The Illinois Appellate Court recently in Stonecrafters, Inc. v. Wholesale Life Insurance Brokerage, Inc. (2d Dist. July 13, 2009) held that a liability insurer that breaches its duty to defend its insured an underlying lawsuit and is estopped from raising coverage defenses may challenge a trial court’s finding of the reasonableness of the underlying settlement between the insured and the underlying plaintiff and may take discovery in furtherance of its challenge. Here, the insured settled a class action lawsuit alleging violations of the Telephone Consumer Protection Act arising out of the sending of blast faxes. The insured had tendered notice of the lawsuit to its insurer, Milwaukee Insurance Co. (“MIC”), but MIC had denied coverage. The trial court certified the settlement class, approved the settlement, and determined that the settlement was fair and reasonable.

Following the initiation of a third-party action against MIC, MIC moved for leave to issue discovery concerning the reasonableness of the settlement. The class plaintiffs refused to comply. The trial court ultimately granted the class plaintiffs’ motion for partial summary judgment, finding that MIC had owed a duty to its insured in the class action, that MIC had breached its duty to defend, and that MIC was estopped from raising policy defenses to coverage.

On interlocutory appeal, the appellate court agreed with MIC that in order to avoid the possibility of collusion to defraud the insurer, a plaintiff must prove that its settlement with the insured is reasonable before the settlement can have a binding effect upon the insurer. In interpreting Guillen v. Potomac Insurance Company of Illinois, 203 Ill. 2d 141 (2003), the appellate court found that the burden to establish the reasonableness of the settlement remains on the parties to the settlement even when the insurer is found to be estopped from asserting policy defenses to coverage. Since MIC was not given notice of the motion to approve the underlying settlement and was not able to participate in the hearing on the fairness of the settlement, the appellate court found that the trial court erred in holding that the settlement was fair and reasonable.

This decision may be found at:
http://www.state.il.us/court/Opinions/AppellateCourt/2009/2ndDistrict/July/2080865.pdf