Bad Faith Failure to Settle (IL Fed.)

Insurer denied summary judgment due to unresolved factual questions  

A federal court for the Northern District of Illinois, applying Illinois law, denied an insurer’s motion for summary judgment on an insured’s claim for bad faith failure to settle.  The court found that genuine issues of material fact existed regarding the insurer’s true assessment of the underlying claim.

The Surgery Center at 900 North Michigan Avenue, LLC (“TSC”) filed suit against American Physicians Assurance Corporation, Inc. and American Physicians Capital, Inc. (collectively “APAC”) alleging that APAC acted in bad faith by not settling an underlying malpractice suit related to complications stemming from laparoscopic surgery.  APAC insured TSC under a $1 million professional liability policy.  APAC defended TSC in the underlying suit in accordance with its APAC’s Defense Attorney Instructions.  According to TSC, while the underlying suit was pending, APCA implemented a company-wide more aggressive defense strategy, the “concrete plan.”  According to TSC, the “concrete plan” included refusing to negotiate settlement and targeting certain high exposure claims for trail regardless of the risk imposed.  APAC alleges that upon receiving the underlying complaint, it warned TSC’s president about the risk of an adverse verdict against TSC and TSC’s right to retain its own personal counsel to advice TSC on settling the case.  There is no dispute that APAC labeled the underlying case as “high exposure.”

APAC rejected two offers to settle the underlying suit for the $1 million policy limit.  APAC advised TSC that it would not be entering into any settlement negotiations since the case was still defensible and that TSC would likely prevail at trial.  APAC increased its Reserve amount but failed to provide a meaning behind the figures used to calculate such an amount.  APAC also asserted that it repeatedly advised TSC of the risk of a verdict in excess of the policy limits and of TSC’s right to obtain personal counsel.  After the trial concluded, the jury returned a verdict of $5.12 million against TSC.  Before the resolution of TSC’s post-trial motions, and without informing APAC beforehand, TSC’s personal counsel reached a settlement with the underlying claimant for $2.5 million.  TSC sued the defense attorneys hired by APAC and obtained a settlement.

APAC moved for summary judgment regarding TSC’s allegations of bad faith failure to settle.  Under Illinois law, an insurer has a duty to act in good faith when responding to settlement offers.  To sustain a successful claim for bad faith, TSC must prove that: (1) a duty to settle existed; (2) the insurer breached that duty, and (3) the breach caused injury to the insured.  A duty to settle arises “when there is a reasonable probability of recovery in excess of policy limits and there is a reasonable likelihood of a finding of liability against the insured.”  The court denied APAC’s motion finding that the APAC’s true assessment of the likelihood that TSC would be found liable and the amount of potential damages to which TSC would be exposed remained a disputed material issue of fact.  It was also disputed whether APAC discussed the risk and liability information with TSC before rejecting the policy-limit settlement demands.  The court held that these facts were material to determining whether APAC intentionally withheld critical information and impeded the litigation process to avoid settling the underlying action.  The Surgery Center at 900 North Michigan Avenue, LLC v. American Physicians Assurance Corporation, Inc., No. 15-CV-4336 (N.D. Ill. June 5, 2018).