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American Service Insurance Company v. David Franchini and Carolina Franchini

396 Ill.App.3d 413, 920 N.E.2d 1142, 336 Ill. Dec. 552 (1st dist. 2nd div. 2009)

Words & Phrases

Bad Faith: Statutory

Trial Judge

Peter Flynn

Appellate Judge

Justice Cunningham


Insurer’s conduct does not constitute bad faith (i.e., “vexatious and unreasonable conduct”) where it investigates claim and defends under a reservation of rights.

Fact Summary

In American Service Insurance Co. v. Franchini, 396 Ill. App. 3d 413 (1st Dist. 2009), the court acknowledged the longstanding rule that an insurer’s conduct does not constitute bad faith where the insurer defends under a reservation of rights and files a declaratory judgment action to determine its obligations under an insurance policy.

American Service Insurance Company (“ASI”) issued a personal automobile insurance policy to David Franchini.  David’s sister, Carolina, was driving David’s automobile when she collided with the Wrights’ automobile.  The Franchinis reported the accident to ASI that same day.  Approximately one month thereafter, ASI rescinded its insurance policy issued to David on the basis that David defrauded ASI by failing to inform ASI in his insurance application that Carolina lived with him and frequently drove his automobile.

The Wrights then filed a complaint against the Franchinis for personal injuries and property damage.  Though ASI had rescinded its insurance policy issued to David, it defended the Franchinis under a reservation of rights specifying it could cease defending the Franchinis, if it determined that David had made a material misrepresentation when he applied for the insurance policy with ASI

ASI thereafter filed a declaratory judgment action against the Franchinis.  Approximately nineteen months thereafter, the Franchinis sought leave to file a counterclaim alleging vexatious and unreasonable conduct under 215 ILCS 5/155, which was denied for failure to state a claim upon which relief could be granted.  On appeal, the appellate court held that the counterclaim was not timely filed, coming as it did over nineteen months after ASI filed its declaratory judgment action and because the Franchinis and their attorneys failed to file the counterclaim earlier despite numerous opportunities to do so.

The court then held that the Franchinis could not state a claim for vexatious and unreasonable conduct under 215 ILCS 5/155 because ASI had done precisely what was endorsed by the supreme court in Employers Insurance of Wausau v. Ehlco Liquidating Trust, 186 Ill. 2d 127, 708 N.E.2d 1122 (1999), namely, defend its insured in the underlying suit while reserving its right to cancel coverage should fraud or material misrepresentation be established, as well as file a declaratory judgment action to have a court of law determine whether there had been such fraud or material misrepresentation.  For those reasons, the court affirmed the trial court’s denial of the Franchinis’ motion for leave to file their counterclaim