RC WEGMAN CONST. CO. v. Admiral Ins. Co.
634 F.3d 371
7th Cir.2011Background
- Wegman Construction sued Admiral Insurance (and Budrik) after Budrik won a >$2M judgment against Wegman in a separate suit; Admiral had a $1M per-occurrence policy and defended Wegman under control of defense counsel paid by Admiral.
- Wegman amended to add Budrik as a defendant, creating potential complete diversity issues for federal jurisdiction; Wegman claimed Admiral breached the implied duty of good faith by not warning of potential excess exposure.
- Admiral controlled Wegman's defense and knew by May 2005 that Budrik's claim could exceed $1M, creating a potential conflict of interest between insurer and insured.
- Wegman allegedly failed to notify its excess insurer and to seek settlement when excess liability was possible; Wegman promptly notified the excess insurer only after it learned of the potential excess, which was too late to preserve excess coverage.
- The district court granted Admiral’s motion to dismiss, Wegman appealed, and the Seventh Circuit reversed the dismissal but remanded for further proceedings on Wegman’s breach-of-fiduciary-duty claim.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Duty to notify of conflict of interest | Wegman: Admiral breached duty by not notifying of conflict. | Admiral: no duty to notify until conflict becomes actual. | Yes, there is a duty to notify when a conflict may affect coverage. |
| Effect of failure to notify on coverage | Wegman would have pursued excess coverage if notified. | Admiral contends no such effect proven. | Breach could lead to liability; proof required, as it may have changed settlement/coverage. |
| Prematurity of dismissal | Dismissal premature because merits unresolved. | Dismissal appropriate if no viable claim. | Dismissal was premature; reversed and remanded for further proceedings. |
Key Cases Cited
- Twin City Fire Ins. Co. v. Country Mutual Ins. Co., 23 F.3d 1175 (7th Cir. 1994) (duty to act in good faith to settle within policy limits)
- Cramer v. Ins. Exchange Agency, 174 Ill.2d 513 (1996) (duty of insurer not to gamble with insured's money; breach if conflicted)
- LaRotunda v. Royal Globe Ins. Co., 87 Ill.App.3d 446 (1980) (duty to notify of conflict; insurer’s responsibility)
- Transport Ins. Co. v. Post Express Co., 138 F.3d 1189 (7th Cir. 1998) (conflict and defense-control implications under Illinois law)