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Pleading a duty to settle in insurance cases

Chicago Daily Law Bulletin April 2, 2014

By Colin H. Dunn

Insurers have a duty to their insured to act in good faith when responding to settlement demands by the plaintiff.

This so-called “duty to settle” exists “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.” Cramer v. Insurance Exchange Agency, 174 Ill.2d 513, 526 (1996).

However, “[t]rial attorneys are not endowed with the gift of prophecy so as to be able to predict the precise outcome of personal-injury litigation.” Kavanaugh v. Interstate Fire & Casualty Co., 35 Ill.App.3d 350, 357 (1991). And the mere fact that the insurance company was unsuccessful at trial does not show that its defense was made in bad faith.

Recently, the 1st District Appellate Court considered whether a complaint stated a bad-faith claim against an insurance company for rejecting a policy-limits settlement demand made before trial. See Powell v. Am. Serv. Ins. Co., 2014 IL App (1st) 123643.

In Powell, the plaintiff allegedly sustained injuries in an automobile accident. The defendant’s insurance policy had an indemnity limit of only $20,000 per person. With medical bills stemming from the crash in excess of $23,000 and a workers’ compensation lien of more than $70,000, the plaintiff demanded the $20,000 policy limit, but the insurance company rejected the settlement offer because it believed its insured was not liable for the crash (the plaintiff had made a U-turn in front of the defendant just before the crash).

The jury found the defendant 60 percent at fault and the plaintiff 40 percent at fault for the accident and awarded the plaintiff a net verdict of $47,951.15 plus costs. After trial, the defendant assigned her rights under the policy to the plaintiff, who then filed a complaint for bad faith against the insurance company.

In that complaint, the plaintiff alleged that “[b]ased on information known to the defendant[-insurance company] at and prior to the transmission of the above described letter [requesting settlement for the policy limits], including the deposition testimony in the prior action of [the parties], both taken on Dec. 18, 2002, facts were readily apparent that the principal proximate cause of the accident causing injury to the then-plaintiff … was the failure of the then-defendant … to keep a proper lookout for the vehicle driven by [the plaintiff].”

The plaintiff also alleged that “[a]s a result of the aforementioned facts, the defendant[-insurance company] was on notice, at and prior to the transmission of the above described letter, that its insured failed to see and properly react to what was obvious in front of her and probable operation of her vehicle at excessive speed and that there was a reasonable probability of a finding of at least 50 percent fault against its insured.”

The insurance company also allegedly knew “at and prior to the transmission of the above described letter … that there was a workers’ compensation lien for workers’ compensation benefits paid to and for the benefit of [the plaintiff] arising from the accident that was the basis of the prior action, in excess of $74,000 of which there were medical charges then in excess of $23,000, which facts created a reasonable probability that recovery of [the plaintiff] at trial would be in excess of the $20,000 policy limit of the policy.”

The plaintiff alleged that the insurance company had a reasonable opportunity to settle the case within the policy limits, and that the insurance company acted in bad faith by 1) refusing to participate in settlement negotiations or alternatively refused to participate in settlement negotiations in good faith; 2) refusing settlement offers made by the plaintiff to settle his claim within the policy limits; 3) failing to advise the defendant of the settlement offer; and 4) failing to keep the interests of the defendant equal to its own.

The insurance company moved to dismiss the complaint pursuant to Section 2-615, arguing that the plaintiff failed to plead sufficient facts to show it was reasonably probable that the defendant was at least 50 percent at fault for the crash. The insurance company also asserted the plaintiff failed to plead sufficient facts demonstrating a reasonable probability of damages in excess of the policy limits.

The circuit court granted the insurance company’s motion, and the appellate court affirmed. The 1st District began its analysis by noting that, in Haddick v. Valor Insurance, our Supreme Court set forth the elements required to establish a bad-faith claim: 1) the duty to settle arose; 2) the insurer breached the duty; and 3) the breach caused injury to the insured. 198 Ill.2d 409, 416 (2001).

The duty to settle arises “when a claim has been made against the insured and there is a reasonable probability of recovery in excess of the policy limits and a reasonable probability of a finding of liability against the insured.” Id.

The court recognizing that no Illinois authority has defined “reasonable probability” in the context of a bad-faith pleading, or the level of the pleading detail required to survive a Section 2–615 motion to dismiss a complaint alleging bad faith by a third party.

But it found that the plaintiff’s allegation that the insurance company “was aware” of a workers’ compensation lien and medical bills exceeding the $20,000 policy limits was (barely) sufficient to establish for motion-to-dismiss purposes that a reasonable probability of recovery in excess of the policy limits existed.

Not so for liability. The “reasonable probability” standard set forth in Haddick requires the plaintiff to plead facts that demonstrate liability is “probable,” as opposed to merely “possible.” Haddick, 198 Ill.2d at 417.

In other words, Haddick requires the pleading of facts which show that liability is at least more likely than not but not necessarily a certainty. Given the nature of the accident, and the plaintiff’s admission that he made a (potentially illegal) U-turn in front of the defendant’s vehicle, the court found the plaintiff failed to sufficiently plead facts demonstrating a reasonable probability of liability against the defendant.

So the insurance company did not have a duty to settle the case for the policy limits.

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