$4.6 Million Judgment Reversed by U.S. Court of Appeals on Insurance Policy Limit and Coverage Dispute

The issue in this case was whether Liberty Mutual Insurance Co. was liable to pay the default judgment of $4.6 million against its insured whose policy limits for this incident was just $25,000. The question then became whether the insurer’s conduct proximately cause the $4.6 million judgment against the insured.

Kimberly Perkins was insured by Liberty Mutual Fire Insurance Co. for auto liability up to $25,000. While her car was being driven by Miquasha Smith, a 16-year-old with a driver’s license permit, it crashed into two parked cars. Smith was convicted of reckless driving.

At the time of the crash, Monteil Hyland was a passenger in the Smith car and was seriously injured. Monteil’s mother, Shannon Hyland, filed suit against Smith. Smith had no auto insurance, but was covered by the car owner’s insurance, Liberty Mutual. In order to be covered, Smith had to have permission from Perkins. Smith claimed that she received the car keys from Perkins’s daughter, Michiah Risby. She said she gave the keys to a person named “Rob” and not to Smith.

When Hyland sued, Liberty Mutual refused Smith a defense. Smith defaulted, and the $4.6 million default judgment was entered against Smith. Smith assigned her claim for coverage from Liberty Mutual to Hyland. Hyland sued Liberty Mutual.

The U.S. District Court for the Northern District of Illinois in Chicago ruled that Liberty Mutual was estopped from denying coverage because it chose not to either defend Smith or file a complaint for declaratory judgment. The district court judge entered judgment against Liberty Mutual for the full $4.6 million despite the $25,000 policy limit.

Liberty Mutual appealed wherein, the opinion written by Justice Frank H. Easterbrook; the district court’s decision was reversed, limiting the damages to the $25,000 policy limits. The appeals panel held that Liberty Mutual’s conduct did not proximately cause the $4.6 million judgment against Smith.

“Although the controversy exceeds $75,000 (the jurisdictional limit for federal court civil cases), the judgment should not have exceeded $25,000. That’s the maximum Liberty Mutual promised to pay and all Smith lost when the insurer declined to defend or indemnify.”

The appeals panel found that because there was damages that were capped by the $25,000 policy limit and Liberty Mutual’s conduct did not cause the $4.6 million judgment, the appeals court found in the absence of bad faith, the maximum loss caused by the failure to defend was $25,000.

“If Smith had a plausible defense, either to liability or the amount of Hyland’s claim, then the insurer’s failure to send a lawyer to help Smith make those arguments could be seen as a proximate cause of the state court judgment. But some judgment against Smith was inevitable (because of the fact that there could be no liability defense) and the amount of the judgment must be taken as justified. Hyland has not argued otherwise. The maximum loss caused by the failure to defend thus is $25,000 and the award in this suit cannot exceed that sum.”

Hyland v. Liberty Mutual Fire Insurance Co., WL 1324593 (7^th Cir. 2018).

Kreisman Law Offices has been handling car accident cases, truck accident cases, bicycle accident lawsuits, motorcycle accidents and brain injury cases for individuals, families and loved ones who have been injured, harmed or killed by the carelessness or negligence of another for more than 40 years, in and around Chicago, Cook County and its surrounding areas, including Hazel Crest, South Barrington, Chicago Heights, Gurnee, Cary, Crystal Lake, Grayslake, Bloomingdale, Darien, Des Plaines, Deerfield, Frankfort, Flossmoor, Olympia Fields, Vernon Hills, Buffalo Grove, Algonquin, Chicago (Old Town, Lincoln Park, South Loop, Roscoe Village, McKinley Park, Lithuanian Plaza, Edgebrook, Back of the Yards, Austin, Jackson Park, Jefferson Park, West Loop, Ravenswood Gardens, Printer’s Row, Pilsen, Chinatown), Hinsdale, Evanston, Lockport, River Forest, Round Lake Beach and Western Springs, Ill.