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Tortfeasor May Not Shift Punitive Damages Claim to Insurer under Illinois Law

The Seventh Circuit Court of Appeals held an insurer did not breach its duty to protect a group of detectives from punitive damages in a civil rights action. The court further questioned whether Illinois law would allow a suit that shifted the burden of punitive damages from the tortfeasor to the insurer.

The court was presented with a diversity case appeal governed by Illinois law. The suit against American Alternatives Insurances Company (AAIC) was brought by Kevin Fox, a former prisoner who had filed suit against a group of Will County detectives, who in turn assigned Fox an indemnity claim against the county’s insurer.

The assignment came in a settlement following a jury verdict awarding Fox and his wife, Melissa, $15.5 million in damages, including $6.2 in punitive damages. That civil rights action stemmed from Fox's 2004 arrest for the sexual assault and murder of his three-year-old daughter. Will County detectives Edward Hayes, Michael Guilfoyle, Scott Swearengen, Brad Watchl, and John Ruettiger were sued for arresting and prosecuting Fox without probable cause in violation of his due process rights.

Specifically, Fox alleged the detectives coerced a confession out of him and delayed DNA evidence, leaving him “imprisoned for nearly eight months and separated from his despairing wife and son.” His defense team obtained the DNA evidence and had it tested at a private lab, which excluded Fox as the source of the DNA. The prosecutor then dropped the charges.

Following the jury's verdict finding for Fox on false arrest, due process, malicious prosecution, and emotional distress claims, the detectives appealed, but before doing so they reached an agreement for the Foxes' covenant to not execute the awards of punitive damages against the detectives' personal assets. Later, they agreed to drop an appeal challenging the district court's striking of $2.6 million in punitive damages. The Seventh Circuit subsequently affirmed the judgment on all but the due process claim, upholding $8,166,000 of the award.

Fox then filed another suit against AAIC asserting it breached its good faith duties to (1) reasonably settle the claims against the detectives within policy limits, and (2) inform the detectives of conflicts of interest created by joint representation and Fox's punitive damages claim. The district court dismissed the suit for failure to state a claim.

The Seventh Circuit noted AAIC was not the primary insurer, and under its policy and Illinois law as an excess insurer it had no duty to defend the detectives until the primary insurer exhausted its policy limits; absent that duty it had no obligation to settle any claims or inform the detectives on any potential conflicts of interest.

The court also questioned whether Illinois law would permit such a suit, which sought to pursue punitive damages from the insurer through the covenant, because under that law for tortfeasors are not allowed to escape their own personal liability for punitive damages, which would defeat the very purpose for such damages. The district court's order was affirmed. See: Fox v. American Alternatives Insurance Corporation. 757 F.3d 680 (7th Cir. 2014).

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Related legal case

Fox v. American Alternatives Insurance Corporation