                           In the

United States Court of Appeals
              For the Seventh Circuit

No. 08-1297

IOWA P HYSICIANS’ C LINIC M EDICAL F OUNDATION,
doing business as IOWA H EALTH P HYSICIANS,

                                            Plaintiff -Appellant,
                               v.


P HYSICIANS INSURANCE C OMPANY OF W ISCONSIN,

                                            Defendant-Appellee.


           Appeal from the United States District Court
                 for the Central District of Illinois.
         No. 07 C 4012—John A. Gorman, Magistrate Judge.



   A RGUED S EPTEMBER 15, 2008—D ECIDED O CTOBER 31, 2008




  Before K ANNE, E VANS, and W ILLIAMS, Circuit Judges.
  E VANS, Circuit Judge. The plaintiff in this case, the Iowa
Physicians’ Clinic Medical Foundation, which does busi-
ness under the name Iowa Health Physicians (IHP), asks
us to predict that the Illinois Supreme Court, if confronted
with the issue, would hold that the tort of bad faith
in refusing to settle a claim at or within the policy limits
2                                               No. 08-1297

of a medical malpractice insurance policy extends to a
noninsured under the policy. Because we think it is
doubtful that the Illinois high court would go that far,
we reject IHP’s appeal and affirm the district court judg-
ment dismissing its complaint.
  Because this case was decided on a motion for judg-
ment on the pleadings, we accept the allegations in the
complaint as true and draw all reasonable inferences in
favor of IHP. Forseth v. Village of Sussex, 199 F.3d 363, 368
(7th Cir. 2000). Here, then, are the facts. IHP runs a
medical clinic in Geneseo, Illinois, where Dr. Randall
Mullin works as a family doctor. While working at the
clinic, Dr. Mullin treated Dennis Goetz, who needed
antimalarial therapy in anticipation of his trip to Africa.
Tragically, Dr. Mullin’s treatment was ineffective and
Mr. Goetz contracted malaria during his trip. To make
matters worse, Dr. Mullin failed to timely diagnose
Mr. Goetz’s condition upon his return. Mr. Goetz eventu-
ally died, and his wife filed suit against Dr. Mullin for
his negligent care and against IHP on a theory of
vicarious liability.
  Dr. Mullin was protected by a medical malpractice
insurance policy issued by the Physicians Insurance
Company of Wisconsin (PIC), which covered his liability
up to $1 million and provided for the defense of claims
made against him. The policy gave PIC control over
Dr. Mullin’s defense, which meant that Dr. Mullin could
only settle a claim if PIC consented in writing. IHP, who
was listed as the policyholder on this insurance
contract, paid the premiums on behalf of Dr. Mullin as
No. 08-1297                                             3

part of the package used to entice him into working at
their clinic. But throughout the policy it was reiterated
that coverage did not extend to IHP. Policyholders
could purchase insurance from PIC, but IHP declined to
do so. Instead, it was covered by a combination of self-
insurance and a separate commercial insurance policy.
Accordingly, IHP hired its own attorney to represent
it in the Goetz case.
  From the beginning, the case did not look good for IHP
or Dr. Mullin. Many experts agreed that Dr. Mullin pro-
vided substandard care to Mr. Goetz, and the damages
in the wrongful death suit threatened to be large. The
economic damage to Mr. Goetz’s widow and son alone
was estimated at over half a million dollars. What’s more,
Mr. Goetz suffered severe pain before passing away. Both
IHP and Dr. Mullin urged PIC to settle the case. The
plaintiff offered to settle the case for $900,000—just
below the policy limit—at least twice. But on both occa-
sions PIC simply ignored the demand. Shortly there-
after, even the defense’s expert witness admitted in his
deposition that Dr. Mullin’s treatment deviated from
the standard of care. This concession led to Mrs. Goetz
withdrawing her $900,000 offer and demanding
$1.5 million instead. PIC eventually countered with a
$200,000 offer, which Mrs. Goetz didn’t deign worthy of a
response, and the case proceeded to trial. The jury
found Dr. Mullin and IHP liable and awarded $3.5 million
in damages. PIC paid $1 million, the limit on Dr. Mullin’s
policy, and IHP, upon agreement with Dr. Mullin, paid
the rest.
4                                               No. 08-1297

  IHP and Dr. Mullin then joined forces and sued PIC in
the Illinois courts. They claimed that PIC breached a duty
owed to both of them to settle the claim in good faith.
PIC removed the case to federal court, resting on diversity
jurisdiction. Once before the federal court, PIC filed a
motion for judgment on the pleadings as to both IHP and
Dr. Mullin. PIC first argued that the duty to settle in
good faith extends only to Dr, Mullin, who was insured
under the malpractice policy, not IHP, who was
excluded from coverage. PIC went on to argue that since
IHP paid the judgment in excess of the policy limit, Dr.
Mullin suffered no damages, dooming his claim as well.
The judge (Magistrate Judge John A. Gorman sitting by
consent) agreed that PIC had no duty to IHP but held that
since Dr. Mullin sought damages for injury to his reputa-
tion and for emotional distress his claim could proceed.
IHP asked the judge to reconsider his decision or, in the
alternative, enter a final judgment as to IHP so that it
could immediately appeal the decision. FED. R. C IV. P.
54(b). The motion for reconsideration was denied, but
seeing no reason to delay IHP’s appeal, the judge
directed entry of a final judgment as to IHP. IHP now
appeals. Dr. Mullin’s claim against PIC remains pending
in the district court.
  An insurer’s duty to settle in good faith on behalf of its
insured, which is well-settled in Illinois, Haddick v. Valor
Ins., 763 N.E.2d 299, 303 (Ill. 2001); Cramer v. Ins. Exch.
Agency, 675 N.E.2d 897, 903 (Ill. 1996), arises from the
covenant of good faith and fair dealing implied in an
insurance contract. This duty is a narrow exception to
the Illinois courts’ otherwise steadfast refusal to recognize
No. 08-1297                                               5

an independent tort arising from the breach of this con-
tractual covenant. Voyles v. Sandia Mortgage Corp., 751
N.E.2d 1126, 1130-31 (Ill. 2001). The paradigmatic duty-to-
settle case involves three parties: the injured third party;
the insured, who is being sued; and the insurer, who
controls the insured’s defense. If the third party sues
the insured for an amount above the policy limit and
seeks a settlement at the upper limit of the policy, a
conflict of interests arises. In this situation, the insurer
may be tempted to decline the settlement offer, no
matter how good the deal is for the insured, and go to
trial. It makes no difference to the insurer’s bottom
line whether the case is settled or the jury awards astro-
nomical damages; in either event it will pay out only the
maximum on the policy. And if the case goes to trial, at
least there’s a shot that they will win and pay nothing.
The insured, on the other hand, calculates the risks of
trial differently because he will be stuck paying anything
above the policy limit. Cramer, 675 N.E.2d at 903. To
combat the temptation to ignore an insured’s interest
and to make sure that the intent behind the insurance
contract is upheld, Illinois courts have recognized that
an insurer has a “duty to act in good faith in responding
to settlement offers,” and if that duty is breached the
insurer is on the hook for the entire judgment, regardless
of the policy limit. Id.
  This case, however, presents a permutation of the
paradigmatic duty-to-settle case. It involves four
parties: the injured third party, the insured, the
insurer, and the policyholder. IHP, the policyholder,
obtained medical malpractice insurance from PIC on
6                                               No. 08-1297

behalf of Dr. Mullin. As the policyholder, IHP paid the
premiums, but only Dr. Mullin was insured under the
policy. After her husband died, Mrs. Goetz sued both IHP
and Dr. Mullin. PIC refused to settle the case, resulting in
a judgment $2.5 million above the policy limit. On the
short record before us today, there is a pretty good case
to be made that PIC’s refusal to settle breached its duty
to Dr. Mullin. But that’s not the issue raised by this
appeal. Instead, we must determine whether PIC owed
IHP, the noninsured policyholder, a duty to settle in
good faith. The Illinois courts have yet to decide this
question, so we must predict whether the Illinois high
court would stretch the duty to settle to cover the case
before us. Zenith Ins. Co. v. Employers Ins. of Wausau, 141
F.3d 300, 304 (7th Cir. 1998). IHP would have the burden to
convince the Illinois Supreme Court that the duty to settle
should be expanded and consequently carries the
burden before us, as we stand in the state court’s stead.
Voyles, 751 N.E.2d at 1132.
  Arguing for this expansion, IHP emphasizes its con-
tractual relationship with PIC as a policyholder and
customer. This emphasis, though, is misplaced. The duty
to settle is designed to protect the bargain embodied in
an insurance contract, not simply honor the relationship
between contracting parties in general. Cramer, 675 N.E.2d
at 903. If a contractual relationship was all that was
needed, the covenant of good faith would be elevated to
a general tort duty, and the Illinois Supreme Court has
repeatedly refused to go that far. See Voyles, 751 N.E.2d
at 1130-31; Cramer, 675 N.E.2d at 903; 7-Eleven, Inc. v. Dar,
757 N.E.2d 515, 523 (Ill. App. Ct. 2001). After all, the
No. 08-1297                                                  7

contractual covenant of good-faith and fair dealing, the
foundation of the duty to settle, is “used only as a con-
struction aid in determining the intent of contracting
parties.” Cramer, 675 N.E.2d at 903; see also Voyles, 751
N.E.2d at 1131. Here, the intent of the parties is clear—IHP
was to be excluded from coverage. IHP could have paid
the higher premiums to receive coverage from PIC but
chose not to. The duty to settle is meant to protect the
bargained-for insurance coverage, not extend it. An
insurer who acts in bad faith may end up paying above
the contracted policy limits but only when doing so
protects the insured’s legitimate expectation of coverage
under the policy. We doubt that the Illinois high court
would extend the duty to settle to give IHP more than
it bargained for.
  What’s more, the duty to settle is predicated on the
“insurer’s exclusive control over settlement negotiations
and defense of litigation.” Haddick, 763 N.E.2d at 303.
Without this control, no conflict of interest arises because
the policyholder can protect itself during settlement
negotiations. Twin City Fire Ins. Co. v. Country Mut. Ins. Co.,
23 F.3d 1175, 1179 (7th Cir. 1994) (noting that in Illinois
the duty to settle is “an implied correlative” of insurer’s
control over the defense). While PIC did control
Dr. Mullin’s defense, it had no equivalent power over
IHP. IHP had its own lawyer representing its interests
and had an unfettered ability to settle. Dr. Mullin may
have been the focus of the wrongful-death suit, and, as
IHP points out, a settlement with Dr. Mullin could
have extinguished IHP’s liability as well, American Nat’l
Bank and Trust Co. v. Columbus-Cuneo-Cabrini Med. Center,
8                                               No. 08-1297

609 N.E.2d 285, 289 (Ill. 1992) (“[A]ny settlement between
the agent and the plaintiff must also extinguish the princi-
pal’s vicarious liability), but that didn’t take the litiga-
tion out of IHP’s hands. IHP was a codefendant in the
case, and it could have gotten itself off the hook for a
big jury verdict if it settled the case with Mrs. Goetz.
   IHP contends that expecting it to ante up anything for a
settlement would be unfair, given the Illinois Supreme
Court’s recognition that a principal who is vicariously
liable for its agent’s negligence is “blameless.” American
Nat’l Bank and Trust Co., 609 N.E.2d at 289 (recognizing
right to contribution and implied indemnification for
vicariously liable principals against agents). But blame
is not the same as liability. IHP, as the employer of Dr.
Mullin, owed Mrs. Goetz a legal duty, the breach of
which gave rise to its liability in this case. We see no
reason why IHP could be expected to pay a judgment
but not a settlement. If IHP is bristling because it’s on the
hook for wrongs it didn’t commit, then its complaint is
really against Dr. Mullin, not PIC, and it could, depending
on the exact nature of their relationship, possibly
pursue contribution or indemnification from Dr. Mullin
to mitigate its injury. See Faier v. Ambrose & Cushing, P.C.,
609 N.E.2d 315-16 (Ill. 1993); American Nat’l Bank and
Trust Co., 609 N.E.2d at 290; 740 ILL. C OMP. S TAT. 100/2.
IHP may have preferred that PIC settle the case, thereby
avoiding the risks involved with chasing down
Dr. Mullin’s share of the common liability, but the point
is that IHP could have settled too. IHP weighed its
options and chose to proceed to a jury trial. It is unlikely
No. 08-1297                                          9

that the Illinois high court would stretch the duty to
settle to compensate IHP for this bet that went bad.
  Accordingly, we A FFIRM the judgment of the district
court.




                        10-31-08
