Illinois Court Holds that Potential for Excess Judgment Requires Independent Counsel

In its recent decision in Perma-Pipe v. Liberty Surplus Ins. Corp, 2014 U.S. Dist. LEXIS 54867 (N.D. Ill. April 21, 2014), the United States District Court for the Northern District of Illinois had occasion to consider whether there was a “nontrivial probability” of an excess judgment in an underlying suit so as to require the insurer to provide for independent counsel where the primary carrier notified the insured and its excess carriers early on in the underlying litigation of the potential for an excess judgment.

Perma-Pipe manufactured pipes that were used by the University of California. On October 26, 2010 the University told Perma-Pipe that its pipes suffered a “catastrophic failure” and that it would seek to hold Perma-Pipe liable for the resulting damage. In effect at the time of the occurrence was a commercial general liability policy that Liberty Surplus issued to Perma-Pipe. Perma-Pipe tendered the University’s claim to Liberty, which agreed to defend Perma-Pipe subject to a reservation of rights. Because the reservation created a conflict of interest, Perma-Pipe selected independent counsel to defend the suit.

Early in 2012, Perma-Pipe was named as a defendant in two lawsuits arising out of the pipe failure. One of the lawsuits was filed by the University, and sought more than $35 million. The other suit was filed by a subrogated insurance carrier, and sought more than $5 million dollars. The limits of the Liberty policy issued to Perma-Pipe were $1 million per occurrence and $2 million in the aggregate. Liberty sent a letter to Perma-Pipe stating that it would defend Liberty without reservation. Perma-Pipe responded by explaining that there was a real possibility of a judgment or settlement in excess of the Liberty policy limits that created a conflict of interest entitling it to independent counsel. Liberty failed to reappoint Perma-Pipe’s chosen counsel, causing Perma-Pipe to file suit.

Applying Illinois law, the United States District Court for the Northern District of Illinois held that Liberty breached its duty to defend Perma-Pipe by refusing to pay for counsel of Perma-Pipe’s choosing. Citing R.C. Wegman Constr. Co. v. Admiral Ins Co., 629 F.3d 724, 729 (7th Cir. 2011), the court stated that a conflict arose when there was a “nontrivial probability” of an excess judgment in the underlying suit. Liberty attempted to distinguish Wegman on the ground that Liberty disclosed to Perma-Pipe and Perma-Pipe’s excess carrier the potential for an excess judgment at the start of the underlying litigation. The court disagreed. In short, the Court explained, “though the conflict in Wegman arose later in the underlying ligation than the one at issue here, the basis for the two conflicts is the same.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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