022
didn’t put two and two together and get four, then Admi-
ral’s breach of duty did not harm it and the case
should indeed have been dismissed. But there is no
evidence of this; there is just Admiral’s attempt to build
a concession on the word “realize.” It’s unlikely that
had Wegman known it faced a judgment in excess of the
limits of Admiral’s policy, it would have failed to
notify its excess insurer. Being only one of several de-
fendants in Budrik’s suit and relying on Admiral’s
duty of good faith notification of any conflict of interest,
Wegman reasonably could assume that until told
otherwise it had no skin in the game and therefore no
need to follow the litigation closely.
Admiral suggests that the lawyer it appointed to repre-
sent Wegman had the duty to notify Wegman of the risk
of an excess judgment, rather than Admiral. But as far as
we know, the lawyer informed Admiral, knowing that
Admiral would be duty-bound to inform Wegman. The
lawyer may have fallen down on the job and notified no
one; we’ve not been told what Wegman alleges in its
suit against the lawyer. But the duty to notify of a
conflict of interest is also the insurer’s, and cannot be
contracted away without the insured’s consent. Admiral
may have a right of contribution or indemnity by the
lawyer if the latter failed to inform Admiral of the risk
of excess liability, but that would not affect Admiral’s
liability to Wegman.
Ordinarily in a case such as this, the insured would
have to prove that had it not been for the breach of duty
by the insurance company, the case could have been
No. 09-2022 15
settled within the policy limit, or at least for a lower
amount than the judgment. LaRotunda v. Royal Globe Ins.
Co., supra, 408 N.E.2d at 935-37; Meixell v. Superior Ins. Co.,
230 F.3d 335, 337 (7th Cir. 2000) (Illinois law). Wegman
will try to prove this and may succeed. But there is
an additional wrinkle that may make such proof inessen-
tial. For remember that had Admiral warned Wegman
of the likelihood of an excess judgment, Wegman would
have sought and obtained coverage under its excess
policy, and thus been freed from liability regardless of
the outcome of Budrik’s suit.
It could be argued on the authority of Gorris v. Scott,
9 L.R. Exch. 215 (1874), and the numerous cases following
it, see, e.g., St. Louis & San Francisco R.R. Co. v. Conarty,
238 U.S. 243, 249-50 (1915); Aguirre v. Turner Construction
Co., 582 F.3d 808, 815 (7th Cir. 2009); Thomas v. City of
Peoria, 580 F.3d 633, 636 (7th Cir. 2009); Shadday v. Omni
Hotels Management Corp., 477 F.3d 511, 517 (7th Cir. 2007);
Movitz v. First National Bank of Chicago, 148 F.3d 760, 762-63
(7th Cir. 1998); Holster v. Gatco, Inc., 618 F.3d 214, 217
(2d Cir. 2010); Abrahams v. Young & Rubicam Inc., 79
F.3d 234, 237 and n. 3 (2d Cir. 1996), that the loss of an
opportunity to trigger excess coverage is not the kind
of loss that the duty of good faith is intended to
prevent, and so that duty was not breached by Admiral.
But the argument would fail. For when a conflict of
interest arises, so that the insured can no longer count
on the insurance company and its lawyer to defend his
interests but must (unless he wants to waive his rights)
fend for himself, the hiring of his own lawyer is only one
option that is opened up to him. Another is to seek addi-
16 No. 09-2022
tional coverage from another insurance policy; and
that alternative was foreclosed by the failure of no-
tice—assuming Wegman was indeed innocently ignorant
of the substantial risk of an excess judgment until the
eve of trial, as it alleges.
Allegation is not proof. The merits of Wegman’s claim
remain to be proved. But dismissal of the complaint
was premature. The judgment is therefore reversed and
the case remanded for further proceedings consistent
with this opinion.
R EVERSED AND R EMANDED.
1-14-11