In the
United States Court of Appeals
For the Seventh Circuit

No. 99-3827

Jeffrey Meixell,

Plaintiff-Appellant,

v.

Superior Insurance Company,

Defendant-Appellee.



Appeal from the United States District Court
for the Central District of Illinois.
No. 99-CV-3123--Richard Mills, Judge.


Argued April 7, 2000--Decided September 6, 2000




  Before Bauer, Easterbrook, and Rovner, Circuit Judges.


  Bauer, Circuit Judge. On October 22, 1999, the
district court dismissed Jeffrey Meixell’s
amended complaint with prejudice. Meixell appeals
contending that the complaint sufficiently
alleged that Superior Insurance Company engaged
in bad faith for refusing to settle.


  On July 5, 1995, Meixell was a passenger in
Terry Whitworth’s vehicle when it collided with
a utility pole. No other vehicles were involved.
The accident rendered Meixell a quadriplegic and
caused him to incur medical bills in excess of
the insurance policy limits. On August 30, 1995,
Meixell sent his medical bills and records to
Whitworth’s insurance, Superior.


  After review of the facts surrounding the
accident and Meixell’s injuries and damages,
Superior sent a draft of $20,000 to Meixell along
with a general release of all claims. On
September 21, 1995, Meixell’s attorney informed
Superior that they would release Whitworth in
exchange for the policy limits and a covenant not
to sue. Meixell refused to give a general release
to potential third parties. On October 12, 1995,
Superior rejected the covenant not to sue and
asked for the return of the settlement draft. The
opportunity to settle was not communicated to
Whitworth.


  On January 30, 1996, an attorney retained by
Superior agreed to tender the $20,000 in exchange
for the covenant not to sue Whitworth,
withdrawing its demand for a general release.
Meixell rejected the offer and filed suit against
Whitworth, the Township of New Berlin, and
Sangamon County on March 29, 1996. Two years
later, New Berlin and Sangamon County settled for
$1,400,000 in return for a covenant not to sue.
On December 1, 1998, a jury returned a verdict
against Whitworth for $4,537,791.38 and judgment
was entered on the jury verdict for $3,137,791.28
after reduction for the monies paid by the co-
defendants.


  On December 14, 1998, Meixell was assigned this
cause of action against Superior by Whitworth and
filed suit based upon Illinois common law for
breach of the duty of good faith owed by an
insurer to its insured. The district court
dismissed his amended complaint with prejudice.
Meixell now appeals.


  Motions to dismiss are reviewed de novo. Under
Illinois law there is a duty on the part of the
insured to give at least equal consideration to
the insured’s interests as it’s own where the
insured is a defendant in a suit in which the
policy limits may be exceeded. Adduci v. Vigilant
Insurance Co. Inc., 98 Ill.App.3d 472, 476, 424
N.E.2d 645 (1st Dist. 1981). Where the insurer
fails to settle resulting in an excess judgment
due to fraud, negligence or bad faith, the duty
is breached. Id. The insurer may then be held
liable for the full amount of the judgment
irrespective of the policy limits. Id. Meixell
must sufficiently show a breach of duty and
demonstrate that the breach was the legal cause
of the harm to the insured. Id. The court in
Phelan v. State Farm Ins., 114 Ill.App.3d 96,
104, 448 N.E.2d 579 (1st Dist. 1983), determined
that the plaintiff must allege sufficient facts
to demonstrate why the offer of settlement after
the deadline could not have been accepted. In
dismissing the complaint, the district court
found that Meixell could not show that Superior’s
conduct proximately caused the excess verdict.


  Meixell’s argument is that Superior breached its
duty when it failed to convey his counteroffer to
settle for the $20,000, the policy limits, and
the covenant not to sue to Whitworth. Because
Superior rejected the offer to settle, Meixell
believes that bad faith was demonstrated. Three
months later however, Superior did offer to
settle for the policy limits. When an insurance
company offers to settle and is refused for no
reason, it does not constitute bad faith. Without
a showing of bad faith Meixell cannot state a
valid cause of action on that basis. Brocato v.
Prairie State Farmers Ins. Assoc., 166 Ill.App.3d
986, 520 N.E.2d 1200 (4th Dist. 1988).


  In Adduci the plaintiff rejected a settlement
offer because it came 40 days after their self-
imposed deadline. Adduci, 424 N.E.2d at 647. The
court found that these allegations were
insufficient as a matter of law to demonstrate
that the Insurer acted in bad faith and breached
its duty to the insured Id. While Superior
initially rejected Meixell’s offer in October,
they returned three months later with an offer to
settle. Meixell rejected it. Meixell offers no
explanation as to why he could not accept the
offer of settlement or how he would be prejudiced
if he had accepted the offer. Meixell claims that
once he returned the settlement draft on November
9, 1995, negotiations ceased. At no time did
Meixell’s attorney establish a timeline for the
settlement negotiations. Superior believed that
negotiations were ongoing and finally offered to
settle on Meixell’s terms. It was less than two
months since their last exchange, and before
Meixell filed suit.


  Finally, Meixell has not established that
Superior failed to protect Whitworth’s interests.
Superior’s conditional offer of the policy limits
and a general release was in the best interests
of Whitworth. By responding with a counteroffer,
Meixell demonstrated that he believed the
negotiation process was ongoing. Although Meixell
did not like the initial terms of the offer or
that Superior at first rejected his offer, at no
time was Whitworth harmed by Superior’s actions.
Meixell’s failure to present evidence that
Superior placed its interests above Whitworth’s
left the district court with no other option than
to dismiss the complaint.


  Superior can not be accused of bad faith for
failing to settle. The allegations of the
complaint do not show why the offer to settle was
not accepted on January 30, 1996 or that Superior
failed to protect Whitworth’s interests. The
district court correctly dismissed the amended
complaint with prejudice.
Affirmed.
  ROVNER, Circuit Judge, dissenting. This case is
before us on appeal from the grant of a motion to
dismiss. In affirming, the majority necessarily
holds that it is impossible for Meixell to
prevail under any set of facts that could be
proven consistent with the allegations. Albiero
v. City of Kankakee, 122 F.3d 417, 419 (7th Cir.
1997). Because I think the complaint is
sufficient to state a claim under Illinois law,
I respectfully dissent.


  The majority properly recognizes that under
Illinois law an insurer has a duty to give at
least equal consideration to the insured’s
interest as to its own where the insured is a
defendant in a suit in which the policy limits
may be exceeded, Adduci v. Vigilant Insurance
Co., Inc., 424 N.E.2d 645, 648 (1st Dist 1981),
and that the duty is breached if the insurer due
to negligence, fraud or bad faith, fails to
settle resulting in an excess judgment. Id.
Relying solely on Adduci and Phelan v. State Farm
Mutual Automobile Insurance Co., 448 N.E.2d 579
(Ill. App. 1983), however, the majority upholds
the dismissal of the complaint because the
plaintiff failed to demonstrate why the
settlement offer which the insurer rejected could
not have been accepted at a later date when the
insurer attempted to resurrect it. I do not
believe that Adduci or Phelan imposes such a
requirement in a case such as this one, and our
application of it here could prove an
insurmountable burden to insured persons in
future cases.


  A short discussion of Adduci and Phelan may
clarify my concerns. In Adduci, the court
recognized "as a general principle of law" that
an insurer may breach its duty to the insured
when it fails to respond to settlement overtures
made by the party proceeding against the insured.
424 N.E.2d at 649. The Adduci court upheld the
dismissal of the complaint, however, because the
insured had failed to adequately plead such a
failure to respond, and in fact pleaded facts
demonstrating that the insured did respond to the
claimant’s settlement demand. Id. The settlement
demand itself had provided that it would be
withdrawn after 28 days, but anticipated the
possibility of an extension based upon any
reasonable ground during the time period. It is
unclear whether it was actually withdrawn; the
insured alleged only that it was withdrawn by its
express terms. Although the insured responded
after the claimant’s self-imposed deadline, it
was only 40 days after the time provided for a
response and merely 72 days after the offer was
first made. Id. No facts indicated why the offer
could not be accepted at that time, and therefore
the court held that the blame for the failure of
settlement could not be placed on the insured.
Id.


  In Phelan, the court construed Adduci narrowly
as based solely on the pleading inadequacies. The
Phelan court declared that

we do not view Adduci to stand for the
proposition that as a matter of law, a settlement
offer forty days after expiration of plaintiff’s
demand is insufficient to establish the bad faith
of the insurer; rather, Adduci involved pleadings
which allege insufficient facts to sustain a
cause of action and, therefore, even if the
allegations in the complaint were proved,
plaintiff would not be able to recover.

448 N.E.2d at 584. Thus, Phelan did not interpret
Adduci as establishing any sweeping, per se rule
for the conduct of settlement negotiations. See
also VanVleck v. Ohio Casualty Ins. Co., 471
N.E.2d 925, 961 (Ill. App. 1984) (setting forth
elements as defined in Phelan). Adduci merely
recognized that where a proposed settlement offer
set a deadline that was extendable for any good
reason within the self-imposed time period, and
the insurer responded beyond that unilateral
deadline but within 40 days of it (and within 72
days of the original offer), and no facts were
pled indicating why the extra 40 days would
impact the decision to settle on those terms,
there was no basis to find that the insurer
breached its duty to the insured. Id. at 583-84.
Thus, the negligence asserted in Adduci was the
failure to act more promptly, but the insurer
responded appropriately with only a reasonably
short delay. The Adduci holding would presumably
prevent the scenario in which an unreasonably
short deadline is imposed unilaterally in order
to "set up" a future bad faith claim when the
insurer is unable to respond in an expeditious
manner. It is consistent with the law in other
jurisdictions as well. See 14 Couch on Insurance sec.
206:28 (3d ed.) (whether an insurer’s delayed
response to an offer constitutes negligence or
bad faith depends on the circumstances of the
case) and cases cited therein.


  In the present case, however, we are not faced
with a failure to respond quickly enough to meet
a unilateral deadline. Superior did respond
timely to the offer in this case--by rejecting it
outright without even informing its insured that
the offer had been tendered./1 That, as they
say, is a horse of a different color. That act of
rejecting a settlement offer that was beneficial
to the insured (as evidenced by Superior’s later
attempt to turn back the clock) was itself a
breach of duty.

  In fact, an analogous sequence of events was
deemed sufficient to support a jury verdict in
Mid-America Bank & Trust Co. v. Commercial Union
Insurance Co., 587 N.E.2d 81 (Ill. App. 1981). In
Mid-America, a truck insured by Commercial Union
hit a 13-year-old causing brain damage. The
plaintiff’s attorney sent a letter offering to
settle for the policy limits of $50,000, but the
offer was never accepted. Id. at 82. Almost three
years later, the plaintiff again offered to
settle for the policy limits. Commercial Union’s
attorney responded by instead offering $30,000,
"’take it or leave it.’" Id. Offended by the
response, the plaintiff withdrew all offers. A
mere six days later, Commercial Union’s attorney
offered to pay the $50,0000, stating that he was
always authorized to settle for that amount. The
plaintiff refused the offer, and a jury awarded
the plaintiff $911,536.50. Id. at 82-83. After
receiving an assignment of claims from the truck
owner, the plaintiff sued Commercial Union
alleging negligence and bad faith in settling the
original claim, and the jury ruled in the
plaintiff’s favor. Id.


  On appeal, Commercial Union argued that the
plaintiff failed to prove a cause of action
because there was no change in circumstances that
justified the plaintiff’s refusal to accept the
offer made six days later. Id. at 83-84. Although
there was no evidence that the plaintiff could
not have accepted the offer, the Mid-America
court nevertheless affirmed. The court refused to
focus solely on that six days, but instead looked
at the totality of the circumstances.
Specifically, the court noted that

Commercial Union was aware of the offer, the
extent of the injury, the possible personal
liability of the owner of the truck, and the risk
of excess liability if the case were tried. For
almost three years there was a clear opportunity
to settle within the policy limits, but
Commercial Union refused. We conclude that the
circuit court properly denied the motion for
directed verdict.

Id. at 84.


  Mid-America thus rejected any rule that a
plaintiff, in order to succeed on a negligence or
bad faith settlement claim, must plead facts
demonstrating that a later settlement offer could
not have been accepted. In Mid-America, it was
assumed that the offer indeed could have been
accepted, but that was not determinative of
whether the insurer acted reasonably. Many of the
factors supporting the jury verdict in Mid-
America are present here as well: the insurer was
aware of the offer; the extent of the injury was
clear and the insurer had in fact requested and
received medical records documenting the severity
of the injury; the personal liability was evident
given that it was a one-car accident and the
insured was driving too fast and collided with a
utility pole; and the risk of excess liability if
the case were tried was unquestionable given that
the accident rendered Meixell a quadriplegic (in
fact, medical bills provided to the insurer had
already exceeded the policy limits.) We do not
have a three-year period in which settlement
could have occurred, but the evidence in Mid-
America did not include any rejection of offers
during that time period, and the Mid-America
plaintiff in fact proved willing to settle after
that time. As in Mid-America, the insurer in this
case was presented with an offer that fully
protected the interests of the insured and
limited the insured’s damages to the limits of
the policy. The insurer here rejected it and
demanded a return of the check because Meixell
refused to waive his right to bring claims
against other parties whose interests were
unrelated to the insured (namely, the township
and county for the failure to maintain an
adequate sign warning of the approaching "T"-
intersection). Moreover, the rejection came only
after a number of phone calls in which Meixell
explained that the interests of the insured were
fully protected and that the issue was only his
ability to sue third parties. Taking all
inferences in the light most favorable to the
plaintiff, that complaint is sufficient to allege
that Superior acted unreasonably and breached its
duty to its insured.


  Those principles identified in Mid-America are
well-recognized in other Illinois decisions as
well. LaRotunda v. Royal Globe Insurance Co., 408
N.E.2d 928, 935-36 (Ill. App. 1980), contains the
oft-quoted test for negligence or bad faith
settlement claims:

If an opportunity appears to settle within the
policy limits, thereby protecting the insured
from excess liability, the insurer must
faithfully consider it, giving the insured’s
interests at least as much respect as its own.
[citations omitted] The insurer need not submit
to extortion; it may reject a bad deal without
waiving the protection the policy limit gives it
against the vagaries of lawsuits. But if the
honest and prudent course is to settle, the
insurer must follow that route. If it deviates
from that course, it will be liable for the whole
judgment, so as to give the insured the
protection that the policy was intended to
provide. . . . If the insurer by its own fault
converts such a case--one the insurer could have
disposed of for a fair sum within the policy
limits--into a case beyond the policy limits, the
insurer cannot complain of the size of the
judgment, a consequence of its own bad faith,
fraud or negligence.

Superior deviated from that prudent course of
settlement, and its actions can render it liable
under Illinois law. See also Stevenson v. State
Farm Fire & Casualty Co., 628 N.E.2d 810, 813
(Ill. App. 1993) (Illinois rule is that "an
insurance company may be liable . . . where it
has not taken advantage of opportunities to
settle the matter upon reasonable terms"); 14
Couch on Insurance sec. 206:6 (3d ed.) (citing
Illinois cases, states that a number of courts
have held that there may be liability for
negligence in rejecting a reasonable compromise
offer). The imprudent rejection of the
advantageous settlement offer, in this case of
high potential liability and damages, is enough
evidence of breach of a duty to survive a motion
to dismiss.


  In addition, Superior’s failure to communicate
the settlement offer to its insured was an
independent breach of duty. In Rogers, M.D. v.
Robson, Masters, Ryan, Brumund and Belom, 392
N.E.2d 1365, 1371 (Ill. App. 1979), the court
held that an attorney retained by the insurer to
defend the insured assumes all the duties imposed
by the attorney-client relationship, including
the duty to inform the insured of any settlement
offers that affect him so that the insured may
take proper steps to protect his own interests.
That principle was affirmed by the Illinois
Supreme Court on appeal. Rogers v. Robson,
Masters, Ryan, Brumund and Belom, 407 N.E.2d 47,
49 (Ill. 1980). Superior failed to inform its
insured of the settlement offer and thus deprived
him of the opportunity to protect his own
interests by accepting it. Therefore, on that
independent basis the complaint adequately
alleges a breach of duty sufficient to survive a
motion to dismiss. See also Bailey v. Prudence
Mutual Casualty Co., 429 F.2d 1388, 1390 (7th Cir.
1970) (failure to advise insured of settlement
offers below policy limits might alone establish
liability); see also 14 Couch on Insurance sec.
206:33 (3d ed.) ("Since an insurer is bound to
communicate settlement offers to its insured, the
failure of an insurer to do so may render the
insurer liable, unless such failure did not cause
an excess verdict against the insured."
(footnotes omitted)).


  The damages from the failure to settle are
apparent, a $3,137,791.28 verdict instead of a
$20,000 settlement covered by insurance, and are
not contested by the parties. The final element
of proximate cause is also sufficiently pled.
Superior devotes its brief to arguing that
proximate cause is not met under the reasoning of
Adduci and Phelan. Those cases, however, did not
address proximate cause, analyzing only the
element of breach of duty. In apparent
recognition of that misuse of the cases, the
majority discusses those cases in the context of
breach of duty.


  The Illinois Supreme Court recently defined the
term "proximate cause" as encompassing two
questions: "Was the defendant’s negligence a
material and substantial element in bringing
about the injury, and, if so, was the injury of
a type that a reasonable person would see as a
likely result of his or her conduct?" First
Springfield Bank & Trust v. Galman, 720 N.E.2d
1068, 1072 (Ill. 1999). That traditional
definition has governed Illinois for "the better
part of this century," id. at 1072-73, and is
adequately pled here. A defendant’s conduct is a
substantial and material factor in the injury if,
absent that conduct, the injury would not have
occurred. Id. at 1072. That is established here
because if Superior had accepted rather than
rejected the offer, or informed the insured and
allowed him to do so, the jury award in excess of
the policy limits would not have occurred. In
addition, given the massive injuries to Meixell
and the high likelihood of individual liability,
the potential for the jury award above the policy
limits was apparent if a settlement was not
obtained. Moreover, we cannot hold as a matter of
law that it was unforeseeable that Meixell would
later decide not to settle a multi-million dollar
claim for $20,000. Under those circumstances,
Meixell adequately pled facts to support his
claim that the negligent rejection of the
settlement offer proximately caused the injury.


  I note briefly that Superior’s attempt to graft
the Adduci analysis into the proximate cause
context would render the analysis unrecognizable.
Under Superior’s approach, Meixell would have to
demonstrate that the injury could not have been
avoided by the actions of another party, namely
the acceptance of a subsequent settlement offer.
Rather than focus on whether an insurer’s actions
caused the injury, Superior would have us ask
whether a third party could have taken action
that would have prevented the injury. Superior
makes no effort to ground its argument in the
traditional definition of proximate cause, and it
is in fact unsupported in Illinois law.


  Finally, I am concerned about the implication
of this decision on future litigants. In this
case, the insured assigned his right to sue for
bad faith to Meixell, and thus the party that
rejected the insurer’s later offer was the one
bringing this lawsuit. The assignee, however,
stands in the same position as the assignor with
respect to the claim. Thus, the principles set
forth in this opinion apply equally to an action
brought by the insured herself. Where the insured
does not assign her rights, the holding today
puts her in the unenviable position of proving
why a person not a party to the action could not
have acted differently and accepted a later
offer. That adds an element not heretofore seen
in Illinois cases. It may be an appropriate
question in those few cases in which the issue is
whether a short delay in responding should be
considered negligence, because the surrounding
circumstances may affect the reasonableness of
the delay. Where, however, an affirmative act by
the insurer is unreasonable on its face, I find
no support for the addition of an extra element
to the cause of action, and many cases imply that
no such element exists. If Illinois indeed
intended such a sea change in the law, I would
expect it to be set forth explicitly. I therefore
would allow this case to proceed at least beyond
this initial stage of the proceedings.
Accordingly, I respectfully dissent.


/1 Superior had offered to settle for the policy
limits and a general release, and it refused to
accept Meixell’s offer of a covenant not to sue
rather than a general release that would have
included third parties. This is not a case in
which an insurer made another counteroffer as
part of an ongoing effort at negotiation.
Superior rejected Meixell’s offer of the policy
limits and the covenant not to sue, and
instructed Meixell to return the settlement draft
if it did not agree to Superior’s condition of a
general release. That "take it or leave it"
rejection of Meixell’s offer did not leave open
further avenues of settlement, and effectively
terminated the negotiations. At least that is
what we must assume taking all inferences in
Meixell’s favor. Superior does not argue on
appeal that its insistence on the general release
was reasonable or necessary to protect the
interest of its insured.
