Guide for Causes of Action for Bad Faith Claims

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Last Updated
July 20, 2021

215 Ill. Comp. Stat.5/154.6 and 155 and Duty to Settle:

A.     Statutory Provisions

Under 215 Ill. Comp. Stat. 5/154.6, an insurer must not engage in improper claims practice. Such practices include: “. . . (d) [n]ot attempting in good faith to effectuate prompt, fair and equitable settlement of claims submitted in which liability has become reasonably clear . . . .” It should be noted that this statute provides direct recourse for breach of contract under the policy for first-party claimants. The statute further states:

[i]n any action by or against a company wherein there is in issue the liability of a company on a policy or policies of insurance or the amount of the loss payable thereunder, or for an unreasonable delay in settling a claim, and it appears to the court that such action or delay is vexatious and unreasonable, the court may allow as part of the taxable costs in the action reasonably attorney fees, other costs, plus an amount not to exceed any one of the following amounts:
(a)  60% of the amount which the court or jury finds such party is entitled to recovery against the company, exclusive of all costs;
(b)  $60,000;
(c)   the excess of the amount which the court or jury finds such party is entitled to recover, exclusive of costs, over the amount, if any, which the company offered to pay in settlement of the claim prior to the action.[1]

B.     Common Law

Currently, there is no common law “bad faith” tort action under Illinois law. However, an insured may assert a common-law action against a liability insurer that has failed to act in good faith in responding to a settlement offer.[2] The duty to settle does not arise until there is a reasonable probability of(1) recovery in excess of policy limits and (2) a finding of liability against the insured.[3] Moreover, the duty does not arise until a third-party demands settlement within the policy limits.[4] “Illinois, courts have recognized that an insurer has a duty to act in good faith in responding to settlement offers and if this duty is breach by refusal to settle, the insurer may be liable for the full amount of the judgment against a policyholder, including any amount in excess of policy limits.”[5]

To determine if an insurer has breached the duty to settle, Illinois courts consider (1) whether the insurer ignored the advice of its own claims adjusters; (2) whether the insurer refused to engage in settlement negotiations; (3) whether the insurer ignored the settlement recommendations of the insured’s defense counsel; (4) whether the insurer kept the insured aware of the third-party’s willingness to settle; (5) whether the insurer conducted an adequate investigation and defense; (6) whether a substantial prospect of an adverse verdict existed; and (7) whether there was a potential for damages to exceed the policy limits.[6] An insurer does not breach a duty to settle when it rejects a settlement offer made after entry of an excess judgment or if it offers to settle and the offer is refused for no reason.

In common law, or failure to settle bad faith claim, an insurer may be liable for punitive damages if the insurer’s failure to settle is a result of conduct that exceeds mere negligence.[7] However, there are no grounds for statutory third-party bad faith in Illinois. Failure to settle claims are not limited to insureds. Courts are divided on the issue of whether there is a direct duty that runs from primary insurers to excess insurers to act reasonably and in good faith in attempting to settle an underlying claim within their policy limits.[8]


[1] 215 Ill. Comp. Stat. 5/155 (1997).

[2] Cramer v. Ins. Exchange Agency, 174 Ill. 2d 513 (1996).

[3] Chandler v. American Fire and Cas. Co., 377 Ill. App. 3d 253, 257 (4th Dist. 2007).

[4] Haddick v. Valor Ins., 198 Ill. 2d 409 (2001).

[5] Chandler,377 Ill. App. 3d at 256 (citing Haddick, 198 Ill. 2d 409 (2001)).

[6] O’Neill v. Gallant Ins. Co., 329 Ill. App. 3d 1166 (5th Dist. 2002).

[7] O’Neill,329 Ill. App. 3d 1166 (holding that punitive damages could be imposed on insurer who acted with “utter indifference and reckless disregard for its policyholder’s financial welfare” in its failure to settle within policy limits).

[8]  Compare Schal Bovis, Inc. v. Casualty Ins. Co., 314 Ill. App. 33 562 (1st. Dist. 1999)(finding that a primary insurer owed an excess insurer a direct duty of good faith) to U.S. Fire Ins. Co. v. Zurich Ins. Co., 329 Ill. App. 3d987, 1002-3 (Ill. App. Ct. 2002) (holding that Illinois law does not recognize a direct duty of good faith between a primary and excess insurer).

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Chartwell Law represents the interests of insurers and employers, as such, we continue to continue to monitor the legal landscape. If you have any questions about issues associated with right of action for bad faith claims, our attorneys are available to help. Please contact your Chartwell Law attorney.