James River Ins. Co. v. Canal Ins. Co.

534 F.Supp.3d 962

JAMES RIVER INSURANCE COMPANY, Plaintiff,

v.CANAL INSURANCE COMPANY, Defendant.

No. 19-cv-5208

United States District Court, N.D. Illinois, Eastern Division.

Signed April 19, 2021

Aaron Warren, Pro Hac Vice, Clyde & Co., Miami, FL, Hope G. Nightingale, Litchfield Cavo, Preetha Jayakumar, Clyde & Co. US LLP, Chicago, IL, for Plaintiff.

Howard B. Randell, Scott Wing, Leahy, Eisenberg & Fraenkel, Ltd., Chicago, IL, for Defendant.

MEMORANDUM OPINION AND ORDER

John J. Tharp, Jr., United States District Judge

In this dispute between insurers, James River Insurance Company ("James River") seeks reimbursement of defense and indemnity costs from Canal Insurance Company ("Canal") incurred in an underlying case against their shared insured, Cardinal Transport. Specifically, James River seeks recovery on the basis of contractual subrogation and estoppel. Canal has moved to dismiss James River's claim in its entirety, arguing that neither theory applies to this action. For the reasons discussed below, Canal's motion to dismiss is granted without prejudice.

BACKGROUND¹

A. Underlying Lawsuit

This case arises from an underlying federal lawsuit in West Virginia, Edwards v. McElliotts Trucking LLC , No. 3:16-1879, 2018 WL 6531680 (S.D. W. Va. Dec. 11, 2018). Compl. ¶ 2, ECF No. 15.² In Edwards , the plaintiff sued for damages following an October 3, 2015 incident in which his foot was crushed while loading metal pipe onto a truck. Id. ¶¶ 9, 12. The plaintiff was assisting in the loading process, as another individual used a forklift to lift the pipe from the ground and place it on the truck. Id. ¶¶ 10-11. Before the plaintiff could remove the strap connecting the pipe to the forklift, the forklift reversed, pulling the pipe off the truck and causing it to fall on to the plaintiff's foot. Id. ¶ 12. Cardinal Transport leased and operated the truck in question. Id. ¶ 9. Following the jury trial, the court entered judgment against Cardinal Transport in the amount of $5.4 million. Id. ¶ 17. The defendants appealed to the Fourth Circuit, which affirmed the district court's judgment in June 2020. Edwards v. Cardinal Transport, Inc. , 821 Fed. Appx. 167, 176 (4th Cir. 2020).

B. Defense of Cardinal Transport

At the time of the incident, Cardinal Transport had two insurance policies in place: Canal's "Business Auto Insurance Policy," No. PIA07664202, and James River's "General Commercial Liability Insurance Policy," No. 00065770-0. Compl. ¶¶ 18, 24. Both policies provide coverage of up to $1 million per occurrence. Id. ¶¶ 21, 25. Following the filing of the complaint in the underlying lawsuit, Cardinal Transport tendered its defense to Canal. Resp. at 2, ECF No. 18.

On April 1, 2016, Canal agreed to defend Cardinal Transport in the underlying lawsuit under a reservation of rights and hired the law firm of Ansbach Meeks and Ellenberger to do so. Compl. ¶¶ 28, 29. James River also defended Cardinal Transport, hiring the firm of Flaherty Sensabaugh & Bonasso. Id. ¶ 30. On April 13, 2016, Canal informed Cardinal Transport that the Canal attorneys would "step back and assume a monitoring role while [one of the James River attorneys] serves as lead counsel." Id. ¶ 31. The Canal attorneys attended court proceedings and depositions, but refrained from taking or defending any depositions, drafting substantive motions, or assisting with the run-up to trial. Id. ¶ 32. Two weeks before the start of trial, on October 5, 2017, Canal sent a letter to James River's lead defense attorney and Cardinal Transport, stating that its policy did not cover Cardinal Transport in the incident and that it would not pay out any sums on its behalf. Id. ¶ 35. Canal has not taken an active defense role in the trial or appeal in the time since. Id. ¶ 32.

On August 1, 2019, James River filed this suit against Canal, seeking reimbursement of defense costs and indemnity obligations in the underlying lawsuit. ECF No. 1. Jurisdiction is secure because James River is incorporated and operates its principal place of business in Virginia, while Canal is incorporated in South Carolina and operates its principal place of business there. Compl. ¶¶ 3, 4. The amount in controversy exceeds the jurisdictional threshold as James River seeks to recover $700,000 in defense costs and indemnity obligations in the $5.4 million judgment. Id. ¶ 5. Further, Illinois law governs because both insurance policies stipulate that Illinois law controls coverage, rights, and duties.³ Id. ¶¶ 23, 27. Canal has moved to dismiss the claim against it, arguing that neither contractual subrogation nor estoppel provides James River with a cognizable cause of action. ECF No. 17. The Court addresses these arguments in turn.

DISCUSSION

I. Subrogation

The premise of James River's subrogation claim is that Canal is liable to Cardinal Transport for its costs of defense and the judgment (or some portion of that judgment) awarded to the plaintiff in the Edwards case. The threshold question that must be addressed is therefore: what right does James River have to assert claims of Cardinal Transport?⁴ The answer, according to James River, is that it is subrogated to Cardinal Transport's claims against Canal. Subrogation, in this context, is defined as the substitution of an insurer in place of the insured to recover funds from a third party. 16 COUCH ON INS. 3d § 222.5; see also Century Indemnity Co. v. Am. Home Assurance , 2017 IL App (1st) 163311-U ¶ 16, 2017 WL 5983716 (defining subrogation as a broad doctrine in which one "pays a debt for which another is primarily liable and in which in equity and good conscience should have been discharged by that latter"). Put differently, subrogation allows the insurer to step into the insured's shoes to seek recovery of payments made to the insured from a third party.⁵ Insurers may pursue equitable or contractual subrogation—the former is rooted in equitable principles, while the latter stems from the specific contractual terms of the policy. Electric Ins. Co. v. Nat'l Union Fire Ins. Co. of Pittsburgh , 346 F. Supp. 2d 958, 963 (N.D. Ill. 2004) ; Schultz v. Gotlund , 138 Ill. 2d 171, 173, 149 Ill.Dec. 282, 561 N.E.2d 652, 653 (1990) ("There are two broad categories of subrogation rights: contractual or conventional rights and common law or equitable rights. Contractual rights are those expressly provided for in the insurance policy or other instrument.... The other class of right to subrogation, equitable subrogation, is implied to have been intended where necessary to avoid an inequitable and unfair result.").

A. Contractual versus Equitable Subrogation

James River argues that it is contractually subrogated to Cardinal Transport based on the contractual transfer of rights clause in its policy. That clause reads:

Transfer of Rights of Recovery Against Others to Us. If the insured has rights to recover all or any part of any payment we have made under this Coverage Part, those rights are transferred to us.

Compl. ¶ 26. This clause subrogates James River to Cardinal Transport's claim in the event it pays funds on Cardinal's behalf that should rightfully have been paid by a third party. See Electric Ins. Co. , 346 F. Supp. 2d at 963 (policy clause transferring "rights to recover all or part of any payment" made by the insurer enabled plaintiff insurer to pursue a contractual subrogation claim); National American Ins. Co. v. Progressive Corp. , 43 F. Supp. 3d 873, 888 (N.D. Ill. 2014) (transfer of rights clause in insurance policy entitled plaintiff insurer to pursue a contractual subrogation claim). In practice, it enables James River to bring a contractual subrogation claim against Canal, asserting Cardinal Transport's rights against Canal as its own.

Canal contends, however, that notwithstanding this contractual subrogation provision, James River does not satisfy the requirements to pursue a subrogation claim. Canal maintains that to proceed as a subrogee, the plaintiff must show that "(1) the defendant carrier [is] primarily liable to the insured for a loss under a policy of insurance; (2) the plaintiff carrier [is] secondarily liable to the insured for the same loss under its policy; and (3) the plaintiff carrier ... discharged its liability to the insured and at the same time extinguished the liability of the defendant carrier." Home Ins. Co. v. Cincinnati Ins. Co. , 213 Ill.2d 307, 323, 290 Ill.Dec. 218, 821 N.E.2d 269, 280 (2004).

James River counters that these are required elements of an equitable subrogation claim, and have no bearing on its claim, which is founded on a contractual subrogation provision rather than on equitable considerations. "When subrogation rights are created by an explicit contract – such as the Transfer of Rights provision in the Policy," it argues, "the contract terms control the right to subrogation, rather than common law or equitable principles." Resp. at 5.

Whether contractual subrogation requires the same elements as equitable subrogation has been the subject of evolving, and sometimes inconsistent, case law in Illinois. In SwedishAmerican Hospital Association of Rockford v. Illinois State Medical Inter-Insurance Exchange , on which Canal primarily draws for support, the court stated that both equitable and contractual subrogation demand the same three elements. 395 Ill. App. 3d 80, 105, 334 Ill.Dec. 47, 916 N.E.2d 80, 101 (2009). But SwedishAmerican cannot bear the weight of Canal's argument. In equating the requirements for equitable and contractual subrogation, the SwedishAmerican court did not advert to, much less discuss, the question of whether the requirements for equitable subrogation also apply to contractual subrogation and the only case cited in support of its statement, Home Insurance Co. v. Cincinnati Insurance Co. , 213 Ill. 2d 307, 323, 290 Ill.Dec. 218, 821 N.E.2d 269, 280 (2004), discussed only equitable subrogation and did not involve a contractual subrogation provision.⁶ Canal, moreover, ignores the fact that...