NOTICE: Under Supreme Court Rule 367 a party has 21 days after
the filing of the opinion to request a rehearing. Also, opinions
are subject to modification, correction or withdrawal at anytime
prior to issuance of the mandate by the Clerk of the Court.
Therefore, because the following slip opinion is being made
available prior to the Court's final action in this matter, it
cannot be considered the final decision of the Court. The
official copy of the following opinion will be published by the
Supreme Court's Reporter of Decisions in the Official Reports
advance sheets following final action by the Court.
Docket No. 79943--Agenda 14--March 1996.
STEVEN CRAMER, Appellee, v. INSURANCE EXCHANGE AGENCY et al.
(Economy Fire & Casualty Company et al., Appellants).
Opinion filed October 24, 1996.
JUSTICE NICKELS delivered the opinion of the court:
We consider here whether a plaintiff may pursue a common law
fraud action arising from the purported cancellation of an
insurance policy. In a complaint filed in the circuit court of Knox
County, plaintiff, Steven Cramer, alleged that defendants, Economy
Fire and Casualty Company and its claims examiner, engaged in fraud
and deceptive practice with regard to the cancellation of his
policy. Defendants filed a motion for summary judgment claiming
that the suit was untimely, based on a one-year limitation
provision contained in the policy. The circuit court construed the
action as a common law fraud action and denied the motion for
summary judgment.
The circuit court certified two questions for interlocutory
appeal: (1) whether section 155 of the Illinois Insurance Code (215
ILCS 5/155 (West 1994)) preempts a common law fraud cause of action
against an insurance company for its alleged unreasonable conduct
in denying an insurance claim; and (2) whether a limitation
provision of an insurance policy which states that "[n]o action can
be brought unless the policy provisions have been complied with and
the action is started within one year after the date of loss" is
applicable to a common law fraud cause of action against an
insurance company for its allegedly unreasonable conduct in denying
an insurance claim. The appellate court answered "no" to both
questions and affirmed denial of summary judgment. 275 Ill. App. 3d
68. We granted defendants' petition for leave to appeal. 155 Ill.
2d R. 315. We reverse.
BACKGROUND
In 1991, plaintiff purchased a homeowner's insurance policy
from the insurer and paid the premium. The policy covered
plaintiff's personal property and was to run for one year from
October 25, 1991, to October 25, 1992. Plaintiff's residence was
later burglarized. The underlying dispute arises from the insurer's
attempted cancellation of the policy. The insurer argues that it
cancelled the policy before the burglary occurred. Plaintiff
contends that he never received a notice of cancellation and that
any purported cancellation is fraudulent.
Initially, we note that plaintiff raised allegations against
two sets of defendants in the complaint: (1) the Insurance Exchange
Agency and one of its employees, and (2) Economy Fire and Casualty
Company and a claims examiner (collectively, insurer). Plaintiff
sought $6,909 from the Insurance Exchange Agency and its employee.
This $6,909 amount represents the total amount of plaintiff's loss.
Plaintiff sought an additional $6,909 in damages from the insurer,
which he labelled "double indemnity" damages.
With respect to the first set of defendants, we note that the
Insurance Exchange Agency is an independent insurance agency and
was initially involved with plaintiff's application for insurance.
In the complaint, plaintiff alleged that the Agency and its
employee engaged in negligence in connection with the issuance of
his policy. Plaintiff alleged that they did not forward
documentation that was needed to complete the application. These
defendants, however, did not participate in the motion for summary
judgment, which is the subject of this appeal. Because this appeal
involves only the insurer, we do not discuss the allegations
against these two defendants further.
With respect to the second set of defendants, plaintiff
alleged that he never received a notice of cancellation from the
insurer and was never informed that the policy was cancelled.
Plaintiff claims that the insurer did not send a notice of
cancellation at all. Plaintiff claims that the insurer is using
this purported cancellation "with the expressed and intentional
purpose to defraud Plaintiff out of his coverage which he was
legally entitled to."
According to the insurer, on December 2, 1991, a notice of
cancellation was sent to plaintiff. The policy was being cancelled
because the insurer had been unable to obtain certain information
from plaintiff. According to the insurer, the cancellation went
into effect on January 6, 1992.
Three days later, on January 9, 1992, plaintiff's home was
burglarized. Plaintiff sent his proof of loss statement to the
insurer in May, showing a loss of $6,909. On May 22, 1992, the
insurer denied the claim because the burglary had occurred three
days after the policy was cancelled. Plaintiff's premium was
refunded in June 1992. In October 1993, more than a year later,
plaintiff filed this suit pro se.
The insurer moved for summary judgment. The insurer based its
motion for summary judgment solely on the one-year suit limitation
clause included in the insurance policy. This clause requires that
any action on the policy be brought within one year after the date
of loss. Plaintiff filed his action more than a year after the
burglary and more than a year after his claim under the policy was
denied. Thus, according to the insurer, an action alleging breach
of the policy is untimely.
At the hearing on the insurer's motion for summary judgment,
the circuit court construed the complaint as stating a cause of
action for fraud, rather than for breach of the policy. The court
then found that the suit limitation clause contained in the policy
applied only to actions on the policy and did not apply to common
law fraud actions. The circuit court, however, gave defendants time
to provide additional authority.
The insurer filed a supplement to the motion for summary
judgment. It argued that, to the extent this action is a breach of
contract action, it is precluded by the one-year limitation period
provided in the policy. The insurer further argued that, to the
extent the action is a tort action, it was barred by the preemptive
effect of section 155 of the Insurance Code. Essentially, section
155 provides a remedy to policyholders whose insurers engage in
unreasonable and vexatious conduct when delaying payment or denying
a claim. The circuit court rejected the insurer's arguments and
denied summary judgment.
The appellate court affirmed. First, the appellate court
considered the effect of section 155 on a common law fraud action.
It held that section 155 does not preempt a common law action for
fraud against an insurer for its unreasonable conduct in denying a
claim. In reaching its decision, the court relied principally on
decisions finding that section 155 does not preempt the tort of bad
faith and unfair dealing.
Second, the appellate court considered whether the limitation
provision in the policy barred a tort action relating to the
policy. It found that a common law fraud action involving policy
proceeds is collateral to an action for breach of contract. It held
that the suit limitation provision in the policy applied only to
actions on the policy and not to plaintiff's action in fraud.
Accordingly, the appellate court affirmed the circuit court's
denial of summary judgment, agreeing that plaintiff should be
allowed to pursue his action.
ANALYSIS
The denial of summary judgment is an interlocutory order that
is generally not appealable. Supreme Court Rule 308(a) allows
appeal of an interlocutory order to the appellate court where "the
order involves a question of law as to which there is substantial
ground for difference of opinion and *** an immediate appeal from
the order may materially advance the ultimate termination of the
litigation." 155 Ill. 2d R. 308. The appellate court's decision may
then be appealed to this court under Rule 315. 155 Ill. 2d R. 315.
The insurer argues that plaintiff has alleged nothing more
than unreasonable and vexatious conduct in the complaint. The
statute provides a remedy for such conduct. The insurer argues that
the statute, in conjunction with a breach of contract action,
provides the remedy for this conduct, not an independent tort
action. According to the insurer, plaintiff's action is essentially
a breach of contract action, which is barred by the limitation
clause contained in the policy.
Much of the analysis of the circuit and appellate courts
relies on cases involving the tort of bad faith and unfair dealing.
Although the complaint is inartfully drafted, it could be construed
as alleging bad faith and unfair dealing. Here, we examine how the
analysis employed by the lower courts, including their reliance on
cases involving the tort of bad faith, applies to the allegations
raised in the instant complaint.
In part I, we examine the development of section 155. In part
II, we consider the interaction of the statute with tort law. We
hold that section 155 does not preempt a separate and independent
tort action involving insurer misconduct. We also hold, however,
that the tort of bad faith is not a separate and independent tort
action that is recognized in Illinois. In part III, we consider the
allegations raised in plaintiff's complaint. We find that the
allegations in the complaint seek to state a cause of action for
breach of the policy, which is barred by the suit limitation
provision. Accordingly, the insurer is entitled to summary
judgment.
I
Resolution of this appeal requires an examination of the
statute. Section 155 provides:
"Attorney fees. (1) In any action by or against a
company wherein there is in issue the liability of a
company on a policy or policies of insurance or the
amount of the loss payable thereunder, or for an
unreasonable delay in settling a claim, and it appears to
the court that such action or delay is vexatious and
unreasonable, the court may allow as part of the taxable
costs in the action reasonable attorney fees, other
costs, plus an amount not to exceed any one of the
following amounts:
(a) 25% of the amount which the court or jury finds
such party is entitled to recover against the company,
exclusive of all costs;
(b) $25,000;
(c) the excess of the amount which the court or jury
finds such party is entitled to recover, exclusive of
costs, over the amount, if any, which the company offered
to pay in settlement of the claim prior to the action."
215 ILCS 5/155 (West 1994).
The statute provides an extracontractual remedy to policyholders
whose insurer's refusal to recognize liability and pay a claim
under a policy is vexatious and unreasonable. Kush v. American
States Insurance Co., 853 F.2d 1380, 1385 (7th Cir. 1988); UNR
Industries, Inc. v. Continental Insurance Co., 607 F. Supp. 855,
863 (N.D. Ill. 1984). Ordinarily, a policyholder may bring a breach
of contract action to recover the proceeds due under the policy.
Pursuant to the statute, a plaintiff may also recover reasonable
attorney fees and other costs, as well as an additional sum that
constitutes a penalty.
Section 155 was enacted in 1937, as part of a major revision
of the Illinois Insurance Code. In its original version, known as
section 767, it allowed an award of attorney fees, up to a maximum
of $500, if an insurer's refusal to pay a claim was "vexatious and
without reasonable cause." Ill. Rev. Stat. 1937, ch. 73, par. 767.
Under the statute, a plaintiff could seek limited attorney fees, in
addition to an action to recover the policy proceeds. Before the
statute was enacted, a plaintiff could not seek an award of
attorney fees, regardless of the bad faith of the insurer. The
purpose of the statute was to provide a remedy for insurer
misconduct:
"Although some companies are very liberal in the
payment of claims, this is by no means true of all. In
the absence of any allowance of attorneys' fees, the
holder of a small policy may see practically his whole
claim wiped out by expenses if the company compels him to
resort to court action, although the refusal to pay the
claim is based upon the flimsiest sort of a pretext. The
strict limit on the amount allowable makes the section
significant only for small claims. It should prove
wholesome in its effect upon companies unreasonably
withholding payment of such claims. It is doubtful if
there are many judges who would allow such fees when the
defense was bona fide although deemed inadequate." H.
Havinghurst, Some Aspects of the Illinois Insurance Code,
32 Ill. L. Rev. 391, 405 (1937).
Since 1937, the statute has been amended several times. The
cap on attorney fees was raised to $1,000 in 1967. Ill. Rev. Stat.
1967, ch. 73, par. 767. In 1977, the legislature amended the
statute again, this time removing the cap on attorney fees entirely
and providing for the award of a penalty against the insurer. Ill.
Rev. Stat. 1977, ch. 73, par. 767. This award was limited to a
maximum of $5,000. In 1986, the statute was amended to its current
version. The maximum allowable penalty under the statute was raised
to $25,000.
Before the statute was enacted, a policyholder's only recourse
was to seek a breach of contract action to receive the policy
proceeds. Attorney fees and punitive damages are generally not
available in breach of contract actions. Section 155 created a
limited statutory exception to this rule. It was intended to make
suits by policyholders economically feasible and to punish
insurers. UNR Industries, Inc., 607 F. Supp. at 866. By enacting
and amending the statute, the legislature has expanded plaintiff's
relief to include reasonable attorney fees, costs, and a limited
penalty, in addition to a breach of contract action to recover the
amount due under the policy. The legislature has steadily amended
the statute to allow an increasingly greater recovery for
unreasonable and vexatious insurer misconduct.
Application of the statute was relatively straightforward
until Ledingham v. Blue Cross Plan for Hospital Care of Hospital
Service Corp., 29 Ill. App. 3d 339 (1975), rev'd on other grounds,
64 Ill. 2d 338 (1976). In Ledingham, the appellate court recognized
a tort action for bad faith and unfair dealing in connection with
the denial of a claim by an insurer. This was the first time the
tort of bad faith and unfair dealing was recognized in Illinois in
this context. In recognizing the existence of this tort, the
Ledingham court did not consider the impact, if any, of section 155
of the Insurance Code on this new tort of bad faith.
The Ledingham court based its ruling on the implied covenant
of good faith and fair dealing that exists between contracting
parties. The appellate court first stated that a defendant may
engage in conduct that both breaches a contract and also
constitutes a separate and independent tort. Ledingham, 29 Ill.
App. 3d at 344. The appellate court then determined that breach of
the contractual covenant of good faith and fair dealing would also
constitute an independent tort in connection with an insurer's
denial of claims. Ledingham, 29 Ill. App. 3d at 350. Thus,
Ledingham elevated this implied contractual covenant to the status
of an independent tort.
After Ledingham, appellate and federal panels have extensively
discussed the interaction between the statute and the tort of bad
faith. Although many of these courts have framed the issue as one
of preemption, the question of preemption is also intertwined with
the question of whether Illinois recognizes the tort of bad faith.
There has been considerable confusion in the courts concerning the
interaction of the statute and tort law.
Some courts have rejected Ledingham and the tort of bad faith
entirely. See, e.g., Buais v. Safeway Insurance Co., 275 Ill. App.
3d 587 (1995); Perfection Carpet, Inc. v. State Farm Fire &
Casualty Co., 259 Ill. App. 3d 21 (1993); Tobolt v. Allstate
Insurance Co., 75 Ill. App. 3d 57 (1979); Debolt v. Mutual of
Omaha, 56 Ill. App. 3d 111 (1978); Ellis v. Metropolitan Property
& Liability Insurance Co., 600 F. Supp. 1 (S.D. Ill. 1982); Strader
v. Union Hall, Inc., 486 F. Supp. 159 (N.D. Ill. 1980). Others have
assumed the existence of the tort of bad faith and have concluded
that the statute preempts only a claim for punitive damages in
connection with the tort. See, e.g., Emerson v. American Bankers
Insurance Co., 223 Ill. App. 3d 929 (1992); Calcagno v.
Personalcare Health Management, Inc., 207 Ill. App. 3d 493 (1991);
Hoffman v. Allstate Insurance Co., 85 Ill. App. 3d 631 (1980);
Kohlmeier v. Shelter Insurance Co., 170 Ill. App. 3d 643 (1988);
W.E. O'Neil Construction Co. v. National Union Fire Insurance Co.,
721 F. Supp. 984 (N.D. Ill. 1989); American Dental Ass'n v.
Hartford Steam Boiler Inspection & Insurance Co., 625 F. Supp. 364
(N.D. Ill. 1985); Scheinfeld v. American Family Mutual Insurance
Co., 624 F. Supp. 698 (N.D. Ill. 1985); UNR Industries, Inc., 607
F. Supp. 855. Still others have held that the statute does not
preempt any tort action at all and that a plaintiff may pursue a
tort action alleging bad faith and seek punitive damages. Roberts
v. Western-Southern Life Insurance Co., 568 F. Supp. 536 (N.D. Ill.
1983); Kelly v. Stratton, 552 F. Supp. 641 (N.D. Ill. 1982).
Finally, several courts have held that the statute preempts a tort
action, regardless of the specific legal theory asserted, if the
complaint alleges nothing more than unreasonable and vexatious
conduct. See, e.g., Mazur v. Hunt, 227 Ill. App. 3d 785 (1992);
Combs v. Insurance Co., 146 Ill. App. 3d 957 (1986); Kush, 853 F.2d
1380; Zakarian v. Prudential Insurance Co. of America, 652 F. Supp.
1126 (N.D. Ill. 1987); Bageanis v. American Bankers Life Assurance
Co., 783 F. Supp. 1141 (N.D. Ill. 1992); York v. Globe Life &
Accident Insurance Co., 734 F. Supp. 340 (C.D. Ill. 1990).
II
As noted, the statute provides an extracontractual remedy for
policyholders who have suffered unreasonable and vexatious conduct
by insurers with respect to a claim under the policy. It
presupposes an action on the policy. As such, nothing in the
statute addresses tortious conduct or tort liability in general.
The statute simply provides an extracontractual remedy to an action
on a policy.
As the Ledingham court correctly stated, a defendant may
engage in conduct that both breaches a contract and constitutes a
separate and independent tort. Kelsay v. Motorola, Inc., 74 Ill. 2d
172, 187 (1978). The statute provides an extracontractual remedy
for insurer misconduct that is vexatious and unreasonable. Well-
established tort actions, such as common law fraud, require proof
of different elements and remedy a different sort of harm than the
statute does. These torts address insurer misconduct that is not
merely vexatious and unreasonable. The statute was not intended to
insulate an insurer from such tort actions.
Much of the confusion among the appellate and federal courts
arises from the interaction of the statute and the tort of bad
faith and unfair dealing. Unlike an action in fraud, a bad-faith
action involves insurer misconduct that is similar to unreasonable
and vexatious misconduct. This court, however, has never recognized
such a tort. We therefore determine, in light of the statute,
whether such a tort is recognized in Illinois.
In Ledingham, the appellate court derived the tort of good
faith and fair dealing from contract law. This good-faith
principle, however, is used only as a construction aid in
determining the intent of contracting parties. See Martindell v.
Lake Shore National Bank, 15 Ill. 2d 272, 286 (1958) ("Every
contract implies good faith and fair dealing between the parties to
it, and where an instrument is susceptible of two conflicting
constructions, one which imputes bad faith to one of the parties
and the other does not, the latter construction should be
adopted"). This principle ensures that parties do not try to take
advantage of each other in a way that could not have been
contemplated at the time the contract was drafted or to do anything
that will destroy the other party's right to receive the benefit of
the contract. Capital Options Investment, Inc. v. Goldberg Brothers
Commodities, Inc., 958 F.2d 186, 189 (7th Cir. 1992); Vincent v.
Doebert, 183 Ill. App. 3d 1081, 1090 (1989). This contractual
covenant is not generally recognized as an independent source of
duties giving rise to a cause of action in tort. Beraha v. Baxter
Health Care Corp., 956 F.2d 1436, 1443 (7th Cir. 1992); Martin v.
Federal Life Insurance Co., 109 Ill. App. 3d 596, 605-07 (1982);
Anderson v. Burton Associates, Ltd., 218 Ill. App. 3d 261, 267
(1991).
The use of the contractual covenant of good faith and fair
dealing to establish an independent tort arises from cases
involving the "duty to settle." See Ledingham, 29 Ill. App. 3d at
345-50; see generally S. Ashley, Bad Faith Liability §§1:01 through
1:13, at 1-48 (1987). These cases generally involve a policyholder,
a liability insurer, and a third party. The liability insurer has
assumed the policyholder's defense under the policy and is
negotiating a settlement with a third party. In the typical "duty
to settle" case, the third party has sued the policyholder for an
amount in excess of the policy limits but has offered to settle the
claim against the policyholder for an amount equal to or less than
those policy limits.
In this circumstance, the insurer may have an incentive to
decline the settlement offer and proceed to trial. The insurer may
believe that it can win a verdict in its favor. In contrast, the
policyholder may prefer to settle within the policy limits and
avoid the risk of trial. The insurer may ignore the policyholder's
interest and decline to settle. This court has recognized that the
insurer has a duty to act in good faith in responding to settlement
offers. Krutsinger v. Illinois Casualty Co., 10 Ill. 2d 518, 527
(1957). When an insurer breaches this duty by refusing to settle,
the insurer may be liable for the full amount of a judgment against
the policyholder, regardless of policy limits. See Mid-America Bank
& Trust Co. v. Commercial Union Insurance Co., 224 Ill. App. 3d
1083, 1087 (1992); Phelan v. State Farm Mutual Automobile Insurance
Co., 114 Ill. App. 3d 96, 104 (1983); Edwins v. General Casualty
Co., 78 Ill. App. 3d 965, 968 (1979); Scroggins v. Allstate
Insurance Co., 74 Ill. App. 3d 1027, 1029 (1979).
The "duty to settle" arises because the policyholder has
relinquished defense of the suit to the insurer. The policyholder
depends upon the insurer to conduct the defense properly. In these
cases, the policyholder has no contractual remedy because the
policy does not specifically define the liability insurer's duty
when responding to settlement offers. The duty was imposed to deal
with the specific problem of claim settlement abuses by liability
insurers where the policyholder has no contractual remedy. Debolt,
56 Ill. App. 3d at 115; see also National Union Fire Insurance Co.
v. Continental Illinois Corp., 673 F. Supp. 267, 270-72 (N.D. Ill.
1987) (distinguishing between "duty to settle" cases and section
155).
This reasoning, however, does not apply to first-party claims
made directly by a policyholder against an insurer and which do not
involve liability insurance. The policyholder does not need a new
cause of action to protect him from insurer misconduct where an
insurer refuses to pay. The policyholder has an explicit
contractual remedy. He can sue for the proceeds due under the
policy. The extent of this remedy is controlled by contract law.
The fact that a policyholder cannot recover as much as he could in
tort arises from the fact that contract law imposes limitations on
recovery. See S. Ashley, Bad Faith Liability §§2:01 through 2:08,
at 55-73 (1987).
The legislature has recognized that the contractual remedy may
not be sufficient and has provided for the award of an
extracontractual remedy. The primary benefit of the tort theory
developed in Ledingham is that it permits insured parties to
collect an extracontractual award in what essentially are breach of
contract actions, where attorney fees and punitive damages are
usually unavailable. Strader, 486 F. Supp. at 162. The legislature,
however, specifically enacted section 155 to deal with this lack of
an extracontractual remedy. The remedy provided by section 155
allows an extracontractual award and specifically defines the
limits of this award.
This court has previously declined to recognize a new common
law tort where the legislature has passed a statutory scheme
providing a limited remedy. See Hall v. Gillins, 13 Ill. 2d 26
(1958) (declining to recognize a new common law action for wrongful
death where the legislature had created a limited wrongful death
remedy by statute); Cunningham v. Brown, 22 Ill. 2d 23 (1961)
(declining to recognize a new common law action for damages caused
by the negligent sale of liquor where the legislature had created
a limited statutory remedy by enacting the Dram Shop Act).
Similarly, in conjunction with a breach of contract action, section
155 provides the remedy to policyholders for insurer misconduct
that does not rise to the level of a well-established tort. In
addition, the legislature has constantly amended the statute to
allow greater recovery. We hesitate to recognize a new tort where
the legislature has constantly acted to remedy a perceived evil in
a certain area. See Hall, 13 Ill. 2d at 31-32 (noting that the
maximum recovery under the statute had steadily been increased);
see also Combs, 146 Ill. App. 3d at 962-63.
To allow a bad-faith action would transform many breach of
contract actions into independent tort actions. Martin, 109 Ill.
App. 3d at 605-07. A duty of good faith and fair dealing would be
tortiously violated whenever one party takes an action designed to
deprive the other of the benefits of the agreement. A bad-faith
action would encourage plaintiffs to sue in tort, and not breach of
contract, to avoid suit limitation clauses and the cap on the
statutory remedy. Hall and Cunningham indicate that "when the
legislature has provided a remedy for a heretofore unremedied evil,
the courts should not allow an end-run around the limits imposed by
that statute by creating a common-law action that remedies the same
basic evil." UNR Industries, Inc., 607 F. Supp. at 864.
In summary, an insurer's conduct may give rise to both a
breach of contract action and a separate and independent tort
action. Kelsay, 74 Ill. 2d at 187. Mere allegations of bad faith or
unreasonable and vexatious conduct, without more, however, do not
constitute such a tort. Courts therefore should look beyond the
legal theory asserted to the conduct forming the basis for the
claim. Kush, 853 F.2d at 1385; Zakarian, 652 F. Supp. at 1136;
Combs, 146 Ill. App. 3d at 963-64. In cases where a plaintiff
actually alleges and proves the elements of a separate tort, a
plaintiff may bring an independent tort action, such as common law
fraud, for insurer misconduct.
III
With these principles in mind, we consider the allegations in
the complaint. The complaint is inartfully drafted and filled with
conclusory language. We ignore this conclusory language and
consider the alleged conduct to determine if plaintiff alleges
anything more than bad faith. Plaintiff alleges that the insurer
never sent him a notice of cancellation. Plaintiff alleges that the
insurer fabricated the notice of cancellation solely to deny his
claim under the policy. Plaintiff seeks the proceeds due him under
the policy.
In order to state a cause of action for common law fraud, the
essential elements of fraud must be pleaded with specificity. See
Talbert v. Home Savings of America, F.A., 265 Ill. App. 3d 376, 382
(1994); In re Marriage of Shaner, 252 Ill. App. 3d 146, 157 (1993);
Trautman v. Knights of Columbus, 121 Ill. App. 3d 911, 914 (1984).
The elements that must be alleged include: "(1) a false statement
of material fact; (2) the party making the statement knew or
believed it to be untrue; (3) the party to whom the statement was
made had a right to rely on the statement; (4) the party to whom
the statement was made did rely on the statement; (5) the statement
was made for the purpose of inducing the other party to act; and
(6) the reliance by the person to whom the statement was made led
to that person's injury." Siegel v. Levy Organization Development
Co., 153 Ill. 2d 534, 542-43 (1992).
Here, the complaint is barren of any allegations of reliance.
Instead, plaintiff alleges that the insurer is lying after the fact
to avoid paying his claim. Essentially, plaintiff alleges that the
insurer is trying to deny him the benefits of the policy. See
Mazur, 227 Ill. App. 3d 785 (allegations that the insurer refused
in bad faith to pay for two items not included on a proof of loss
form was not sufficient to allege fraud). Plaintiff did not allege
that he acted in reliance on any statement by the insurer. See
Trautman, 121 Ill. App. 3d 911 (allegations that the insurer forged
an amendment to the policy and in bad faith deprived the plaintiff
of insurance proceeds did not contain allegation of reliance on the
amendment); Kinney v. St. Paul Mercury Insurance Co., 120 Ill. App.
3d 294 (1983) (allegations that the insurer made an estimate for
repairs in bad faith in connection with a settlement offer did not
contain allegation of reliance).
The insurer based its motion for summary judgment on the one-
year limitation provision contained in the policy. Summary judgment
is appropriate where the pleadings, depositions, and admissions on
file, together with the affidavits, demonstrate that there is no
genuine issue as to any material fact and the moving party is
entitled to judgment as a matter of law. 735 ILCS 5/2--1005(c)
(West 1994); First of America Bank, Rockford, N.A. v. Netsch, 166
Ill. 2d 165, 176 (1995). The review of a summary judgment ruling is
an issue of law and our review is therefore de novo. Busch v.
Graphic Color Corp., 169 Ill. 2d 325, 333 (1996).
At best, plaintiff alleges a breach of contract action. The
policy provides that a suit on the policy must be brought within
one year of loss. The Insurance Code provides that the limitation
period is tolled by the number of days between the date when a
proof of loss is submitted and the date when the claim is denied.
215 ILCS 5/143.1 (West 1994). Compliance with the suit limitation
provision of the policy is a condition precedent to recovery under
a policy. See Schoonover v. American Family Insurance Co., 214 Ill.
App. 3d 33, 44 (1991). The loss occurred on January 9, 1992, and
plaintiff's claim was denied on May 22, 1992. Plaintiff's suit was
filed on October 19, 1993. Even assuming the limitation provision
was tolled until plaintiff's claim was denied by the insurer on May
22, the suit, which was filed more than 16 months later, was
untimely. The fatal flaw with plaintiff's action is simply that he
waited too long to file it.
In light of the foregoing analysis, we need not further
address the second certified question, concerning whether a suit
limitation provision applies to common law fraud actions.
CONCLUSION
Section 155 does not preempt a claim of insurer misconduct
based on a separate and independent tort. Mere allegations of bad
faith or unreasonable and vexatious conduct, however, are not
sufficient to constitute a separate and independent tort.
Plaintiff's breach of contract action is untimely under the policy.
Accordingly, we reverse the judgments of the appellate and circuit
courts and remand the cause to the circuit court of Knox County
with directions to enter summary judgment in favor of the insurer.
Appellate court judgment reversed;
circuit court judgment reversed;
cause remanded with directions.
JUSTICE FREEMAN, specially concurring:
I agree with the majority that summary judgment was proper
based on the fact that the plaintiff's suit was barred by the
insurance policy's limitations provision. I cannot agree with the
majority's reasoning regarding the preemptive scope of section 155,
or the present status in Illinois of the tort of insurer bad faith
and unfair dealing. Based on my examination of section 155, and a
host of state and federal decisions, I am convinced that the tort
of bad faith and unfair dealing is long established in Illinois and
should remain so, section 155 notwithstanding.
Moreover, I believe it is unfortunate that the majority has
seen fit to render a decision in this area, a decision arguably
adverse to the interests of small policyholders, without the
benefit of substantial briefs from that quarter. I note that the
plaintiff's pro se appellate brief consists of a single letter to
this court merely arguing that his claim for fraud be allowed so as
to deter insurers from engaging in deceptive and vexatious conduct
in settling claims.
Ironically, that misfortune only highlights why a tort cause
of action for insurer bad faith is necessary even in the realm of
first-party coverage claims. Insureds are often at a bargaining
disadvantage with their insurers. Thus, insurers have been found to
fail to adequately investigate claims or deny claims without
adequate supporting evidence; fail to evaluate claims objectively,
interpreting policy provisions in an arbitrary and unreasonable
manner; make unreasonably low settlement offers; rely on minor
misrepresentations in the insurance application or where their
agents knowingly complete false applications; or exert coercion
designed to compel compromise of a claim. See Emerson v. American
Bankers Insurance Co., 223 Ill. App. 3d 929, 936 (1992), citing
Annot., 33 A.L.R. 4th 579 (1984).
That said, I turn to the majority's reasoning. The majority
concludes that section 155 does not preempt a separate and
independent tort involving insurer misconduct such as fraud. Slip
op. at 4, 12. The majority finds that a first-party claim alleging
insurer bad faith and unfair dealing is not within that category.
"Mere allegations of bad faith or unreasonable and vexatious
conduct, without more, however, do not constitute such a tort."
Slip op. at 12. One problem with this reasoning, however, is that,
contrary to the majority's view of the issue, a claim for third-
party insurer bad faith and unfair dealing does not come within
this category, either. Contrary to the majority's statements,
third-party coverage claims for bad faith are based, like first-
party claims, on an implied duty arising from the insurance
contract. See Olympia Fields Country Club v. Bankers Indemnity
Insurance Co., 325 Ill. App. 649, 662 (1945); Cernocky v. Indemnity
Insurance Co. of North America, 69 Ill. App. 2d 196, 206 (1966);
Scroggins v. Allstate Insurance Co., 74 Ill. App. 3d 1027 (1979);
Twin City Fire Insurance Co. v. Country Mutual Insurance Co., 23
F.3d 1175, 1178 (7th Cir. 1994) ("that duty [good faith] is founded
on the insurance contract itself").
Furthermore, it is simply not true, as the majority asserts,
that the good-faith "principle" is used only as a construction aid
in determining the intent of contracting parties. Slip op. at 9. It
is well established that an insurance contract is one of adhesion.
To that extent, the relationship of insured and insurer has
elements reflective of a fiduciary relationship, and also bears the
obligations attendant to that relationship. It is therefore
incorrect for the majority to contend that good faith is no more
than an aid to construal of a contract.
As such, third-party bad-faith claims are no more separate and
independent tort actions than are such claims in the first-party
context. Moreover, this court has recognized that an insurer has an
implied duty to act in good faith towards insureds with regards to
settlement. Krutsinger v. Illinois Casualty Co., 10 Ill. 2d 518,
527-28 (1957). Notably, Ledingham v. Blue Cross Plan for Hospital
Care of Hospital Service Corp., 29 Ill. App. 3d 339 (1975), relied
on the existence of this same implied-in-law duty of good faith and
fair dealing in the context of a first- party coverage claim. This
court then later approvingly cited Ledingham for the proposition
that the same conduct may both breach a contract as well as
constitute a separate and independent tort. Kelsay v. Motorola,
Inc., 74 Ill. 2d 172, 187 (1978).
Thus, the distinction that the majority seeks to draw between
bad-faith claims in the first-party context and those in the third-
party context does not withstand scrutiny. If bad-faith claims must
fall in one area, because they are essentially creatures of
contract, so must they fall in the other area. We thus swiftly
approach the "slippery slope."
Furthermore, section 155, entitled "Attorney fees," speaks
primarily to what statutory remedies are recoverable under the
provision. The provision's language presumes the existence of
either a coverage dispute, whether first or third party, a claims
payment dispute, a loss payable dispute, or a delay in claims
settlement. 215 ILCS 5/155 (West 1994). Such claims can encompass
more than a breach of the insurance contract, and indeed, the
provision is applied in fact to a broad range of claims against
insurer. See W.E. O'Neil Construction Co. v. National Union Fire
Insurance Co., 721 F. Supp. 984 (N.D. Ill. 1989) (refusal to
contribute to settlement); Keepes v. Doctors Convalescent Center,
Inc., 89 Ill. App. 2d 36 (1967) (refusal to pay insured's
creditors); Phillips v. Inter-Insurance Exchange of the Chicago
Motor Club, 91 Ill. App. 3d 198 (1980) (auto liability insurer's
refusal to stack med pay coverage).
Consequently, I believe the preemptive scope of section 155 is
more appropriately distinguishable on the basis of the statutory
remedies it provides, rather than on whether the conduct is
independently based in tort or contract. Thus, I adhere to that
increasing trend of majority opinions which hold that section 155
preempts attorney fees and punitive damages, but not compensatory
damages. W.E. O' Neil Construction Co., 721 F. Supp. at 998;
Chicago HMO v. Trans Pacific Life Insurance Co., 622 F. Supp. 489
(N.D. Ill. 1985); Calcagno v. Personalcare Health Management, Inc.,
207 Ill. App. 3d 493 (1991); Kohlmeier v. Shelter Insurance Co.,
170 Ill. App. 3d 643 (1988); McCall v. Health Care Service Corp.,
117 Ill. App. 3d 107 (1983); Lynch v. Mid-America Fire & Marine
Insurance Co., 94 Ill. App. 3d 21 (1981); Hoffman v. Allstate
Insurance Co., 85 Ill. App. 3d 631 (1980); Schienfield v. American
Family Mutual Insurance Co., 624 F. Supp. (N.D. Ill. 1985);
American Dental Ass'n v. Hartford Steam Boiler Inspection &
Insurance Co., 625 F. Supp. 364 (N.D. Ill. 1985); UNR Industries,
Inc. v. Continental Insurance Co., 607 F. Supp. 855 (N.D. Ill.
1984); see also Kaniuk v. Safeco Insurance Co., 142 Ill. App. 3d
1070 (1986) (leaving question open as to compensatory damages);
Debolt v. Mutual of Omaha, 56 Ill. App. 3d 111 (1978) (same).
In general, several factors support these decisions. For one,
as mentioned, section 155 specifically addresses attorney fees,
costs of the action, and limited penalties. No mention is made in
the provision of any compensatory remedies and, indeed, the
provision is premised on the very existence of a "core" action
against an insurer. See UNR Industries, 607 F. Supp. at 866
(language expressed belies intention to address problem of
compensating insured for damages sustained). Further, this core
action is not limited in terms of its legal basis, but only in
terms of the factual nature of the alleged insurer misconduct.
Second, it was not until 1977, two years following the Ledingham
decision, that the legislature amended the statute to include
specific limited penalties in addition to attorney fees. Thus, it
may also be wrong to discount Ledingham, which only expanded bad-
faith recovery beyond third-party coverage claims to punitive
damages in the area of first-party coverage claims, for failing to
mention section 155. See Kinney v. St. Paul Mercury Insurance Co.,
120 Ill. App. 3d 294, 298 (1983). At the time that Ledingham was
decided, section 155 did not include penalties per se and, thus,
the provision posed no potential conflict with and was, therefore,
inapplicable to the Ledingham analysis. See Emerson, 223 Ill. App.
3d at 935; but see American Dental, 625 F. Supp. at 368 (provision
was at least punitive in nature at enactment). Additionally, I note
that many of the cases which later discounted Ledingham suffer from
inconsistencies in their own approach (see UNR Industries, 607 F.
Supp. at 867), or they either simply cite precedent without
engaging in analysis.
Also, close examination of the legislative history of section
155 reveals that there was no legislative intent that the provision
cover compensatory claims. See UNR Industries, 607 F. Supp. 855.
Furthermore, the Hall/Cunningham preemption analogy relied on by
the majority does not diminish the strength of these several
factors because subsequent authorities have shown that that
preemption analogy is incomplete. See Barr Co. v. Safeco Insurance
Co. of America, 583 F. Supp. 248, 255 (N.D. Ill. 1984)
Finally, even the majority recognizes the utility of a bad-
faith tort cause of action in the realm of third-party coverage.
Slip op. at 10-11. Insureds may be exposed to damages beyond the
value of their contract, and for which, otherwise, they may not
recover. I am not at all convinced, as is apparently the majority,
that the same reasoning fails to hold sway within the context of
first-party coverages simply because an insured there can sue for
proceeds due under the policy and seek attorney fees and penalties
for insurer misconduct limited to $25,000. I can easily conceive of
scenarios where, for instance, a small homeowner insured places
trust in his first-party coverage property insurer to his detriment
at a cost far beyond contract compensatory damages and the
provision's limited statutory penalties. It makes no sense, in
terms of the balance of society's interests, that an small policy
insured may have sufficient remedies in one instance, but not in
the other.
As a final matter, I would hold, contrary to the majority's
reasoning, that the suit limitation clause here applies to bar
plaintiff's attempted fraud action. The clause refers to actions
against the insured and is not limited to only actions upon the
policy. As a result, this alleged action, whether sounding in
fraud, contract, or bad faith, does not survive the bar.
JUSTICE HARRISON, dissenting:
The majority has made a basic analytical error that is
probably inadvertent but certainly unfair.
The issue before the circuit and appellate courts was whether
plaintiff's pro se claim against its insurer for common law fraud
was preempted by section 155 of the Illinois Insurance Code (215
ILCS 5/155 (West 1994)) or time-barred by a limitations provision
contained in the insurance policy. This issue was raised in the
context of a motion for summary judgment under section 2--1005 of
the Code of Civil Procedure (735 ILCS 5/2--1005 (West 1994)), and
both the circuit and appellate courts concluded that neither the
Code section nor the contractual limitations provision defeated
plaintiff's claim. Accordingly, the circuit court denied summary
judgment, and the appellate court affirmed on a Rule 308 appeal
(155 Ill. 2d R. 308).
My colleagues now reverse and remand with directions to enter
summary judgment in favor of the insurer. That decision, however,
has nothing to do with the lower courts' reasoning. The majority
agrees that section 155 of the Code does not preempt a common law
fraud claim, and they decline to reach the limitations question.
The reason my colleagues believe that summary judgment should be
entered in favor of the insured on plaintiff's common law fraud
claim is simply that the allegations in plaintiff's complaint are
insufficient to state such a claim.
The problem with this approach is that it overlooks how
summary judgment is supposed to work. Contrary to the majority's
apparent belief, summary judgment cannot be used to challenge the
sufficiency of a plaintiff's complaint. The reason is simple. As
this court has repeatedly held, a motion for summary judgment
assumes that a cause of action has been stated. Delgatto v. Brandon
Associates, Ltd., 131 Ill. 2d 183, 190 (1989); Janes v. First
Federal Savings & Loan Ass'n, 57 Ill. 2d 398, 406 (1974). If the
existence of a valid cause of action is assumed by the motion,
granting the motion on the theory that a cause of action has not
been properly stated, as the majority does here, is illogical.
Although we can affirm the judgment of a lower court on any
grounds called for by the record (Leonardi v. Loyola University,
168 Ill. 2d 83, 97 (1995)), we should be reluctant to reverse for
reasons that were not raised below, and the logical inconsistency
of the majority's opinion is a good illustration of why that is so.
What makes the majority's mistake especially troublesome to me is
that it has left the plaintiff with no means for salvaging his
case. This is not a situation where the plaintiff elected to stand
on his pleadings after they were dismissed by the trial court. As
previously noted, the sufficiency of the pleadings did not become
an issue until now, and until now, the plaintiff had no reason to
believe that his common law fraud allegations required
modification. Now that the pleading defects cited by the majority
have been brought to the plaintiff's attention, there is every
reason to believe that he would be able to cure them if given the
opportunity.
By remanding with directions to enter judgment in favor of the
insurer, the majority has denied plaintiff that opportunity. Such
a result is incompatible with the principle that a cause of action
should not be dismissed on the pleadings unless it is clearly
apparent that no set of facts can be proven which would entitle a
plaintiff to relief. Grzeszczak v. Illinois Farmers Insurance Co.,
168 Ill. 2d 216, 223 (1995). If, by amendment, a plaintiff can
state a cause of action, a case should not be dismissed with
prejudice on the pleadings. Bowe v. Abbott Laboratories, Inc., 240
Ill. App. 3d 382, 389 (1992).
The majority's result likewise contravenes the summary
judgment statute. Subsection (g) of that statute expressly
provides:
"Before or after the entry of a summary judgment,
the court shall permit pleadings to be amended upon just
and reasonable terms." 735 ILCS 5/2--1005(g) (West 1994).
Under my colleagues' analysis, this statutory right to amend has
been nullified.
A situation similar to the one present here was addressed by
the appellate court in Sinclair v. State Bank, 226 Ill. App. 3d 909
(1992). There, the circuit court refused to dismiss the plaintiff's
complaint, but on a Rule 308 appeal (134 Ill. 2d R. 308), the
appellate court reversed, holding that the trial court should have
dismissed plaintiff's complaint on the pleadings. No remand was
ordered. When the plaintiff subsequently attempted to amend his
complaint in the circuit court to cure the pleading defects, the
defendant objected, arguing that the appellate court's reversal,
without remand, constituted an adjudication on the merits, leaving
the trial court without power to take further action in the case.
Although the trial court agreed with the defendant, the
appellate court subsequently reversed. It held that where a
defendant brings a Rule 308 appeal involving pleadings that were
not dismissed on the trial level and the complaint is found to be
fatally deficient for the first time on that appeal, the plaintiff
should still be allowed to amend his complaint "unless the Rule 308
appellate opinion necessarily forecloses all theories of recovery."
226 Ill. App. 3d at 915.
The majority's disposition here clearly does not foreclose all
theories of recovery. It merely holds that the existing pleadings
are inadequate to state a cause of action. For the reasons set
forth above, the court is therefore wrong to reverse and remand
with directions that judgment be entered in favor of the insurer.
Plaintiff should be afforded the chance to plead again.
Accordingly, I dissent.
CHIEF JUSTICE BILANDIC joins in this dissent.