On April 16, 2013, the first district appellate court held that the insured of an insolvent insurer could not recover any proceeds from its insurance policies above the amount paid to an injured party in a settlement agreement.
In October 1998, Kristie Talley was fatally injured when her bicycle became trapped between a curb and a school bus. Talley's parents sued Barrington Transportation Co., Inc. ("Barrington"), the operator of the school bus.
Barrington was covered by two liability insurance policies with Legion Indemnity Company ("Legion") with a combined policy limit in the range of $6 million dollars. However, before the case reached trial, Legion became insolvent and was placed into liquidation under the control of the Illinois Department of Insurance ("Liquidator").
With its insurer insolvent, Barrington lacked the financial resources to compensate Talley's parents and opted to file for bankruptcy. The Talleys and Barrington ultimately negotiated a settlement agreement that was approved by the bankruptcy court. The agreement provided that the Talleys' claims amounted to $7,500,000 and that Barrington agreed to pay the Talleys $1,200,000 to settle their claims in exchange for the Talleys assigning their rights as against Legion to Barrington.
In April 2004, Barrington sought to recover the full limit of its proceeds under the two liability insurance policies. After considering Barrington's claim, the Liquidator determined that Barrington was only entitled to be reimbursed $1,200,000 out of Legion's assets. The trial court adopted the Liquidator's recommendation. The court based its decision in part on section 209(8) of the Illinois Insurance Code ("Code"), which states that judgments occurring "after the date of the entry of the liquidation...order shall [not] be considered in the proceedings as evidence of liability, or of the amount of damages." Id. at *3. The court also rejected the transfer of the Talleys' claim to Barrington as an impermissible assignment of a personal injury claim.
On appeal, Barrington argued that section 209(8) did not preclude the Liquidator from considering settlement agreements entered into after the date of the entry of liquidation. Barrington contended that the settlement agreement provided for the assignment of a contractual right to payment, not the assignment of a personal injury claim.
Barrington also offered as precedent the case of In re Liquidation of Pine Top Insurance Co., 266 Ill.App.3d 99, 639 N.E.2d 168 (1994), which involved similar facts. The injured party in Pine Top reached a settlement agreement with the insured, subsequently filed a claim in liquidation against the insurer, and was awarded the remaining proceeds of the insurance policy. Barrington argued that this case demonstrated that Illinois policy favored enforcing settlement agreements bargained for by the parties.
The appellate court held that the trial court correctly limited Barrington's recovery to the amount it paid the Talleys. The court ruled that the restriction in Section 209(8) was applicable because the settlement agreement was the product of a judgment entered by the bankruptcy court. The court rejected Barrington's characterization of the assignment as involving contractual rights and restated the Illinois public policy against assignment of personal injury claims. Finally, the court noted that Pine Top decision was not relevant to this case because the injured party in Pine Top did not assign their right to payment to the insured.