Northern District of Illinois Denies Summary Judgment for Insurer on Bad Faith Claim Where Disputed Facts Exist as to Insurer’s Affirmative Duty to Initiate Settlement Discussions and Whether Insurer’s Responses to Settlement Offers Were in Good Faith

by Saul Ewing Arnstein & Lehr LLP
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Following a fatal vehicle accident in 2008, a group of plaintiffs brought suit against Venture One, Inc., the owner of a truck involved in the accident.  After several unsuccessful attempts to settle the matter with Venture One's insurer, Defendant National American Insurance Company (NAIC), the case went to trial and plaintiffs won a jury verdict of more than $3.6 million - well in excess of the $1 million insurance coverage Venture One had with NAIC.  The plaintiffs in that case obtained a judicial lien on Venture One's assets, including an assignment of Venture One’s rights against NAIC.  Pursuant to that assignment of rights, Plaintiffs in this case brought suit against NAIC alleging, among other things, that NAIC acted in bad faith by failing to settle the claims against Venture One within the policy limits.  NAIC moved for summary judgment, arguing that Plaintiffs’ bad faith claim fails as a matter of law because the plaintiffs in the original action never made a settlement offer that would have settled all claims against Venture One within the policy limits.  NAIC also argued that the attorney for the plaintiffs did not have authority to make the settlement offers in question.

The Court denied NAIC's motion for summary judgment on the bad faith claim, finding that a genuine dispute of material facts exists as to whether NAIC acted in good faith in responding to the plaintiffs' settlement offers, and because NAIC lacks standing to challenge the validity of those settlement offers based on the authority granted to their attorney. 

Although plaintiffs made multiple settlement offers within (or at) the policy limits, NAIC argued that none of these offers can support a bad faith failure to settle claim because none of them mentioned the rights of the third party lienholders and subrogees.  The Court explained that while "the insurer generally does not have a duty to initiate settlement discussions ... such a duty is triggered where the probability of an adverse finding on liability is great and the amount of probably damages would greatly exceed the coverage" (quotations and citation omitted).  The Court determined that Plaintiffs had adduced sufficient evidence for a jury to conclude that “NAIC was facing a considerable possibility that the damages would greatly exceed the insured’s coverage under the policy,” thereby triggering NAIC’s duty to initiate settlement discussions.  "A reasonable jury could conclude that faced with an affirmative obligation to initiate settlement, and in receipt of an offer to settle all claims against it for an amount within the policy limits, NAIC had a good faith obligation to respond to the [plaintiffs’] offers to clarify whether or not the [plaintiffs] intended to include language addressing the rights of the subrogees and third party lienholders." 

Furthermore, "[e]ven if [the duty to initiate settlement discussions] were not triggered, NAIC still had a duty to respond to settlement offers in good faith."  The Court determined that "a reasonable jury could conclude that NAIC's failure to respond to the offer of settlement with a request that the settlement address the third-party lienholders was not in good faith."  The Court also determined that “a reasonable jury could find that NAIC's $350,000 counter offer was not a good faith response to the [plaintiffs'] settlement offer," in light of evidence that the insured was facing liability well in excess of the policy limits and that the plaintiffs were "highly unlikely to accept the $350,000 counter offer" and “NAIC knew this." 

With respect to the validity of the settlement offers, the Court determined that the right to challenge the validity of a settlement based on a lack of authority "rests solely with the party whose attorney is alleged to have acted without authority."  "NAIC provides no legal support for the premise that in a bad faith action the right to challenge the validity of a settlement offer is transferred to the offeree."  In any event, the Court determined that even if it were to reach the issue of whether plaintiffs’ counsel had settlement authority, "the result would not change" because NAIC had not shown "by clear and satisfactory proof" that plaintiffs' counsel "was acting without authority" (quotations omitted).

Malcom for K.H. v. National American Insurance Company, No. 15 C 8228 (N.D. Ill. Feb. 13, 2018)

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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