CBA Record January 2018

and non-covered counts, the insured would prefer that the loss falls on the covered counts but the insurer prefers that it falls on the non-covered counts. Take the example of a garden variety auto accident where the insured has a large amount of insurance and the insured’s conduct in driving his car was terrible: intoxication, deliberately running a stop sign, hitting a pedestrian in the crosswalk, etc. In count I plaintiff sues in negligence for compensatory damages and in count II sues in gross negligence for punitive damages. Typically, there will be insurance coverage under defendant’s auto liability insurance policy on count I but not on count II. As there is at least one covered count, the insurer will pay its attorney to defend the insured on both counts. But, in our example, the insurer would typically send a reservation of rights letter to its insured stating that it will not pay any judgment on count II, i.e. it will not indemnify on count II. Because of the defendant’s outrageousness, the trier of fact is highly likely to pump up the amount of damages awarded. That could happen by either increasing the compensatory award on count I or the punitive award on count II. While nobody on the defense side wants plaintiff’s damages to be pumped up, if that does occur the insurer will want the pumping up of the damages to occur exclusively on count II, because on count II the insurer pays nothing and the insured pays everything. On the other hand, the insured will want the pumping up of the damages to occur exclusively on count I, because on count I the insured pays noth- ing and the insurer pays everything (up to the policy limit). Obviously, there is a big conflict between what the insurer wants and what the insured wants. Caught in the middle between the insured and the insurer is the defense attorney hired by the insurer. Depending on how he or she handles the defense, the defense attorney can encourage the trier of fact that if it finds for the plaintiff and is going to pump up the damages, to either pump up the damages on count I or on count II. The defense attorney’s client in this case is the defendant, but the insurer is also his client. Nandorf, Inc. v. CNA Insur- ance Companies, 134 Ill.App.3d 134, 137

DETERMINING IF THERE IS A CONFLICT The Peppers doctrine is extremely pro-insured and depends entirely on whether there is a conflict of interest between the insured and insurer. If the doctrine is invoked and the insurer objects, the court must determine whether there is in fact such a conflict. To do this, the court compares the insurance policy and the complaint. Illinois Masonic Medical Center v. Turegum Insurance Co., 168 Ill.App.3d 158, 163 (1st Dist. 1988). Illinois and Seventh Circuit cases hold that there can be a conflict of interest between the insured and the insurer (triggering the Peppers doctrine) in the following scenarios: • “The interests of the insurer would be furthered by providing a less than vigorous defense to the al- legations against the insured.” Central Mutual, 2014 IL App (1st) 123339, ¶ 45. • “The insurer’s interest would be equally protected by a finding that would not be in the interest of the insured.” American Family Mutual Insurance Co. v. W.H. McNaughton Builders, Inc., 363 Ill.App.3d 505, 511 (2d Dist. 2006). • “The insurer retained counsel will have the opportunity to shift facts in away that takes the case outside the scope of policy coverage.” American Family, id. • “Factual issues will be resolved in the…suit that would allow insurer retained counsel to lay the groundwork for a later denial of coverage.” American Family, id. • “The underlying complaint contains twomutually exclusive theories of liability, one of which the policy covers and one of which the policy excludes.” National Casualty Co. v. Forge Industrial Staffing, Inc., 567 F.3d 871, 875 (7th Cir. 2009), citing Illinois law. • The complaint alleges both arson and negligence. Home Insurance Co. v. Lorelei Restaurant Co., 83 Ill. App.3d 1083, 1087 (1st Dist. 1980). • The complaint alleges the defendant is both an agent and an independent contractor. Aetna Casualty & Surety Co. v. Dichtel, 68 Ill.App.3d 807, 820 (2d Dist. 1979). • The complaint alleges the defendant is guilty of both intentional conduct and negligent conduct. Peppers. • The complaint seeks both punitive damages and compensatory damages. N andorf, id; Mobil Oil Corp. v. Maryland Casualty Co., 288 Ill.App.3d 743, 756 (1st Dist. 1997); Illinois Municipal League Risk Manage- ment Ass’n v. Siebert, 223 Ill.App.3d 864, 875-76 (4th Dist. 1992); Ivy v. Illinois State Police, 263 Ill.App.3d 12, 20 (1st Dist. 1994). These cases were distinguished, based on specific policy language, in Village of Lombard v. IRMA, 288 Ill.App.3d 1003, 1011-12 (2d Dist.1997). • Some of the wrongful conduct alleged in the complaint occurred during the policy term and some occurred outside the policy term. Illinois Masonic, 168 Ill.App.3d at 167-68. • The complaint alleges defendant was both a permissive user and a non-permissive user. M urphy v. Urso, 88 Ill.2d 444, 453-54 (1982).

• The complaint alleges defendant was both an employee and a non-employee. Murphy, id.

• There is a nontrivial probability of an excess judgment against the insured. R.C. Wegman Construction Co. v. Admiral Insurance Co., 629 F.3d 724, 730 (7th Cir. 2011), citing Illinois law; P erma-Pipe, Inc. v. Liberty Surplus Insurance Corp., 38 F.Supp.3d 890, 895 (N.D. Ill. 2014) ( ad dannum of $40 million; coverage of $1 million; conflict found to exist), citing Wegman.

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