Creation Supply, Inc. v. Selective Insurance Company of the Southeast

Filing 320

MEMORANDUM Opinion: The Court grants CSI an award of $2,846,049.34 in fees and expenses based on Selective's Section 155 conduct of unreasonable and vexatious conduct incurred up to and including February 28, 2019. CSI is also given l eave, upon completion of the contract damages trial, to supplement its request for fees and expenses incurred upon entry of final judgment entered against Selective. Upon determination of all final fees, costs, expenses and other judgments, prejudgment interest shall be awarded at the conclusion of the proceedings. It is so ordered. Signed by the Honorable Charles P. Kocoras on 11/12/2019. Mailed notice(vcf, )

Case: 1:14-cv-08856 Document #: 320 Filed: 11/12/19 Page 1 of 11 PageID #:16064

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
CREATION SUPPLY, INC.,
Plaintiff,
v.
SELECTIVE INSURANCE COMPANY
OF THE SOUTHEAST,
Defendant.

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14 C 08856

MEMORANDUM OPINION
CHARLES P. KOCORAS, District Judge:
Selective Insurance Company of the Southeast (“Selective”) denied insurance
coverage to Creation Supply Inc. (“CSI”) when CSI was sued by Too Marker in federal
court in Oregon for trade dress infringement. President of CSI, John Gragg, was also
personally named as a defendant in the action. The Oregon suit and Selective’s formal
denial of coverage on June 22, 2012, spawned a series of lawsuits, appeals, and other
court actions which persist to the present day.
This ruling on fees and costs under 215 ILCS 5/155 will be followed by a trial
for consequential damages and fees, if any, sustained by CSI due to Selective’s breach
of its insurance contract with Selective. A bench trial was previously held by this Court
which resulted in findings of fact and conclusions of law being made in favor of CSI

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based on Section 155 conduct. Document 259 of the record in this case reflects those
results.
In addition to the original complaint filed in Oregon by Too Marker, other actions
relevant to Section 155 include Selective’s Illinois Declaratory Judgment Complaint;
CSI’s Illinois case against Too Marker (brought because Gragg was named as a
defendant in the Oregon action); CSI’s Illinois suit against Alpha for implied warranty
of noninfringement and indemnification; Selective’s appeal of the Illinois Circuit Court
judgment that Selective had a duty to defend; and CSI’s Illinois defensive crossclaims
against Alpha (Alpha being the supplier of the accused products in the Oregon action).
Completion of the appeals processes resulted in return of the matters to the trial
courts for resolution of the remaining ancillary issues. The Illinois Circuit Court
entered final judgment in its action on October 2, 2017. Attempts by this Court to settle
all remaining issues between CSI and Selective have failed, necessitating a ruling at
this time as to taxable costs, reasonable attorney’s fees, and other statutory allowances.
As stated in Neiman v. Economy Preferred Ins. Co., 357 Ill.App.3d 786, 829
N.E.2d 907 (1st Dist. 2005), Section 155’s reach is described as follows:
The statute begins by stating that it applies to those insurance cases where
one of three issues remains undecided: the liability of the insurer, the
amount owed under the policy, or whether a delay in settling a claim has
been unreasonable.
The language of this section is entirely plain to us. It directs that in a cause
of action where there remains “in issue” either the liability of a company
on an insurance policy or the amount of loss to be paid under a policy or

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an unreasonable delay in “settling a claim,” a court may award a monetary
remedy to an insured, as described in subsection 1(a), (b) or (c).
Contrary to Selective’s position, the instant action involved two claims, one for
breach of the insurance contract and one under Section 155. This Court granted CSI’s
motion for summary judgment on its breach-of-contract claim with its damages and fees
remaining to be decided by a jury or the Court.
Selective’s main argument in opposition to the award of any fees is that any
recovery under Section 155 must arise out of an action by a policyholder to enforce the
terms of the policy. Inasmuch as Selective claims the present action does not involve a
determination of Selective’s liability under an insurance policy, no fees to CSI are
authorized per Selective. Selective argues that the “action” referred to in the statute
means the declaratory judgment action before Judge Flynn in the Cook County Circuit
Court and not the instant action.
Selective’s position is both factually and legally wrong. There are a number of
cases in which a Section 155 claim is consolidated with a breach-of-contract claim as
in this case. CSI’s breach-of-contract claim, already determined by this Court to be
meritorious, is an action involving the liability of the insurance company Selective.
Keller v. State Farm Insurance Co., 180 Ill.App.3d 539, 536 N.E. 2d 184 (5 th Dist.
1989). There remains to be decided the amount of the loss payable by virtue of the
breach of contract already found by the Court, a matter squarely encompassed by the
language of Section 155.

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COLLATERAL ESTOPPEL
Selective’s next attack is that the doctrine of collateral estoppel prevents
previously unrecovered fees and expenses related to the underlying Oregon action from
being recovered.

It is Selective’s assertion that the Illinois courts have already

determined the fees and expenses CSI was entitled to recover against Selective.
In order for collateral estoppel to apply, all of the following conditions must be
present: (1)The issue sought to be precluded must be the same as that involved in the
prior action; (2) the issue must have been actually litigated in the prior action; (3) the
determination of the issue was essential to the final judgment in the prior action; and
(4)the party against whom estoppel is invoked was fully represented in the prior action.
No court has had before it the application of Section 155 and possible liability
thereunder in any prior proceeding. The Illinois courts have held that Selective owed
CSI a duty to defend the Oregon action and have determined the amount required to
reimburse CSI for the defense costs incurred by it because of Selective’s refusal to do
so. CSI also asserts that none of the fees and expenses sought in this action have been
awarded by any other courts.
The Section 155 standard of unreasonable and vexatious conduct alleged by CSI
has never been litigated previously before any other court. The presentation of witness
testimony and documentary and other evidence have all been directed to the issue of
whether Selective’s conduct in this never-ending saga acted unreasonably and
vexatiously at any time in its dealings with CSI, its insured. There is simply no basis
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to conclude that some form of estoppel is operative between these parties as to Section
155 liability on the part of Selective.
PROPORTIONALITY DEFENSE
Selective also contends that CSI’s current request for fees is disproportionate to
the $195,000 in defense costs incurred after Selective refused to defend the Oregon
action. Section 155 awards are neither an award of damages nor reimbursement for
necessary costs for an insured to defend itself. As has been held in this court, UNR
Industries, Inc. v. Continental Ins. Co., 607 F.Supp. 855, 866–677 (N.D. Ill. 1984):
. . . the provisions of § 155 are fully explainable in terms of a punitive
purpose, and some of its provisions are only [emphasis in original]
explainable in terms of that purpose. As already noted, §155 applies only
when the insurer’s conduct was vexatious and unreasonable. That
limitation makes perfect sense if the award is intended to punish the
defendant, but little sense if the award is intended to compensate the
plaintiff since the need for compensation is wholly independent of the
vexatiousness of the insurer's conduct. Similarly, the computation of the
statutory award is consistent with a punitive but not a compensatory
purpose. The award is not figured by looking to the losses sustained, but
rather to the amount of reasonable attorneys’ fees incurred. While that
method of computation is consistent with a punitive purpose, [citations
omitted], the amount of attorneys’ fees bears no necessary relation to the
amount of loss.
The objective of Section 155 is to ensure the prevailing party the ability to
recover full costs. Rosenburg v. Lincoln American Life Ins. Co., 883 F.2d. 1328, 1340
(7th Cir. 1989). The term “other costs” in Section 155 is given a broad interpretation
with the goal of placing “the insured in as good a position as he would have been had

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the insurer paid the value of the claim when requested.” Watson v. State Farm Fire &
Casualty Co., 122 Ill.App.3d 559, 461 N.E.2d 57, 61 (3d Dist. 1984).
OTHER LITIGATION
In light of the purpose of awards under Section 155 and in light of the multiplicity
of actions taken by and against CSI as a consequence of Selective’s refusal to honor its
contract of insurance with CSI, it is necessary to determine whether CSI’s actions were
reasonable and necessary under the then-existing circumstances. Section 155 provides
an extra-contractual remedy to policyholders whose refusal to recognize liability and
pay a claim is vexatious and unreasonable. We have determined that Selective’s
conduct met that standard, starting with the issuance of David Hahn’s rejection of
coverage letter of June 22, 2012, to CSI.
Because CSI was put in a position of having to defend itself of charges of
infringement, its posture as a defendant was forced upon it. Those defensive actions
were manifestly reasonable and necessary. Although there can be no double recovery
by CSI, fees and expenses of defense counsel are within the purview of Section 155.
CSI’s Illinois case against Too Marker, the Oregon plaintiff, was undertaken
because Gragg was named personally as a defendant in the Oregon action. Oddly
enough, the sixth ground for denial of the duty to defend asserted by Selective was that
trademark infringement was not within the scope of the duties of an executive officer.
Mr. Hahn apparently believed Gragg was a law violator based simply on an allegation

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made in a federal civil complaint and that it was perfectly proper to indulge that personal
belief in deciding Selective’s contractual obligation as to its duty to defend.
If an insurance company was free to decide for itself whether an executive of an
insured company was guilty of misconduct based merely on an allegation of a courtfiled complaint, there would be precious few cases in which coverage would be offered
under the terms of any insurance policy. The offensive Illinois action against Too
Marker was a reasonable and necessary strategy in order to defend Mr. Gragg.
CSI’s suit against Alpha for implied warranty of noninfringement and
indemnification was also reasonable and necessary, given that CSI was not the
manufacturer of the markers it sold but merely a link in the chain of distribution.
Although successful in the Illinois actions pitting CSI and Selective in their coverage
dispute actions, CSI’s was a classic example of a Pyrrhic victory. The Illinois Appellate
Court’s ultimate affirmance of CSI’s legal triumph would not be enough to reverse the
demise of the insured company Selective was duty bound to defend.
FEES AND EXPENSES RELATED TO DAVID HAHN
Selective has lodged specific objections to fees and expenses incurred by CSI on
matters involving David Hahn. The first challenge relates to CSI’s reporting the Court’s
Section 155 ruling to the Illinois Department of Insurance. CSI argues that, in addition
to being directly related to the findings and conclusions made in the Section 155 trial,
Selective neglected to make its own timely notification to the state agency responsible

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for the oversight of insurance companies. As such, those fees and expenses are
recoverable as part of and ancillary to the instant action.
Selective also complains that attempts to disqualify David Hahn are not
compensable. Motions were filed in this action due to an apparent conflict of interest
on Mr. Hahn’s part. As previously described, in denying CSI’s request for insurance
coverage at the initial stages of the Oregon lawsuit, Mr. Hahn was not only the
authoritative voice in the decision to decline to defend CSI, he was essentially the sole
decisionmaker. The Section 155 trial had, as its evidentiary centerpiece, the bona fides
of the reasons Mr. Hahn asserted in support of the decision not to defend. To act as a
lawyer in defense of his own prior conduct was problematical. Coupled with the lack
of clarity as to what his role would be at trial, it was necessary and appropriate for Mr.
Hahn’s role to be defined. This was done at the outset of the trial. CSI’s conduct in
this regard was eminently reasonable and proper.
REASONABLENESS OF THE FEES OF BISHOP DIEHL AND LEE, LTD.
Selective asserts that CSI’s fee petition “requests payment of every conceivable
fee and expense allegedly incurred in 16 different categories addressing a surprisingly
expansive range of matters.” It then argues that, at best, “the broadest possible scope
of recoverable fees would be those incurred in 3 of the 16 matters.”
Against that broadside challenge, CSI counters with the following:
The Court should view CSI’s aggregate cost to see if they were
reasonable in view of the stakes and Selective’s litigation strategy. CSI’s
total fees of $2.8 million for seven years of contentious litigation on
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multiple fronts, including Selective’s three appeals, all spawned from
Selective’s vexatious and unreasonable refusal to defend CSI. In this
action and all the actions, Selective’s strategy was to make CSI litigate for
everything it should have been entitled to. Selective has lost at every turn.
If Selective had defended as it should have, none of these actions would
have been necessary. Selective’s griping about CSI’s fees should be
ignored.
Any fair assessment of the conduct and positions taken by Selective was to fight
CSI at virtually every turn.

Its resistance would have been reasonable and

understandable if the decision to decline coverage had been based on meritorious
reasons relevant to policy language when compared to an honest reading of the Oregon
lawsuit claiming product infringement. The conclusion is inescapable that Mr. Hahn
thought that Mr. Gragg and CSI were law violators after he, in violation of the four
corners rule, did his own personal investigation and found them both guilty. Selective
fought CSI tooth and nail ever since, and the only time it performed under the terms of
the insurance contract is when a judge ordered them to do so.
Based on Taco Bell Corp. v. Continental Cas. Co., 388 F.3d 1069 (7th Cir. 2004),
a painstaking line-by-line analysis of CSI’s invoices is not necessary.

That is

particularly apt in this case because of the heavy burden on CSI to prove Selective’s
conduct was vexatious and unreasonable. Due to the uncertainty of recovery, whether
by court decree or infusion of resources to CSI, there was every incentive on the part of
CSI to minimize fees and expenses as opposed to acting like a spendthrift.
In addition to other challenges, Selective offers the report and opinions of Rick
Hammond as to the alleged unreasonableness of CSI’s fees and expenses.
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Mr.

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Hammond testified in the Section 155 case in chief and is, apparently, being proffered
as an expert in legal fees and related matters.
With due respect to Mr. Hammond’s professional background, there is no basis
upon which to conclude that he is an expert on fees and expenses as to insurance cases
generally and Section 155 cases particularly. The Court has made no such finding and
expressly declines to do so. Nor is there any basis to conclude any report or study he
sponsors is the product of reliable principles and methods or that he reliably applied the
principles and methods to the facts of the case.
In the Section 155 liability phase of the case, during which Mr. Hammond was
proffered as an expert witness, the overarching issue was whether the June 22, 2012
letter authored by Mr. Hahn reflecting declination of Selective’s duty to defend, along
with reasons for the declination, were well founded in fact and law, reflective of
industry standards, and otherwise meritorious. Although declared to be an expert in
coverage issues, instead of making his own analysis of the letter in light of the described
standards, Mr. Hammond offered no testimony as to the letter’s bona fides. He simply
adopted Selective’s position that the letter was true, accurate and correct, and went on
to tutor the Court about the general custom and practice of insurance companies filing
declaratory judgment actions as an offensive tactic. The tutorial was unhelpful.

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CONCLUSION
The Court grants CSI an award of $2,846,049.34 in fees and expenses based on
Selective’s Section 155 conduct of unreasonable and vexatious conduct incurred up to
and including February 28, 2019. CSI is also given leave, upon completion of the
contract damages trial, to supplement its request for fees and expenses incurred upon
entry of final judgment entered against Selective. Upon determination of all final fees,
costs, expenses and other judgments, prejudgment interest shall be awarded at the
conclusion of the proceedings. It is so ordered.

Dated: 11/12/2019

________________________________
Charles P. Kocoras
United States District Court Judge

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