The Illinois Appellate Court recently in Federal Insurance Co. v. Binney & Smith, Inc. (1st Dist. June 30, 2009) found that Federal Insurance was obligated to pay a settlement between its insured, a manufacturer of asbestos-containing crayons, and a class of purchasers of said crayons. The class plaintiffs alleged in part that the insured violated the Illinois Consumer Fraud Act and Uniform Deceptive Trade Practices Act because the subject crayon packaging was falsely labeled that the product was “Certified Non-Toxic” and “safe for children.” Ultimately, the insured and the class plaintiffs settled the lawsuit for approximately $1 million. The trial court, after conducting a fairness hearing, approved the settlement.

The insured tendered to Federal Insurance the defense and indemnity of the lawsuit under the “advertising injury” provisions of the policies. Federal Insurance filed the instant declaratory action against its insured. The trial court found in the insured’s favor.

On appeal, the appellate court considered whether the settlement was reasonable, i.e., whether the settlement was for a covered loss and was reached in “reasonable anticipation of liability.” The insured contended that while it believed that the class plaintiffs’ allegations were not meritorious, it did not want to risk putting the issues before a jury, in light of juries’ tendency to render adverse verdicts against manufacturers whose products contain even trace amounts of asbestos. The insured thus believed it potentially faced significant liability. The appellate court was not compelled by Federal Insurance’s response that its insured had an absolute defense to the consumer fraud claims. The lack of evidence that the insured was “specifically authorized” by statute or regulation to use the term “Certified Non-Toxic” on its packaging indicated that the insured’s defense could not have been absolute. Accordingly, the appellate court agreed with the trial court that the settlement was reasonable. It also agreed with the trial court that the alleged false labeling was sufficient to trigger Federal Insurance’s indemnity obligations under its “advertising injury” provisions. The appellate court thus affirmed this aspect of the trial court’s ruling.

This decision may be found at:
http://www.state.il.us/court/Opinions/AppellateCourt/2009/1stDistrict/June/1080843.pdf