Increasing Reserves Insufficient to Prove Insurer Thought Liability Reasonably Probable

The Seventh Circuit, applying Illinois law, affirmed a lower court ruling that held the American Physicians Assurance Corporation, Inc. (“APAC”) acted in bad faith when it rejected settlement offers in the underlying case against its policyholder, Surgery Center at 900 North Michigan Avenue, LLC (“Surgery Center”).  The appellate court reached its conclusion through a fact-intensive inquiry that ultimately rested on whether there was any evidence that APAC believed Surgery Center’s liability was reasonably probable. 

Surgery Center is an outpatient surgery center that allows surgeons to use its facilities to perform surgeries.  In 2002, Dr. Harrith Hasson performed a routine surgery on Gwendolyn Tate that developed complications and ultimately resulted in Tate’s quadriplegia.  Tate sued Dr. Hasson and Surgery Center.  Dr. Hasson eventually settled, but APAC, on behalf of Surgery Center, litigated the suit.  Ultimately a jury returned a verdict of $5.17million against Surgery Center, far in excess of its $1M limit under the APAC policy.  In 2015, Surgery Center sued APAC for negligence in its failure to settle the case.  After discovery and trial, APAC moved for judgement as a matter of law, which the trial court granted.  Surgery Center appealed.

The appellate court opinion recited the elements necessary to prove bad faith: that a duty to settle arose, that the insurer breached that duty, and that the breach harmed the insured.  The question in this case was whether a duty to settle arose.  Under Illinois jurisprudence, a duty to settle arises when there is a reasonable probability of recovery in excess of the settlement limits in combination with a reasonable probability that an adverse judgment might be reached.

The appellate court looked in particular at the reasonable probability of a finding of liability against Surgery Center.  In reviewing the record, it found no evidence that either the insurer or the insured thought that a finding of liability was likely.  In fact, Surgery Center repeatedly requested that APAC not settle the suit, and APAC and Surgery Center both presented evidence of their internal deliberations, showing that both parties believed the suit to be unlikely to succeed.  The sole fact presented by the Surgery Center tending to show that APAC believed that there was a probability of a finding of liability against Surgery Center is that APAC increased its reserve after certain changes to the case’s posture as it worked its way through the courts.  The appellate court was unpersuaded by this fact.

Ultimately the appellate court found that “Surgery Center did not present any evidence that anyone involved in litigating the Tate case believed there was more than a mere possibility Surgery Center would be found liable[.]”  Therefore, there was no reasonable probability of a finding of liability and no duty to settle arose on the part of the insurer.  Surgery Center at 900 North Michigan Ave. v. American Physicians Assurance Corporation, Inc., No. 15‐CV‐4336 (7^th Cir. Apr. 25, 2019).