Brian Budrik suffered serious injuries in a fall at a construction site where he was working. He brought a negligence action against several parties, includingR.G. Wegman Construction Company, which managed the site. Wegman was an additional insured on a $1 million policy with Admiral Insurance Company. Wegman also had an excess policy with a $10 million limit. Wegman tendered the case to Admiral, which accepted and controlled the defense. According to Wegman, Admiral knew fairly early on that Budrik's injuries were quite serious, and knew that there was a significant possibility that the ultimate loss would exceed the policy limits, and yet failed to advise Wegman of that risk. Wegman claims that it did not appreciate the risk until right before trial. It advised its excess carrier immediately but the carrier refused coverage because of the late notice. Budrik prevailed at trial and the court entered a judgment in excess of $2 million against Wegman. Wegman filed suit against Admiral, alleging that it breached its duty of good faith. Judge Zagel (N.D. Ill.) dismissed the complaint. Wegman appeals.

In their opinion, Chief Judge Easterbrook and Judges Posner and Tinder reversed and remanded. The Court first had to deal with a jurisdictional issue. After Admiral removed the case to federal court, Wegman amended its complaint to add Budrik as a defendant. Since Budrik and Wegman are both Illinois citizens, the federal court may not have had diversity jurisdiction. But the Court noted that Wegman sought no relief against Budrik. Since there was no basis for adding him, and he is not necessary to resolve the case, the Court dismissed him and proceeded to the merits. The Court noted that a defendant with insurance coverage frequently has no interest in the litigation. If there is no reason to believe that the outcome will exceed the policy limits, only the insurer has a financial stake in the case. In those cases, it makes sense for the insurer to control the defense, to retain competent counsel, and to stay informed of the progress of the litigation. But here, accepting the allegations as true, Admiral learned early on that the outcome could exceed the $1 million policy limit. This fact created a conflict of interest between Admiral and Wegman. The existence of the conflict of interest requires the insurer to notify the insured. Admiral was duty bound to advise Wegman so that Wegman could take whatever steps were necessary to protect its own interest. Of course, the Court emphasized that it was relying only on the pleadings and that Wegman would still have to prove its allegations.