HAYES LEMMERZ INTERNATIONAL v. ACE AMERICAN INSURANCE CO. (August 31, 2010)

An explosion at a plant owned by Hayes Lemmerz International-Huntington (LMIH) , a subsidiary of Hayes Lemmerz International (HLI), injured one employee and killed another. The injured employee and the widow of the deceased employee filed workers' compensation claims against both HLI and HLIH as employers and recovered. They then brought a tort suit against the same two companies. The suit did not identify either defendant as an employer. Rather, it alleged that the defendants owned and operated the plant and failed to exercise reasonable care. Apparently, they did not identify the defendants as employers because the exclusive remedy against an employer for a workplace injury is a workers’ compensation claim. HLI notified ACE American Insurance Co., its employer liability policy carrier. ACE declined to take over the defense and offered to pay only half the combined litigation expenses. HLI incurred over $250,000 in defense costs attempting to convince the state court that it was not the employer -- and therefore not liable. Ironically, it eventually discovered that Indiana, by statute, treats a parent and its subsidiaries as joint employers, for workers' compensation purposes, of each other's employees. The suit against HLI was therefore dismissed with prejudice because of the workers' compensation bar. HLI brought an action against ACE for recovery of its attorneys' fees. Chief Judge Simon (N.D. Ind.) dismissed the complaint. HLI appeals.

In their opinion, Judges Bauer, Posner, and Flaum affirmed. Under Indiana law, the duty to defend is determined by the nature of the complaint. The "nature of the complaint" includes not only the specific allegations contained therein but also facts readily ascertainable by the insurer. Here, although neither HLI nor HLIH were identified as employers in the complaint, the Indiana statute made their status as such readily ascertainable. The fact that the complaint lacked merit is irrelevant -- an insured deserves a defense to meritless complaints as well as meritorious ones. A duty to defend (or reimburse) therefore existed. However, that duty requires reimbursement only of reasonable costs of defense. HLI's failure to appreciate the existence and significance of the Indiana statute (HLI has filed a malpractice action against its lawyers) led the Court to conclude that the defense costs were unreasonable and unrecoverable. The Court also rejected HLI's argument that ACE's duty to defend included a duty to advise it about the existence of the statute. ACE had no duty to provide legal advice.