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Illinois Appellate Court Finds Insured’s Consumer Fraud Act Claim Not Preempted by the Illinois Insurance Code

February 22, 2013

In Burress-Taylor v. American Security Insurance Company, 2012 IL App (1st) 110554 (Cook Co. 5th Div.) (October 26, 2012), an Illinois appellate court recently reversed the dismissal of an insured’s complaint against her insurance company for alleged violations of the Illinois Consumer Fraud and Deceptive Business Practices Act (“Consumer Fraud Act”) (815 ILCS 505/1 et seq.).

The plaintiff alleged that in August of 2006 her home was damaged by a fire.  The plaintiff had two insurance policies, both of which covered fire losses, and submitted claims to both.  The first insurance company Hanover Fire Casualty Insurance Co. (“Hanover”) estimated the property damage to be approximately $128,000.  The claims adjuster informed plaintiff that Hanover’s ratio of coverage for the loss was 44.45% and issued plaintiff a check for approximately $57,000.

In a letter dated November 30, 2006, Hanover denied plaintiff’s request to disburse more funds because “the shared liability” of Hanover and defendant was in dispute. In the letter, Hanover said that it would “inform [plaintiff] immediately following the resolution of that issue between the insurance companies.”  On March 28, 2007, the second insurer American Security Insurance Co. (“ASI”) also issued plaintiff a letter stating that it would not respond to the claim until all other insurance has been paid.

The plaintiff filed a five-count class action complaint against both ASI and Hanover (and other defendants who were subsequently dismissed) alleging breach of contract, deceptive conduct in violation of the Consumer Fraud Act, and a declaratory judgment. ASI moved to dismiss the Consumer Fraud Act claim on the grounds that it was preempted by section 155 of the Illinois Insurance Code (“Insurance Code”) (215 ILCS 5/155). Section 155 provides policyholders with a means of seeking recovery of not only compensatory damages but attorney fees where an insurance company’s refusal to pay a claim is “vexatious and unreasonable.” The trial court granted ASI’s motion and dismissed plaintiff’s complaint.

On appeal, the court examined the purpose of section 155 which was meant to serve as an “extracontractual remedy” to policyholders whose insurers unreasonably refuse to pay a claim. Indeed, section 155 was intended to make suits by policyholders more economically feasible and to punish insurers for vexatious and unreasonable conduct that does not rise to the level of tort.  The court held that because well-established torts require proof of different elements and address insurer misconduct that is not merely vexatious and unreasonable, section 155 was not intended to insulate insurers from such tort actions.

The court recognized, however, that mere allegations of bad faith or unreasonable and vexatious conduct, without more, do not constitute a separate and independent tort and such allegations are preempted by section 155.  When examining the allegations in plaintiff’s complaint, the court held that plaintiff properly stated a consumer fraud claim that was separate and independent of her breach of contract claim and therefore was not preempted by section 155 of the Insurance Code.  The court held that although plaintiff’s consumer fraud claim incorporated by reference and realleged the factual basis underlying all of her claims, including breach of contract, it was not based on ASI’s breach of the contractual promise contained in the insurance policy and therefore could proceed as an independent tort.

This case demonstrates that insurers should always move to dismiss Illinois Consumer Fraud Act claims when they contain only allegations of bad faith or unreasonable and vexatious conduct as such claims will be preempted by the Insurance Code, while policyholders need remember that allegations of conduct separate and independent from that giving rise to contractual liability are necessary to proceed under the Consumer Fraud Act.  The full Burress-Taylor opinion is available here.