Ill. Pattern Jury Instr. (Civil) 710.09

A contract of liability insurance contains an implied covenant of good faith and fair dealing.

Scroggins v. Allstate Ins. Co., 74 Ill.App.3d 1027, 1029, 393 N.E.2d 718, 720 (1st Dist.1979);

National Sur. Corp. v. Fast Motor Serv., 213 Ill.App.3d 500, 572 N.E.2d 1083 (1st Dist.1991)

(workers' compensation insurance). The breach of this duty may give rise to a cause of action in

tort.

In Illinois, causes of action against an insurer for breach of its duties under “first party”

insurance policies--life and casualty insurance (fire, theft, etc.), health insurance, and other similar

policies that indemnify the insured's own losses--are preempted by a statutory cause of action, 215

ILCS 5/155. See, e.g., McGee v. State Farm, 315 Ill. App. 3d 673, 680- 81 (2000); Valdovinos v.

Gallant Ins. Co., 314 Ill. App. 3d. 1016 (2d Dist. 2000).

Section 155 provides an extra contractual remedy to policy holders . Employers Ins . of

Wausau v. Elhco Liquidating Trust, 186 Ill. 2d 127, 159 (1999). The statute provides an insure d

may collect a statutory penalty, attorney;s fees, interest, and costs where an insurer creates a

“vexatious and unreasonable” delay in settling a claim. 215 ILCS 5/155 (1). For example,

evidence of improper claims practices, see 50 Ill. Adm. Code 919.50(a)(1), are relevant and tend

to support a section 155 claim. See also Zagorski v. Allstate Ins. Co., 2016 IL App (5 th) 140056,

¶27.

Claims against liability insurers for bad faith refusal to settle are not preempted by the

Illinois Insurance Code. See Haddick ex. rel. Griffith v. Valor Ins., 198 Ill. 2d. 409, 417 (2001).

“The duty does not arise at the time the parties enter into the insurance contract, nor does

it depend on whether or not a lawsuit has been filed.” Id. The duty of an insurer to settle arises

“when a claim has been made against the insured and there is a reasonable probability of recovering

in excess of policy limits and a reasonable probability of a finding of liability against the insured.

Since Illinois law generally does not require an insurance provider to initiate settlement

negotiations … this duty also does not arise until a third party demands settlement within policy

limits.” Haddick ex rel. Griffith v. Valor Ins., 198 Ill. 2d 409, 416-417 (2001); see Powell v. Am.

Serv. Ins. Co., 2014 Ill. App. (1 st) 123643, ¶18; Charter Props. Inc. v. Rockford Mut. Ins. Co.,

2018 IL App. (2d) 170637.

Fraud, negligence, and bad faith appear to be alternative bases of liability. An insurer may

be held liable for negligence. Browning v. Heritage Ins. Co., 33 Ill.App.3d 943, 338 N.E.2d 912,

915-16 (2d Dist.1975); Olympia Fields Country Club v. Bankers Indem. Ins. Co., 325 Ill.App. 649,

60 N.E.2d 896, 906 (1st Dist.1945); General Casualty Co. v. Whipple , 328 F.2d 353, 356 (7th

Cir.1964). A showing of fraud is not necessary to prove bad faith. Cernocky v. Indem. Ins. Co., 69

Ill.App.2d 196, 216 N.E.2d 198, 203 (2d Dist.1966).

The duty of good faith and fair dealing requires the insurer defending the insured to give

the insured's interests consideration at least equal to its own interests when deciding whether to try

or settle a claim. Cernocky v. Indem. Ins. Co., 69 Ill.App.2d 196, 207, 216 N.E.2d 198, 204 (2d

Dist.1966); Olympia Fields Country Club v. Bankers Indem. Ins. Co., 325 Ill.App. 649, 60 N.E.2d

896 (1st Dist.1945). The failure to so consider the insured's i nterests constitutes a breach of the

duty of good faith. Mid-America Bank v. Commercial Union Ins. Co., 224 Ill.App.3d 1083, 1087,

587 N.E.2d 81, 84, 167 Ill.Dec. 199, 202 (5th Dist.1992); Sanders v. Standard Mut. Ins. Co., 142

Ill.App.3d 1082, 1084, 492 N.E.2d 917, 918, 97 Ill.Dec. 258, 259 (4th Dist.1986); Edwins v. Gen.

Cas. Co., 78 Ill.App.3d 965, 968, 397 N.E.2d 1231, 1232 (4th Dist.1979); Smiley v. Manchester

Ins. & Indem. Co., 13 Ill.App.3d 809, 812, 301 N.E.2d 19, 21 (2d Dist.1973). The argument tha t

the insurer should be required to give paramount consideration to the interests of the insured has

been rejected. Adduci v. Vigilant Ins. Co., 98 Ill.App.3d 472, 424 N.E.2d 645, 650 (1st Dist.1981).

The Illinois Supreme Court has recognized that an insurance provider has a duty to act in

good faith in responding to settlement offers. Cramer v. Ins. Exch. Agency , 174 Ill. 2d 513, 526

(1996); Krutsinger v. Ill. Cas. Co., 10 Ill. 2d 518, 527 (1957). If the insurer breaches this duty, it

may be liable for the entire judgment against its insured, including any amount in excess of policy

limits. Cramer, 174 Ill. 2d at 526.

An insurer derives the authority to engage in settlement negotiations from the language of

the insurance contract. Generally, such language gives the insurer the right to “make such

investigation, negotiation, and settlement of any claim or suit as it deems expedient.” 14 Couch

§ 203:7. The basis for the duty to settle is the insurer’s exclusive control over settlement

negotiations

and defense of litigations. Haddick , 198 Ill. 2d at 417; Cramer, 174 Ill. 2d at 526 (policyholder

relinquishes defense of suit); 14 Couch § 203:13 (insurer controls settlement negotiations). This

exclusive control, however, necessarily results in a conflict of interest between the insurance

provider and its insured. The Illinois Supreme Court stated in Cramer:

In the typical 'duty to settle' case, the third party has sued the policyholder for an

amount in excess of the policy limits but has offered to settle the claim against the

policyholder for an amount equal to or less than those policy limits.

In this circumstance, the insurer may have an incentive to decline the settlement

offer and proceed to trial. The insurer may believe it can win a verdict in its favor.

In contrast, the policyholder may prefer to settle within the policy limits and avoid

the risk of trial. The insurer may ignore the policyholder's interest and decline to

settle.

174 Ill. 2d at 525-26.

In such cases, the insurance contract itself does not provide a remedy to the insured

faced with a judgment in excess of policy limits; th erefore, the law imposes upon

the insurer the duty to settle in good faith.

Id. at 526.

Breach of Duty--Standards and Proof

There is no per se liability for failure to settle within policy limits . Browning v. Heritage

Ins. Co., 33 Ill.App.3d 943, 946, 338 N.E.2d 912, 915 (2d Dist.1975). The insurer's duty to its

insured is not unlimited; the insurer is not required to disregard its own interests. Adduci v. Vigilant

Ins. Co., 98 Ill.App.3d 472, 424 N.E.2d 645, 650 (1st Dist.1981).

A claim against an insurer for breach of its duty to its insured presupposes that the insurer

had a reasonable opportunity to settle within the policy limits. Brocato v. Prairie State Farmers

Ins. Assoc., 166 Ill.App.3d 986, 520 N.E.2d 1200 (4th Dist.1988); Van Vleck v. Ohio Cas. Ins. Co.,

128 Ill.App.3d 959 471 N.E.2d 925 (3d Dist.1984) (where only settlement demand was over 160%

of the policy limits, insurer violated no duty by refusing to settle).

In Kavanaugh v. Interstate Fire & Cas. Co., 35 Ill.App.3d 350, 356, 342 N.E.2d 116, 121

(1st Dist.1975), the Appellate Court made reference to two rules. First, it stated, “we cannot hold

that the law imposes a duty on an insurance company to initiate negotiations to settle a case.” Id.

Next, it stated, “Illinois law does not demand that an insurer settle within the policy limits

without exception or else invariably suffer the consequences of an excess liability judgment for

breach of its fiduciary duty.” Id. The opinion then goes on to state: “There is a well recognized

exception to the general principle when the probability of an adverse finding is great and the

amount of probable damages would greatly exceed the policy limits.” Id. Thus, it is unclear

whether the “exception” in that sentence was intended to state elements of the bad faith cause of

action, applicable generally, or only to describe an exception to the rule that an insurer has no

duty to initiate

settlement negotiations.

Two subsequent cases adopted the factors stated by Kavanaugh as elements of the cause

of action. Phelan v. State Farm Mut. Auto. Ins. Co., 114 Ill.App.3d 96, 448 N.E.2d 579, 585 (1st

Dist.1983); Van Vleck v. Ohio Cas. Ins. Co., 128 Ill.App.3d 959, 471 N.E.2d 925, 927 (3d

Dist.1984). This would mean that the insured would have to prove that when the insurer faced the

decision of whether to settle, the probability of an adverse finding was great and the amount of

probable damages would greatly exceed the policy limits. The "reasonable probability" standard

set forth in Haddick requires pleading facts that demonstrate liability is "probable," as opposed to

merely "possible." Haddick, 198 Ill. 2d at 417. In other words, Haddick requires the pleading of

facts which show that liability is at least more likely than not, but not necessarily a certainty.

Powell v. Am. Serv. Ins. Co., 2014 Ill. App. (1st) 123643, ¶ 26-32.

However, two other decisions have cited the Kavanaugh exception in reference to the

general rule that the insurer does not have to initiate settlement negotiations. Adduci v. Vigilant

Ins. Co., 98 Ill.App.3d 472, 424 N.E.2d 645, 649 (1st Dist.1981); Ranger Ins. Co. v. Home Indem.

Co., 741 F.Supp. 716, 722 (N.D.Ill.1990). The general rule is that the insurer has no obligation to

initiate settlement negotiations, as such a duty would put the insurer at a negotiating disadvantage.

Adduci v. Vigilant Ins. Co., 98 Ill.App.3d 472, 424 N.E.2d 645 (1st Dist.1981); Haa s v. Mid

America Fire & Marine Ins. Co., 35 Ill.App.3d 993, 343 N.E.2d 36, 39 (3d Dist.1976); Kavanaugh

v. Interstate Fire & Cas. Co ., 35 Ill.App.3d 350, 356, 342 N.E.2d 116, 121 (1st Dist.1975). An

insurer need not submit to demands for the policy limits simply because there is a risk of an excess

verdict. And an insurer need not make settlement proposals when it reasonably believes it has a

good defense to the claim. Haas v. Mid America Fire & Marine Ins. Co., 35 Ill.App.3d 993, 343

N.E.2d 36, 39 (3d Dist.1976).

The fact that the plaintiff did not make a firm settlement demand may not be conclusive of

the insurer's good faith. Cernocky v. Indem. Ins. Co., 69 Ill.App.2d 196, 216 N.E.2d 198, 205 (2d

Dist.1966). When the probability of an adverse finding on liability is considerable and the amount

of probable damages would greatly exceed the insured's coverage, the insurer, to avoid a breach

of the duty of good faith, may be required to initiate settlement negotiations . Adduci v. Vigilant

Ins. Co., 98 Ill.App.3d 472, 424 N.E.2d 645, 649 (1st Dist.1981); Ranger Ins. Co. v. Home Indem.

Co., 741 F.Supp. 716, 722 (N.D.Ill.1990). An insurer is only required to settle within the policy

limits if that is the honest and prudent course of action. LaRotunda v. Royal Globe Ins. Co., 87

Ill.App.3d 446, 454, 408 N.E.2d 928, 936 (1st Dist.1980). Similarly, the majority of jurisdictions

require the insurer to consider the conflicting interests of itself and the insured with impartiality

and good faith. That duty has been breached where the risk of an unfavorable result is out of

proportion to the chances of a favorable outcome. See, e.g., Eastham v. Or. Auto. Ins. Co., 273 Or.

600, 540 P.2d 364, 367 (1975).

Factors that have been considered by the courts in determining whet her the insurer

breached its duty to the insured include: the insurer's willingness to negotiate,Cernocky v. Indem.

Ins. Co., 69 Ill.App.2d 196, 216 N.E.2d 198, 203 (2d Dist.1966); the insurer's proper

investigation of the claim, Olympia Fields Country Club v. Bankers Indem. Ins. Co., 325 Ill.App.

649, 60 N.E.2d

896, 906 (1st Dist.1945); Ballard v. Citizens Cas. Co., 196 F.2d 96, 103 (7th Cir.1952); the

insurer's consideration of the advice of its defense counsel, Olympia Fields Country Club, supra;

Bailey v. Prudence Mut. Cas. Co., 429 F.2d 1388, 1390 (7th Cir.1970); whether the insurer

informed the insured of the injured plaintiff's offer to settle within the limits of coverage; the risks

of litigation, and the insured's right to retain (at insured's personal expense) additional counsel of

his or her choice, Olympia Fields Country Club, supra; Bailey, supra.

On the other hand, the insured likewise owes the insurer a duty of good faith and fair

dealing, and the insured may be deemed to have breached that duty when the insured misleads the

insurer as to the underlying facts or fails in some respect to cooperate in the presentation of the

defense. Sanders v. Standard Mut. Ins. Co., 142 Ill.App.3d 1082, 1084, 492 N.E.2d 917, 918 (4th

Dist.1986); Waste Mgmt., Inc. v. Int’l Surplus Lines Ins. Co., 144 Ill.2d 178, 579 N.E.2d 322

(1991).

The conduct of the insurer is tested against an objective --not a subjective--standard. It is

not sufficient that the insurer sincerely believes that its insured will not be held liable. Its refusal

to settle will be judged upon review of those factors with which the insurer was faced at the time

it decided to forgo settlement. Shearer v. Reed, 286 Pa. Super. Ct. 188, 428 A.2d 635, 638 (1981).

The fact that the injured person has refused to consider settlement, or that the insurer reasonably

believes it has a good defense to the claim, are also important factors. Haas v. Mid Am . Fire &

Marine Ins. Co., 35 Ill.App.3d 993, 343 N.E.2d 36, 39 (3d Dist.1976); Kavanaugh v. Interstate

Fire & Cas. Co., 35 Ill.App.3d 350, 342 N.E.2d 116, 121 (1st Dist.1975).

Where no reasonable person, upon consideration of the interests of the insurer and the

insured and those factors which led to the insurer's decision, would decide that the insurer had an

affirmative duty to settle within the policy limits, there is no liability as a matter of law. General

Cas. Co. v. Whipple, 328 F.2d 353, 357 (7th Cir.1964).

Where there are multiple claimants against the same policy, so long as the insurer acts

reasonably and in good faith, the insurer may settle fewer than all the claims and thereby exhaust

the policy limits without incurring liability to the nonsettling claimants. Haas v. Mid Am. Fire &

Marine Ins. Co., 35 Ill.App.3d 993, 343 N.E.2d 36, 39 (3d Dist.1976).

The insurer's liability may arise from the negligence of its agent- attorney in the settlement

negotiations. Mid-Am. Bank & Trust Co. v. Commercial Union Ins. Co., 224 Ill.App.3d 1083, 587

N.E.2d 81 (5th Dist.1992); Smiley v. Manchester Ins. & Indem. Co., 71 Ill.2d 306, 375 N.E.2d 118.

Compare Steele v. Hartford Fire Ins. Co., 788 F.2d 441 (7th Cir.1986) (attorney's conduct as a

matter of law was neither negligent nor bad faith).

In most cases, the insured will have suffered an excess judgment. However, in certain

situations the insured may settle in excess of the policy limits, rather than suffer an excess

judgment, and then recover the full amount of the settlement from the insurer. Nat’l Union Fire

Ins. v. Cont’l Ill. Corp., 673 F.Supp. 267, 272-74 (N.D.Ill.1987). Where the plaintiff’s claim is

based on a settlement in excess of the policy limits, the word “settlement” should be substituted

for “judgment” where it appears in instructions 710.02 or 710.03.

Status of the Plaintiff

The insured is the party wronged by the insurer's breach; it is the insured that has sustained

a judgment in excess of the policy limits, and the insured's assets and income are exposed to the

excess liability.

The plaintiff in the underlying action may collect the excess part of the judgment from the

insured, leaving the insured to maintain the bad- faith action against the insurer. More often,

however, the insured will assign the bad- faith action to the original injured plaintiff in exchange

for a covenant not to enforce, and the plaintiff will then maintain the bad- faith action as the

insured's assignee. Such assignments are valid, see Edwins v. Gen. Cas. Co., 78 Ill.App.3d 965,

397 N.E.2d 1231, 1232(4th Dist.1979); Scroggins v. Allstate Ins. Co., 74 Ill.App.3d 1027, 393

N.E.2d 718, 720 (1st Dist.1979); Browning v. Heritage Ins. Co., 33 Ill.App.3d 943, 338 N.E.2d

912, 915- 16 (2d Dist.1975); Brown v. State Farm Mut. Auto. Ins. Ass'n, 1 Ill.App.3d 47, 272

N.E.2d 261 (4th Dist.1971); Bailey v. Prudence Mut. Cas. Co., 429 F.2d 1388 (7th Cir.1970), and

in fact may be ordered by the court. See Nicholson v. St. Anne Lanes, Inc., 158 Ill.App.3d 838, 512

N.E.2d 127, 128 (3d Dist.1987); Phelan v. State Farm Mut. Auto. Ins. Co., 114 Ill.App.3d 96, 448

N.E.2d 579 (1st Dist.1983), rejecting the contrary holding in Roundtree v. Barringer, 92 Ill.App.3d

903, 416 N.E.2d 675 (5th Dist.1981). As assignee of the insured, the plaintiff stands in the insured's

shoes, and plaintiff's bad faith action is subject to any defenses that would have been available

against the insured. Sanders v. Standard Mut. Ins. Co., 142 Ill.App.3d 1082, 492 N.E.2d 917, 97

Ill.Dec. 258 (4th Dist.1986); Edwins v. Gen. Cas. Co., 78 Ill.App.3d 965, 397 N.E.2d 1231, 1232

(4th Dist.1979).

The injured plaintiff is not a beneficiary of the insurance contract and does not have

standing to maintain an action against defendant's insurer based upon the insurer's breach of a duty

owed only to the insured. Kennedy v. Kiss, 89 Ill.App.3d 890, 412 N.E.2d 624, 629 (1st Dist.1980);

Murphy v. Clancy, 83 Ill.App.3d 779, 404 N.E.2d 287, 301 (1st Dist.1980), aff'd in part & rev'd

in part on other grounds, 88 Ill.2d 444, 430 N.E.2d 1079 (1981); Scroggins v. Allstate Ins. Co., 74

Ill.App.3d 1027, 393 N.E.2d 718, 721 (1st Dist.1979); Yelm v. Country Mut. Ins. Co., 123

Ill.App.2d 401, 259 N.E.2d 83 (3d Dist.1970).

Damages

The measure of damages includes at least the full amount of the judgment rendered against

the insured, less any amount the plaintiff has been paid by the insurer, other tortfeasors, and any

other allowable offsets. Also, since the insured's liability includes statutory post-judgment interest

(735 ILCS 5/2-1303), this is also recoverable . Mid-Am. Bank & Trust Co. v. Commercial Union

Ins. Co., 224 Ill.App.3d 1083, 587 N.E.2d 81, 85-86 (5th Dist.1992).

There are no Illinois cases directly on point on the issue of whether attorneys' fees, or any

other damages, are recoverable in a bad faith action.

The very fact of the entry of the excess judgment against the insured itself constitutes the damages;

the plaintiff need not allege payment of the excess judgment. Scroggins v. Allstate Ins. Co., 74

Ill.App.3d 1027, 393 N.E.2d 718, 720 (1st Dist.1979); Browning v. Heritage Ins. Co., 33

Ill.App.3d 943, 338 N.E.2d 912, 916 (2d Dist.1975). It does not matter that the judgment may be

uncollectible at that time, or ever. Edwins v. Gen. Cas. Co., 78 Ill.App.3d 965, 397 N.E.2d 1231,

1232 (4th Dist.1979) (insolvent estate ); Smiley v. Manchester Ins. & Indem. Co., 13 Ill.App.3d

809, 301 N.E.2d 19, 22 (2d Dist.1973) (same); Wolfberg v. Prudence Mut. Cas. Co., 98 Ill.App.2d

190, 240 N.E.2d 176 (1st Dist.1968) (same). However, if the insured's entire personal liability has

been contracted away, the excess judgment has caused the insured no damage that will support a

bad faith claim. Childress v. State Farm Mut. Auto. Ins. Co., 97 Ill.App.2d 112, 239 N.E.2d 492

(4th Dist.1968). Accord Nat’l Union Fire Ins. Co. v. Cont’l Ill. Corp., 673 F. Supp. 267, 274-75

(N.D.Ill.1987) (insureds not personally liable, so FDIC as insureds' assignee cannot maintain bad

faith claim).

Introduction revised March 2021.