Plaintiffs horse was insured through the defendant insurance agency. She filed a claim for loss of use of the horse, which the insurance company refused to pay on the ground she had not provided timely notice of the various medical problems the horse posed. She filed suit in the United States District Court.
The defendant insurance company defended that her claim under the policy was for $40,000 (half the mortality value of the policy) which was less than the $50,000 minimum jurisdictional amount for a lawsuit in United States District Court. Plaintiff responded to this claim with the contention that the insurance company unreasonably refused to pay the claim and thereby subjected itself to additional statutory damages that raised the total amount to over $50,000.
The insurance company responded that her failure to provide prompt notice
justified its denial of the claim and the District Court agreed. Accordingly, it found
plaintiff had no chance of recovering the $50,000 jurisdictional amount and dismissed the
lawsuit. The court did not say that the plaintiff loses, but only that her failure to
notify the insurance company of her horse's medical problems justified the company in
denying the claim.
Before the court are the parties' cross motions for summary judgment. For the reasons set forth below, we grant defendant's motion for summary judgment based on this court's lack of subject matter jurisdiction.
Plaintiff ("Ms.Peterson") is the owner of a competitive show jumping horse named "Ungermann Turbo" ("Turbo"). Shortly after Ms. Peterson purchased Turbo in 1991, she bought an insurance policy on the horse, and she renewed the policy in 1992 and 1993. Defendant is an underwriter at Lloyd's, London, the insurance company that issued the policy. In 1994, the plaintiff sought to increase the value of the policy to $80,000, and the defendant agreed to the increase after the plaintiff provided medical information about Turbo, including x-rays of the horse's legs.
In the summer of 1994, Turbo was diagnosed with several serious maladies that significantly compromise his use in show jumping. On June 24, 1994, the College of Veterinary Medicine at the University of Illinois wrote that Turbo had been diagnosed with "Bilateral Distal Tarsitis, Bilateral Palmar Third Metacarpal Bone Stress Remodeling, RF Pedal Osteitis, RF Medial Sesamoiditis, Mild RH High Ringbone, Allergic Lung." Allergic Lung Disease is also known as chronic obstructive pulmonary disease and may become very serious and debilitating. As a result of these diagnoses, the plaintiff filed a claim for loss of use in October of 1994. The policy provides that in the event of "loss of use," the insurer will pay 50 percent of the value of the horse or the limit of the policy, whichever is less.
In August of 1995, after the defendant conducted an investigation of the claim, it denied liability under the policy because: (1) Ms. Peterson failed to report that Turbo injured his tendons in 1992; (2) Ms. Peterson never disclosed the injury when she renewed her policy in the fall of 1992; (3) Ms. Peterson did not report Turbo's inability to show in the summer of 1993 because of health problems; (4) Ms. Peterson never disclosed this problem to the defendant when she renewed her policy in the fall of 1993; (5) Ms. Peterson learned of Turbo's serious maladies in June of 1994, but she waited over three months to notify the defendant. The defendant asserts that Ms. Peterson's failures were clear breaches of the insurance contract, which required her to notify the insurer "immediately," by telephone or telegraph, of any injury or illness. Furthermore, because the insurance policy requires that the horse be healthy at the commencement of the policy, the defendant contends that the 1993 insurance policy was never valid to begin with.
Ms. Peterson brought this action to compel the defendant to pay the insurance claim and to recover attorney fees, costs, and other penalties for its vexatious conduct. See 215 Ill.Comp.Stat.Ann. 5/155 (West, 1993). She alleges that she is entitled to the vexatiousness penalties because the defendant engaged in improper claims practices.
The defendant's summary judgment motion asserts, among other things, that this court lacks subject matter jurisdiction because there is less than $50,000 in controversy. Plaintiff asserts that the jurisdictional requirement is met by the $40,000 under the insurance policy plus statutory penalties of up to $25,000.
The applicable jurisdictional amount is $50,000. 28 U.S.C.A. § 1332 (1993).
Plaintiff claims $40,000 under the insurance policy [FN3] and another $25,000 in
statutory penalties. We note that in the plaintiff's complaint she did not specify whether
her claim was for "loss of use" (a $40,000 claim) or "economic
slaughter" (a $60,000 claim). In her subsequent motion for summary judgment, she
stated that the actual damages are "$40,000 or 50% of the $80,000 value." This
is consistent with the uncontested evidence, which shows that Ms. Peterson mailed a claim
on October 19, 1994 for "loss of use." Moreover, in response to the Defendant's
Statement of "Uncontested Facts," she admitted without qualification that she
filed a claim for "loss of use." She also admitted in her deposition that she
has never made a claim for "economic slaughter" but only "loss of
use." [FN4] Pl.'s Dep. at 73-74. Thus, the maximum she could recover under the policy
FN3. The policy provided that the plaintiff would recover 100 percent of the horse's value for the death of the horse, 75 percent of the horse's value for "economic slaughter," and 50 percent of the horse's value for "loss of use."
FN4. However, in Plaintiff's Answer to Defendant's Cross-Motion for Summary, Judgment she claims that the amount in controversy is either $40,000 or $60,000, in addition to statutory penalties. She does not explain the $60,000 figure, but we surmise that her calculations are based on the amount she would recover under the policy for "economic slaughter." This appears to be a sound conclusion in light of Plaintiff's Answer to Defendant's Statement of "Uncontested Facts," in which she states that the amount in controversy is "at most $65,000 (for loss of use) or $85,000 (economic slaughter) which includes punitive damages of $25,000." These figures, submitted July 9, 1997, were the first indication that the plaintiff hopes to recover under the "economic slaughter" provisions of the policy. We assume any recourse to the "economic slaughter" provision is a reaction to defendant's challenge to the amount in controversy, but it comes too late. The $60,000 figure is not the amount in controversy because Ms. Peterson never filed a claim for "economic slaughter." The claim at issue is for "loss of use," or $40,000.
The main issue, then, is whether Ms. Peterson could recover statutory penalties in order to supplement her $40,000 claim and meet the $50,000 amount in controversy requirement.
Punitive damages may be included in a court's calculation of the amount in controversy. Bell v. Preferred Life Soc'y, 320 U.S. 238, 240, 64 S.Ct. 5, 88 L.Ed. 15 (1943); Anthony v. Security Pac. Fin. Serv. Inc., 75 F.3d 311, 315 (7th Cir.1996). However, where punitive damages are used to satisfy the jurisdictional requirement, the court must engage in a two part inquiry. First, the court must determine whether punitive damages are recoverable as a matter of state law. Anthony, 75 F.3d at 315. Second, the court must determine whether "it is clear beyond a legal certainty that the plaintiff would under no circumstances be entitled to recover the jurisdictional amount." Id. If it is clear that the plaintiff would not be entitled to recover the jurisdictional amount, then the court does not have jurisdiction over the case.
The first prong of the test is clearly satisfied: Illinois law permits recovery of
statutory penalties in insurance contract cases where the insurer has engaged in vexatious
or unreasonable conduct. 215 ILCS 5/155. Specifically, the Illinois statute permits
parties to recover attorney's fees, costs, and additional amounts the court may determine
according to the statutory formula. [FN5] Plaintiff claims $25,000 in statutory penalties
because of the defendant's vexatious conduct. Plaintiff's claim fails on the second prong
of the test because "it is clear beyond a legal certainty that the plaintiff would
under no circumstances be entitled to recover" statutory penalties.
FN5. The amount awarded may not exceed any one of the following: "(a) 25% of the amount which the court or jury finds such party is entitled to recover against the company, exclusive of all costs; (b) $25,000; (c) the excess of the amount which the court or jury finds such party is entitled to recover, exclusive of costs, over the amount, if any which the company offered to pay in settlement of the claim prior to the action." 215 ILCS 5/155.
Although the question of what constitutes vexatious and unreasonable conduct is a fact-specific inquiry, the final evaluation of the insurer's conduct is made by the court. Horning Wire Corp. V. Home Indem. Co., 8 F.3d 587, 590 (7th Cir.1993) (affirming denial of penalties for vexatious conduct); O.T. Foods & Liquor v. Hartford Ins. Co., No. 95 C 0845, 1996 WL 131805, at *5 (N.D.Ill. March 21, 1996). In determining whether an insurer is guilty of vexatious conduct, the court must consider the totality of circumstances. Buais v. Safeway Ins. Co., 275 Ill.App.3d 587, 211 Ill.Dec. 869, 656 N.E.2d 61, 64 (Ill .App.Ct.1995). Wrongful denial of coverage is not enough by itself to warrant statutory penalties; rather, the denial of coverage must be unreasonable and vexatious. Matsushita Elec. Corp. of Am. v. Home Indem. Co., 907 F.Supp. 1193, 1200 (N.D.Ill.1995). An honest dispute as to the legal obligations of the parties does not qualify as vexatious conduct. Johnson v. Safeco Ins. Co. of Am., 809 F.Supp. 602, 608 (N.D.Ill.1992), aff'd, 9 F.3d 112 (7th Cir.1993); Cummings Foods, Inc. v. Great Cent. Ins. Co., 108 Ill.App.3d 250, 64 Ill.Dec. 108, 439 N.E.2d 37, 42 (Ill.App.Ct.1982) (finding that the insurer behaved fairly in asserting a policy defense, supported by case law, within the language of the agreement).
Ms. Peterson argues that the defendant's improper claims practices included: (1) knowingly misrepresenting policy provisions, (2) failing to settle or compromise the claim in a fair manner, and (3) failing to promptly investigate and determine the claim. See 215 ILCS 5/154.6. We deal with each of these allegations separately.
Ms. Peterson's allegation that the defendant misrepresented the policy is based on a myopic reading of a single sentence that the defendant wrote in a letter immediately after being notified of her claim. On October 7, 1994, the defendant wrote: "This policy was due for renewal on [October 1, 1994] and technically, as this claim was notified after the expiry of the policy, there is no claim admissible under the terms of the policy." Plaintiff points out that the policy covers illness and injury that occurred while the policy was in effect, and the fact that the policy expired after the illness was diagnosed has no bearing on defendant's liability. She argues that this "misstatement" in the letter is alone sufficient to constitute an improper claims practice warranting statutory penalties.
We are not persuaded. First, taken in context, the statement in the letter appears to reiterate the defendant's concern--which it expressed at least twice in that letter and consistently thereafter--that Ms. Peterson delayed an excessive time in filing her claim. For example, at the beginning of the letter, the defendant expressed concern that Ms. Peterson had known of the horse's illnesses on June 21, 1994, but that she had waited over three months to report the condition to the insurance company. The defendant also stated that Ms. Peterson had had a sufficient amount of time to report the illness, but she had failed to do so. Thus, the defendant's statement cannot fairly be interpreted to mean that plaintiff's claim was invalid simply because the policy had expired before the claim was made.
Second, this single sentence was part of a short statement the defendant made one day after receiving preliminary notice of plaintiff's claim. After investigating her claim, the defendant sent Ms. Peterson a detailed statement setting forth the reasons for denying her claim. The expiration of the policy was not among them, nor has the defendant suggested in this litigation that Ms. Peterson's claim is flawed because it was filed after her policy expired. Ms. Peterson has not alleged that the defendant ever repeated this assertion. Rather, the defendant has consistently maintained that Ms. Peterson's failure to report the illnesses "immediately," and her failure to report other injuries, was a breach of the contract.
Third, plaintiff has presented no evidence that she was prejudiced by the statement in the letter.
Finally, plaintiff has cited no cases to support her position that a single misstatement can constitute an improper claims practice. Cf. Dixon Distrib. Co. v. Hanover Ins. Co., 244 Ill.App.3d 837, 183 Ill.Dec. 919, 612 N.E.2d 846, 855 (Ill.App.Ct.1993) (stating that defendant's repeated and consistent misinterpretation of the policy may have been an improper claims practice). Certainly in the circumstances of this case, there is no basis for holding that a single sentence--taken out of context and uttered in a preliminary communication--can be the basis for imposing statutory penalties for vexatious refusal to pay.
Plaintiff's next argument is that the defendant vexatiously refused to settle the claim
in a fair manner. Defendant argues that it acted reasonably in refusing to settle because
plaintiff withheld material information at the inception of the contract and failed to
make an immediate report the horse's illness and injury. Defendant asserts that this
breached two conditions precedent to coverage under the policy:
1. It is a condition precedent to any liability of the [defendant] that at the commencement of this Insurance each animal hereby insured is in sound health and free from any illness, disease, lameness, injury or physical disability whatsoever.
6. It is a condition precedent to any liability of the [defendant] that ...
b) ... in the event of any illness, disease, lameness, injury, accident or physical disability whatsoever, of or to an insured animal ...
d) ... the Assured shall immediately give notice by telephone or telegram to the person or persons specified for the purpose in the Schedule, who will instruct a Veterinary Surgeon on the [defendant's] behalf if deemed necessary, and any failure by the Assured so to do shall render the Assured's claim null and void and release the [defendant] from all liability in connection therewith....
App. of Ex. for Def.'s Mot. for Summ. J., Ex. 4, p. 18.
We believe there is no genuine dispute as to whether the defendant behaved fairly in asserting the policy defenses. See Cummings, 64 Ill.Dec. 108, 439 N.E.2d at 42. As a matter of Illinois law, the duty to provide notice is a reasonable requirement in an insurance policy. American Country Ins. Co., v. Bruhn, 289 Ill.App.3d 241, 224 Ill.Dec. 805, 682 N.E.2d 366, 370 (Ill.App.Ct.1997) (citing Barrington Consol. High School v. American Ins. Co., 58 Ill.2d 278, 319 N.E.2d 25 (Ill.1974)). An insurance company is justified in denying coverage to an insured who fails to comply with the notice provision contained in the insurance policy. Id. The insured must provide notice within a reasonable time. Id. The insurance company need not allege that it was prejudiced by the insured's failure to notify it within a reasonable time. Id.
Ms. Peterson admits that she knew Turbo was diagnosed with a tendon injury in April of
1992. Pl.'s Dep. at 27. In a letter to defense counsel in January 1995, Ms. Peterson also
stated that it took almost nine months for Turbo to recover from that injury. App. of Ex.
for Def.'s Mot. for Summ. J., Ex. 8. She also knew that Turbo was unfit to show in the
summer of 1993 because he was lethargic and had trouble keeping his breath. Pl.'s Dep. at
37-39. It is uncontested that plaintiff failed to report either of these problems to the
defendant at the time they occurred or at the inception of her 1992 and 1993 renewal
FN7. Counsel for Ms. Peterson appear to suggest that she was not required to report the problems because she furnished veterinary and x-ray reports to the defendant "continually" from 1991 through 1994. Pl.'s Mot. for Summ. J. at 6. However, plaintiff's counsel did not make that allegation in their "Statement of Uncontested Facts," nor have they provided this court with evidence indicating that the defendant received regular medical reports regarding Turbo prior to 1994. They refer to letters indicating receipt of a single veterinary certificate in November of 1993, and two sets of incomplete x-rays in "1993" and December of 1993. Pl.'s Production of Documents, Exs. 7, 13c, 20, 22. Even if she did furnish such reports regularly, Ms. Peterson never reported the injury of April 1992 nor the illness of 1993.
Plaintiff testified at her deposition that at a show in May of 1994 she felt Turbo was going to collapse. Pl.'s Dep. At 41-42. She also admitted that she received a tentative diagnosis of Turbo's potentially serious and debilitating illnesses on June 24, 1994. Id. at 52-54. She admitted in her deposition that she knew she should have notified the defendant of Turbo's maladies in September of 1994, id. at 60, but she did not report the illnesses until October 6, 1994. Id. at 62-63.
While these facts may or may not ultimately discharge the defendant of liability under the contract, they do, as a matter of law, create an "honest dispute" as to its liability. See Johnson, 809 F.Supp. at 608. This evidence is sufficient to preclude characterization of the defendant's conduct as "vexatious and unreasonable." See O.T. Food & Liquor, 1996 WL 131805 at *5 (granting summary judgment for the defendant insurance company on the issue of penalties for vexatiousness).
Plaintiff's final claim is that defendant failed promptly to investigate and determine her claim. This claim is easily disposed of because Ms. Peterson has presented no evidence, nothing but a bare allegation, that the investigation was unreasonably delayed or flawed. She filed the claim on October 19, 1994, and an investigation commenced one month later, on November 18, 1994. See Pl.'s Production of Docs. Ex. 38. Based on her three month delay in notifying the defendant of Turbo's potentially serious maladies, the defendant was entitled to investigate the possibility of other injuries or illnesses predating the June 21, 1994, diagnosis. Certainly when the defendant learned from Ms. Peterson in January of 1995 that Turbo had been injured seriously enough in April 1992 to require nine months of recuperation, it was entitled to continue investigating its liability under the policy.
For the reasons set forth above, we find that plaintiff cannot succeed on her claims for statutory penalties and thus, cannot meet the amount in controversy requirement. We grant summary judgment in favor of the defendant, without prejudice to refiling the claim in state court.
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