Shannon Hyland v. Liberty Mutual Fire Insurance Company

Monteil Hyland was a passenger

in a car owned by Kimberly Perkins and driven by

Miquasha Smith—who, at age 16, was not lawfully behind

the wheel when she smashed the car at 12:46 a.m. one Saturday

into two parked vehicles, seriously injuring Hyland.

Smith has been convicted of aggravated reckless driving.

Neither Smith nor her parents had auto insurance. But Perkins

had a policy of insurance with Liberty Mutual. It cov2

No. 17-2712

ered her family, including her daughter Michiah Risby, plus

anyone else driving the car with the family’s permission.

Smith told Liberty Mutual that Risby gave her the car’s keys

during a party; Risby denied doing that and said that she

had given the keys to “Rob,” who was never identified.

The police reported that Smith had told many incompatible

stories about the events. Liberty Mutual believed its insured,

Risby, and when Shannon Hyland (Monteil’s mother,

acting as his next friend) sued Smith it told Shannon’s lawyer

that it would not provide a defense or indemnity. (From

now on, all references to “Hyland” are to Shannon Hyland,

the plaintiff in both the state and federal suits.) Eventually

Smith defaulted, and a state court entered a judgment for

about $4.6 million. Smith assigned to Hyland whatever claim

she had against Liberty Mutual. In this suit under the diversity

jurisdiction, the district court concluded that Liberty

Mutual’s failure either to defend Smith or to seek a declaratory

judgment of non-coverage violated Illinois law, making

it liable for the entire tort judgment, even though the policy

provided only $25,000 per person in coverage. 2017 U.S.

Dist. LEXIS 124374 (C.D. Ill. Aug. 7, 2017). Liberty Mutual

now concedes that it should have defended Smith while reserving

a right to decline indemnity, but it contends that its

liability cannot exceed the policy’s cap.

Appellate jurisdiction is the first problem we must address.

The district court entered this judgment:

IT IS ORDERED AND ADJUDGED that the Plaintiff, Shannon

Hyland’s, Motion for Summary Judgment [19] is GRANTED in

full. The Defendant, Liberty Mutual Fire Insurance Co.’s, Motion

for Partial Summary Judgment on Damages [20] is DENIED.

Judgment is entered in favor of the Plaintiff and against the Defendant.

Case closed.

No. 17-2712 3

A judgment providing that “[j]udgment is entered” is circular.

Judgments under Fed. R. Civ. P. 58 must provide the relief

to which the prevailing party is entitled. See, e.g., Cooke

v. Jackson National Life Insurance Co., 882 F.3d 630 (7th Cir.

2018) (collecting authority). This document does not do so.

Judgments must not recite the pleadings and other papers

that led to the decision. See Fed. R. Civ. P. 54(a). So this

judgment omits what must be included and includes what

must be omitted.

We dismissed the appeal in Cooke, where a similar document

had been entered, because the district judge had yet to

decide how much the defendant must pay. In this case the

judge’s opinion contains the principal amount

($4,594,933.85) plus a formula (9% per annum) for determining

interest. The judge called this post-judgment interest,

2017 U.S. Dist. LEXIS 124374 at *35, by which he apparently

meant post the state judgment of July 28, 2014. The process of

adding interest should be sufficiently mechanical that the

parties can agree on what Liberty Mutual owes under the

district court’s decision.

The judge’s opinion and the “Case closed” line in the

judgment show that the district court is done with this litigation.

This makes the decision appealable notwithstanding

the lack of a judgment conforming to Rules 54(a) and 58.

Bankers Trust Co. v. Mallis, 435 U.S. 381 (1978), permits an

appeal when the case is over but the court has failed to enter

a proper judgment. So we have jurisdiction—but once again

we urge district courts to comply with these rules. “Courts

enforce the requirement of procedural regularity on others,

and must follow those requirements themselves.” Hollingsworth

v. Perry, 558 U.S. 183, 184 (2010).

4 No. 17-2712

Having appellate jurisdiction, we now must ask whether

the district court had subject-matter jurisdiction, a question

that the judge and the parties alike ignored. Jurisdiction depends

on diversity of citizenship, and until oral argument of

this appeal everyone had assumed that the citizenships of

Monteil Hyland (Illinois) and Liberty Mutual (Massachusetts

and Wisconsin) were all that mattered. (Shannon Hyland’s

citizenship is irrelevant under 28 U.S.C. §1332(c)(2).) But 28

U.S.C. §1332(c)(1) contains a special rule for suits against insurers:

in any direct action against the insurer of a policy or contract of

liability insurance … to which action the insured is not joined as

a party-defendant, such insurer shall be deemed a citizen of—

(A) every State and foreign state of which the insured is a citizen;

(B) every State and foreign state by which the insurer has

been incorporated; and

(C) the State or foreign state where the insurer has its principal

place of business[.]

Perkins, Risby, and Smith, all arguably among the insureds,

have not been joined as defendants, and as all three appear

to be citizens of Illinois complete diversity is missing if this

suit is a “direct action against the insurer” within the scope

of paragraph (c)(1).

Because Liberty Mutual is the only defendant, and Hyland

seeks money directly from it, it is tempting to call this

suit a “direct action” and order its dismissal. But because the

original state suit named as the defendant Smith, who might

have called on Liberty Mutual for defense and indemnity

(though she never did), things are not so easy. Hyland sues

as Smith’s assignee, and a dispute between Smith and LiberNo.

17-2712 5

ty Mutual about its obligations to Smith would not be a direct

action as insurance law uses that term.

In 1964, when this part of paragraph (c)(1) was enacted,

two states (Louisiana and Wisconsin) allowed what they

called “direct actions” against insurers. These states permitted

people who sought damages to sue the alleged wrongdoers’

insurers, bypassing the need to get a judgment

against the supposed tortfeasor. The other 48 states insisted

that plaintiffs sue the supposed wrongdoers. See Donald T.

Weckstein, The 1964 Diversity Amendment: Congressional Indirect

Action Against State “Direct Action” Laws, 1965 Wis. L.

Rev. 268, 269–70. Some permitted plaintiffs to add insurers

as additional defendants, while other states not only forbade

this but also prohibited juries from learning whether a defendant

had insurance. See Steven Plitt, et al., 7A Couch on

Insurance §104:13 (3d ed. 2013).

Justice Frankfurter was among those who noticed that

the approach taken in Louisiana and Wisconsin allowed suit

against an insurer under the diversity jurisdiction, even

though both the injured party and the asserted injurer were

citizens of the same state. He called for a legislative fix. See

Lumbermen’s Mutual Casualty Co. v. Elbert, 348 U.S. 48, 56

(1954) (concurring opinion). The Wright and Miller treatise

is among many sources understanding the enactment of

paragraph (c)(1) as a response to that suggestion. Charles

Alan Wright, Arthur R. Miller & Edward H. Cooper,

13F Federal Practice & Procedure §3629 (3d ed. 2009).

As far as we have been able to find, in 1964 no one

knowledgeable about insurance law would have used the

phrase “direct action” to mean anything other than a suit, by

the purported victim of a tort, that omitted the supposed

6 No. 17-2712

tortfeasor as a defendant. It is always possible that legislators

and the President used the phrase “direct action” more

colloquially to include every suit in which an insurance

company is the only defendant, but no contemporaneous evidence

supports that reading.

Since 1964 thousands of suits in which an insurer is the

sole defendant—often suits among insurers seeking to allocate

liability between primary and excess layers of coverage—

have been adjudicated without anyone thinking the

practice incompatible with paragraph (c)(1). Many decisions

hold that suits based on the insurer’s liability for its own

conduct are not “direct actions” that fall under §1332(c)(1).

See, e.g., Velez v. Crown Life Insurance Co., 599 F.2d 471, 473

(1st Cir. 1979); Rosa v. Allstate Insurance Co., 981 F.2d 669,

674–75 (2d Cir. 1992); Beckham v. Safeco Insurance Co., 691

F.2d 898, 902 (9th Cir. 1982).

Surprisingly, however, only one precedential appellate

decision has addressed the question whether a suit following

assignment of an insured’s claim against the insurer is a

statutory “direct action.” Kong v. Allied Professional Insurance

Co., 750 F.3d 1295, 1299–1301 (11th Cir. 2014), holds that it is

not. We agree with both the reasoning and the conclusion of

that decision. Because Hyland obtained a judgment against

Smith and sues only as her assignee, this suit is unaffected

by paragraph (c)(1). Complete diversity of citizenship exists,

and the amount in controversy comfortably exceeds $75,000.

Although the controversy exceeds $75,000, the judgment

should not have exceeded $25,000. That’s the maximum Liberty

Mutual promised to pay and all Smith lost when the insurer

declined to defend or indemnify.

No. 17-2712 7

The district court gave two reasons for awarding Hyland

more than the policy limit. One is that, under Illinois law, an

insurer that fails to defend or seek a declaratory judgment is

estopped to assert any policy defense. 2017 U.S. Dist. LEXIS

124374 at *18–25. Relying principally on Clemmons v. Travelers

Insurance Co., 88 Ill. 2d 469 (1981), the district court saw

the maximum indemnity as just another defense that the insurer

cannot assert. The second theory is that any damages

proximately caused by an insurer’s neglect are recoverable,

without regard to the policy limit. 2017 U.S. Dist. LEXIS

124374 at *25–35. Here the court relied principally on Conway

v. Country Casualty Insurance Co., 92 Ill. 2d 388 (1982), and

Delatorre v. Safeway Insurance Co., 2013 IL App (1st) 120852.

In this court Hyland disclaims the estoppel theory, recognizing

that Clemmons has nothing to say about the circumstances

under which a judgment may exceed the policy’s limit.

But Hyland defends the proximate-cause approach.

Liberty Mutual insists that Illinois law limits damages to

the policy limit, plus a maximum of $60,000 extra if the

plaintiff shows that the refusal to defend or indemnify arose

from bad faith. See 215 ILCS 5/155. It quotes this passage

from Conway: a “mere failure to defend does not, in the absence

of bad faith, render the insurer liable for [the] amount

of the judgment in excess of the policy limits.” 92 Ill. 2d at

397. As Liberty Mutual sees things, bad faith and injury

proximately caused by the insurer’s conduct are both necessary

for a judgment to exceed the policy limit; proof of one

but not the other won’t do. And the insurer adds that Hyland

has never alleged—and the district judge did not find—

that it acted in bad faith. Smith was neither a named insured

nor a member of Perkins’s family, and Hyland’s state-court

complaint did not allege that Smith had Risby’s permission

8 No. 17-2712

to drive the car. Because an insurer’s responsibilities under

Illinois law depend on whether the complaint as drafted arguably

comes within the policy’s coverage, see U.S. Fidelity

& Guaranty Co. v. Wilkin Insulation Co., 144 Ill. 2d 64, 73

(1991), it would not be possible to say that an insurer displays

bad faith by not defending when the complaint omits a

fact (Risby’s consent) essential to the policy’s coverage.

What’s more, Smith never asked Liberty Mutual to defend

her. If Liberty Mutual is right that bad faith (or some equivalent,

such as fraud) is essential to any award exceeding a policy’s

limit, then recovery is capped at $25,000.

Hyland observes that Conway said that “damages for a

breach of the duty to defend are … measured by the consequences

proximately caused by the breach.” 92 Ill. 2d at 397–

98. This language does not directly address the insurer’s contention

that both bad faith and proximate cause are essential.

Liberty Mutual maintains that Cramer v. Insurance Exchange

Agency, 174 Ill. 2d 513 (1996), reinforces its view that Illinois

requires bad faith plus proximate cause. For her part, Hyland

does not so much as cite Cramer.

We are reluctant to get into this dispute about the meaning

of Illinois insurance law, for we lack the remit to supply

an authoritative answer. It is enough for current purposes to

say that, even if proximate cause by itself suffices, Hyland

has not shown how the insurer’s conduct could have caused

Smith any loss exceeding $25,000—and recall that Hyland is

Smith’s assignee, so only Smith’s injury matters.

The best situation for Smith would have been Liberty

Mutual’s provision of a defense lawyer plus the tender of the

policy limit toward a settlement or judgment. Then Smith

would have been at least $25,000 to the good. A tender of

No. 17-2712 9

cash would have been unlikely compared with a reservation

of rights to decline indemnity later, but let us make conditions

as favorable to Smith as they could be.

The provision of a lawyer to defend Smith would have

been valuable to her, independent of a policy-limit tender,

only if a vigorous defense might have defeated Hyland’s

claim or at least held damages under $4.6 million. Yet Hyland

has not argued in this court—and the district judge did

not find—that either outcome was plausible. Smith had a restricted

license, see 625 ILCS 5/6-113, yet was behind the

wheel after the 11 p.m. curfew to which Illinois subjects 16-

year-old drivers. 625 ILCS 5/6-110(a-1). Smith had too many

passengers (the limit is one person under 20, 625 ILCS 5/6-

107(g)), crashed into two parked cars at high speed, and was

criminally convicted for her behavior. Smith’s liability was

too clear for argument; counsel could not have hoped to defeat

Hyland’s suit. There was no difference between what

counsel could have achieved and what actually happened (a

default judgment when Smith did not defend herself).

As for damages: the state judge awarded Hyland the

amount that she proved after the default was declared. Hyland

has not argued that she asked for too much and pulled

the wool over the state judge’s eyes. She’s in no position to

contend that Liberty Mutual must pay her $4.6 million precisely

because that sum represents more money than her entitlement—

and she does not say anything of the sort. Nor

does she offer any alternative. She does not contend, for example,

that a vigorous defense could have held damages to,

say, $2 million, and that $2.6 million (the $4.6 million awarded

less $2 million that should have been awarded) thus is the

loss, from Smith’s perspective, proximately caused by the

10 No. 17-2712

lack of a defense. Instead Hyland wants the whole $4.6 million,

which is proper only if it is the right judgment—and

thus not proximately caused by the absence of a lawyer dispatched

by Liberty Mutual to defend Smith.

If Smith had a plausible defense, either to liability or to

the amount of Hyland’s claim, then the insurer’s failure to

send a lawyer to help Smith make those arguments could be

seen as a proximate cause of the state-court judgment. But

some judgment against Smith was inevitable and the

amount of the judgment must be taken as justified. Hyland

has not argued otherwise. The maximum loss caused by the

failure to defend thus is $25,000, and the award in this suit

cannot exceed that sum.

Liberty Mutual is not satisfied with this conclusion. It also

maintains that it does not owe interest on even the

$25,000. That’s wrong. Illinois provides for post-judgment

interest at 9% per annum. 735 ILCS 5/2-1303. The district

judge found that Liberty Mutual should have paid the

judgment against Smith in July 2014, and Liberty Mutual

does not contest that decision to the extent that the principal

obligation is capped at $25,000. Thus Smith’s substantive entitlement,

as a matter of Illinois law, is $25,000 plus interest

from July 2014. This is what Hyland now holds by assignment.

That the insurer later offered to pay $25,000 is irrelevant;

§5/2-1303 provides that interest stops only with tender

of payment. (Liberty Mutual’s reliance on the policy’s language

does not help it, because the policy limits interest only

in suits that Liberty Mutual defended.) And Liberty Mutual

does not contend that interest after the date of the federal

judgment should run at the federal post-judgment rate rather

than the state post-judgment rate; we do not decide

No. 17-2712 11

whether a change from one rate to the other would be appropriate.

The judgment is vacated, and the case is remanded for

the entry of a judgment for $25,000 plus interest at 9% per

annum from July 28, 2014, until the date of payment.