Mid-America Bank & Trust Co. v. Commercial Union Insurance
224 Ill. App. 3d 1083, 587 N.E.2d 81, 167 Ill. Dec. 199 (1992)
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Rule of Law:
An insurer that acts with negligence or in bad faith by refusing to settle a claim within policy limits may be held liable for the full amount of a subsequent judgment against the insured, including any amount in excess of the policy limits.
Facts:
- A truck insured by Commercial Union under a policy with a $50,000 per person limit struck a 13-year-old boy, causing severe brain damage.
- The plaintiff's attorney sent a letter to the truck's owner offering to settle the case for the $50,000 policy limit.
- A Commercial Union claims adjuster internally reported that the case had a value of up to $1,000,000, noted the chance of losing exceeded 10%, and recommended setting aside a $50,000 reserve.
- An internal memo from a Commercial Union claims manager acknowledged the possibility of a million-dollar verdict and a 30-40% chance of losing, but suggested a strategy to "put the lawyer off on his policy limits demand" to avoid acting in bad faith while delaying settlement.
- The plaintiff's offer to settle for the $50,000 policy limit remained open for almost three years.
- Nearly three years after the initial offer, the lawyer hired by Commercial Union made a counteroffer of $30,000 on a "take it or leave it" basis, without informing the insured truck owner.
- The plaintiff was offended by the low offer and withdrew all settlement offers.
- Six days later, the lawyer hired by Commercial Union offered the full $50,000 policy limit, but the plaintiff refused to accept it.
Procedural Posture:
- In an initial lawsuit, the plaintiff (the injured boy) sued the truck owner in a trial court and a jury awarded the plaintiff $911,536.50.
- The truck owner then settled with the plaintiff by assigning all his legal claims against his insurer, Commercial Union, to the plaintiff in exchange for the plaintiff's promise not to collect the large judgment from the truck owner personally.
- The plaintiff, as the assignee of the truck owner, sued Commercial Union in the circuit court (trial court) for negligence and bad faith failure to settle.
- Commercial Union filed a third-party complaint in the same action against the lawyer it had hired, seeking indemnity and contribution.
- A jury in the bad faith case found in favor of the plaintiff, awarding $686,536, and apportioned fault as 75% to Commercial Union and 25% to the third-party defendant lawyer.
- The circuit court entered judgment on the verdict, adding interest and fees, and dismissed Commercial Union's claim for indemnity.
- Commercial Union (appellant) and the estate of the third-party defendant lawyer (appellant) appealed the circuit court's judgment to the Illinois Appellate Court.
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Issue:
Does an insurer act with negligence or in bad faith, making it liable for a judgment exceeding policy limits, when it fails for nearly three years to accept a reasonable settlement offer despite being aware of catastrophic injuries and the high probability of a large verdict against its insured?
Opinions:
Majority - Justice Howerton
Yes, an insurer that fails to accept a reasonable settlement offer under these circumstances acts with negligence or in bad faith. An insurer must give the interests of its insured consideration at least equal to its own, especially when a recovery may exceed policy limits. The court's bad faith analysis cannot be confined to the final days of negotiation; it must encompass the entire three-year period during which Commercial Union had a clear opportunity to settle within the policy limits. The company was aware of the catastrophic injuries, the potential for a verdict far exceeding the policy, and its own internal assessment of high liability, yet it refused to settle and instead engaged in delay tactics. This conduct, culminating in a lowball "take it or leave it" offer, constitutes a breach of its duty to the insured, making it liable for the entire judgment.
Analysis:
This decision reinforces the significant fiduciary-like duty an insurer owes to its insured when handling third-party claims. It clarifies that an insurer's bad faith is evaluated based on the totality of the circumstances over the entire claims-handling period, not just a snapshot of the final offers. The ruling serves as a strong deterrent against insurers engaging in dilatory tactics or making lowball offers when liability is clear and the insured's personal assets are at risk. Future cases will likely use this precedent to hold insurers accountable for the full consequences of their failure to prioritize the insured's interests in settlement negotiations.
