First District orders retrial, clarifying standard for a policyholder’s burden to prove a settlement was reasonable and realigning the defendant policyholder as a plaintiff.

The Illinois First District Appellate court, applying Illinois law, overruled a verdict in favor of United National Insurance, finding that the trial court had applied an incorrect burden of proof on the policyholder, Faure Brothers Corp.  The trial judge, Sophia Hall, ruled that in order for the policyholder to recover the amounts paid in settlement of an underlying claim relating to the alleged mislabeling of chemicals, it had to prove that its subsidiary had indeed mislabeled the chemicals and that the mislabeling was the cause of the damages alleged in the underlying action. The trial judge then found that Faure had not met this burden and therefore United National did not have an indemnity obligation to Faure for the settlement of the underlying claims.

Air Products & Chemical Inc. provided the chemicals at issue to Faure’s subsidiary.  The subsidiary allegedly mislabeled them and shipped them to Henkel Corp., which used them in an adhesive product it shipped to two medical device companies which later alleged that the chemicals did not bond according to specifications.  Air Products settled claims by the downstream companies and filed suit against Faure for alleged damages. Faure settled the Air Products claim for $210,000 and then sought coverage from its comprehensive general liability policy issued by United National Insurance Co. The insurer denied coverage and filed suit seeking a declaration that it had no duty to defend or indemnify Faure in the underlying action. It is unclear as to why United National was not involved prior to the settlement between Faure and Air Products.

United National secured a ruling that it had no defense duty to Faure. But, in an earlier opinion the appellate court reversed and found that United National did have a duty to defend based on the language of the policy.  It remanded the case for a trial on whether United National had to indemnify Faure for the settlement with Air Products. At trial, the court placed the burden of proof on Faure to demonstrate that its alleged mislabeling of the chemicals actually occurred and the mislabeling caused the damages claimed in the underlying suit. In addition, the trial judge ordered Faure to put on its case first, despite the fact it was a named defendant in the declaratory judgement suit brought by United National.

At the close of Faure’s evidence, United National moved for judgment. The trial judge found that the policyholder had not met its burden of proof in regard to the facts of the alleged mislabeling, and whether it was the actual cause of the alleged damages.

In an unpublished opinion, the Appeals Court, applying de novo review, affirmed the trial court’s ruling that Faure was the nominal plaintiff because “the burden of proving the reasonableness falls on the insured both out of fairness, since the insured was the one who agreed to the settlement, and out of practicality, since the insured will have better access to the facts bearing upon the reasonableness of the settlement.” The court opinion did note that the insurer then has the opportunity to present evidence challenging the reasonableness of the settlement agreement.

The appellate court, however, reversed and remanded on the basis that the trial judge had applied the wrong burden of proof. The appellate court found that when a policyholder settles an underlying claim which is covered by the policy at issue in “reasonable anticipation of liability,” it need not prove that it would actually have been held liable for the underlying claims.  It need only demonstrate that it reasonably anticipated that it could be held liable in the underlying matter. Because the trial court had applied the wrong evidentiary burden, the matter was reversed and remanded for a new trial on the issue of whether the underlying settlement was indeed “reasonable.” United National Ins. Co. v. Faure Bros. Corp., No. 1-13-2419,1-14-3669 (Ill. App. Ct. Jan. 11, 2016). The opinion was filed as unpublished pursuant to Supreme Court Rule 23 and cannot be cited as precedent except as provided under 23(e)(1).