Insurer has Standing to Vacate a Stipulated Judgment Where the Policy is the Sole Source of Recovery
In G.M. Sign, Inc. v. Schane, 2013 IL App (2d) 120434 (March 1, 2013), the IL Appellate Court ruled that State Farm had standing to challenge a stipulated judgment entered against its insured in an underlying TCPA action, even though it was not a party to that suit, nor had it sought to intervene in that case. Per the settlement agreement, the stipulated judgment could only be recovered from the State Farm policy proceeds. Thus, State Farm was the only party that could be injured if the judgment was not vacated or modified. This case also has some interesting coverage implications as the class plaintiffs amended the TCPA complaint after the settlement in order to plead around the TCPA exclusion. So, let the saga begin….
·State Farm, relying upon a TCPA exclusion, denied a defense and indemnity obligation for the underlying suit that alleged the insured violated the TCPA, committed common law conversion and violated the IL Consumer Fraud and Deceptive Trade Practices Act.
·Unbeknownst to State Farm - on Oct. 27, 2010, the trial court preliminarily approved a settlement agreement and stipulated judgment of $4.9 million that could only be collected from State Farm.
·Three weeks later, the class plaintiffs filed a motion for leave to file an amended class action complaint, the express purpose of which was to plead into coverage the claims against the insured. The TCPA claim remained the same, but the other claims selectively alleged facts that made no reference to the TCPA. That motion was granted without objection.
·On Dec. 16, 2010, the trial court conducted a fairness hearing and entered final approval of the settlement and stipulated judgment.
·On Feb. 24, 2011, the class plaintiffs filed a declaratory judgment action against State Farm seeking a declaration that State Farm owed the $4.9 million.
·On Nov. 29, 2011 the declaratory judgment court found that State Farm owed a duty to defend and indemnify its insured, but reserved ruling on the question of the reasonableness of the settlement.
·On Dec. 30, 2011, State Farm filed a Section 2-1401 petition to vacate the Dec. 16, 2010 class action judgment on several grounds, including:
-the named class representative was an inadequate representative
-the TCPA claims were time-barred
-notice to class members was insufficient.
·The trial court found that State Farm failed to satisfy the “diligence” requirement for a 2-1401 petition, suggesting that State Farm had the opportunity to participate in the underlying litigation, but instead it denied coverage.
The Appellate Court ruled that:
(1) State Farm had standing to bring the 2-1401 petition, as State Farm was named in the consent judgment and was the only entity from which the judgment could be satisfied. Thus it was the only entity injured by the judgment. As such, it had standing to petition under section 2-1401 to vacate or modify the judgment.
(2) State Farm showed due diligence with respect to the original action. It denied coverage for the original complaint based on the TCPA exclusion. The amended complaint was filed after the settlement had been reached. While State Farm received the amended complaint, the insured did not attach a copy of the settlement agreement. The court ruled that “there was no lack of diligence in State Farm’s failure to defend under a reservation of rights, where a settlement had been reached.”
(3) State Farm showed due diligence with respect to the filing of the 2-1401 petition. State Farm did not learn of the facts illustrating how the settlement was executed and approved until it delved into discovery in the coverage action. It filed the petition within 30 days of discovering the facts on which the petition was based.
(4) State Farm’s petition raised potential meritorious claims regarding the adequacy of the class representative, the adequacy of the notice and the fairness of the settlement terms to the absent class members. The Appellate Court remanded the case back to the trial court for an evidentiary hearing on the merits of the petition.
NOTE: Although this is not a coverage case, the ruling on point (2) above suggests that the amended pleading filed after the settlement may not have any impact on whether State Farm owed a duty to defend (or breached that duty). Thus, the class plaintiffs’ attempt to plead around the TCPA exclusion after the settlement was already entered may be for naught.