Possible Liability Proves Insufficient to Support Bad Faith Settlement Suit

July 16, 2019 / Writing and Speaking

By Don R. Sampen, published, Chicago Daily Law Bulletin July 16, 2019

The 7th U.S. Circuit Court of Appeals, interpreting Illinois law, recently held that an insurer did not act in bad faith despite having the opportunity to settle within its policy limit a medical-malpractice case in which a damage judgment against the insured was entered in excess of the limit.

The insured in Surgery Center at 900 N. Michigan Avenue LLC v. American Physicians Assurance Corp., 2019 U.S. App. Lexis 12929 (7th Cir. April 12, 2019), was represented by Spellmire Bruck LLP. Stamos & Trucco LLP represented the insurer, APA.

Surgery Center patient Gwendolyn Tate suffered complications following surgery which rendered her a quadriplegic. She sued both the doctor performing the surgery, who was an independent contractor having privileges at the center, and the Surgery Center itself in Cook County Circuit Court for medical malpractice.

APA provided professional liability coverage for Surgery Center, subject to a $1 million limit. It initially set a reserve of $560,000, labeling the case as “high exposure” because it believed the damages, if liability were found, could exceed its policy limit.

Prior to trial, Tate’s counsel offered to settle with Surgery Center at the policy limit, which APA rejected. After commencement of trial, the physician performing the surgery settled at his insurer’s policy limit.

At the same time, the trial court reconsidered the earlier denial of Surgery Center’s motion for summary judgment and granted that motion, resulting in dismissal of the case. On appeal to the Illinois Appellate Court, however, that court reversed and remanded on the issue of whether the Surgery Center’s nursing staff breached the standard of care when discharging Tate.

On remand, APA raised the reserve to the policy limit of $1 million. Prior to the second trial, Tate sent another settlement demand to Surgery Center, which APA again rejected. Following the trial, the jury returned a verdict for Tate for $5.17 million.

At that point, Surgery Center retained noninsurer counsel, settled with Tate for $2.25 million, of which APA paid $1 million and brought this suit against APA for bad faith failure to settle. At the bad-faith trial, following the close of Surgery Center’s case, APA moved for judgment as a matter of law.

The U.S. District Court granted the motion.

It found that all the principal defense players of the underlying case believed they would be successful in obtaining a no liability determination in the underlying case.

Surgery Center took this appeal.

Liability standard

In an opinion by Judge Joel M. Flaum, the 7th Circuit affirmed. He initially outlined the standards applicable to a claim for bad faith failure to settle. Under Haddick ex rel. Griffith v. Valor Insurance, 198 Ill.2d 409 (2001), the claim requires, at minimum, that the insured establish a reasonable probability of recovery in excess of policy limits and a reasonable probability of a finding of liability.

As for what constitutes a “reasonable probability,” APA argued that a more-likely-than-not standard applied. Surgery Center advocated a standard involving a showing of more than a mere possibility of liability but less than a finding based on a preponderance of the evidence.

Although the Illinois Supreme Court had not weighed in on that issue, Flaum noted that the Illinois Appellate Court has required a showing that “liability is at least more likely than not, but not necessarily a certainty.”

Possibility of liability

Under the facts here, Flaum said, the APA claims representative believed that Surgery Center would not be found liable from the start. She thought that its case got stronger after remand because, at that point, Tate was limited to a single claim involving Surgery Center’s nurses.

Surgery Center’s attorneys shared the view of the claims representative, in part because Tate did not have an expert who could address the nursing care.

Surgery Center’s president, its main witness at trial, based on many documents at trial, likewise believed that Surgery Center would not be found liable, in her view, because it was not negligent.

She relied in part on input from the APA adjuster and the attorneys, but she also testified that a review of Tate’s records by the Surgery Center clinical staff showed that the staff, too, believed that no negligence occurred.

In addition, the president made clear to the APA adjuster and to defense counsel that she did not want the case settled. She admonished them telling them she wanted to continue with the defense so that Surgery Center could win the case.

As for the increase in the reserve, Flaum reiterated the evidence that the increase took into account only the potential damages and not APA’s evaluation of liability.

He also noted that, while Surgery Center offered two experts at the summary judgment stage to opine on the significance of APA raising the reserve, one of the experts did not testify at the bad faith trial. The second expert did not link the increase of the reserve to APA’s assessment of the risk of liability.

Flaum further pointed out that APA repeatedly reminded Surgery Center of the policy limit, that Surgery Center would be responsible for any judgment exceeding the limit and that damages could be in the $10 million range if liability were found.

Surgery Center nonetheless argued that APA relied on a get-tough defensive approach to defend the case. But Flaum said there was no evidence that approach had any bearing on APA’s decision not to settle. Rather, the decision was likely linked to Surgery Center’s own belief that the underlying case was frivolous and the center’s concern about the effect of a settlement on insurance premiums.

Ultimately, Flaum found that Surgery Center did not present any evidence that anyone involved in the underlying case believed there was more than a mere possibility that Surgery Center would be found liable. And the mere possibility was insufficient under either party’s interpretation of the reasonable probability standard.

The court, therefore, affirmed in favor of APA.

Key point

For bad faith failure to settle, an insured must establish, among other things, a reasonable probability of damages in excess of policy limits and a reasonable probability of liability.

A mere possibility of such damages or liability is not sufficient.

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