Absent Policyholder Demand To Settle, Seventh Circuit Affirms Dismissal of Bad Faith Action Against Insurer After Unexpected Excess Judgment

The Seventh Circuit, applying Illinois law, recently tackled the highly-charged issue of a bad faith claim against an insurer for failing to settle for the policy limit. In Surgery Center at 900 North Michigan Avenue, LLC v. American Physicians Assurance Corp., Inc., the Seventh Circuit closely scrutinized the facts and affirmed the trial court’s decision that the insurer did not act in bad faith.

 The coverage dispute arose between the Surgery Center at 900 North Michigan Avenue, LLC (Surgery Center) and its insurer when a jury found the Surgery Center liable for medical malpractice to the tune of $5.17 million. Since coverage under the insurer’s policy was limited to $1 million, thereby exposing the Surgery Center to excess exposure, the Surgery Center sued its insurer for failing to settle for the policy limit. In reaching its decision, the Seventh Circuit painstakingly reviewed the underlying litigation, which involved a botched outpatient laparoscopic surgery that rendered the patient a quadriplegic. After the patient initiated a lawsuit against the Surgery Center, the insurer hired an outside law firm to defend them. Internally, the insurer set reserves in the amount of $560,000 and labeled the case as “high exposure” due the possibility of an adverse verdict exceeding the policy limit. After discovery and prior to the first of two trials, the patient’s counsel offered to settle for $1 million, which was rejected.  Thereafter, the trial court granted summary judgment in favor of the Surgery Center. However, that ruling was ultimately reversed and remanded for trial by the Appellate Court.

Following the remand, the insurer raised its reserves to the policy limit. Notably, the insurer did not inform the Surgery Center of this action, but did advise them that the case was defensible. After another $1 million settlement was rejected, the jury handed down the award of $5.17 million. Ultimately, there was a settlement for $2.25 million, with $1 million being paid by the insurer.

During the trial of the ensuing bad faith suit, evidence was presented showing the insurer’s new company-wide strategy was to promote aggressive defense of claims against insureds; and that the suit against the Surgery Center was rated a 9 out of 10 on its severity scale. Before the second trial, the insurer notified the Surgery Center of the renewed $1 million settlement demand and indicated it would not be negotiating a settlement. Additionally, since the patient did not have an expert to testify against nurses at the Surgery Center, the insurer considered this very favorable under Illinois law.

Evidence also revealed that although the Surgery Center was aware of the potential for an adverse verdict, it nonetheless implored counsel retained by the insurer to not settle under the belief that the Surgery Center was not negligent. Ultimately, at the close of trial, the district court granted judgment as matter of law in favor of the insurer since the duty to settle was not triggered. In particular, the district court concluded that although there was a reasonable probability of recovery in excess of the limit, there was a consensus of a strong probability of a finding of no liability.

The Seventh Circuit agreed, stating that document after document showed the Surgery Center’s president believed the case was defensible and that it would be found not negligent. Moreover, the Seventh Circuit pointed out that the insurer repeatedly reminded the Surgery Center of its policy limit and that it would be on the hook for any excess judgment. As a result, the mere possibility that the Surgery Center would be found liable was not sufficient to overturn the district court’s ruling.

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