Transport Insurance Company, Inc., Cross-Appellee v. Post Express Company, Inc.
138 F.3d 1189 (1998)
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Rule of Law:
An insurer that assumes exclusive control of its insured's defense, even while disputing coverage, must give the insured's interests equal consideration to its own. The existence of a 'fairly debatable' defense to coverage does not absolve the insurer of liability for an excess judgment caused by a bad-faith or negligent handling of that defense.
Facts:
- Alfonzo Frazier was injured while unloading cargo from a flatbed truck owned by Post Express Company and operated by its employee, Thomas Fuller.
- During the unloading process, Fuller pulled the truck forward before Frazier had disembarked, causing Frazier to roll off the five-foot-high flatbed and land on his back.
- Fuller notified Greg Postma, the president of Post Express, about the accident on the day it occurred, reporting that he believed Frazier was not seriously injured.
- Believing the accident was trivial, Postma took no action and did not notify Post Express's liability insurer, Transport Insurance Company.
- Four months after the accident, an investigator working for Frazier's lawyer interviewed Fuller.
- Fuller did not inform Postma or anyone else at Post Express about this interview.
- Post Express did not notify Transport Insurance of the accident until two years later, after Frazier filed a lawsuit against his employer, who then sued Post Express.
Procedural Posture:
- Alfonzo Frazier sued his employer, Norfolk & Western Railway, in a Federal Employers’ Liability Act (FELA) action.
- The railroad filed a third-party action against Post Express Company for contribution.
- Post Express tendered its defense to its insurer, Transport Insurance Company, which assumed the defense under a reservation of rights, citing late notice.
- In the FELA trial, a jury found Post Express 90% at fault and liable for $2,070,000, which was over Transport Insurance's $1 million policy limit.
- Transport Insurance then filed this diversity suit in federal district court, seeking a declaratory judgment that it owed no coverage to Post Express due to the two-year delay in notice.
- Post Express filed a counterclaim, arguing that Transport Insurance acted in bad faith in its handling of the defense and should be liable for the entire $2,070,000 judgment.
- The district court judge, after a bench trial, ruled that Post Express had satisfied the policy's notice requirement.
- A subsequent jury trial on the bad-faith counterclaim resulted in a verdict for Post Express, requiring Transport Insurance to pay the full judgment.
- On post-trial motions, the district judge set aside the jury's verdict, ruling as a matter of law that an insurer with a 'fairly debatable' defense to coverage cannot be held liable for bad faith.
- Both parties appealed to the U.S. Court of Appeals for the Seventh Circuit.
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Issue:
Does an insurer's 'fairly debatable' defense to policy coverage absolve it of liability for a bad-faith or negligent handling of the insured's defense when the insurer assumes control of that defense?
Opinions:
Majority - Easterbrook, Circuit Judge.
No. An insurer's 'fairly debatable' defense to coverage does not excuse it from liability for bad-faith conduct of the defense if the insurer chooses to control that defense. Illinois law requires an insurer to give 'its insured’s interests at least equal consideration with its own' when a potential verdict exceeds policy limits. Here, evidence supported the jury's conclusion that Transport Insurance gambled with its client's money by adopting a 'lowball' trial strategy—conceding liability but arguing for an insupportably low damages amount—which exposed Post Express to a massive excess judgment while minimizing the insurer's own potential payout. The district court erred by relying on cases like Stevenson, which apply when an insurer has a duty to settle or when the insured is provided with independent counsel due to a conflict. The key distinction is control; because Transport Insurance assumed exclusive management of the defense, it owed a fiduciary duty to Post Express to conduct that defense with equal regard for Post Express's financial exposure, regardless of the separate coverage dispute.
Analysis:
This decision clarifies that an insurer's duties when controlling a defense are distinct from its duties when merely deciding whether to settle a claim under a disputed policy. It establishes that in Illinois, a 'fairly debatable' coverage defense is not a license for an insurer to conduct a self-interested, high-risk defense strategy at the insured's expense. The ruling incentivizes insurers in conflict-of-interest situations to either cede control of the defense to the insured with independent counsel or, if they retain control, to act as if they are fully liable for any judgment. This strengthens protections for insured parties against being financially ruined by an insurer's strategic gambling.
