Perma-Pipe, Inc. v. Liberty Surplus Insurance
38 F. Supp. 3d 890
N.D. Ill.2014Background
- Perma-Pipe purchased a CGL policy from Liberty (Nov. 1, 2008–Mar. 31, 2010) with $1M per-occurrence / $2M aggregate limits. Liberty agreed to defend under a reservation of rights.
- After a catastrophic pipe failure at the University of California, Perma-Pipe was sued in two actions seeking >$40M in damages combined.
- Liberty later withdrew its reservation of rights and notified Perma-Pipe it would provide defense counsel of Liberty’s choice (Archer Norris) and terminate payment for Perma-Pipe’s chosen counsel (Laurie & Brennan).
- Perma-Pipe insisted Illinois law entitled it to select independent counsel (Laurie & Brennan) to be paid by Liberty because of a conflict arising from the realistic prospect of an excess judgment; Liberty refused.
- Perma-Pipe filed this suit for breach of contract and bad faith and moved for summary judgment on the breach-of-contract/duty-to-defend claim. The court treated Liberty as admitting Perma-Pipe’s LR 56.1 facts due to Liberty’s failure to respond.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Choice of law for the coverage dispute | Illinois law governs because the insurance contract and contacts (insured domicile, place of delivery/performance) point to Illinois | California law should govern (Liberty argued relevant because underlying damage/litigation in CA) | Illinois law governs (policy contacts strongest with Illinois) |
| Duty to defend under reservation of rights | Liberty had a duty to defend and, if reserving rights created a conflict, must fund independent counsel chosen by Perma-Pipe | Liberty initially reserved rights then withdrew reservation and asserted it could appoint defense counsel; Liberty contends Perma-Pipe knew of excess risk/excess carriers so no conflict like Wegman | Duty to defend exists; because reasonable possibility of coverage, insurer must defend; Liberty breached by refusing to pay for insured-chosen independent counsel |
| Existence of conflict of interest requiring independent counsel | Perma-Pipe: large potential exposure (> $40M) vs. $1M limit creates a "nontrivial probability" of excess judgment, producing a conflict mandating independent counsel at insurer’s expense | Liberty: factual distinctions from Wegman and existence/notice to excess carriers negate a Wegman-type conflict; excess coverage availability undermines conflict | A conflict existed (nontrivial probability of excess judgment); Liberty’s assertions about excess carriers were unsupported and irrelevant to primary-insurer conflict; Perma-Pipe entitled to independent counsel paid by Liberty |
| Sufficiency of Liberty’s factual rebuttal at summary judgment | Perma-Pipe: record supports conflict and breach; Liberty failed to controvert Perma-Pipe’s LR 56.1 facts | Liberty argued facts differ but submitted no evidentiary support and failed to respond to LR 56.1 | Liberty’s unsubstantiated assertions cannot avoid summary judgment; material facts admitted for failure to respond; summary judgment for Perma-Pipe on Count I |
Key Cases Cited
- Anderson v. Liberty Lobby, 477 U.S. 242 (summary judgment standard, evidence viewed in light most favorable to nonmoving party)
- GATX Leasing Corp. v. Nat’l Union Fire Ins. Co., 64 F.3d 1112 (choice-of-law analysis in diversity cases)
- Md. Cas. Co. v. Peppers, 64 Ill.2d 187 (insurer must pay for independent counsel where conflict of interest exists)
- R.C. Wegman Constr. Co. v. Admiral Ins. Co., 629 F.3d 724 (conflict exists when there is a nontrivial probability of an excess judgment)
- Lapham-Hickey Steel Corp. v. Protection Mut. Ins. Co., 166 Ill.2d 520 (Illinois choice-of-law rules for insurance contracts)
- Standard Mut. Ins. Co. v. Lay, 989 N.E.2d 591 (insurer’s duty to defend when underlying complaint alleges facts potentially within coverage)
- Emerson Elec. Co. v. Aetna Cas. & Sur. Co., 743 N.E.2d 629 (contacts relevant to choice of law and presumption of performance where insured is domiciled)