Steven Plitt, Expert Witness Steven Plitt, Expert Witness
Insurance Bad Faith Claim Handling Expert Serving Clients Nationwide

An Insurance Company's Refusal To Authorize Settlement While Defending Under Ror May Breach The Insurer's Duty To Defend And Settle Under Illinois Law According To Illinois Court Of Appeals

In this case, the insurance company authorized the retention of independent counsel chosen by the insured due to the insurer's reservation of rights. As the case was being defended, independent counsel advised the insurer that the demand made by the claimant for settlement was reasonable in light of the likelihood that an excess judgment would be entered. Notwithstanding this advice from independent counsel, the insurer threatened to withdraw coverage if the insured continued to negotiate a settlement with the claimant. The court in Rogers Cartage Co. v. Travelers Indemnity Co., _____ N.E.3d _____ 2018 Ill. App. (5th) 160098 (Ill. App. 5th Dist. April 5, 2018) held that under those case facts, the insurance company was estopped from asserting its coverage defenses.

The court in Rogers rejected the insurer's argument that it complied with its duty to defend merely by paying independent counsel throughout the underlying action. According to the court, under Illinois law, an insurance company could breach its duty to defend and lose its right to contest coverage if it put its own interests ahead of its insured's interests. The court found that the insurer had placed its interests ahead of its insured's interest when it attempted to intimidate its insured into stopping negotiations and by filing a declaratory judgment action. This conduct was characterized by the court as being "coercive," "underhanded," and inconsistent with "standard industry practice." The court also found that such conduct amounted to a bad faith refusal to settle within the policy limits.

In this environmental pollution case, the insurer agreed to defend against the pollution claims under a reservation of rights. The insured was permitted to select defense counsel of its own choosing and the insured agreed to pay counsel's reasonable and necessary fees in the defense. On September 9, 2010, the insured advised the insurance company of the trial date that was set by the court and that the insured was planning on entering into informal settlement meetings with the plaintiffs. One month later, the plaintiffs proposed settling the case for $4 million if the insurance company would resolve the claims for cash. However, the insurance company refused, the plaintiffs proposed settling directly with the insured for $7.5 million, with the insured paying $50,000 of that total settlement amount. The agreement would permit the plaintiffs to pursue the insurer for the remainder of the settlement. Almost one month later, the plaintiffs renewed their demand for $4 million to be paid by the insurance company, but made no mention of the alternative proposal. This proposal was sent to the insurance company. Upon receipt of the settlement demand, the insurance company asked defense counsel for his evaluation of the case. At that time, defense counsel told the insurer that the plaintiff's $4 million demand was reasonable and that defense counsel believed the case could be settled for an amount between $2 and $3 million. Defense counsel also advised the insurance company that, based on his evaluation, he did not believe that he could win at the trial level, but did think that there was an 85% chance of prevailing on appeal. Defense counsel also advised the insurance company that the case was a "bet the company" type of case because the insured could neither afford to go to trial nor afford to lose at trial. Therefore, defense counsel advised the insured that there were only two reasonable options: (1) negotiate and settle; or (2) have the insurance company indemnify the insured and post a bond on appeal. The insurance company was disputing coverage and also asserted that the insured had less than $300,000 in applicable coverage. During a settlement meeting the insurer offered $275,000 to settle the case. The plaintiffs countered with a demand for $3.75 million. This demand was rejected by the insurer, with the insurer refusing to make a counteroffer. The letter rejecting the demand also advised independent counsel that the insurer would not consent to any unilateral settlement negotiations and that if negotiations took place or a settlement was reached, that the insured would be in breach of the policy's cooperation and anti-assignment clauses, which would vitiate coverage. The insurer then filed a declaratory judgment action to establish its no coverage position. Thereafter, the insured entered into a settlement with the plaintiffs without the insurer's consent. The amount of the settlement was $7.5 million, with the insured agreeing to pay only $50,000 and the plaintiff's agreeing to seek the remainder from the insurer.

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