In the case of Malaker v. Cincinnati Insurance Co., 2011 WL 1337095 (N.D. Ill. April 7, 2011), a federal judge decided the entire case on a motion to dismiss one count of the complaint.
Mr. John Helfrich was an insured under a CGL (or Commercial or Comprehensive General Liability Insurance) policy issued by Cincinnati Insurance Company. An incident took place in which Mr. Helfrich’s hand came into contact with a shirt and jacket worn at the time by Mr. Eric Malaker. Mr. Helfrich admitted that, and Mr. Helfrich also admitted that he pushed Mr. Malaker.
Mr. Helfrich informed Cincinnati of this incident. (It is not clear from the opinion how he informed Cincinnati, i.e., whether verbally or in writing, but it did not seem to matter to the judge in reaching her decision). Cincinnati denied coverage in response to this pre-suit notice and in its “denial-of-coverage letter” asked Mr. Helfrich, should he be sued, to provide Cincinnati with notice “of the suit immediately” so that Cincinnati “may review the wording of the suit” for possible coverage. Malaker, 2011 WL 1337095 at *1.
Thereafter, Malaker sued Helfrich. Some two years later, Mr. Helfrich’s attorneys may have notified Cincinnati of the underlying lawsuit by Malaker against Helfrich, a fact which was in dispute. Six years after the underlying lawsuit was filed, Mr. Malaker and Mr. Helfrich reached a settlement for $5.1 million. The Circuit Court of Illinois entered what appears to be a consent judgment in the underlying case accordingly. Mr. Helfrich paid $100,000.00 to Mr. Malaker and assigned all of his rights against Cincinnati to Malaker.
Malaker then filed a complaint against Cincinnati in which he alleged three claims in three counts: Count One for alleged breach of contract, Count Two for alleged breach of fiduciary duty owed by Cincinnati to Helfrich, and Count Three for alleged bad faith under Section 115 of the Illinois Insurance Code. In the decision in question, the federal court expressly considered Cincinnati’s motion to dismiss the claim for its alleged breach of fiduciary duty. However, the Court also noted that the parties had filed motions for summary judgment by the time of this decision. Id. at *2, *2 n.1. The federal court’s disposition of the motion to dismiss also disposed of the motions for summary judgment in this case.
As the federal judge threaded her way through to a determination in considering a motion to dismiss that no fiduciary relationship existed on the face of the complaint, the Court made a series of interesting and potentially instructive rulings for duty-to-defend cases.
First, the Federal District Court held that a “breach-of-fiduciary-duty claim” is subject to the notice-pleading standards of Federal Rule of Civil Procedure 8, and not the requirements of pleading with particularity which are required for fraud claims under Rule 9(b). Id. at *3.
Second, the Court agreed with Cincinnati that the mere existence of an “insurer-insured relationship does not in itself give rise to a fiduciary relationship under Illinois law.” Id. Under Illinois law there could be a fiduciary relationship triggered by a duty to defend, but in this particular case whether a duty to defend were triggered involved fact questions of timely vs. late notice which could not be determined at the pleading state, the federal judge wrote. Id. at *5, *6-*7. Therefore, the federal court determined, in effect, that it would not determine that factual issue but would instead determine the legal issue of whether, even assuming timely notice, there was a duty to defend Mr. Helfrich against the underlying complaint under Cincinnati's CGL policy. See id. at *6.
The federal court held that there was never a legally enforceable fiduciary duty between Helfrich and Cincinnati in this matter, because under Illinois law Cincinnati never had a duty to defend him against Malaker’s underlying complaint. In order to reach this legal conclusion, the federal court had to look behind the complaint at bar, which did not contain allegations which revealed what were the claims and allegations made by Mr. Malaker against Mr. Helfrich in the underlying lawsuit. Therefore the federal court employed Federal Rule of Evidence 201(b) to examine the underlying state court complaint for the fact of those underlying claims and allegations and not to determine whether they were true or false. Id. at *6-*7. It is not clear from the federal court’s opinion in this case whether the underlying complaint was attached as an exhibit to the complaint at bar, or whether there was a request for judicial notice of the underlying complaint under Evidence Rule 201(b) in this case. It would be a good practice to do both in an appropriate case, and to invite the court in any future case to determine the duty to defend based upon documents which are easily referenced in the record at bar.
There was a possibility that Illinois State Courts considering the question of whether there was a duty to defend the underlying case, would look to other pleadings in the underlying case in addition to looking at the underlying complaint. The federal judge wrote that she also considered the complaint and other pleadings in the underlying case, although the opinion does not provide a list of all the other pleadings that she considered. In any event, the result would be the same: the court held that there still would have been no duty by Cincinnati to defend Mr. Helfrich in the underlying Malaker lawsuit. Id. at *8. Defense practitioners may thus wish also to consider attaching all relevant underlying pleadings to the complaint, or to consider attaching them to a notice of filing with a request for judicial notice of them, in any appropriate duty-to-defend insurance coverage case.
The federal court was not done in this case, however. The federal judge went on to consider the legal sufficiency of the counts for alleged breach of contract and for alleged bad faith under the Illinois Insurance Code. There could be no breach of contract since Cincinnati did not have a duty to defend the underlying Malaker case, and there could not be any bad faith or “vexatious and unreasonable” conduct under the Illinois Insurance Code by Cincinnati denying a duty to defend where, the Court ruled, it did not have a duty to defend.
Since amendment of any count would be futile, dismissal of all claims in all counts in the federal court complaint was warranted. Accordingly, all counts were held dismissed with prejudice, and the pending motions for summary judgment were held moot as a result. Id. at *10.
The holdings of the Federal Court in this case came down to this concise summary:
In the present case, the operative Complaint fails to state a claim because its constituent allegations, coupled with relevant pleadings of which the Court takes judicial notice, reveal that Defendant properly denied coverage.