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Insurance Defense and Bad Faith Actions: Requirements to Plead the Reasonable Probability Standard

Insurance Defense and Bad Faith Actions:  Requirements to Plead the Reasonable Probability Standard

Those working in insurance defense litigation are familiar with bad faith claims which can arise when insurers breach the duty to act in good faith when responding to settlement offers. According to the Illinois Supreme Court: “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 problems of claim settlement abuses by liability insurers where the policy holder has no contractual remedy.” Cramer v. Insurance Exchange Agency, 174 Ill.2d 513, 526, 675 N.E.2d 897 (Ill. 1996).

“To sustain a cause of action for bad faith because of an insurer’s breach of the duty to settle, the plaintiff must allege: 1) the duty to settle arose; 2) the insurer breached the duty; and 3) the breach caused injury to the insured. A plaintiff must allege sufficient facts to demonstrate the existence of the duty to settle in good faith. A sufficient pleading of facts to establish this duty includes “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.” The duty does not arise until a third party demands settlement within the policy limits.” Powell v. American Service Insurance Co., 2014 IL App (1st) 123643 at 18, citing Haddick v. Valor Insurance, 198 Ill.2d 409, 416-417, 763 N.E.2d 299 (Ill. 2001).

In Haddick, the bad faith claim arose from a single car accident which resulted in the death of one of the people in the car. The car owner had insurance coverage for $20,000 per person. The owner of the car survived the accident, initially stating that he was the driver of the vehicle, only to state later that he did not remember the accident and did not remember who was driving the vehicle. The decedent’s medical bills from the accident totaled $82,544.80. The decedent’s attorney made a demand for settlement, and the insurer responded that it would discuss settlement after it received the police report. After receiving the police report, the insurer put off settlement discussions while an investigation into who was driving the vehicle was pending. The decedent filed a wrongful death action and a policy limit demand was made. The insurer responded that the demand was premature due to its investigation into the accident. One year after the accident, the insurer offered to settle the case for the policy limits which the decedent’s estate refused. A motion for summary judgment in favor of the decedent’s estate was granted and a judgment for $150,924.80 entered in favor of the estate.

The decedent’s estate filed a bad faith claim against the insurer alleging that the insurer failed to settle the claim within the policy limits. The court found that the insurer was aware the decedent’s medical bills exceeded $20,000 in liability coverage at the time it received the estate’s demand for the policy limits. The insurer knew the owner of the vehicle and that the police report showed that the owner of the car had informed the emergency room doctor that he was driving at the time of the accident. Even though he later said he did not recall who was driving, the proof of ownership raises a presumption that the owner of the vehicle was in control of it at the time of the accident. The alleged facts demonstrated a reasonable probability of recovery in excess of the policy limits and a reasonable probability of a finding of liability against the driver. Powell v. American Service Insurance Company, 2014 IL App (1st) 123643.

The “reasonable probability” standard set forth in Haddick requires pleading facts that demonstrate liability is “probable” as opposed to merely “possible.” In other words, Haddack requires the pleading of facts which show that liability is at least more likely than not, but not necessarily a certainty. The fact that the insurance company was unsuccessful in the trial of a case does not show that its defense was made in bad faith. Further, the Haddick court made clear that the reasonable probability standard applies at the time of the settlement demand, because that is when the duty to settle arises. Powell, 2014 IL App (1st) 123643, 36-42. It is important in an insurance defense practice, whether representing the insurance company or a litigant with a bad faith claim, to know the pleading standards for bad faith causes of action.

The laws and court decisions pertaining to bad faith claims against insurance carriers require the talents of attorneys well-versed in this area of law to provide knowledgeable and skilled insurance defense. For more information about this topic, contact Kelly Purkey at McKenna Storer.

Categories Insurance Litigation Defense

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