N. Am. Elite Ins. Co. v. Menard Inc.

491 F.Supp.3d 333

NORTH AMERICAN ELITE INSURANCE COMPANY, Plaintiff,

v.MENARD INC., Defendant.

No. 19 C 6528

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

Signed September 30, 2020

Robert Patrick Conlon, Scott Taylor Stirling, Walker Wilcox Matousek LLP, Chicago, IL, for Plaintiff.

David V. Goodsir, Reed Smith LLP, Thomas Allen Marrinson, Reed Smith Sachnoff & Weaver, Chicago, IL, for Defendant.

OPINION AND ORDER

SARA L. ELLIS, United States District Judge

Plaintiff North American Elite Insurance Company ("NAE") contracted with Defendant Menard Inc. to provide excess insurance coverage with liability limits of $25 million (the "NAE policy"). Menard could only reach this coverage if it exhausted its self-insurance of $2 million and excess coverage of $1 million, insured by Greenwich Insurance Company ("Greenwich"). Menard settled a negligence action for $6 million, leading NAE to pay $3 million of the settlement. NAE subsequently filed an action in this Court, alleging that Menard should have settled the case when it received a settlement demand of roughly $2 million. NAE brings claims for breach of contract and breach of the duty to settle. NAE also seeks a declaration that it does not owe a duty to indemnify Menard or pay any portion of the $6 million settlement. Menard filed a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). The Court finds that a policyholder does not owe an excess carrier a duty to settle, and NAE has not plausibly alleged an express breach of contract claim. Further, NAE is not entitled to declaratory relief. Therefore, the Court grants in part and denies in part Menard's motion to dismiss [13]. NAE may proceed with its breach of contract claim to the extent that it relies on an implied duty of good faith.

BACKGROUND¹

Menard maintained multiple layers of insurance between November 1, 2015 and November 1, 2016. Its primary layer was self-insurance for bodily injury in the amount of $2 million per occurrence and allowed Menard to retain the ability to control and direct the investigation, defense, and settlement of general liability claims within this layer. Above its primary insurance, Menard had two excess and umbrella coverage insurance policies for general liability bodily injury claims. Greenwich issued an excess policy to Menard with a $1 million per location and per occurrence limit of liability for bodily injury claims in excess of the Menard self-insured retention (the "Greenwich policy"). The Greenwich policy included a "Self-Insured Retention Endorsement," which provided that Menard retained a $2 million per occurrence self-insured retention for bodily injury claims. The Self-Insured Retention Endorsement stated:

You shall be responsible for the investigation, defense and settlement of any claim or ‘suit’ for damages within the Self-Insured Retention, and for the payment of all ‘Allocated Loss Adjustment Expenses.’ You shall exercise utmost good faith, diligence and prudence to settle all claims and ‘suits’ within the Self-Insured Retention.

We shall have the right but not the duty to participate with you at our own expense in the defense or settlement of any claim or ‘suit’ seeking damages not exceeding the Self Insured Retention. In the event of a claim or ‘suit’ which in our reasonable judgment may result in payments, including ‘Allocated Loss Adjustment Expenses,’ in an amount in excess of the Self-Insured Retention, we shall have the right and the duty to defend and may, at our sole discretion, assume control of the defense or settlement of such claim or ‘suit.’ You will continue to be responsible for the payments of the Self-Insured Retention.

Doc. 1 ¶ 18.

Beyond the Greenwich policy, NAE issued a commercial umbrella liability policy to Menard with liability limits of $25 million. If Menard exhausted the scheduled underlying insurance and the total limits of other insurance, it would trigger the NAE policy. The NAE policy included a provision regarding Menard's maintenance of scheduled underlying insurance, which listed Menard's self-insured retention and the Greenwich policy, as well as the relevant limits of both. With respect to settlement, the NAE policy provided that Menard must "cooperate with [NAE] in the investigation or settlement of the claim or defense against the ‘suit.’ " Doc. 1-2 at 20. In suits claiming damages for bodily injury, property damage, or personal and advertising injury, NAE had the "right and duty to defend [Menard]" when the underlying insurance or other insurance "have been exhausted by payment of ‘loss.’ " Id. at 8. In all other suits, NAE had the "right, but not the duty, to participate in the defense of any ‘suit.’ " Id. at 9. If NAE did assume the defense, it would "settle the ‘suit’ as [i]t deem[ed] expedient." Id.

An individual brought a negligence action against Menard and one of its employees based on an incident that occurred at a Menard store on August 10, 2016. Menard controlled the defense of the action through its retained defense counsel. Greenwich and NAE never controlled the defense. On May 3, 2019, five days before a scheduled mediation, NAE informed Menard that it encouraged Menard to settle the claim at least up to $2 million. On June 3, 2019, the day before trial was scheduled to begin, the plaintiff made a $1.985 million demand to settle. Greenwich was willing to pay any potential amounts due to any erosion of Menard's $2 million self-insured retention. Menard did not respond to the demand and proceeded to trial. NAE first learned of the demand on June 10, 2019, in an email from Menard's defense counsel.

The email stated that the judge was "not pleased that Menards did not respond to the $1.985 settlement demand in response to Menards request for a demand under the $2 million SIR." Doc. 1 ¶ 38. The email also said that the judge encouraged the parties to engage in settlement discussions, but there had not been any further discussions. Two days later, NAE wrote to Menard, demanded that Menard accept the settlement immediately, and instructed Menard that its failure to settle would be in bad faith. NAE, Menard, and Menard's claim handlers subsequently held a conference call in which NAE continued to demand that Menard settle below the NAE layer. In response, Menard's claim handlers expressed they would not settle because they believed Menard would obtain a defense verdict. However, Menard's defense counsel advised Menard that she did not believe Menard would receive a defense verdict and Menard should therefore seek to settle before a verdict. NAE expressed to Menard that if it refused to settle, it should at least accept a high-low agreement to protect Menard from exposure given NAE's position that it would not be liable for any verdict that reached NAE's layer due to Menard's failure to settle within its self-insured retention.

Prior to the verdict, Menard agreed to a $6 million/$500,000 high-low agreement with the plaintiff. The jury returned a verdict of $13 million, which was reduced by 5 percent due to the plaintiff's comparative negligence. The court vacated the judgment pursuant to the $6 million settlement, as a function of the high-low agreement. Menard subsequently requested that NAE fund the settlement amount exceeding $3 million. NAE informed Menard that it did not believe it had any obligation to fund the settlement due to Menard's unreasonable and bad faith failure to settle, however, it would pay the amounts requested under full reservation of rights and Menard's agreement that payment would not waive NAE's right to seek reimbursement. Menard agreed to those terms.

NAE now brings an action against Menard, alleging that Menard breached certain duties that it owed NAE as its excess carrier by failing to reasonably settle. NAE seeks a declaratory judgment stating: (1) it is not obligated to pay any of the settlement or other amounts of loss, and (2) it is entitled to reimbursement for the amounts it paid in the underlying suit. NAE contends that Menard's failure to accept the $1.985 million demand gives rise to a breach of contract claim, as well as a claim for a breach of the common law duty to settle.

LEGAL STANDARD

A motion to dismiss under Rule 12(b)(6) challenges the sufficiency of the complaint, not its merits. Fed. R. Civ. P. 12(b)(6) ; Gibson v. City of Chicago , 910 F.2d 1510, 1520 (7th Cir. 1990). In considering a Rule 12(b)(6) motion to dismiss, the Court accepts as true all well-pleaded facts in the plaintiff's complaint and draws all reasonable inferences from those facts in the plaintiff's favor. AnchorBank, FSB v. Hofer , 649 F.3d 610, 614 (7th Cir. 2011). To survive a Rule 12(b)(6) motion, the complaint must not only provide the defendant with fair notice of a claim's basis but must also be facially plausible. Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ; see also Bell Atl. Corp. v. Twombly , 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal , 556 U.S. at 678, 129 S.Ct. 1937.

ANALYSIS

In its complaint, NAE states claims for breach of contract and breach of the duty to settle. NAE also seeks related declaratory relief. Menard moves the Court to dismiss all three claims for the following reasons. First, Menard argues that NAE asks the Court to impose a contractual duty of good faith on Menard that is absent from the NAE policy and instead appears in the Greenwich policy. Menard also argues that the Court cannot imply a duty of good faith because such duty is only a gap filler and the NAE policy contemplated NAE's rights in settling lawsuits. Second, Menard moves for dismissal of the duty to settle claim because no Illinois court has found a policyholder to owe an excess carrier a duty to settle. Finally, Menard argues that declaratory...