In Illinois, an insurer’s bad faith refusal to settle within policy limits arises only when the insurer refuses a policy limits settlement demand in the face of a "reasonable probability" of a liability verdict in excess of the policy limits. A cause of action exists in Illinois when an insurer breaches its duty of good faith to its insured by wrongfully failing to settle a claim within the policy limits. Whether the insurer’s refusal to settle a claim within the policy limits can be considered "wrongful" has become the obvious crux of bad faith litigation in Illinois. The Supreme Court of Illinois, in Cramer v. Insurance Exchange Agency,1 explained the tort of bad faith refusal to settle third-party claims, stating:
Unlike an action in fraud, a bad-faith action involves insurer misconduct that is similar to unreasonable and vexatious misconduct…
In Ledingham, the appellate court derived the tort of good faith and fair dealing from contract law…The use of the contractual covenant of good faith and fair dealing to establish an independent tort arises from cases involving the "duty to settle."…These cases generally involve a policyholder, a liability insurer, and a third party. The liability insurer has assumed the policyholder’s defense under the policy and is negotiating a settlement with a third party. In the typical "duty to settle" case, the third party has sued the policyholder for an amount in excess of the policy limits but has offered to settle the claim against the policyholder for an amount equal to or less than
those policy limits.
In this circumstance, the insurer may have an incentive to decline the settlement offer and proceed to trial. The insurer may believe that it can win a verdict in its favor. In contrast, the policyholder may prefer to settle within the policy limits and avoid the risk of trial. The insurer may ignore the policyholder’s interest and decline to settle. This court has recognized that the insurer has a duty to act in good faith in responding to settlement offers… When an insurer breaches this duty by refusing to settle, the insurer may be liable for the full amount of a judgment against the policyholder, regardless of policy limits…
The "duty to settle" arises because the policyholder has relinquished defense of the suit to the insurer. The policyholder depends upon the insurer to conduct the defense properly. In these cases, the policyholder has no contractual remedy because the policy does not specifically define the liability insurer’s duty when responding to settlement offers. The duty was imposed to deal with the specific problem of claim settlement abuses by liability insurers where the policyholder has no contractual remedy…2
In general, the duty of good faith and fair dealing requires the insurer to defend the insured’s interests with at least equal consideration to its own interests in evaluating settlement. An insurer is not required to disregard its own interests or to treat the insured’s interests as "paramount".3 The risk of an excess verdict is insufficient, and an insurer need not make a settlement proposal when it reasonably believes it has a good defense to the claim.4 The insurer’s conduct is tested against an objective standard, and its refusal to settle is judged upon review of the relevant factors and upon the facts that existed at the time the insurer chose to forego settlement.
The factors considered in bad faith refusal or delay in settling are numerous, and are generally dependent on the facts and surrounding circumstances. These factors include: (1) plaintiff’s refusal to settle and the insurer’s willingness to negotiate; (2) the insurer’s reasonable belief it has a good defense to the claim; (3) the insurer’s proper and timely investigation of the claim; (4) the insurer’s consideration of the advice of its defense counsel; (5) the insurer’s communication with and informing the insured of offers to settle within the policy limits, as well as the nature and risks of litigation, and the insured’s right to retain additional counsel at the insured’s expense; (6) the strength of the liability evidence against the insured and the potential of the verdict exceeding the limits; (7) attempting to have the insured contribute to settlement within the policy limits; (8) whether or not the insurer actually had an opportunity to settle; (9) the insured’s "misconduct"; and (10) opinions and advice of the insurer’s claim personnel.5 Further, whether an insurer’s "delayed" response to a settlement offer is in bad faith depends on the circumstances of the case, taking into account such additional factors as the complexity of the case and the stage of the negotiations, that is, early in the claim as opposed to after a significant amount of investigative time.6
An insurer has a duty to act in good faith in responding to settlement offers and, if the insurer breaches this duty, it may be liable for the entire judgment against the insured, including any amount in excess of the policy limits.7 The wrongful failure to settle a claim against an insured can arise from negligence, fraud or "bad faith" on the part of the insurer.8 The duty of an insurer to settle arises when a claim has been made against the insured and there is a "reasonable probability" of both recovery in excess of the policy limits and of a finding of liability against the insured.9 Also, an insurer’s duty to settle within the policy limits generally does not arise until a third party demands settlement within the policy limits, and thus, an insurer generally does not have a duty to initiate settlement negotiations.10 There is, however, an exception to this latter rule, where the probability of an adverse finding on liability is great and the amount of probable damages would greatly exceed the policy limits.11
Plaintiff’s unilateral time-limit demand. A determination of whether an insurer can be said to have acted in bad faith by failing to offer its policy limits in response to a plaintiff’s unilateral time-limit demand certainly involves an analysis of the Supreme Court of Illinois decision in Haddick v. Valor Insurance.12 In Haddick, the administrator of a passenger’s estate brought suit against the driver’s automobile liability insurer to recover "as assignee" for bad faith refusal to settle for the policy limits. The administrator’s decedent, James Griffith, was a passenger in a vehicle that was insured by Valor Insurance, which insured the vehicle’s driver, Larry Woodley. Valor insured Woodley for $20,000 per person. In response to pre-suit correspondence transmitting $82,000 in medical bills submitted on behalf of the administrator, Valor first responded that it would discuss settlement after it received a copy of the police report. Later, Valor indicated that its investigation was still pending to ascertain whether Woodley was actually driving the vehicle at the time of the accident. On March 7, 1997, a 14-day policy limit demand was made by the administrator, after which time the administrator would "no longer settle the claim within the policy limits."13 Valor responded that the settlement demand was premature and that it was still investigating to determine who was driving the vehicle. The administrator extended the settlement deadline to April 7, 1997. When Valor did not settle by that date, the administrator filed suit and informed Valor that it had "no intention of settling the case at this time."14
Approximately one year after suit was filed, the administrator refused Valor’s offer of the policy limits in settlement of the case against Woodley. Later, a judgment against Woodley in the amount of $150,924 was entered. After the judgment was entered, Woodley assigned his claims against his insurer to the administrator, who filed the bad faith action against Valor. The trial court dismissed the administrator’s complaint, finding that Valor had no duty to settle the claim prior to suit being filed, and that the administrator could not maintain a bad faith action once she withdrew her policy demand.
The trial court was reversed by the Appellate Court, and the Appellate Court was affirmed by the Illinois Supreme Court. The Supreme Court recognized that the insurance policy gives the insurer the right to investigate, negotiate and settle any claim or suit against its insured. However, the duty to settle within policy limits does not arise at the time the parties enter into the insurance contract, nor does it depend on whether or not a lawsuit has been filed. Instead, the duty of an insurer to settle arises when a claim has been made against the insured and there is a "reasonable probability" of recovery in excess of policy limits, as well as a "reasonable probability" of a finding of liability against the insured. The Haddick Court held that the administrator stated a cause of action against Valor for bad faith, since the administrator pled sufficient facts to establish that Woodley was in fact the driver of the vehicle at the time of the accident, and had established that the damages greatly exceeded the amount of the insurance available to Woodley.
Finally, with respect to the issue of the plaintiff’s withdrawal of the settlement demand, the Supreme Court in Haddick held that once the duty to settle arises on behalf of the insurer, the next question is whether the insurer breached that duty. The Haddick Court looked to the amount of time that Valor had to investigate and respond to the policy demand, in spite of the fact that the administrator stated that the offer to settle within policy limits would be withdrawn if not accepted by a certain date. The Court determined that whether Valor acted in bad faith by failing to settle within the unilaterally imposed deadline was a question of fact for the jury. The Haddick Court focused on the policy limits demand being made by the administrator giving rise to a duty on the part of the insurer to settle within policy limits. The Court looked to the fact that Valor had approximately a year to investigate and respond to the administrator’s demand, before it was withdrawn, and held that the administrator had stated a cause of action for bad faith by alleging that there was both a reasonable probability of liability and a reasonable probability of a recovery in excess of policy limits at the time the policy limits demand was made.15
Haddick focuses on the time before the policy limits demand expired to determine whether the "reasonable probability" of liability and excess damages existed. Other Illinois decisions involving a unilateral policy limits deadline have looked at the issue from another perspective, that being the claimant’s reasons for not accepting the demand although the offer was made after the deadline. For example, in Meixell v. Superior Insurance Company,16 the court held that in order for the plaintiff to state a claim for breach of an insurer’s duty of good faith under Illinois law, the plaintiff must allege sufficient facts to demonstrate why the offer of settlement after the deadline could not have been accepted. The court in Meixell upheld the dismissal of the bad faith complaint against the insurer because the insured could not show that the insurer’s conduct proximately caused the excess verdict. The insured argued that the insurer had breached its duty when it failed to settle for the policy limits of $20,000. Because the insurer rejected the offer to settle for $20,000, the insured believed that bad faith had been demonstrated. However, three months after the demand was made, the insurer did offer to settle for the policy limits.
The Meixell court held that when an insurance company offers to settle and it is refused for no reason, it does not constitute bad faith. Without a showing of bad faith, an insured cannot state a cause of action.17 Thus, a "bad faith" refusal to settle presupposes that an insurer had a reasonable opportunity to settle within the policy limits.18
Similarly, in Adduci v. Vigilant Ins. Co.,19 the claimants made a policy demand with a 28-day deadline to the defendant’s insurer. After the expiration of the 28-day deadline, the insurer’s attorney indicated by letter that a response to the policy limits demand would be forthcoming. At a later date, 72 days after the claimants demanded settlement, the insurer offered to pay the insured’s full policy limits of $25,000 in settlement. The claimants refused this offer. In examining this fact situation, the Adduci court found that the insureds had sufficiently alleged the existence of the insurer’s duty to treat the insured’s interests at least equally with its own.
The Adduci court found that the allegations established that the insurer was aware of almost certain liability on the part of the insured for the injuries suffered by the claimant. However, the Adduci court found that the insurer had not breached its duty to protect the interests of its insured when it did not respond with a policy limits offer within the time frame dictated by the claimants. The Adduci court found that the sole reason alleged in the complaint for the claimants’ refusal to accept the insurer’s tender of the offer 72 days after the demand was made and 40 days after it "expired" was that "further preparation of the claims for trial was conducted, thereby necessitating a different attorney fee arrangement between plaintiffs’ counsel and all three plaintiffs."20 According to the Adduci court:
We are of the opinion that these allegations are insufficient as a matter of law to demonstrate that the activities of Insurer constituted a breach of its duty to Insured. As stated, we recognize in some circumstances an insurer’s failure to respond to a settlement demand, where trial could result in a judgment exceeding policy limits, could constitute a breach. Here, the allegations show that Insurer did respond to the claimants’ demand. While this response was forthcoming after the passage of the claimants’ self-imposed deadline, it was made only 40 days thereafter, and came only 13 months after the occurrence of the accident giving rise to the claimants’ suit. No facts sufficiently indicate why the claimants found it impossible to accept the offer at this time, so as to fairly place the blame for failure of settlement upon Insurer... In such circumstances, we cannot say that the recited facts adequately allege a breach of duty on the part of Insurer.21
Finally, of note, there is one Fifth District Appellate Court case that held that a question of fact exists for a jury as to bad faith when the insurer waits for an extended period of time to offer its limits after a policy demand is made. In Mid America Bank & Trust Company v. Commercial Union Insurance,22 the plaintiff was prepared to settle his claim for the Commercial Union policy limits of $50,000; however, the offer was withdrawn on the eve of trial after being held open for three years. Subsequently, a jury awarded the plaintiff over $900,000 and the defendant assigned his claim of "bad faith dealing" to the plaintiff. The Mid America court found that Commercial Union was aware of the policy limits demand, the extent of the injury, the possibility of bad faith, the possible personal liability of the insured, and the risk of excess liability if the case were tried. The court found that for three years there was a clear opportunity to settle within the policy limits but Commercial Union refused. Based on this fact pattern, the court found that there was a jury question as to whether Commercial Union acted negligently or in bad faith by not offering to settle the case for the policy limits for three years, even though the insurer later offered to pay the policy limits and the plaintiff refused that offer.23
Is There a Duty on the Insurer to "Initiate"? A plaintiff’s steadfast refusal to accept (or even consider) any settlement offer after his unilateral deadline has expired raises the issue of the insurer’s obligation to "initiate" settlement negotiations. As noted, an exception to the general rule of no duty to initiate settlement negotiations applies where the probability of an adverse finding on liability is great and the amount of probable damages would greatly exceed the policy limits.24 An entire body of law has developed in this area.25 In Illinois, the exception to the general rule that an insurer does not owe a duty to initiate settlement negotiations is to be employed "sparingly, and then only in the most glaring cases of an insured’s liability, since trial attorneys are not endowed with the gift of prophecy so as to be able to predict the precise outcome of personal injury litigation."26
1 174 Ill.2d 513, 675 N.E.2d 897 (1996).
2 Cramer, 174 Ill.2d at 525-27 (citations omitted).
3 Adduci v. Vigilant Ins. Co., 98 Ill.App.3d 472, 424 N.E.2d 645 (1st Dist. 1981).
4 Haas v. Mid America Fire & Marine Ins. Co., 35 Ill.App.3d 393, 343 N.E.2d 36 (3rd Dist. 1976).
5 See generally, 14 Couch on Ins. §206:28.
7 Cramer, 174 Ill.2d at 525-27.
8 Transport Insurance Company, Inc. v. Post Express Company, 138 F. 3d 1189 (7th Cir. 1998) (applying Illinois law).
9 Haddick v. Valor Insurance, 198 Ill.2d 409, 763 N.E.2d 299 (2001).
10 See, e.g. Kavanaugh v. Inter-State Fire & Cas. Co., 35 Ill.App.3d 350, 356, 342 N.E.2d 116, 121 (1st Dist. 1975).
11 Kavanaugh, 35 Ill.App.3d at 356; Adduci v. Vigilant Insurance Company, 98 Ill.App.3d 472, 424 N.E.2d 645 (1st Dist. 1981).
12 198 Ill.2d 409, 763 N.E.2d 299 (2001).
13 763 N.E.2d at 302.
15 763 N.E.2d at 306.
16 230 F.3d 335 (7th Cir. 2000) (applying Illinois law).
17 Meixell, 230 F.3d at 336, citing Brocato v. Prairie State Farmers Ins., 166 Ill.App.3d 986, 520 N.E.2d 1200 (1998).
18 See also, Van Vleck v. Ohio Cas. Ins. Co., 128 Ill.App.3d 959, 471 N.E.2d925 (3rd Dist. 1984).
19 98 Ill.App.3d 472, 424 N.E.2d 645 (1st Dist. 1981).
20 424 N.E.2d at 649.
21 424 N.E.2d at 649.
22 224 Ill.App.3d 1083, 587 N.E.2d 81 (5th Dist. 1992).
23 587 N.E.2d at 84.
24 Kavanaugh, 35 Ill.App.3d 350.
25 See generally, Duty of Insurer to Initiate Settlement Negotiations, 51 A.L.R. 5th 701.
26 Adduci, 98 Ill.App.3d at 478, citing, Kavanaugh, 35 Ill.App.3d at 357; see also, Ranger Ins. Co. v. Home Indemnity Co., 741 F.Supp. 716 (N.D.Ill. 1991) (applying Illinois law) (probability of adverse finding on liability must be "considerable" and amount of probable damages would "greatly exceed" limits; no showing settlement offer within the policy limits would have been accepted); Haas v. Mid America Fire & Marine Ins. Co., 35 Ill.App.3d 993 (3rd Dist. 1976) (dismissal proper where it was clear that claimant would not accept policy limit offer or insurer reasonably believed it had a good defense to the claim); Interstate Indemnity Co. v. Utica Mutual Ins. Co., 867 F.Supp. 1355 (applying Illinois law) (no indication claimant would have accepted settlement within policy limits); General Casualty. Co. v. Whipple,328 F.2d 353 (7th Cir. 1964) (applying Illinois law) (no offer to settle within the policy limits; insurer did not believe settlement within liability limits was possible; strong liability defense); Oda v. Highway Ins. Co., 44 Ill.App.2d 235 (1st Dist. 1963) (imposing duty to initiate settlement negotiations places an insurer at a negotiating disadvantage not imposed on other litigants; no duty to initiate settlement negotiations where no possibility of settlement within limits). Thus, it has been observed that Illinois law does not require an insurer to initiate settlement negotiations where there is no realistic possibility of settlement within the policy limits. 51 A.L.R. 5th 701 at §10[b] (and cases cited therein).
James P. Marsh is an equity member of Momkus McCluskey, LLC, Downers Grove. He received his B.A. in 1983 from Eastern Illinois University, and his J.D. in 1988 from The John Marshall Law School. Jim’s practice concentrates in the areas of casualty defense, municipal liability, insurance coverage, appellate, and professional liability defense.