Illinois Appellate Court Finds Breach of Duty to Defend When Insurer Reserved Rights to Challenge Insured’s Decision to Settle Without The Insurer’s Consent

Rogers Cartage Co. v. Travelers Indem. Co.¸ 2018 IL App. 160098 (5th Dist. 2018), arose from underlying litigation involving environmental contamination and cleanup at two United States Environmental Protection Agency (EPA) Superfund sites. Pharmacia Corporation (Pharmacia) and Solutia, Inc. (Solutia) brought a third-party claim against Rogers Cartage Company (Rogers) alleging that Rogers handling of toxic materials, disposal of cleanup waste, and deposit of those wastes in pools was the cause of the environmental contamination at the Superfund sites.

Beginning in 1960 and for the next several years, Travelers issued policies of insurance to Rogers. The policies issued by Travelers required that, in the event of litigation against Rogers, Travelers would defend and indemnify Rogers. When Rogers was sued in the underlying litigation in 2009, Travelers sent Rogers a reservation of rights letter, including language agreeing to contribute to the payment of reasonable and necessary fees for defense-related work performed by counsel of Rogers’ choice.

On September 9, 2010, Rogers informed Travelers of the trial date and advised Travelers that it was planning an informal settlement meeting with Pharmacia and Solutia and would advise Travelers of any settlement demand

On October 8, 2010, Pharmacia and Solutia sent Rogers a demand for settlement. The claimants proposed settling the case for $4 million if Travelers would participate and resolve the claims for cash, but in the event that Travelers refused, they proposed settling with Rogers in the amount of $7.5 million, with Rogers paying $50,000.00 and pursuing insurance proceeds for the remainder, using claimants’ counsel.

On November 2, 2010, claimants renewed their demand of $4 million to be paid by Travelers, with no mention of the alternative proposal. The renewed demand was forwarded to Travelers. Rogers’ counsel told Travelers that claimants’ demand was reasonable in light of the facts but that he believed the case could be settled between $2 and $3 million. Additionally, he advised Travelers that he did not believe that he could win at the trial level but thought there was an 85% chance of prevailing on appeal; however, Rogers could neither afford to go to trial nor afford to lose at trial.  Rogers’ counsel concluded that there were only two reasonable options: negotiate and settle or indemnify Rogers and post the bond on appeal.

On November 19, 2010, Travelers disputed coverage and claimed that Rogers had less than $300,000.00 in applicable coverage. Travelers made a counteroffer of $275,000.00 to claimants’ demand, and claimants countered with $3.75 million. Travelers refused to make any other counteroffers.

On December 30, 2010, Travelers sent Rogers a letter advising them that Travelers did not consent to any unilateral settlement negotiations, and that if negotiations were taking place or a settlement had been reached, Rogers would be in breach of the cooperation and anti-assignment clauses in its policies, negating coverage. Travelers then filed suit against Rogers disputing coverage under the policies.

Ultimately, Rogers, without the consent of Travelers, entered into a settlement with Pharmacia and Solutia for $7.5 million, out of which it agreed to pay $50,000.00 and promised to seek indemnification from Travelers. After entering into the settlement agreement, Rogers, Pharmacia and Solutia, brought suit against Travelers seeking a declaration of coverage.

Rogers filed a motion for partial summary judgment seeking a finding that it did not breach any terms of the Travelers policies by settling without Travelers consent. On May 3, 2012, the trial court granted partial summary judgment in favor of Rogers, finding that Travelers breached its duty of good faith to settle.

Additionally, Rogers filed a motion for partial summary judgment seeking rulings that Travelers breached its duty to defend and therefore should be estopped from asserting defenses to coverage. On December 12, 2014, the trial court granted Rogers’ motion and found that Travelers breached its duty to defend and must indemnify Rogers in the underlying suit. The trial court also awarded Rogers $2,665,384.90 in attorney’s fees and costs and an additional $60,000.00 penalty pursuant to the Insurance Code. Travelers appealed.

On appeal, the Court affirmed the trial court on the basis that Travelers’ conduct breached its duty to defend, when the insurer refused to settle within the policy limits and attempted to intimidate Rogers into stopping negotiations and settlement. The court reasoned that Travelers’ threat of negating coverage in an attempt to keep Rogers from settling was contrary to Illinois law and constituted a breach of its duty to defend. The court stated that “while Travelers initially agreed to defend Rogers in the underlying action under a reservation of rights, Travelers attempted to take over the defense of the matter by refusing to allow Rogers to settle at a crucial time during negotiations.” The court found Travelers actions to be offensive and contrary to standard industry practice, putting its interests ahead of its insured. Furthermore, the court found Travelers actions to amount to evidence of “bad faith,” also breaching its duty to settle.