R.C. Wegman Construction Co. v. Admiral Insurance, 629 F.3d 724

Admiral issued a $1 million per-occurrence liability policy naming Wegman as an insured and Budrik as the injured plaintiff; Budrik’s tort suit against Wegman proceeded to judgment for over $2 million against Wegman.
Admiral defended Wegman under the policy and controlled the defense; Admiral allegedly knew by 2005 that Budrik’s claim could exceed the policy limit but did not warn Wegman.
Wegman sued Admiral in Illinois state court seeking recovery for alleged breach of the insurer’s duty of good faith in not disclosing the excess-claim risk; Admiral removed the case to federal court on diversity grounds.
After removal, Wegman amended to add Budrik as a defendant; Budrik is an Illinois citizen, raising a potential diversity problem; the district court dismissed Budrik as a non-diverse party, and the Seventh Circuit affirmed the dismissal, then addressed the merits of the good-faith claim.
The district court later granted Admiral’s motion to dismiss the complaint; the Seventh Circuit reversed and remanded for merits consistent with its opinion, holding that Admiral’s delay in notifying Wegman of the excess-risk conflict could violate the duty of good faith.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether Budrik’s addition destroys federal diversity.	Wegman needed Budrik as a party; Budrik’s status affects jurisdiction.	Budrik is a nominal defendant; diversity remains intact because Wegman seeks relief against Admiral.	Dismissal of Budrik was proper; diversity not satisfied.
Whether Admiral owed Wegman a duty to notify of a potential excess-judgment conflict.	Admiral breached by not warning Wegman of excess-judgment risk.	No duty to notify of potential conflict before actual negotiations or demands for settlement.	There is a duty to notify when a conflict arises; notification is not contingent on actual negotiations.
Whether Admiral’s duty to notify was breached and whether dismissal was premature.	Admiral’s failure to notify harmed Wegman’s ability to obtain excess coverage.	Absent proof Wegman could have settled within policy limits, dismissal proper.	Dismissal was premature; merits must be considered on remand.
What is the governing standard for insurer control and good-faith duty in Illinois law.	Insurer must act in good faith to protect insured from excess judgments.	Insurer’s control is compatible with defending insured; duty is limited.	Insurer’s duty to act in good faith includes notifying conflicted status to insured.

Twin City Fire Ins. Co. v. Country Mutual Ins. Co., 23 F.3d 1175 (7th Cir. 1994) (duty not to gamble with insured’s money by forgoing settlements that protect against excess judgments; disclosure of conflicts advised)
Cramer v. Ins. Exchange Agency, 174 Ill.2d 513 (198? (1996)) (breach of fiduciary duty when insurer gambles with insured’s money)
LaRotunda v. Royal Globe Ins. Co., 87 Ill.App.3d 446 (1980) (duty to notify conflicts when risk of excess exposure exists)
Transport Ins. Co. v. Post Express Co., 138 F.3d 1189 (7th Cir. 1998) (Illinois law on insurer control of defense and conflicts of interest)