Time Limit Settlement Demands – What is the Insurance Company’s Responsibility?

We are sometimes asked by insurance company representatives about how to respond to a plaintiff’s time limit settlement demand.  There are no direct Tennessee cases on point on this issue, though Tennessee does have certain requirements in considering settlement demands against an insured.  In Tennessee, insurance carriers who have exclusive control over investigation and settlement of a claim may be liable for more than the policy limit when it fails, in bad faith, to settle within policy limits.  Clark v. Hartford Acc. & Indem. Co., 61 Tenn. App. 596, 457 S.W.2d 35 (Ct. App. 1970).  Such a recovery sounds in tort, as opposed to under the contract, and is based upon a theory of the breach of the duty of “good faith and diligence in protecting the interests of the insured.”  Id.  This is also the rule in the vast majority of jurisdictions.   State Auto. Ins. Co. of Columbus, Ohio v. Rowland, 427 S.W.2d 30, 33 (1968).  As one court pointed out, things to be considered include:

the strength of the injured claimant’s case on the issues of liability and damages; attempts by the insurer to induce the insured to contribute to a settlement; failure of the insurer to properly investigate the circumstances so as to ascertain the evidence against the insured; the insurer’s rejection of advice of its own attorney or agent; failure of the insurer to inform the insured of a compromise offer; the amount of financial risk to which each party is exposed in the event of a refusal to settle; the fault of the insured in inducing the insurer’s rejection of the compromise offer by misleading it as to the facts; and any other factors tending to establish or negate bad faith on the part of the insurer. Id.

Other states have examined time limit settlement demands, but in a limited fashion.  A Georgia court explained that “an insurance company does not act in bad faith solely because it fails to accept a settlement offer within the deadline set by the injured person’s attorney” but whether “the insurer acted unreasonably in declining to accept a time-limited settlement offer.”  S. Gen. Ins. Co. v. Wellstar Health Sys., Inc., 726 S.E.2d 488, 491-92 (2012)(emphasis added).  New York courts hold that failure to respond to a time limit demand when the insured’s liability was still under investigation is not enough to establish a case for bad faith.  Pavia v. State Farm Mut. Auto. Ins. Co., 626 N.E.2d 24 (1993).  However, Florida courts hold that failing to “ensure payment of the policy limits within the time demands” is included in the consideration for bad faith.  Berges v. Infinity Ins. Co., 896 So. 2d 665, 672 (Fla. 2004).

Thus, the failure to accept a time limit demand is but one consideration courts allow to be made in examining whether a carrier has acted in bad faith.  Thus, it is important to be actively engaged in investigation, consider all settlement demands, communicate all settlement demands with the insured, and otherwise consider the interests of the insured.  While there appears to be no per se rule about responding to time limited demands, it is in the best interest to respond within the time period, if possible, even if it is to simply let the claimant know the reasons why a response cannot be made within the time constraints of the demand.