Insurer's Duty to Settle in Good Faith Does Not Extend to an Uninsured Policyholder in Illinois
IOWA PHYSICIANS’ CLINIC MEDICAL FOUND. V. PHYSICIANS INSURANCE CO. (October 31, 2008)
Dr. Randall Mullin worked at a clinic in Geneseo, Illinois operated by the Iowa Physicians’ Clinic Medical Foundation under the name Iowa Health Physicians (“IHP”). Dr. Mullin provided anti-malarial therapy to his patient Dennis Goetz. Unfortunately, the treatment was not effective. Goetz contracted malaria and died. Goetz’ wife brought suit against Mullin and IHP. IHP provided malpractice insurance for Mullin through Physicians Insurance Company (“PIC”). PIC covered Mullin’s liability and defense up to $1 million. PIC did not insure IHP, however. Goetz’ widow offered to settle the case for $900,000 on more than one occasion before trial. When the defense’s own expert admitted in a deposition that Mullin’s treatment did not meet the standard of care, Goetz’ widow retracted the offer. At trial, the jury awarded Goetz’ widow $3.5 million in damages. PIC paid $1 million. IHP, under an agreement with Mullin, paid the rest. Mullin and IHP sued PIC in state court. They alleged that PIC breached its duty to settle in good faith. PIC removed the claim to federal court. The district court entered final judgment against IHP on the ground that PIC owed no duty to IHP. Mullin’s case remained pending. IHP appeals.
In their opinion, Judges Kanne, Evans, and Williams affirmed. The Court started with the “well-settled” recognition in Illinois of an insurer’s duty to settle in good faith. The duty arises from the covenant of good faith and fair dealing in an insurance contract. It arises when the insurer controls the litigation and the plaintiff seeks a settlement near the upper limits of the policy. The situation creates a conflict of interest for the insurer. Proceeding to trial presents little risk to the insurer and much risk to the insured. In fact, the Court observed that Mullin made out a good case for PIC’s breach of its duty. The Court had to consider, however, whether the Illinois Supreme Court would extend the duty of good faith to an uninsured policyholder, in addition to the insured himself. IHP argued that its contractual relationship with PIC supported such a duty. The Court pointed out that the Illinois Supreme Court has refused on numerous occasions to extend the insurer’s duty of good faith to contracts in general. Here, IHP could have purchased its own coverage. It chose not to. In addition, PIC did not control IHP’s defense. IHP could have settled the case before trial and limited its liability to Goetz’ widow. The Court concluded that the Illinois Supreme Court would not extend the good faith duty to settle to an uninsured policyholder.
Michael Rigney practices in the law offices of GVC Ltd. in Chicago. In this blog, he reports on select