What Do You Do when Someone Else’s Insurance Refuses to Settle?

Picture this: You’re seriously injured in a car wreck. You believe the other driver is at fault. Her liability insurer believes you are at fault. You sue the other driver, seeking damages that exceed her insurance policy limits, but offer to settle for an amount equal to those limits. The insurance company refuses, believing that it can avoid paying anything at all by winning at trial. And even if you win, it’s only obligated to pay up to policy limits, so what’s it got to lose, right?

Wrong. To understand why, let’s step back and look at the big picture when it comes to liability insurance.

Background: Liability Insurance

Liability insurance protects the purchaser (i.e., the insured) against liability for claims made by a third party. In such cases, the insurance company pays to cover any third-party claims made against the insured. In the above example, the other driver is the insured and you are the third party. The insurance policy requires the insurance company to pay for your claims against the other driver if you prevail at trial.

In addition, liability insurance generally requires the insurance company to pay for the insured’s legal defense. Not only does the insurer pay for the defense of its insured, but it also gets to control how that defense is conducted. That is, the insurance company is generally the only one that can decide to settle a case or not. In fact, if the insured were to attempt to settle the case with the third party directly, the insurance company could try to get out of paying the third party’s claim at all.

Insurers’ Good-Faith Duty to Settle

Recognizing that this arrangement gives insurance companies the incentive to go to trial, even when it would be better for the insured to settle to avoid a judgment in excess of the policy limits (called an “excess judgment”), Illinois law imposes a duty of good faith on the insurance company in responding to settlement offers. When an insurance company refuses to settle, it may be liable for the full amount of the excess judgment after trial, notwithstanding the lower policy limits.

This duty of good faith aligns the insurance company’s incentives with those of its insured. Now, its choice isn’t between settling at the policy limits before trial or paying up to the policy limits after trial. Instead, its choice is between settling at the policy limits before trial, or paying the full amount of the judgment—even if it exceeds the policy limits—after trial.

Plaintiffs’ Remedies

What does this mean for plaintiffs? First, plaintiffs don’t have their own claim against the defendant’s insurance company when it breaches its duty of good faith. That claim belongs to the defendant. But the defendant can assign his or her claim to the plaintiff. Defendants often do so in exchange for the plaintiff’s agreement not to collect the judgment from the defendant him- or herself, but only from the insurance company. When the defendant’s claim for bad faith against its insurance company is assigned to the plaintiff, the plaintiff and their car accident attorney in Chicago can then sue the insurance company to recover the excess judgment.

Second, it means that plaintiffs don’t have to be as worried about proceeding to trial against a judgment-proof defendant when the defendant’s insurance has refused a settlement offer within policy limits. A judgment-proof defendant is one who lacks the resources (e.g., money or property) to satisfy a judgment in the plaintiff’s favor. Normally, a plaintiff might be reluctant to go to trial against a judgment-proof defendant, since the plaintiff has no guarantee that he or she will be paid even if the defendant loses the case. But when the insurer breaches its duty of good faith to settle within policy limits, the plaintiff may be able to go after the insurer to pay the excess judgment, regardless of how much property the defendant has.

Conclusion

As you can tell, the duty of good faith that Illinois imposes on insurance companies can impact a personal injury plaintiff’s litigation strategy. However, there are several steps that the plaintiff must follow to be able to later pursue a claim of a bad-faith refusal to settle against the defendant’s insurance company. And not every refusal to settle within policy limits will qualify as a bad-faith refusal. Understanding how to lay the foundation to support a claim of bad faith by an insurance company requires a thorough knowledge of Illinois law. That’s why you should contact us at Costa Ivone, LLC to help you with your personal injury claims.