Illinois Court of Appeals Rules Insurer Did Not Act in Bad Faith in Denying Coverage Where Claim Was Made Before Policy Period

The Illinois Court of Appeals, applying Illinois law, affirmed a trial court’s ruling that an insurer did not act in bad faith by denying coverage where there was a “bona fide” coverage dispute concerning an underlying lawsuit against the insured.  Nine Grp. II, LLC v. Liberty Int’l Underwriters, Inc., 2020 Ill. App. WL 190320 (Ill. Ct. App. Jun. 18, 2020).  The court held that the trial court had correctly refused to award certain costs to the insured under an Illinois statute applicable where an insurers’ conduct is “vexatious and unreasonable.”

The insured had sought coverage from its insurer for a lawsuit stemming from a business-deal gone awry.  After the insurer denied coverage, the insured filed a bad faith lawsuit against the insurer, alleging that the insurer had failed to properly investigate the insured’s claim; delayed in considering the insured’s request for coverage; refused to promptly respond to inquiries from the insured; and denied coverage without a reasonable basis for doing so.  The insured filed the lawsuit under an Illinois statute which “provides an extracontractual remedy to an insured who encounters unnecessary difficulties when an insurer withholds policy benefits,” including taxable costs, attorneys’ fees, and other costs, if the insurer’s conduct was “vexatious and unreasonable.”  The trial court rejected the insured’s arguments and granted summary judgment in favor of the insurer.

The Illinois Court of Appeals affirmed, concluding that a “bona fide” coverage dispute existed because the evidence created a reasonable, genuine basis for a dispute.  The court noted that the evidence clearly showed that the underlying claim had come to fruition before the start of the policy period and that it was related to an earlier claim that had also arisen before the policy period.  Second, the court rejected the insured’s argument that the insurer had failed to adequately investigate the claim and to communicate with the insured.  The court noted that the claims handler had reviewed all “salient documentation” and made a sincere effort to understand the nuances of the claim in making a coverage determination, and that she had communicated appropriately with the insured’s attorney.  The court also rejected the insured’s argument that the insurer had taken too long (approximately 2 months) to make a coverage determination because the claim was quite complex and the insurer did not breach any internal company policies regarding the timeline for handling claims.

Because the court determined that the insurer had not acted vexatious and unreasonably, and because a bona fide coverage dispute existed, the court concluded that the insurer had not acted in bad faith and therefore the insured could not recover the requested amounts under the statute.