By Robert A. Clifford
Clifford Law Offices
When is an offer of settlement not a real offer? Defense counsel over the years have learned how to sharpen their skills at pretending to make what sounds like a legitimate offer when, in fact, nothing has been offered at all.
Take, for example, the instance of the defense insurer making a lump sum "offer of settlement" to three plaintiffs severely injured due to the same wrongful conduct in a personal-injury case without differentiating a separate amount offered to each individual. When asked to make separate offers to each plaintiff, the insurer refuses. This is not a legitimate offer to settle.
Nonetheless, the ethical obligation of the plaintiffs' lawyers in a situation like this is to communicate the "offer" to the clients. But questions arise: Was the insurer trying to "set up" plaintiffs' counsel for a conflict of interest? Should the court be asked to hold a hearing to determine the division of the amount if the total sum was acceptable to the three plaintiffs? Does the insurer have a good faith duty to its insured to make separate offers? All of these questions come to bear upon such a bogus request.
The basis for a liability insurer's duty to settle is the insurer's exclusive control over settlement negotiations as well as the defense of the litigation. Despite liability insurers actually being third parties to the litigation because the claim generally is brought against the policyholder, it is the insurer's exclusive control over settlement negotiations as well as the defense of the litigation that is the basis for its duty to settle in good faith.
Pursuing bad faith litigation against an insurer can be time-consuming and expensive. Insurance carriers have a duty to defend civil claims against their policyholders as well as a separate duty to indemnify, but they also have a duty to act in good faith when the claim is covered by the insurance policy. In many jurisdictions what that means is that the insurer must settle within the contractual limits of the policy when there is no viable defense and by independent investigation or discussions with the plaintiff's representatives, the insurer should know the policy limits are likely to be exceeded.
When asking did the insurer act in bad faith and a third party demands settlement within the policy limits, one must look at the claim made against the insured to determine whether 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." Haddick v. Valor Insurance. 198 Ill.2d 409, 763 N.E.2d 299 (2001). The failure to act in good faith in responding to a settlement demand may lead to the insurer being held liable for the entire judgment against the insured, including any amount in excess of the policy limits.
Many insurance carriers, though, frivolously refuse to settle, costing the judicial system time and money while forcing plaintiffs to go to trial on cases unnecessarily where liability of the defendant was clear cut. Good faith settlement offers come under scrutiny, particularly when the vast majority of cases settle rather than go to verdict. Just as the right to a trial is key to the civil justice system, the right to and the timing of a fair settlement also are indispensable to improving adjudication to satisfy the parties' needs and interests.
Illinois has defined an insurer's "vexatious and unreasonable" refusal to settle and provided remedies to the injured party including attorney fees and costs to "punish" the insurer for misconduct. McGee v. State Farm Fire and Casualty Company. 315 Ill.App.3d 673, 734 N.E.2d 144 (2d Dist. 2000); 215 ILCS 5/15 West (1998). Similarly, in Bedoya v. Illinois Founders Insurance Co., 293 Ill.App.3d 668, 688 N.E.2d 757 (1st Dist. 1997), the appellate court upheld sanctions against the insurer for "vexatious and unreasonable" breach of its duty to defend under its policy. As another court put it, allowing such extra-contractual remedies prevents insurance companies, "with their superior financial resources," from dragging out claims in order "to discourage claimants." Verbaere v. Life Investors Life Ins. Co. 226 Ill.App.3d 289. 300, 589 N.E.2d 753 (1st Dist. 1992).
The cost of going to trial is one consideration, and the economics of litigation is a serious concern for all parties, but now carriers seem to be making conservative offers for different reasons — gambling with fate, setting examples if they can for future plaintiffs, defense counsel wanting to continue billing before the case settles, instead of settling the value of the claim that is before them.
Illinois courts have held that "the duty to settle is designed to protect the bargain embodied in an insurance contract, not simply honor the relationship between contracting parties in general." Iowa Physicians' Clinic Medical Foundation v. Physicians Insurance Company of Wisconsin, 547 F.3d 810 (7th Cir. 2008), citing Cramer v. Ins. Exch. Agency. 174 Ill.2d 513, 675 N.E.2d 897, 903 (01996). Insurance companies should not be allowed to abuse their power over a settlement by inappropriately refusing to respond to a settlement demand or making bogus offers, thereby exposing their insureds to liability in excess of the policy limits.
After all, protection against such a situation is precisely why the insured purchased liability insurance in the first place.