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BREACH OF THE DUTY TO SETTLE: LIFE SINCE OLYMPIA FIELDS

BREACH OF THE DUTY TO SETTLE:
LIFE SINCE OLYMPIA FIELDS

Jay Paul Deratany
Barry G. Doyle
Deratany & Carden
205 West Wacker Drive
Suite 900
Chicago, IL 60606
(312) 857-7285
Breach of the Duty to Settle: Life Since Olympia Fields

A. Olympia Fields: The Traditional Standard

The traditional statement of the insurer’s duty to settle was originally set forth in Olympia Fields Country Club v. Banker’s Indemnity Ins. Co., 325 Ill.App. 649, 60 N.E.2d 896 (1st Dist. 1945). There the tort defendant carried liability insurance with policy limits of $10,000. A suit was brought against the tort defendant by an invitee who was injured while on the premises. The tort plaintiff’s attorney offered to settle the matter for $3,500 prior to verdict. This demand was declined, and the matter proceeded to trial, resulting in a $20,000 verdict in favor of the plaintiff. Post-verdict, the plaintiff offered to settle the matter for $8,000, but this was also declined. After the verdict for the plaintiff was affirmed on appeal, the tort defendant paid the excess judgment and brought an action against the liability carrier for the money paid to satisfy the excess verdict. The bad faith action proceeded to trail, and a judgment was entered in favor of the tort defendant and against the liability carrier, and the carrier appealed.

The Appellate Court recognized that the case presented an issue of first impression in Illinois as to the insurer’s duty to settle within policy limits. It consulted cases from numerous other jurisdictions and found that the case acknowledged that an insurer may be liable for the entire judgment recovered against an insured although the judgment exceeds policy limits if the insurer is guilty of fraudulent conduct or bad faith in refusing to settle within policy limits. It held that the rule in Illinois would be that a carrier would not be liable for an excess verdict if it failed to settle within policy limits in the absence of fraud, negligence, or bad faith. However, the Appellate Court reversed the verdict in favor of the tort defendant.

Following Olympia Fields, the Illinois Appellate Curt continued to hold that the insurer would be liable for an excess verdict only where the insurer was guilty of fraud, bad faith, or negligence, but expressed the carrier’s duty to settle as being determined by whether the insurer gave the insured’s interests as much weight as its own. See, e.g., Adducci v. Vigilant Ins. Co., Inc,, 98 Ill.App3d 472, 53 Ill.Dec. 854, 424 N.E.2d 645 (1st Dist. 1981).

B. Haddick v. Valor Insurance

Olympia Fields expressed the standard for the insurer’s duty to settle until the Illinois Supreme Court’s 2001 decision in Haddick v. Valor Insurance, 198 Ill.2d 409, 261 Ill.Dec 329, 763 N.E.2d 299 (2001).

Haddick arose from a single vehicle accident involving James Griffith, the decedent, and Larry Woodley, the tort defendant. After the accident occurred, Woodley was taken to the hospital where he told the investigating officer that he was driving the vehicle. He was insured by Valor Insurance with policy limits of $20,000. Griffith died of injuries sustained in accident after incurring medical bills in excess of $80,000. Woodley subsequently told the police officer that he did not remember the accident or who was driving the vehicle.

Haddick, the special administrator of Griffith estate, hired an attorney to represent the estate. The attorney submitted a demand for settlement on August 13, 1996. The carrier responded on August 22, 1996 stating that it needed to obtain a copy of the police report. On November 1, 1996 it acknowledged receipt of a copy of the police report, but stated that there was an investigation still pending as the insured claimed that he was unable to recall the accident. On March 7, 1997, sent a letter demanding settlement for the policy limits within fourteen days or the settlement offer would be withdrawn. The carrier responded that the demand was premature as the investigation was still ongoing. The deadline for settlement was extended to April 7, 1997. When the deadline passed without settlement, suit was filed against the insured and the plaintiff withdrew the settlement demand. One year later, the carrier tendered its policy limits, but the plaintiff refused the offer. The trail court entered summary judgment in favor of the plaintiff on liability. After a jury trial, judgment was entered against the insured in the amount of $150,924.80.

The plaintiff received an assignment from the tort defendant of his rights against the carrier and initiated suit alleging that the carrier acted in bad faith by failing to settle the case within policy limits. The trail court dismissed the bad faith action, holding that there was no duty on the part of the carrier to settle prior to suit being filed and that the plaintiff could not maintain a bad faith action after having withdrawn her settlement demand. The plaintiff appealed.

The Appellate Court (315 Ill.App.3d 752, 248 Ill.Dec. 812, 735 N.E.2d 132 (3rd Dist. 2000)) reversed the trial court. The Appellate Court held that the duty to settle attached at the inception of the contract of insurance due to the insured’s relinquishment of control over settlement negotiations. It also held that the plaintiff could maintain a bad faith action after having revoked her settlement demand. The Illinois Supreme Court granted the carrier’s petition for leave to appeal.

The Supreme Court reversed the trial court and affirmed the Appellate Court. It held (1) that the duty to settle within policy attaches even where no suit has been filed when there is a demand to settle the case within policy limits where there is a reasonable probability of a finding of liability against the insured and reasonable probability of a recovery in excess of policy limits and (2) it is a question of fact as to whether that duty has been breached, even where the tort claimant withdraws from settlement negotiations.

As to the duty to settle, the Illinois Supreme Court began its analysis by stating that a carrier has a duty to act in good faith to respond to settlement offers and where the carrier breaches that duty, it may be held liable for the entire amount of the judgment even that part in excess of the policy limits. The duty to settle arises from the control over settlement negotiations that the carrier gains through the insurance contract. The Supreme Court rejected the Appellate Court’s holding that the duty to settle arises from the conception of the insurance contract because Illinois law does not impose a duty on insurance carriers to initiate settlement negotiations and that this duty is not triggered until there has been a demand to settle within policy limits. As to when settlement is required it held the duty to settle is owed where there is a reasonable probability of a recovery in excess of policy limits and a reasonable probability of a finding of liability against the insured. As to the facts presented, in light of the nature of the injuries sustained and the police report where Woodley stated that he was the driver of the vehicle, there was a reasonable probability of a finding of liability and of damages in excess of the policy limits, the Supreme Court held that the facts alleged were sufficient to create a duty on the part of the carrier to settle.

After having established that there was a duty to settle prior to suit being filed, the Illinois Supreme Court held that it was a question of fact as to whether the carrier breached its duty. Having already held that there was a duty to settle even though suit had not been filed. Under the circumstances presented, the Supreme Court held that it was for the jury to determine whether the carrier acted in bad faith by failing to settle within the defendant’s policy limits.

C. Significance of Haddick

There are two propositions which are clearly established by Haddick. The first is that a tort claimant can withdraw from settlement negotiations and still later maintain a bad faith action. The second is that the duty to settle attaches before suit is filed when there is a demand for settlement within policy limits and there is a reasonable chance of a verdict in excess of policy limits and a reasonable chance of an adverse finding to the insured on liability.

The first proposition established by Haddick serves to level the playing field between insurers and tort claimants. Without the ability on the part of tort claimants to withdraw from settlement negotiations, there would be no incentive for a carrier to settle short of going to trial other than saving defense costs. Had the holding in Haddick been the other way, tort claimants could be made to hold open offers to settle indefinitely, incurring costs in prosecuting the case while carriers could wait for the plaintiff to either tire of the litigation or make some procedural misstep which would allow the carrier to settle the case for substantially less than fair value. The feeling from insurance carriers has been that the ability of tort claimants to threaten to withdraw from negotiations has tipped the balance in favor of tort claimants. As is seen in Sections E, F, and G, below, it behooves neither side to behave in an unreasonable way with regard to the conduct of settlement negotiations.

The second proposition established by Haddick is the more far-reaching and signals a shift in bad faith claims in Illinois. One aspect in which Haddick represented a change in Illinois law is in how it determined when a duty to settle exists. It is often stated that the duty to defend is broader than the duty to indemnify, and the duty to defend does not attach until suit is filed. The duty to settle arises from the insurer’s control over the defense of the litigation, but with Haddick, the duty to settle can attach prior to there being a duty to defend. However, the most far-reaching change wrought by Haddick is in how the duty is measured. The Illinois Supreme Court in Haddick did not rely upon the traditional measure of the insurer giving the insured’s interests as much weight as its own. Instead, it held that the duty attached when there was a reasonable probability of an adverse verdict with damages in excess of policy limits. By using the “reasonable probability” language, it appears that the Illinois Supreme Court has abandoned the idea that fraud or bad faith is required to hold a carrier liable for an excess verdict and has instead adopted a negligence standard. This significantly increases the leverage which a tort claimant has over a carrier in making policy limits demands and also affords tort defendants great protection against excess verdicts when the carrier makes poor decisions to proceed to trial where there is a potential for a verdict in excess of policy limits.

D. Case Law Since Haddick

As of this writing, there have not been any cases handed down by the Illinois Supreme Court or Illinois Appellate Court which have addressed the extent to which Haddick has changed Illinois law or which have otherwise construed Haddick. However, the case of O’Neill v. Gallant Ins. Co., 329 Ill.App.3d, 263 Ill.Dec 898, 769 N.E.2d 100 (5th Dist. 2002) did further address the bad-faith failure to settle. It appears that O’Neill was tried prior to the issuance of the Haddick decision, as there is reference within the decision to the “giving the insured’s interests as much consideration as the insurer’s” standard, a standard which was implicitly abandoned in the Haddick decision.

In O’Neill, the insured left her child unattended in an automobile with the motor running. The child out the car into gear and then put it in motion. The car struck two other pedestrians and two parked vehicles before it pinned Mrs. O’Neill in between the insured’s vehicle and another vehicle. Mrs. O’Neill suffered multiple fractures and had to be confined in a nursing home thereafter. Her medical expenses exceeded the insured’s $20,000 policy limits.

Mrs. O’Neill hired an attorney who made a time limited demand for the $20,000 policy limits in return for a full release from liability. All of the adjusters who reviewed the file recommended payment of the $20,000 policy limits before a settlement demand was ever made. Prior to the expiration of the settlement demand, the attorneys hired by the carrier to defend the insured recommend payment of the policy limits. After the demand was made, there was no response from the carrier, and the carrier did not advise the insured of the settlement demand. However, the executive vice president of the company, one of only two people authorized to make settlement offers in excess of $15,000 refused to authorize payment. A few days before the trial, the executive vice president authorized settlement for the policy limits. Mrs. O’Neill, having incurred $3,000 in litigation expenses and an increased contingency fee structure, as well as having doubled her economic losses since the expiration of the settlement demand, declined to accept the tender of the policy limits. The jury returned a verdict in favor of Mrs. O’Neill and against the insured in the amount of $731,063. The carrier paid its policy limits of $20,000 immediately, leaving the insured personally liable for an excess verdict in the amount of $711,063.

In enforcement proceedings, the insured’s rights against the carrier were assigned to Mrs. O’Neill, who then brought a bad-faith action against the carrier. The matter was tried to a jury, with the jury awarding actual damages in the amount of $710,063 and $2,300,000 in punitive damages. The carrier appealed, arguing that the verdict was against the manifest weight of the evidence. The Appellate Court affirmed, and discussed seven factors which supported the jury’s verdict:

(1) The advice of the carrier’s own adjusters – The three adjusters who reviewed the file all concurred as to the liability of the insured and recommended payment of the policy limits. However, the executive vice president of the company ignored that advice until it was too late to settle the case.
(2) The refusal to negotiate – Once the policy limits was demanded, the carrier did not make any kind of response, whether it be a counter-offer or a request for more time. The claims manager for the carrier testified that a timely response to a policy limits demand, even a rejection of the demand, is of critical importance because it keeps open the lines of communication toward compromise and settlement.
(3) The advice of defense counsel – The attorneys for the carrier advised that they believed that the insured would be found liable and that the potential verdict would have been well in excess of policy limits. Despite this advice the carrier declined to make an offer to settle the case while the settlement demand was open.
(4) Communications with the insured – The attorneys hired by the carrier told the insured that the settlement demand was still being evaluated when the demand had in fact expired. Failing to keep the insured informed of the claimant’s willingness to settle within policy limits denies the insured an opportunity to protect himself or herself and signals bad faith.
(5) Inadequacies in the investigation and defense – One of the allegations on negligence against the insured was an inadequate child restraint system. The carrier and its attorneys did not advise her to retain the booster seat and she disposed of it, resulting in a missing-evidence instruction in the underlying case. The carrier only authorized two of the thirteen depositions requested by defense counsel, some of which were intended to minimize the expected excess verdict.
(6) A substantial prospect of an adverse verdict – Everyone involved in the handling of the case except the person authorized to settle the case expected an adverse verdict with damages in excess of policy limits.
(7) The potential for the verdict to exceed policy limits – The attorneys hired to defend the insured initially evaluated the minimum verdict potential of the case as being 15 times policy limits. The medical expenses were known to be at least 5 times policy limits. The failure to settle a claim of this magnitude within policy limits signals bad faith.

The carrier also challenged the award of punitive damages, arguing both that punitive damages cannot be assessed as a matter of law and that the award was against the manifest weight of the evidence. The Appellate Court rejected both contentions.

As to the claim that punitive damages could not be awarded as a matter of law, the Appellate Court held that where the insurer’s conduct exceeds mere negligence and demonstrates that the failure to settle within policy limits demonstrates an utter indifference and reckless disregard for the financial welfare of its policy holder, punitive damages can be awarded. It reasoned that punitive damagers are authorized where there is a breach of a fiduciary duty and held that the carrier’s irrevocable power to control settlement negotiations creates a fiduciary relationship. The Appellate Court noted that it was the duty of the courts to protect those in a vulnerable position in a fiduciary relationship and noted that the kind of drivers insured by a substandard carrier are most vulnerable to bad-faith claims practices. The Appellate Court also specifically rejected the carrier’s claim that punitive damages were pre-empted by Section 155 of the Insurance Code, reasoning that Section 155 is intended to cover only first-party claims.

As to the claim that punitive damages were not warranted, the Appellate Court held that the jury heard a lot of evidence from which they could infer that the carrier deliberately gambled with the insured’s financial security so that they could delay payment of the policy limits. The jury was also permitted consider a number of other cases in which the carrier withheld payment of policy limits, exposing their insured to a large excess verdict. Accordingly, it held that the award was proper.

E. How and when to demand policy limits

There are two questions here: (1) when to make a policy limits demand and (2) when to make a time-limited policy limits demand. Haddick suggests that a policy limits demand is appropriate where there is a duty on the part of the carrier to settle; that is where there is a reasonable probability of a finding of liability on the part of the insured and a reasonable probability of a verdict exceeding policy limits. This is true whether there is a time-limited demand or not. The decision to issue a time-limited demand requires a more delicate calculus, and should turn on a number of factors including the extent to which the claim has been investigated, the posture of the case, the policy limits involved, and the potential magnitude of the damages. Having a more extensive factual work-up, having the case in a posture where advancing the litigation will result in additional expenses to the plaintiff, lower policy limits, and very significant injuries and damages all militate in favor of issuing a time-limited policy limits demand.

Irrespective of whether the demand is time-limited or not, a policy limits demand should

(1) Be made in writing
(2) The demand letter should contain an explanation of the theory of liability, including where necessary citations to authority (statutory or case law) and should have enclosed any factual materials (statements, police reports, photographs, etc.) which support the theory of liability being advanced.
(3) There should be a summary of the injuries and of the medical treatment received for the injuries and all of the pertinent records should be enclosed, as well as the itemized bills. Often, it will be helpful to include a spreadsheet putting the expenses in chronological order and totaling the expenses.
(4) A clear and unambiguous demand for payment of the policy limits must be made. Two exceptions to this rule: (1) If the case has not been put into suit, an affidavit from the defendant that there was no other insurance and that he was not acting in the course and scope of his employment. In this situation, it must be clear that you are reserving the right to make another settlement demand if in fact the defendant had additional insurance and/or was acting in the course and scope of his employment. (2) If you are planning to pursue an underinsured motorist claim, you cannot offer a full release to the defendant because granting one would destory the subrogation rights of the UIM carrier and bar your UIM claim. In that situation, you must instead advise of the intention to pursue an underinsured claim and demand a tender of the policy limits.
(5) Close by urging that the terms of the demand be communicated to the client/insured. (e.g., “I trust that you will communicate the contents of this letter and the terms set forth herein to your client/insured.”)
(6) If a time limited demand is to be made, the drop-dead date must be clearly set forth and
the reasons for it should be clearly communicated to the opponent. (E.g., “As you know this case is set for trial 90 days from now. We will be incurring significant case file expenses in the last 30 days before trial. Therefore, the terms of this demand must be met within sixty (60) days from today’s date or by ___. If the terms of this demand are not met, the demand will be withdrawn and we will proceed to trial and seek an excess verdict.”) Be reasonable and do not set unrealistically short time frames for response.

F. After the policy limits demand: insurer’s perspective

Responding to a policy limits demand, whether time-limited or not, requires many of the same steps. The main difference between a demand with a time limit and one without is the timing of the steps to be taken. Common to both:

(1) Acknowledge receipt of the demand and assure the plaintiff’s attorney that it is being considered.
(2) Advise the insured of the policy limits demand. In the event that a policy limits demand has been made, the insured may wish to retain independent counsel to advise him or her as to what course should be taken. Under O'Neill, failure to advise the insured of the demand is one of the factors indicative of bad faith on the part of the carrier.
(3) Determine what additional factual investigation needs to be taken, if any.
(4) Obtain an objective review of the medical records and expenses and make an objective assessment of the merits of the damages case.
(5) Where appropriate, a good-faith offer of settlement should be made. Making a counter-offer short of the policy limits is not necessarily indicative of bad faith, but failing to make a counter offer is, although making an offer short of policy limits when payment of the limits is warranted will not insulate the carrier from a bad faith claim.
(6) Substantive discussions regarding settlement negotiations should be reduced to writing in follow-up correspondence following settlement discussions.

Where the policy demand is time-limited, the determination of what additional investigation is needed must be made immediately. If the time set by the plaintiff is too short to allow for the reasonable investigation which is required, an extension of the time must be made in writing including a short explanation of the reason why the extension is being sought. Every effort must be made to complete the evaluation of the claim within the time extended to the carrier. If the evaluation cannot be completed in time, as soon as that is recognized additional extensions must be sought as needed.

G. After the policy limits demand: tort claimant’s perspective

While Haddick clearly granted plaintiffs the right to issue time-limited demands, it did not place a duty on the part of the insurance carrier to clear unreasonable hurdles placed arbitrarily by the plaintiff’s attorneys. The duty on the part of the carrier is to settle where there is a reasonable probability of a finding of liability on the part of the insured and a reasonable probability of a verdict in excess of policy limits. In short, the carrier is entitled to make a reasoned assessment of the facts, the injuries, and the potential damages in making its decision whether to offer its policy limits. To that end, the plaintiff’s attorney should not engage in unreasonable behavior in making a time-limited demand. If the liability picture and the medical situation has not been sufficiently developed, a carrier can still act in good faith and fail to meet the terms of a time-limited demand even though a substantial excess verdict is later returned. Therefore, the demand must not be made prematurely. Further, the time frame specified must not be unrealistically short in light of the posture of the case and the development of the factual and medical investigation. A week-long time limited demand may be reasonable as trial is fast approaching after several years of litigation; it is probably not a reasonable demand one month after the accident has occurred. Further, if extensions are requested for good reasons, they should be given. Any substantive agreements or discussions should be confirmed in writing.