Punitive Damages Demand Alone Likely Insufficient to Trigger Independent Counsel

Illinois courts have long made clear that when a conflict of interest exists between an insured and its insurer, the insured is entitled to independent counsel of the insured’s own choosing and at the insurer’s reasonable expense. See Maryland Cas. Co. v. Peppers, 64 Ill.2d 187, 193 (1976). What is less clear, however, is when exactly a conflict of this nature arises.

We know that a conflict giving rise to independent counsel does not exist simply because the insurer provides a defense under reservation of rights. We also know that certain types of cases, such as those involving negligent versus intentional conduct, almost always give rise to independent counsel under a general liability policy. Other situations are a bit more complicated.

Take, for instance, cases seeking punitive damages. At least one case has held that a claim for punitive damages created a conflict of interest between the insured and the insurer giving rise to independent counsel. See Nandorf, Inc. v. CNA Ins. Companies, 134 Ill.App.3d 134, 136 (1985). However, a recent Rule 23 Order[1] from the Illinois Court of Appeals, First District in Bean Products, Inc. v. Scottsdale Insurance Co., 2018 IL App (1st) 170421-U, suggests that the holding in Nandorf may be limited to the unique circumstances of that particular case.

Bean Products concerned a dispute between an insured and its liability insurer over whether the insured was entitled to independent counsel in a suit against it seeking punitive damages. The insurer agreed to provide the insured with a defense, reserving its rights only as to coverage for punitive or exemplary damages (and generally to the extent other defenses may arise). Though the insurer retained defense counsel to represent the insured against the suit, the insured took the position it was entitled to independent counsel and kept its own counsel involved in the defense. After the underlying suit was resolved, with the insurer paying the entire settlement amount to the claimant, the insured demanded that the insurer reimburse the costs incurred by the insured’s own counsel in defending the suit and reaching a settlement.

The First District agreed with the insurer that a punitive damages request alone does not create a conflict giving rise to independent counsel, distinguishing Nandorf. Nandorf involved a unique set of facts, with the claimant seeking $5,000 in compensatory damages and $100,000 in punitive damages in a wrongful imprisonment case. With such a significant portion of the damages uncovered, the Nandorf Court found the insurer’s “interests would have been just as well served by an award of minimal compensatory damages and substantial punitive damages.” Bean Products, 2018 IL App (1st) 170421-U at ¶ 138 (citing Nandorf, 134 Ill.App.3d at 138). The First District declined to extend this holding to all cases involving punitive damages.

Bean Products suggests that it was the large disparity between the compensatory and punitive damages requested – rather than the mere punitive damages request – that created the conflict of interest between the insured and the insurer. However, such a conflict does not exist simply because punitive damages have been demanded. To hold otherwise “would eviscerate an insurer’s right to control the defense of its insured” given the frequency of punitive damage demands. Id. at ¶ 40. Thus, the First District declined to allow independent counsel in all cases seeking punitive damages.

Though an unpublished Rule 23 Order, Bean Products provides some guidance as to the fairly limited scope of the Illinois court’s holding in Nandorf and suggests that a mere punitive damage request alone does not entitle the insured to independent counsel. It also serves as a helpful reminder that each particular case must be evaluated independently to determine whether independent counsel is warranted.

[1] Rule 23 provides that an order entered pursuant to this Rule “is not precedential and may not be cited by any party” except for certain limited purposes as provided in the Rule itself. See Rule 23(e)(1).

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Kerri Forsythe

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