U.S. Court of Appeals Reverses District Court Decision on the Right to Sue and Enforces Arbitration Agreement

The U.S. Court of Appeals for the 7th Circuit in Chicago has reversed the decision of a U.S. District Court judge wherein an agreement between the parties, Hennessy Industries Inc. and National Union Fire Insurance Co. of Pittsburgh, required arbitration of any dispute that mandated an interpretation of the agreement. In this case, Hennessy Industries manufactured car parts. Since the 1980s, Hennessy has been the named defendant in many lawsuits for asbestos-related personal-injury cases. Hennessy has been looking to National Union Fire Insurance Co. of Pittsburgh for insurance coverage for these claims. The two companies entered into a cost-sharing agreement in 2008.

When the lawsuits for asbestos-related injuries started coming in, Hennessy requested that National Union indemnify it for settlement and defense costs as provided for in their agreement. The two parties, however, could not come to an agreement as to what was owed. Hennessy demanded arbitration in line with the agreement, which provided for arbitration of disputes between the parties.

Hennessy filed suit in 2013 under 215 ILCS 5/155(1), maintaining that National Union’s delays in granting coverage of the asbestos claims had been vexatious and unreasonable.

National Union contended that the arbitration clause in the cost-sharing agreement required arbitration of Hennessy’s Section 155 claim and moved the court to dismiss the lawsuit. The district court denied the motion on the basis of the belief that Hennessy’s claim arose under Illinois statutory law rather than the cost-sharing agreement.

National Union took this interlocutory appeal.

National Union had argued that the cost-sharing agreement required arbitration of any dispute where interpretation of the agreement was needed and that because a finder of fact will have to interpret the agreement in order to determine whether it was violated, vexatiously or unreasonably, Hennessy’s Section 155 claim required an interpretation of the cost-sharing agreement and therefore must be arbitrated.

The court of appeals found that argument persuasive. However, the panel did reject National Union’s argument that the Federal Arbitration Act pre-empted Section 155 of the Illinois Insurance Code. The court of appeals stated that the McCarran-Ferguson Act provided that no federal statute should be construed to invalidate any law enacted by any state for the purpose of regulating the business of insurance.

The panel also agreed with National Union in that Hennessy agreed to waive any right to ask for arbitration to award punitive damages, fines or penalties for National Union’s allegedly unreasonable delay in honoring Hennessy’s claims.

The appeals court found that having submitted a dispute to arbitration that explicitly excludes a particular remedy, a party cannot then sue in court for the excluded remedy. Finally, the appellate panel concluded that Section 155 is procedural rather than substantive and provides a remedy in a specified type of action rather than creating a cause of action. The court of appeals rejected the holding of an Illinois case, Smith v. State Farm Insurance Companies where a lawsuit was allowed based solely on Section 155. The court reasoned that because Smith was a decision by the intermediate state appellate court, rather than the state Supreme Court, it chose not to follow it.

Therefore, the district court’s decision allowing the lawsuit is reversed and ordered that the Hennessy lawsuit be dismissed.

Hennessy Industries Inc. v. National Union Fire Insurance Co. of Pittsburgh, No. 14-1277, U.S. Court of Appeals for the 7th Cir., Oct. 28, 2014

Kreisman Law Offices has been handling catastrophic personal injury cases, business litigation, commercial litigation, medical negligence cases, birth injury cases and nursing home abuse cases for individuals, families and businesses for more than 38 years in and around Chicago, Cook County and its surrounding areas, including Evergreen Park, Calumet City, Alsip, Crestwood, Orland Park, Niles, Morton Grove, Lockport, Kenilworth, Lisle, Geneva, Des Plaines, Deerfield, Cicero, Western Springs, Chicago (Brighton Park, Englewood, Marquette Park, Washington Heights, Lake Calumet, Pullman), Berwyn and River Forest, Illinois.

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