DePasquale Steel Erectors, Inc. v. Gemini Insurance Company

Filing 24

MEMORANDUM Opinion and Order Signed by the Honorable Milton I. Shadur on 4/11/2017.(gcy, )

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

DePASQUALE STEEL ERECTORS INC.,
an Illinois Corporation,
Plaintiff,
v.
GEMINI INSURANCE COMPANY,
a Delaware Corporation,
Defendant.

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Case No. 16 C 10892

MEMORANDUM OPINION AND ORDER
DePasquale Steel Erectors Inc. ("DePasquale") filed a lawsuit against its insurer, Gemini
Insurance Company ("Gemini"), alleging breach of contract and bad faith under 215 ILCS 5/155
in a matter related to an underlying lawsuit filed against DePasquale as third party defendant.
DePasquale asserts that a conflict of interest exists between itself and Gemini so that Gemini
may not use its own counsel to defend the lawsuit and must instead appoint independent counsel.
Although the parties have filed cross-motions for summary judgment, this opinion explains that
both parties' failure to provide sufficient input on all genuine issues of material fact requires that
both motions be denied.
Factual Background
DePasquale holds a Commercial General Liability policy from Gemini with a $1 million
per occurrence limit (D. St. ¶¶ 4, 5). According to the policy Gemini has a "right and duty to
defend the insured against any suit" (D. St. ¶ 6).

On or about June 14, 2016 Two Brothers Property LLC and Go To Logistics, Inc. filed a
complaint against Triumph Development Corporation and Triumph Construction Services
(collectively "Triumph") charging that negligent construction resulted in the sudden and violent
collapse of the roof of their property and seeking damages in excess of $1.7 million (G. St. ¶¶ 8,
9, 10). Triumph then filed a third party complaint against nine subcontractors, including
DePasquale, seeking contribution for their pro rata shares of liability as joint tortfeasors (G. St.
¶¶ 12, 13). DePasquale in turn tendered the original and third party complaints to Gemini, noting
that the liability was at least potentially covered by its insurance policy and thus Gemini owed a
duty to defend DePasquale in the lawsuit (D. St. ¶ 9).
Gemini then notified DePasquale by email that it would defend the lawsuit without
reservation of right (D. St. ¶¶ 19, 20). DePasquale then sent a letter to Gemini explaining that a
potential conflict of interest existed because the jury demand exceeded Gemini's policy limit, so
that Gemini was required to pay for independent counsel to defend the lawsuit (D. St. ¶ 21).
DePasquale's letter cited Perma-Pipe, Inc. v. Liberty Surplus Ins. Corp., 38 F.Supp.3d 890 (N.D.
Ill. 2014) for that proposition (D. St. ¶ 22). On November 4 Gemini sent a letter to DePasquale
advising it to put its excess insurance carrier on notice because there could be a verdict in excess
of its policy limits (G. St. ¶ 17). On November 7 Gemini sent a letter to DePasquale stating that
it disagreed with that position and denying Pasquale's request to retain independent counsel at
Gemini's expense (D. St. ¶ 23).

Legal Standard
Every Rule 56 movant bears the burden of establishing the absence of any genuine issue
of material fact (Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986)). For that purpose courts
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consider evidentiary records in the light most favorable to nonmovants and draw all reasonable
inferences in their favor (Lesch v. Crown Cork & Seal Co., 282 F.3d 467, 471 (7th Cir. 2002)).
Courts "may not make credibility determinations, weigh the evidence, or decide which
inferences to draw from the facts" in resolving motions for summary judgment (Payne v. Pauley,
337 F.3d 767, 770 (7th Cir. 2003)). But a nonmovant must produce more than "a mere scintilla
of evidence" to support the position that a genuine issue of material fact exists (Wheeler v.
Lawson, 539 F.3d 629, 634 (7th Cir. 2008)) and "must come forward with specific facts
demonstrating that there is a genuine issue for trial" (id.). Ultimately summary judgment is
warranted only if a reasonable jury could not return a verdict for the nonmovant (Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)).
There is a potential added complexity where, as here, cross-motions for summary
judgment are presented. Because the court must then adopt a dual perspective that this Court has
often referred to as Janus-like, it must credit the nonmovant's version of any disputed facts as to
each motion, and that can on occasion lead to the denial of both motions. Regrettably that
unfortunate consequence has eventuated here.
Material Factual Issues
Under Illinois law "an insurer has a broad duty to defend its insured in any action where
the allegations in the complaint are even potentially within the scope of the policy's coverage"
(Nat'l Cas. Co. v. Forge Indus. Staffing Inc., 567 F.3d 871, 874 (7th Cir. 2009)). And with its
duty to defend comes its right to direct its defense, which includes choosing its lawyer (id.). To
be sure, that lawyer owes ethical obligations to both the insurer and the insured, but in reality an
insurer-appointed lawyer may be more closely aligned with the insurer's interests (id.). Thus if a

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conflict of interest exists between the insurer and the insured, the insurer may be required to
appoint and pay for independent counsel (id.).
But in that respect Littlefield v. McGuffey, 979 F.2d 101, 105 (7th Cir. 1992) has
cautioned that "[n]ot just any conflict will do." Instead Illinois courts have found that a conflict
necessitating independent counsel exists "when the insurer's and the insured's interests in the
conduct of the tort action are in serious conflict" and the insurer and the insured are "complete
adversaries on a crucial issue which would necessarily be decided either one way or the other if
liability was imposed" (id. at 106).
But Littlefield was also informed by the less demanding standard in Illinois caselaw -specifically Nandorf, Inc. v CNA Ins. Cos., 134 Ill. App. 3d 134, 479 N.E.2d 988 (1st Dist.
1985) -- that recognized a broader category of conflicts of interest, noting that one could exist
when "the insurer has 'an interest in providing a less than vigorous defense'" (Littlefield, 979
F.2d at 106, quoting Nandorf, 134 Ill. App. 3d at 139, 479 N.E.2d at 992). In that light
Littlefield, id. concluded that "[u]nder Nandorf, then, a conflict of interest may exist when the
insurer lacks incentive to defend its insured on a portion of the claims that appear not to be
covered by the insurance contract."
Of course the operative word in Littlefield is "may;" and here the parties pose the
question whether the $700,000 disparity between DePasquale's $1 million policy limit with
Gemini and the $1.7 million total sought from all nine subcontractors as joint and several
tortfeasors creates the degree of conflict that requires independent counsel. Our Court of
Appeals has answered that question differently in different circumstances.

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For instance, Nat'l Cas. held that independent counsel was not required in a case where
the plaintiff sought punitive damages that would not be covered by the defendant's insurance
policy. In doing so the court reasoned that under the specific fact pattern "both punitive and
compensatory damages would be tied to the same underlying conduct" (567 F.3d at 876), so that
the likelihood that the insurer-appointed counsel would elicit facts that could negate the insurer's
obligation to pay for the insured's liability was "quite minimal given that this information is
highly likely to be discovered anyway" (id. at 877-78). In other words, because the theories of
liability underlying compensatory and punitive damages were not mutually exclusive, Nat'l Cas.,
id. at 878 concluded that an insurer-appointed lawyer would fairly represent the insured's
interests as well.
But in contrast, R.C. Wegman Constr. Co. v. Admiral Ins. Co., 629 F.3d 724, 728 (7th
Cir. 2011) instructs that when it comes to deciding whether to settle or go to trial, a likelihood
that the insured will incur liability in excess of its insurance policy limit throws the interests of
the insurer and the insured "out of alignment." R.C. Wegman, id. employed hypothetical
numbers to illustrate:
Suppose [the insurer] thought that if [the] case went to trial there was a 90 percent
chance of a judgment no greater than $500,000 and a 10 percent chance of a
judgment of $2 million (to simplify, we ignore other possibilities). Then the
maximum expected cost to [the insurer] of trial would have been $550,000
(.90 x $500,000 + .10 x $1,000,000, the policy limit), and so (ignoring litigation
expenses) [the insurer] would not want to settle for any higher figure. But [the
insured] would be facing an expected cost of $100,000 (.10 x ($2,000,000 1,000,000)), and no benefit, from a trial (id.).
In a case such as that, it can be said that the lawyer for the insurance company has an
incentive to be "gambling with the insured's money" -- a clear breach of fiduciary duty

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under Illinois law (id. at 729). Such a scenario requires the insurer to foot the bill for
independent counsel.
But in its brief opinion and order denying rehearing, R.C. Wegman, 634 F.3d 371 (7th
Cir. 2011) explained that the possibility of a verdict in excess of the insureds policy limit did not
alone drive its decision. Instead its holding was based on a totality of the circumstances,
weighing these factors (id. at 372):
1) the nature and severity of the plaintiff's injury, (2) the settlement demand in
excess of policy limits, (3) the fact that the case had been slated for trial (and in
fact tried), (4) the plaintiff's securing at trial an award double the policy limit,
(5) [the insurer's] admission that its primary litigating strategy was to downplay
Wegman's responsibility rather than to deny liability, and (6) [the insurer's] failure
to warn [the insured] that it had adopted a strategy that placed [the insured] in
jeopardy of an excess judgment.
This Court's role in diversity cases is to apply our Court of Appeals' precedents in
construing state law (Reiser v. Residential Funding Corp., 380 F.3d 1027, 1029 (7th Cir. 2004)).
Here the jury demand against DePasquale and eight other subcontractors exceeds the policy limit
by $700,000, and that requires this Court to determine whether that poses a conflict of interest
between DePasquale and Gemini. And as shown by the cases discussed in this opinion, that fact
alone does not automatically create a disqualifying conflict of interest between DePasquale and
Gemini.
In the underlying lawsuit Triumph makes different claims against the nine subcontractors
according to their respective roles in the planning, development and construction of the
warehouse (G. Mem. Ex. B). Under Illinois law any defendant whose fault is determined to be
more than 25 percent of the total fault is jointly and severally liable for the total damages (735
ILCS 5/2-1117). And the input -- or more precisely, the lack of input -- from the parties leaves

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this Court unable to predict whether DePasquale's share of the blame will clear that threshold, so
that there is no basis to conclude as a matter of law whether or not a conflict of interest exists
between the parties such as to require independent counsel.
In an examination of the raw probabilities (1) that DePasquale out of the nine
subcontractors would have to shoulder more than a quarter of the blame and (2) whether the
availability or unavailability of resources of other subcontractors held liable would cause
Triumph to look to Gemini (and hence to DePasquale) for more than $1 million, DePasquale's
odds of finding itself on the hook financially because of the $1 million ceiling on Gemini's
exposure would appear slim. But litigation is not a simple game of roulette. Here the parties'
counsel appear to have forgotten that the standard in summary judgment cases is one of certainty
and not just probability, and they have not presented this Court with the evidentiary input to
provide certainty on either side of the "v." sign.
Moreover, even apart from what has been said here, Gemini has offered no reason why
the excess demand does not create a conflict of interest, apart from pointing to decisions that
have held otherwise when examining fact patterns wholly distinguishable from this case. Nor
has Gemini offered any explanation as to how its own interests would be disserved by being
represented by a well-qualified counsel who would be chosen by DePasquale (which has every
incentive to select first-class representation) and who would also owe fiduciary responsibility to
Gemini.
Conclusion
As it stands, then, neither party has provided this Court with the facts needed to enable
this Court to find summary judgment in its favor as a matter of law. Both parties' motions for

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summary judgment are therefore denied, and a status hearing is set for 9 a.m. April 20, 2017 to
discuss further proceedings in this action.

__________________________________________
Milton I. Shadur
Senior United States District Judge
Date: April 11, 2017

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