December 03, 2014 Practice Points

Statutory Attorney Fees Claim Ruled Arbitrable Despite Contrary Illinois Precedent

By Courtney D. Tedrowe

In Hennessy Indus., Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, No. 14-1277, 2014 WL 5449490 (7th Cir. Oct. 28, 2014) (Posner, J.) the Seventh Circuit reversed a district court order denying the appellant’s motion to compel arbitration of a suit under section 155(1) of the Illinois Insurance Code (Section 155). In doing so, it had to overcome a directly contrary line of Illinois Appellate Court cases.

In 2008, Hennessy, a manufacturer faced with numerous asbestos claims, entered into an agreement with National Union whereby National Union would indemnify Hennessy for certain costs related to the claims. The agreement contained an arbitration clause. When a dispute arose as to amounts owed by National Union, the parties initiated arbitrated.

While the arbitration was pending, Hennessy filed a federal court action under Section 155. Section 155 provides that “a court” may award an insured its attorney fees in an action against an insurer for failure to pay, or delay in paying, on a policy, where the insurer’s conduct was “vexatious and unreasonable.” 215 ILCS 5/155(1). Hennessy complained that National Union’s actions had been vexatious and unreasonable.

National Union moved to compel arbitration. The district court denied the motion on the grounds that (1) the arbitration clause expressly stated that “the arbitrators shall not be empowered or have jurisdiction to award punitive damages, fines or penalties”, and (2) the Section 155 claim did not arise under the parties’ agreement, but under the Illinois Insurance Code. National Union appealed. The Seventh Circuit reversed.

Noting that the arbitration clause mandates arbitration of “any dispute” requiring “interpretation” of the agreement, the court found persuasive National Union’s argument that resolution of the “vexatious or unreasonable” issue would require interpretation of the agreement. Regarding the language the district court relied on to deny the motion—“the arbitrators shall not be empowered or have jurisdiction to award punitive damages, fines or penalties”—it also found persuasive National Union’s argument that this simply meant that Hennessy had waived the Section 155 claim—not that the arbitrators could not hear it.

Having addressed the arguments related to the arbitration clause, the court next had to overcome Hennessy’s statutory argument based on a line of Illinois Appellate Court cases that culminated in Amerisure Mut. Ins. Co. v. Golbal Reinsurance Corp. of Am., 927 N.E.2d 740, 751-52 (Ill. App. 2010). The Amerisure cases applied rules of statutory construction to Section 155, which provides that “the court” may award attorney fees. Notably, the Amerisure cases had clearly held that “a party may not recover attorneys fees under section 155 by way of an arbitration proceeding.” Id. at 751. Notwithstanding this clear holding, the court held that Section 155 claims could be arbitrated. The court noted that Amerisure line of case were all intermediate appellate cases, and stated that Amerisure is “highly vulnerable, because it is wooden.” Perhaps explaining what it meant, the court said that Section 155 is about remedies, not jurisdiction or venue, in that it creates a remedy but not a separate cause of action. The court further noted that parties to arbitration clauses frequently agree to arbitrate disputes that could have been brought in a court.

The Seventh Circuit’s opinion is noteworthy because, faced with a clear line of Illinois appellate court cases holding that an Illinois statute did not permit arbitration, the court nevertheless held to the contrary, and directed the trial court to order arbitration.

Keywords: alternative dispute resolution, litigation, arbitration, arbitrability, enforceability, statutory interpretation, insurance, Illinois Insurance Code

Courtney D. Tedrowe is with Novack and Macey LLP in Chicago, Illinois.

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