Vexatious and Unreasonable Refusal to Tender Uninsured Benefits
In Castellano v. State Farm Mutual Automobile Insurance Co., Jeffrey M. Castellano filed a complaint against State Farm Mutual Automobile Insurance and alleged that State Farm vexatiously and unreasonably delayed payment of underinsured motorist benefits in breach of it duties under an automobile insurance contract. Castellano sought damages for extra-contractual remedies, pursuant to section 155 of the Illinois Insurance Code (215 ILCS 5/155 (West 2004)).
Castellano was seriously injured when a vehicle driven by Roger Sigmon rear-ended his vehicle. At that time, both vehicles were insured by State Farm. Sigmon’s policy provided a bodily injury liability limit of $50,000. This amount was not sufficient to compensate Castellano for his injuries and damages. Castellano filed a claim for underinsured motorist benefits under his own auto insurance contract with State Farm. Pursuant to Castellano’s policy covering underinsured motorist benefits, State Farm would pay for damages for bodily injury that an insured is legally entitled to collect from the owner or the driver of an underinsured motor vehicle. However, two questions must be decided by agreement between the insured and State Farm: (1) is the insured legally entitled to collect damages from the owner or driver of the uninsured or underinsured motor vehicle; (2) if so, in what amount. If there is no agreement, these questions shall be decided by arbitration. Castellano and State Farm agreed that Castellano was entitled to collect damages; however, the parties could not agree on the amount of damages. Castellano notified State Farm that he would pursue his contractual right to arbitrate and requested that State Farm tender $10,000 pending arbitration, since the parties agreed that the the claim was at least worth that amount. State Farm responded via a letter that it was preparing for arbitration and enclosed a check for $5,000. The claim was arbitrated, and Castellano was awarded $25,000. At this point, Castellano filed an action against State Farm. Castellano filed a second amended complaint, which pared to its core the allegations of State Farm’s breach of contract.
The court addressed the question of whether the insured, Castellano, alleged sufficient facts to state a claim for a breach of his insurance contract and for section 155 penalties. Section 155 states: “In any action by or against a company wherein there is in issue the liability of a company on a policy or policies of insurance or the amount of the loss payable thereunder, or for an unreasonable delay in settling a claim, and it appears to the court that such action or delay is vexatious and unreasonable, the court may allow as part of the taxable costs in the action reasonable attorney fees, other costs, plus an amount not to exceed any one of the following amounts…”(215 ILCS 5/155(1) (West 2004). Section 155 does not establish an independent cause of action, but expands a plaintiff’s relief to include attorney fees, costs, and a limited penalty, in addition to a breach of contract action to recover the amount due under the insurance contract. Therefore, plaintiff must adequately allege a cause of action for a breach of an insurance contract; as mere allegations of vexatious conduct are not sufficient, he must include modicum of factual support. The key question in an action brought under section 155 is whether the insurer’s conduct is vexatious and unreasonable. Whether an insurer’s action or delay is vexatious and unreasonable is a factual question, and the decision whether to allow section 155 fees and penalties lies within the discretion of the court. An insurer does not violate section 155 merely because it unsuccessfully litigates a dispute involving the scope of coverage or the magnitude of the loss or it delays settlement because of a bona fide coverage dispute. That said, an insurer’s conduct may be vexatious and unreasonable if the insurer refuses to settle and proceeds to arbitration without presenting a bona fide defense. Therefore, the court determined that Castellano provided a modicum of factual support necessary to allege a cause of action for a breach of the insurance contract and claim relief under section 155. He alleged sufficient facts to support a claim that State Farm, in breach of its contractual duties and its own internal company policy or practice, vexatiously and unreasonably refused to tender the undisputed amount of underinsured benefits pending arbitration, and instead arbitrarily tendered the amount of its first offer. In this first-party insurance claim, the allegations are adequate to allow for discovery on the factual questions regarding the insurer’s attitude, its superior financial position, and its motivation for withholding payment of the undisputed sum of underinsured benefits pending arbitration.
The court held the insured provided a modicum of factual support necessary to allege a cause of action for a breach of the insurance contract and claim relief under section 155.
Castellano v. State Farm Mutual Automobile Insurance Co., 2013 WL 5519596 (Ill.App. 5 Dist.). (This order was filed under Supreme Court Rule 23 and may not be cited as precedent by any party except in the limited circumstances allowed under Rule 23(e)(1)).
