APPEALS COURT SORTS OUT MESS WITH HYBRID AUTO POLICY

August 16, 2004

Steven P. Garmisa
Hoey & Farina Attorney
garmisa@hoeyfarina.com
1-888-425-1212

A stated value policy -- unlike typical actual cash value insurance -- pays a predetermined amount when an automobile is destroyed.
In a case with an unusual twist, the insureds say they asked for a $30,000 stated value policy on an old, restored Cadillac, but the declaration page of the policy issued by Allstate Insurance said the coverage limit for the Cadillac was "$30,000 or actual cash value."

So, what did Allstate owe when the Cadillac was destroyed? The insureds, Karry and Tobey Young, demanded $30,000, while Allstate insisted it was obligated to pay only actual cash value. And when it received this demand, Allstate triggered the policy's appraisal provision, which resulted in a decision that the actual cash value was only $12,000.

Ruling on the Youngs' lawsuit, the Cook County Circuit Court dismissed some claims and granted Allstate's motion for summary judgment on the others.

Some of the questions for the Illinois Appellate Court were whether this strange policy was ambiguous, whether the insureds alleged a proper respondeat superior claim against Allstate, whether the insureds had a duty to read and object to the policy form, whether estoppel applied and whether a consumer fraud claim was preempted by section 155 of the Insurance Code. Young v. Allstate Insurance Co., 2004 WL 1469453 (1st Dist., June 30).

Significantly, although the Youngs say they asked an Allstate agent named Walton for stated value coverage -- and they had some documentary evidence supporting this allegation -- they apparently did not seek reformation of the policy form. Instead, they argued the insurance policy was ambiguous, and they attempted to allege a negligence claim against Allstate.

The Appellate Court concluded that the policy was not ambiguous. For example, several provisions of the policy form (like the section on limits of liability and the appraisal section) supported the notion that this was an actual cash value policy.

The ruling that the policy is not ambiguous was the key to several other conclusions. Also, since there apparently was no claim for reformation, there was no discussion about whether Allstate ever provides stated value coverage, whether it has a specific form for stated value policies and whether its agent might have botched things up by using the wrong form.

With these observations, here are some highlights of Justice Michael J. Gallagher's opinion (with various omissions not noted in the quoted text).

Respondeat Superior

The Youngs argued that the trial judge "erred in dismissing the respondeat superior count because a cause of action for respondeat superior based on negligence was sufficiently pleaded. To establish a cause of action based on negligence, a plaintiff must demonstrate: (1) the existence of a duty owed to plaintiff; (2) a breach of the duty; and (3) injury proximately resulting from the breach.

"An agent's duties to a prospective insured are to promptly evaluate the insurance application by providing coverage for the applicant or notifying the applicant of rejection of coverage to prevent the insured from being harmed by a delay in seeking coverage elsewhere or from feeling a false sense of security.

"Plaintiffs claim that the trial court erred in finding that Walton, the insurance agent, did not breach a duty to plaintiffs.

"An independent insurance agent may owe duties to both the insurance company and insured. When an insurance agent's negligent actions cause damage to an insured, the agent can be liable to the insured for the loss sustained. To recover for the loss sustained, the insured must prove that the agent negligently performed his duty to secure the type of coverage requested by the insured.

"Plaintiffs contend that Walton, by her failure to procure for plaintiffs the stated value coverage negotiated, promised and paid for, breached her duty to plaintiffs. Plaintiffs claim that they sufficiently pleaded a cause of action for respondeat superior based on negligence because Walton had a duty of care to plaintiffs that was breached by her failure to provide a stated value policy for plaintiffs, plaintiffs were damaged as a result of the breach and Allstate conceded that Walton was acting within the scope of her employment and was Allstate's agent."

"Plaintiffs also claim that the trial court erred in dismissing the respondeat superior count based on plaintiffs' alleged failure to read the policy because the failure to read a policy is 'never contributory negligence as a matter of law.' Black v. Illinois Fair Plan Association, 87 Ill.App.3d 1106, 1111 (1980). In support of this claim, plaintiffs rely on Black and Perelman v. Fisher, 298 Ill.App.3d 1007 (1998).
"In Black, the insured procured an insurance policy from an insurance broker who became the insured's agent thereby creating a fiduciary relationship between the insurance broker and the insured. This court in Black held that due to the insurance agent's fiduciary duty to the insured and because the policy was not being altered to prejudice a party to the contract, the insured's failure to read the contract and identify errors in its basic terms could never be contributory negligence as a matter of law.

"Adopting its earlier holding in Black, this court in Perelman held that an insured's failure to read and understand the terms in a policy procured by his broker was not an absolute bar to the insured's right to recover against his broker based on the broker's breach of a fiduciary duty.

"Relying on Perelman and Black, plaintiffs contend that the trial court erred in dismissing the respondeat superior count due to plaintiffs' failure to read the policy and identify discrepancies between their understanding of coverage and the coverage provided under the policy.

"Allstate responds that the trial court properly dismissed the respondeat superior count because Allstate did not owe a duty to plaintiffs.

"We agree with Allstate that the cause of action for respondeat superior was not sufficiently pleaded because plaintiffs failed to set forth a duty Walton owed to plaintiffs.

" 'A broker owes a duty to the insured; an agent owes a duty to the insurer.' Farmers Automobile Insurance Association v. Gitelson, 344 Ill.App.3d 888, 892 (2003). An independent broker may act as agent of the insurer and insured in certain circumstances. Determining whether a person is acting as agent or broker identifies to whom the individual owes a duty.

"Such a determination requires analysis of the following four factors: (1) who first set the agent in motion; (2) who controlled the agent's action; (3) who paid the agent; and (4) whose interests the agent was protecting.

"Application of these four factors to the instant case supports a conclusion that Walton acted as Allstate's agent and accordingly, owed a duty to Allstate and not plaintiffs. Based on the record in this case, we conclude that Walton had a fixed and permanent relationship with Allstate because the policy declarations list Walton as an Allstate agent.

"Moreover, plaintiffs did not dispute that Walton was an Allstate agent. As such, we can infer Allstate first set Walton in motion to provide coverage to a prospective insured, controlled her actions and paid her, and she in turn protected Allstate's interests. Since Walton is an insurance agent with a fixed and permanent relation to Allstate, Walton has duties and allegiances to Allstate.

"The extent of an agent's responsibility to a prospective insured is to promptly provide insurance coverage or to inform the party of the rejection of coverage. In the instant case, despite the dispute concerning the amount of insurance coverage, plaintiffs received automobile damage insurance. Thus, plaintiffs were insured for automobile damage under the policy. Therefore, we reject plaintiffs' contention that Walton owed and breached a duty of care to plaintiffs.

"We also find plaintiffs' reliance on Black and Perelman misplaced. This court in Black and Perelman concluded that the individual who sold the insured the insurance policy was the insured's agent and owed the insured a fiduciary duty. Here, unlike in Black and Perelman, we conclude that Walton was Allstate's agent and had a fiduciary relationship with Allstate, not plaintiffs.

"Given this disparity in the facts of this case with Black and Perelman, we do not find Black and Perelman dispositive. Since we decide plaintiffs failed to sufficiently plead a cause of action for which relief can be granted based on respondeat superior, the trial court properly dismissed this count."

Estoppel

"Plaintiffs next contend that a cause of action for estoppel was sufficiently pleaded and the trial court erred in dismissing this count," Gallagher noted. "To prevail in a cause of action for estoppel, a plaintiff must show: (1) he was misled by the acts or statements of the insurer or its agents; (2) reliance by the insured on the representations of the insurer; (3) the reliance was reasonable; and (4) the reliance was to the detriment of the insured.

"In determining whether a claim for estoppel can be established, the reasonableness of the insured's reliance must be examined. A plaintiff bringing a cause of action based on estoppel cannot shut his eyes to obvious facts, or neglect to seek information that is easily accessible, and then charge his ignorance to others.

"To prevail on an estoppel theory, the plaintiff must have had no knowledge or means of knowing the true facts.

"Plaintiffs claim that each element for estoppel was established. First, plaintiffs contend that they were misled by Walton and Allstate's acts and statements because Walton offered to sell them stated value coverage in the amount of $30,000. Second, plaintiffs contend they relied on Walton's representation and paid enhanced premiums for more than a year. Third, plaintiffs contend that the reliance was reasonable because Walton indicated that plaintiffs purchased a stated value policy, Allstate did not request additional information regarding the vehicle's value or condition prior to issuing the policy and the vehicle underwent a $20,000 restoration prior to the purchase of insurance. Fourth and finally, plaintiffs contend that the reliance was detrimental because Allstate offered $12,000, or actual cash value, to settle the claim.

"Plaintiffs also rely on Meier v. Aetna Life & Casualty Standard Fire Insurance Co., 149 Ill.App.3d 932 (1986), to support their position that an insured can bring a cause of action for estoppel against an insurer. The insurance agent in Meier contacted the insured and offered to sell $5,000 of stated value insurance for a vehicle as inducement to change insurance companies.

"In Meier, the insurer offered $2,000 in settlement of the insureds claim after the vehicle was involved in a collision, but the insured rejected the offer, contending that the vehicle was insured for $5,000. The trial court awarded the insured $5,000. This court affirmed the trial court's ruling, reasoning that the insurer was estopped from denying the coverage amount under the stated value policy and the insurer's actions of delaying settlement amounted to vexatious and unreasonable conduct.

"Plaintiffs claim that similar to the insured in Meier, plaintiffs were misled by Walton into believing a stated value policy was procured, which estops Allstate from challenging the $30,000 benefits provided by the policy. Plaintiffs also claim that the trial court failed to comply with the limitations of a motion to dismiss relating to the estoppel count, as well as the respondeat superior count, because the trial court ignored well-pled facts in the second amended complaint and the pleadings and supporting documents should have been interpreted in the light most favorable to plaintiffs.

"We agree with Allstate that the trial court properly dismissed the estoppel count. To address this contention, we must determine whether the facts set forth in plaintiffs' pleadings demonstrate that plaintiffs' reliance on Walton's acts or statements was reasonable. We previously concluded that the policy clearly and unambiguously provided for actual cash value coverage and not stated value coverage.

"Since plaintiffs possessed a copy of the policy, plaintiffs had the ability to learn of and to determine the policy's coverage in the event of a total loss. A party neglecting to seek easily accessible information or ignoring obvious facts cannot prevail on an estoppel theory.

"We agree with the trial court that plaintiffs' failure to read the unambiguous policy and inform Allstate of any discrepancies in the policy and their understanding of coverage precludes plaintiffs from relying on estoppel. Given the information accessible to plaintiffs regarding the policy's coverage, we conclude that plaintiffs' reliance was unreasonable.

"Also, we find Meier distinguishable from the instant case. Unlike in Meier, here, Walton did not contact plaintiffs in an attempt to lure plaintiffs from another insurance company. Also unlike Meier, the insurance policy in the instant case does not contain express language indicating that the policy issued was for stated value insurance; rather, the policy unambiguously provided for actual cash value indemnification. Therefore, plaintiffs' reliance on Meier is misplaced.

"We also disagree with plaintiffs that Walton's lack of further investigation regarding the vehicle's value demonstrates that their reliance was reasonable. Moreover, we agree with Allstate that plaintiffs' participation in the appraisal process but rejection of the appraised value is an attempt to increase insurance coverage, which cannot be accomplished through an estoppel claim.

"Due to plaintiffs' unreasonable reliance, no facts could be pleaded entitling plaintiffs to relief on an estoppel theory, and therefore, the trial court properly dismissed the estoppel count."

Consumer Fraud Act

"Plaintiffs' last contention," Gallagher continued, "regarding the propriety of the trial court's granting summary judgment in favor of Allstate is that section 155 does not preempt plaintiffs' cause of action under the Consumer Fraud [and Deceptive Business Practices] Act. The relevant inquiry regarding a Consumer Fraud Act claim is whether the alleged conduct implicates consumer protection issues.

"Section 155 'provides an extra-contractual remedy for policyholders who have suffered unreasonable and vexatious conduct by insurers with respect to a claim under the policy.' Cramer v. Insurance Exchange Agency, 174 Ill.2d 513, 523- 24 (1996). Section 155 sets forth a remedy for 'insurer misconduct that does not rise to the level of a well-established tort.'

"Plaintiffs claim that Allstate's reliance on Cramer v. Insurance Exchange Agency, 174 Ill.2d 513, 675 N.E.2d 897 (1996), to support its position that section 155 preempts claims based on the Consumer Fraud Act is misplaced.

"Plaintiffs contend that Cramer stands for the proposition that an insured may bring any cause of action, except one based on the tort theory of bad faith, against the insurer.

"Plaintiffs also contend that contrary to Allstate's position, Cramer does not hold or imply that section 155 has a preemptive effect on statutes such as the Consumer Fraud Act.

"Plaintiffs further contend that Allstate charges insureds enhanced premiums for stated value coverage but treats the policy as the lesser of stated value or actual cash value for settlement purposes. Plaintiffs claim that the trial court erred in granting Allstate's motion for summary judgment on the basis that the Consumer Fraud Act claim was preempted by section 155.

"We conclude that section 155 preempts plaintiffs' Consumer Fraud Act claim. We recognize that 'an insurer's conduct may give rise to both a breach of contract action and a separate and independent tort action.' Cramer, 174 Ill.2d at 528. A plaintiff may bring an independent tort action for insurer misconduct if the plaintiff alleges and proves the elements of the separate tort. Allegations of an insurer's bad faith or unreasonable and vexatious conduct do not alone constitute a tort.

"The Supreme Court held in Cramer that 'irrespective of a statutory remedy, the existence of a contractual remedy would have made the tort theory unnecessary.' Voyles v. Sandia Mortgage Corp., 196 Ill.2d 288, 297 (2001), citing Cramer, 174 Ill.2d 513.

"In the instant case, plaintiffs brought a breach of contract claim alleging Allstate refused to tender the amount due under the insurance contract. Based on Cramer, a separate tort claim is not necessary and is inapplicable in the present case because a contractual remedy is available to plaintiffs."

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