MACEO RAINEY, Plaintiff-Appellee, v. INDIANA INSURANCE CO., Defendant-Appellant.
No. 1-15-0862
Appellate Court of Illinois, First Judicial District, Third Division
May 11, 2016
2016 IL App (1st) 150862-U
JUSTICE LAVIN delivered the judgment of the court. Presiding Justice Mason and Justice Pucinski concurred in the judgment.
NOTICE: This order was filed under Supreme Court Rule 23 and may not be cited as precedent by any party except in the limited circumstances allowed under Rule 23(e)(1). Appeal from the Circuit Court of Cook County, Illinois. No. 11 CH9884. Honorable Franklin Ulysses Valderrama, Judge Presiding.
¶ 1 Held: The circuit court improperly entered summary judgment, finding the insurer was required to pay for the insured to hire independent counsel, where the insurer defended the insured without a reservation of rights, and no conflict of interest existed in the underlying action.
¶ 2 This appeal arises from an action filed by Maceo Rainey against his insurer, Indiana Insurance Company (Indiana), seeking a declaration that Indiana breached its obligation to defend him in the underlying action by refusing to pay for counsel of Rainey‘s choice. In that action, Fred Jacobeit, former teacher and coach, sued Principal Rainey and their employer, Rich
I. BRIEFS ON APPEAL
¶ 4 As a threshold matter, both parties’ briefs are deficient in several respects. Their statements of facts are at times misleading and fail to cite the record. See
A. Underlying Action
¶ 7 Jacobeit is a Caucasian male with Syringomyelia, which requires him to walk with a cane. According to Jacobeit, Rich hired him as a teacher in 1978, and for 30 years, Rich hired Jacobeit to coach at least one sport every year. When Jacobeit applied to be the girls’ basketball coach in 2007, Rich hired someone else, a non-disabled, African-American woman under age 40. According to Jacobeit, Rich said the candidate was more “energetic” and better for the school‘s “diverse” community, which was largely African-American. Rich denied saying this. In October 2007, Principal Rainey authorized athletic director Will Dwyer to inform Jacobeit that he was hired as the assistant girls’ basketball coach. While Rich admitted that Dwyer advised Rainey that the hiring committee had recommended Jacobeit, Rich denied that Rainey authorized Dwyer to inform Jacobeit that he was hired; rather, hiring an employee required Rich‘s approval.
¶ 8 Jacobeit also alleged that he began working as an assistant coach on October 29, 2007, but was told he would not be paid until January. In November, Rainey signed a “recommendation for hire” form but never presented it to Rich for final approval. That same month, Dwyer informed Jacobeit that Rainey decided to rescind Jacobeit‘s offer. Jacobeit alleged that he was not given a reason at that time and that Rich knew of Rainey‘s decision. Rich denied that Rainey had even been hired, however. Additionally, Rich denied that it knew of Rainey‘s employment decision. Jacobeit subsequently received a check for the work he performed.
¶ 9 According to Jacobeit, Rainey later said that Rich “wanted to keep the position open for a certified staff member,” notwithstanding that Jacobeit had been a certified member for 30 years. Jacobeit also alleged that later still, Rainey, an African-American, said that Rich rescinded the job because Jacobeit was racially insensitive to African-American boys whom he coached in an
¶ 10 Moreover, Jacobeit filed a complaint in the United States District Court for the Northern District of Illinois (No. 09-cv-1924) in 2009. On July 2, 2009, he filed his first-amended, four-count complaint against Rich and Rainey, alleging that they declined to hire him as a coach and subsequently terminated his position as an assistant coach due to his race, age and disability. Specifically, Jacobeit alleged that (1) Rich and Rainey violated the Civil Rights Act of 1964(
B. Rainey‘s Defense
¶ 12 At Rich‘s request, Indiana hired Rich‘s general counsel, Scariano, Himes & Petrarca, Chtd. (Scariano), to represent Rich and Rainey. In its letter agreeing to provide a defense, Indiana stated, “[b]y providing a defense to this matter, please understand that Indiana Insurance does not waive any of its rights under the policy, or give rise to any estoppel to raise those rights.” Despite the general nature of this caveat, the policy itself excluded coverage for intentional injuries, and punitive damages.
¶ 13 Rich‘s answer to Jacobeit‘s amended complaint denied that that he was dismissed due to discriminatory practices; instead, it had appropriate, non-discriminatory reasons for its employment decisions related to Jacobeit. In addition, Rich and Rainey moved to dismiss the
¶ 14 At some point, Rainey lost his position as principal and, instead, became the principal of the alternative school program. Teachers celebrated Rainey‘s change of employment at a gathering in St. John, Indiana in June 2010. They burned Rainey‘s photograph in effigy and allegedly displayed a noose.
¶ 15 In October 2010, Rainey informed Rich‘s superintendant, Dr. Donna Simpson Leak, that Scariano had serious conflicts of interest and thus, he wanted Rich to retain Rainey‘s own choice of counsel, Jerome Davis, to defend him in the Jacobeit suit. Additionally, Scariano informed Davis that the firm would not withdraw as counsel unless Rich directed it to do so. Michael Hetzel, senior claims analyst at Indiana, informed Davis that Rainey could retain whomever he wanted but Indiana would not pay for it. Hetzel also informed Davis that Indiana was pleased with Scariano‘s work and saw no conflict. By November, however, Hetzel stated he was “uncomfortable” with Scariano representing Rainey because Scariano was representing Rich regarding the St. John incident. Indiana then hired attorney Jeff Taylor, from Spesia & Ayers, to defend Rainey and Rich in the Jacobeit case. Rainey refused Taylor‘s counsel, however, unsuccessfully insisting that Indiana pay for Davis to defend him. Rainey proceeded pro se for most of the Jacobeit litigation.
C. Present Action
¶ 18 Count I alleged that Indiana breached its duty to defend him through independent counsel and count II alleged that Indiana was equitably estopped from denying its obligation to provide an independent defense because Indiana induced him to permit its control of his defense for two years, even though Indiana knew Scariano had a conflict of interest. Additionally, count III alleged that Jacobeit sought punitive damages from him, requiring Rainey to show he fired Jacobeit at Rich‘s direction. Thus, a conflict of interest existed. Furthermore, Indiana breached its duty to defend because it did not advise him of the conflict, authorize him to retain independent counsel, or seek a declaration of Indiana‘s obligations. As a result, Indiana was required to pay for his independent counsel and was estopped from asserting contractual defenses.
¶ 19 In response, Indiana essentially professed a lack of sufficient knowledge regarding many of the complaint‘s allegations, including allegations regarding its own employees. In addition, the circuit court found many of Indiana‘s responses were insufficient and the corresponding allegations were admitted. Accordingly, Indiana was deemed to admit, among other things, that Scariano advised Rich in a campaign of harassment and retaliation against Rainey for his public
¶ 20 Subsequently, on November 14, 2012, Judge John J. Tharp Jr. dismissed the federal action in light of a settlement agreement reached between Rich and Jacobeit. Pursuant to the agreement, Jacobeit dismiss all claims against Rich and Rainey with prejudice. Judge Tharp stated, “[r]ather than welcoming the dismissal of the claims against him, Rainey objects to Jacobeit‘s motion on the grounds that dismissal will prejudice his rights.” Specifically, Rainey argued that the settlement could negatively impact his case against Indiana. Judge Tharp found, however, that “[w]hatever the source of Rainey‘s reimbursement rights, a favorable result in this case ***, has no bearing on the validity of Rainey‘s argument that [Rich‘s] insurer had an obligation to provide separate counsel to Rainey along the way.” See also Nandorf, Inc. v. CNA Insurance Companies, 134 Ill. App. 3d 134, 139 (1985) (finding that an outcome favorable to the insured will not justify exercising hindsight to negate the existence of a conflict of interest). The court further found “dismissal of the claims against him should not affect any right or claim he may have for reimbursement of the costs he has already incurred.”
¶ 21 In June 2013, Rainey moved for summary judgment on counts I and III, arguing that a conflict existed between him on the one hand, and Rich and Indiana on the other. We note that
¶ 22 Meanwhile, Indiana moved to dismiss Rainey‘s third-amended complaint as moot under
¶ 23 In November, the circuit court denied Rainey‘s motion for summary judgment, and apparently denied Indiana‘s motion to dismiss as well. First, the court found that the settlement of the Jacobeit suit, which occurred after Rainey filed the declaratory action, “cannot operate as a shield against any liability for a breach of a duty to defend.” With that said, the court rejected
¶ 24 Rainey then filed a motion for reconsideration. Despite contrary allegations in his pleadings, Rainey argued that Indiana was not providing coverage for all loss sustained by Rainey because Indiana had reserved exclusions in its insurance policy, which included punitive damages, and, thus, would not provide coverage for any award of punitive damages. He also alleged that Jacobeit sought punitive damages in excess of $1.3 million and intended to seek an unspecified amount of damages for emotional distress, which Indiana could avoid paying if Rainey intentionally caused them. Curiously, Rainey then stated that “Indiana‘s defense without a reservation of rights did not resolve the conflict between the parties because Indiana did not indemnify plaintiff against punitive damages.” Rainey repeated that the defenses of Rich and Rainey were diametrically opposed: “To assert a defense of qualified immunity or to avoid punitive damages, Plaintiff had to show that he faithfully carried out the policy of the District; however, to avoid liability, the District had to negate that defense by showing that Plaintiff was not executing its policy.”
¶ 25 Indiana responded that Jacobeit‘s complaint did not seek punitive damages and, in any event, Indiana did not reserve its right to deny coverage on any ground. Thus, no argument made on Rich‘s behalf would require Rainey to pay an award entered against him. Furthermore, several consistent defenses were available, including showing that any employment decision was based on appropriate, rather than discriminatory, reasons.
¶ 26 On April 1, 2014, the circuit court reconsidered its decision and entered summary judgment in Rainey‘s favor. The court found a conflict of interest existed because “[w]hile
¶ 27 Rainey also filed a petition for attorney fees, costs and statutory damages under ¶ 30 On appeal, Indiana asserts that the circuit court erroneously entered summary judgment in Rainey‘s favor because no conflict of interest existed and Indiana defended Rainey without a reservation of rights. Although Rainey‘s characterization of the conflict‘s source varied from time to time, the circuit court found there was no genuine issue of material fact in that Rainey‘s ¶ 31 The duty to defend and the duty to indemnify are corresponding, albeit separate and distinct. Waste Management, Inc. v. Int‘l Surplus Lines Ins. Co., 144 Ill. 2d 178, 203 (1991). An insurer‘s duty to defend is broader than its duty to pay. Nandorf, Inc., 134 Ill. App. 3d at 136. The duty to defend also includes, however, the right to assume control of the litigation. Id. This right permits insurers to protect their financial interest in the litigation‘s outcome and minimize unwarranted liability claims. Waste Management, Inc., 144 Ill. 2d at 203. Similarly, that right allows the insurer to safeguard the proper disbursement of large sums of money involved. Nandorf, Inc., 134 Ill. App. 3d at 136. ¶ 32 Generally, the determination of whether an insurer has a duty to defend an insured requires examining the complaint‘s allegations. Maryland Casualty Co. v. Peppers, 64 Ill. 2d 187, 193 (1976). If the complaint alleges facts that are potentially within the policy‘s coverage, the duty is triggered. Id. When policy coverage is in question, an insurer may defend the suit under a reservation of right or seek a declaratory judgment defining the insurer‘s obligations. Pekin Insurance Co. v. Home Insurance Co., 134 Ill. App. 3d 31, 34-35 (1985). An insurer who undertakes an insured‘s defense without a reservation of rights will be estopped from denying coverage if doing so would result in prejudice. Standard Mutual Insurance Co. v. Lay, 2013 IL 114617, ¶ 19. ¶ 34 A conflict exists if, in comparing the complaint‘s allegations to the insurance policy‘s terms, the insurer‘s interests would be furthered by providing the insured a less than vigorous defense to the allegations. Country Mutual Insurance Co. v. Olsak, 391 Ill. App. 3d 295, 302 (2009). With that said, “the conflict must rise to a level from which it appears that the insurer may not vigorously defend a claim lodged against its insured.” Illinois Municipal League Risk Management Ass‘n v. Seibert, 223 Ill. App. 3d 864, 872 (1992). ¶ 35 Courts have recognized two instances in which a conflict of interest is so great as to require the insurer to pay for outside counsel. Pekin Insurance Co., 134 Ill. App. 3d at 35. The first instance arises when proof of certain facts would transfer liability from the insurer to the insured. Id. Attorneys’ interest in protecting the insurer who hired them is more compelling than their interest in protecting the insured, notwithstanding their fiduciary duty to both clients and regardless of whether a chosen strategy coincides with insured‘s best interest. Nandorf, Inc., 134 Ill. App. 3d at 137. The second instance arises where a conflict of interests exists between two insureds covered by the same insurer. Pekin Insurance Co., 134 Ill. App. 3d at 35. This may ¶ 36 We find that neither Rich nor Indiana were Rainey‘s enemies in the underlying litigation. First, Rainey failed to demonstrate that he and Rich possessed diametrically opposed defenses. Rainey argues that the defenses were opposed because “Rich could avoid liability by showing that [Rainey‘s] decision to withdraw the recommendation to hire was not based on its policy or directives,” whereas Rainey “could avoid liability by showing that his decision to rescind the recommendation for hire was based on Rich‘s policy and directives, not racial discrimination.” Notwithstanding Rainey‘s contention, he has failed to cite legal authority in support of his assertion that these defenses were appropriate and available. ¶ 37 First and foremost, Rich alleged and argued that neither it nor Rainey made discriminatory employment decisions with respect to Jacobeit. Additionally, Rich argued that Rainey was not a final decision maker. While Rainey argues that Rich‘s purpose for the latter defense was to shift liability to him, he takes Rich‘s argument out of context. Rich stated below that if an official is not a final decision maker and he violates, rather than implements school policy, the official is responsible, not the school district. Rich went on to state, however, that Rainey had not violated policy. At no point did Rich itself agree that Rainey acted improperly, notwithstanding that the deposition testimony of certain board members speculated that it would have been wrong for the insureds to rely on the “black tar baby” incident in making employment ¶ 38 Here, Indiana could and did choose a defense strategy for one insured without harming the other. Cf. Country Mutual Insurance Co., 391 Ill. App. 3d at 304 (finding the insured‘s interests were diametrically opposed where the insurer could not choose a defense strategy in the underlying action without harming one of the insureds). Furthermore, we observe that where an insurer has agreed to pay the judgment against either insured, it will generally be in the insurer‘s best interest to present consistent and vigorous defenses on behalf of both insureds. ¶ 39 To the extent Rainey argues that Jacobeit‘s request for punitive damages created a conflict, Jacobeit‘s amended complaint did not seek punitive damages. See Illinois Municipal League Risk Management Ass‘n, 223 Ill. App. 3d at 870 (observing that “because no punitive damages were alleged at that time, Seibert could not have relied on this information in deciding to retain his own counsel“). Additionally, Rainey cites no authority for the proposition that we can, and should, look past the complaint to a status report to determine that Jacobeit was seeking punitive damages.2 See National Casualty Co. v. Forge Industrial Staffing, 567 F. 3d 871, 875-76 (7th Cir. 2009) (finding the mere possibility that punitive damages may be sought in later litigation did not create an actual conflict of interest); see also Nandorf, Inc., 134 Ill. App. 3d at 140 (finding that independent counsel was not required every time punitive damages are sought). Because Jacobeit had not formally requested punitive damages, the threat of a claim for punitive damages did not put Rainey and Indiana at odds. ¶ 41 Nonetheless, Rainey states as follows: “It does not matter that the insurer will pay the claim, because the ethical duty to vigorously defend is not predicated on who pays if the insured loses. The goal of providing a vigorous defense is to make sure that the insured does not lose.” In determining whether an insurer will present a vigorous defense, we find it more appropriate to consider the insurer‘s incentive. It goes without saying that an insurer‘s primary incentive is to minimize the amount that it must pay in any lawsuit. Given that incentive, we have no doubt that an insurer will provide a vigorous defense for all insureds where the insurer alone will bear any award against them. We do not disagree with Rainey‘s contention that an insurer “cannot choose a strategy that harms one of its insureds,” but, here, Rainey has not identified any other potential harm arising from Indiana‘s joint defense of Rich and Rainey against the claims raised in Jacobeit‘s complaint. Under these circumstances, we agree with Indiana‘s contention that the circuit court erroneously found a conflict of interest prevented it from controlling Rainey‘s defense. ¶ 42 Here, Rainey failed to demonstrate that he was entitled to judgment on count I. Absent a conflict of interest in the Jacobeit litigation, Indiana was not obligated to pay for independent counsel and did not breach its duty to defend by failing to do so. Because Rainey cannot show Indiana breached its duty, he cannot satisfy count III‘s contention that Indiana was estopped ¶ 43 Finally, we reiterate that Indiana did not file a cross-motion for summary judgment in the circuit court. Accordingly, we cannot enter judgment on the merits in Indiana‘s favor at this juncture, notwithstanding our determination that the record shows no conflict of interest or breach of duty. See Schnabel v. County of DuPage, 101 Ill. App. 3d 553, 563 (1981). We can only reverse and remand for further proceedings consistent with this opinion. ¶ 45 In light of our determination that Indiana was not required to pay for Rainey‘s choice of independent counsel, it follows that Indiana‘s conduct in declining to procure such counsel was neither vexatious nor unreasonable, as required by section 155 of the Code. ¶ 47 The circuit court erred in finding the pleadings and exhibits attached thereto showed a conflict of interest requiring Indiana to hire Rainey‘s counsel of choice. Thus, the court erroneously entered summary judgment in his favor. Additionally, the circuit court erroneously entered an award of damages under section 155 because Indiana‘s decision not to pay for independent counsel was neither vexatious nor unreasonable. Accordingly, we reverse and remand for further proceedings consistent with our decision. ¶ 48 Reversed and remanded.II. ANALYSIS
A. Conflict of Interest
B. Section 155 Damages
III. CONCLUSION