Douglas R. Richmond on Developments in Bad Faith: Time-Restricted Settlement Offers
A wide variety of allegations of bad faith permeate insurance litigation. A common scenario involves an allegation by the policyholder or the policyholder’s assignee that the liability insurer unreasonably failed to settle a claim against the policyholder within its policy limits. This exposes the policyholder, and in turn, the insurer, to excess liability.
In the vast majority of jurisdictions, an insurer must be presented with a settlement offer or demand within its policy limits to be potentially liable for damages exceeding those limits. When a plaintiff’s damages exceed available coverage, the plaintiff is unlikely to be satisfied by a policy-limits settlement offer. An example of this would be where the plaintiff is seriously injured in an automobile accident but the defendant’s automobile liability policy only has a $25,000 per person injury limit. The plaintiff in such a situation may be tempted to try to artificially expand that limit. A time-restricted settlement offer is the plaintiff’s means of doing so. The plaintiff’s lawyer sends the insurer a settlement offer that expires in a short time. The plaintiff’s settlement deadline is arbitrarily chosen in the sense that the plaintiff will not be harmed if the deadline passes and the offer is not acted upon. On the contrary, the plaintiff hopes that the insurer will not accept the offer before it expires, thus supporting a future bad faith claim. The plaintiff will then withdraw the offer in the expectation of ultimately receiving a judgment exceeding the insurer’s policy limits.
In his commentary, Douglas R. Richmond, Senior Vice President in the Professional Services Group of Aon Risk Services, points out that in many cases the insurer cannot fairly accept the offer in the time allotted. For example:
• The plaintiff’s offer may be sent to an agency instead of a claims office
• The plaintiff’s offer may be sent to the wrong claims office
• The insurer may not have obtained sufficient information to responsibly evaluate the claim
• Where multiple claimants are involved, the insurer may need time to consult with its policyholder or to evaluate all of the claims
The plaintiff’s tactics are often successful. The threat of bad faith liability has caused many insurers to pay more than their policy limits to settle cases in which they did not accept a time-restricted settlement offer before its expiration. The author states that in many cases the insurer was not actually guilty of bad faith, but reluctantly saw settlement as being preferable to expensive, time-consuming, and potentially risky litigation. This is especially true in cases in which the plaintiff and the defendant policyholder entered into a sizable consent judgment following the insurer’s failure to settle on the plaintiff’s terms.
In offering practical advice to insurers, Richmond writes: “Insurers must be wary of time-restricted settlement offers. They must always remember their obligation to give their insureds’ legitimate interests consideration equal to their own. To the extent possible, they should promptly respond to all time-restricted offers within their policy limits, even if it is only to request additional time to consider the offer. If they need information from a plaintiff to evaluate a claim, they should request it.”
The author also offers advice to plaintiffs’ attorneys: “Plaintiffs’ lawyers considering time-restricted offers must give careful thought to them. What legitimate reasons are there for selecting a specific response time? Will your reasons withstand challenge as merely a bad faith set-up? Are the facts such that the insurer should be able to reasonably respond within the time stated? If the offer is within the insurer’s policy limits but is not for their full amount, what do you do if the insurer misses your settlement deadline? Do you simply withdraw the offer, or do you instead increase it?”
This commentary discusses decisions of the Ninth and Tenth Circuits, and the U.S District Court for the District of Arkansas as well as decisions of the courts of Georgia and New York involving time-restricted settlement offers and insurers’ alleged bad faith. The commentary delves into the facts of each case as the totality of the circumstances is generally dispositive when bad faith is alleged. Mr. Richmond comments on how the courts have applied settled principles of bad faith in reaching their decisions.
The author observes, “Though their use is understandable, time-restricted settlement offers are rarely reasonable. For the most part they are litigation ploys.” He concludes, “Accordingly, courts should carefully scrutinize them when offered as a basis for a bad faith claim.”