The Time Limited Demand and Duty to Settle: Common Themes and Advising Your Insurer Client How to Avoid Bad Faith

There must be something in the water or the plaintiff’s bar just had a conference where the keynote speaker addressed strategies for putting pressure on insurers by issuing time-limited demands (“TLD”) because we have been asked by several insurer clients over the last few weeks to evaluate whether a TLD triggers their duty to settle and the best course of action in responding to the TLDs. Regardless of the reason for the recent myriad of TLDs, properly advising your insurer client on how to respond is critical in avoiding bad faith and the imposition of extracontractual damages. This blog entry, although not exhaustive, addresses common themes that arise in TLDs and recommendations on what to look for and how to properly advise your client on how to respond.

Duty of Good Faith

As a preliminary matter, a practitioner must remember that an insurance policy is a contract between an insurance company and an insured. Generally, the insured pays the insurer premiums in exchange for the insurer’s agreement to defend the insured and to pay all covered losses. As the insurer/insured relationship arises out of a contract, each of the parties has an independent duty of good faith and fair dealing.[1] For example, insurers have an implied-duty to act in good faith in dealing with their insureds, which includes the investigation and payment of claims.[2] Whereas, insureds have a duty to act in good faith when applying for insurance and cooperating with the insurer in response to claims.[3] The California Supreme Court in Gruenberg v. Aetna Ins. Co., 510 P.2d 1032 (Cal. 1973) first recognized a tort of bad faith for breach of contract where the insurer breached its duty of good faith and fair dealing.[4] The tort arises out of the special relationship between the insurer and the insured.[5]

Duty to Settle

One common theme in advising  your insurer client to respond to a TLD is to evaluate what layer of insurance your client provides to the insured. The trigger of a primary insurer’s duty to settle is different from an excess insurer’s duty to settle. For example, a primary insurer’s duty to settle is typically triggered when a third party demands settlement within the policy limits.[6] Whereas, an excess insurer’s duty to settle generally only arises once the primary insurer has either tendered or indicated that it will tender its policy limits.[7] However, some states impose a continuous duty to negotiate and settle in good faith regardless of whether there is a present demand to settle.[8]

Our client, who issued an excess policy that attached at $16 million, received a Massachusetts Chapter 93A demand. In that matter, plaintiff’s decedent was a passenger in a medical transport vehicle and he allegedly sustained injuries when the insured’s driver stopped short to avoid a collision with a pedestrian. Plaintiff’s decedent died a few weeks after the incident and his estate filed suit. In advance of trial, plaintiff issued a 93A demand to all insurers. Plaintiff alleged that the insurers violated Chapter 93A by failing to effectuate a fair, prompt, fair, and equitable settlement. Notably, the TLD was in the amount of $1,000,000. Given that the TLD did not implicate our client’s layer of insurance and our client had no indication that the primary insurer was tendering its limits, our client did not have a present obligation to respond to the TLD.[9]

Reasonable Probability of Success

Another common theme that you will encounter when advising your insurer client on how to respond to a TLD is whether the claimant/plaintiff has a reasonable probability of success. In many jurisdictions, an insurer’s duty to settle does not arise unless there is a reasonable probability of recovery in excess of the policy limits and there is a reasonable probability of a finding of liability against an insured.[10]

Recently, we were asked by our insurer client to determine whether a TLD in a premises liability case triggered its duty to defend. In that case, an 18-year old, recent high school graduate was murdered at a gas station. The assailants, after shooting the victim at point blank range, stole her car and drove away. The victim’s estate filed a lawsuit against the gas station alleging that it was negligent by failing to provide adequate security; failing to warn; failing to provide adequate safeguards, etc. We moved to dismiss the plaintiff’s complaint because arguing that the gas station did not have a duty to protect customers from unforeseeably third-party criminal acts; however, the plaintiff amended their complaint and framed the victim’s death as a carjacking gone wrong.

Given that the gas station owner was on notice of prior car jackings at the gas station and the gas station was on notice of myriad other crimes, the court held that the plaintiff pled a viable cause of action. Accordingly, considering the venue, settlement and trial verdicts in similar cases, and the insured’s demand to settle the case, we recommended accepting the TLD. However, in a separate gas station murder case we handled, the gas station owner was not on notice of prior incidents. While the case ultimately settled for the policy limits, the insurer would not have acted in bad faith for refusing to accept the TLD.

Accepting the TLD

Another issue that comes up is how to accept the TLD. We recently encountered a situation in Georgia where plaintiff made a TLD, which included a demand for payment within 12-days of acceptance. Our client, due to internal red-tape, said it may be difficult to issue payment within 12-days. We were asked to determine whether it was reasonable to request additional time to make the payment. While asking for additional time to pay a TLD seems reasonable, in Pierce v. Banks, 890 S.E.2d 402 (Ga. Ct. App. 2023), the Georgia appellate court held that any deviation from the terms of the TLD constituted a rejection and counter-offer.[11] In our case, we recommended to our client that they make every effort to issue payment within the 12-days. Notably, the client ended up processing the payment before the response to the TLD was due and made sure that defense counsel had payment in hand for delivery to plaintiff on the 12th day after acceptance of the TLD.

Conclusion

An insurer that is found to have unreasonably failed to settle a TLD when the insurer has full knowledge of the insured’s potential liability and damages exceeding the policy limits commits bad faith.[12] Accordingly, when your insurer client approaches you about how to respond to a TLD, you should always consider: (1) the type of policy that your client provides (i.e., primary or excess); (2) whether the TLD implicates your client’s duty to settle (although many jurisdictions have similar standards you must determine the particular standard in the jurisdiction in which the claim is being pursued); (3) potential liability of the insured (i.e., whether there is a reasonable probability of a finding of liability); and (4) whether the insured wants to settle. In addition, you should always consider how to properly accept the TLD. These recommendations are not exhaustive, but provide a roadmap on how to properly advise your insurer client on how to respond to TLDs and avoiding extra-contractual damages by committing bad faith.

Practice Point: Remember that an insurer’s duty is born of the contractual relationship with the insured. If a applicable policy provides the insurer with the exclusive right to settle, the insurer may be able to settle the matter over the insured’s objection. However, it is good practice to always consider the insured’s position on settlement.

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[1] U.S. Aviation Underwriters Inc. v. Aerospike Iron, LLC, 2024 U.S. Dist. LEXIS 103968, at * 42 (S.D. Ca. June 11, 2024); Scott Fetzer Co. v. Am. Home Assur. Co., 173 Ohio St. 3d 256, 2023-Ohio 3921, 229 N.E.2d 70, 80.

[2] Apodaca v. Young Am. Ins. Co., 702 F. Supp. 3d 1094, 1159 (D. N.M. 2023);

[3] Am. Country Ins. Co. v. Mahoney, 203 Ill. App. 3d 453, 463 (Ill. App. Ct. 1990) (“An insurance applicant has the duty to act in good faith, and an insurer is entitled to truthful responses so that it may determine whether the applicant meets its underwriting criteria. Accordingly, the applicant must disclose all information and let the insurer determine its materiality.”); N. Am. Van Lines, Inc. v. Lexington Ins. Co., 678 So. 2d 1325, 1331 (Fla. Dist. Ct. App. 1996) (noting that the duty of good faith and fair dealing in an insurance policy is a “two way street” that runs from the insured to his/her insurer and vice versa).

[4] Ala. Mun. Ins. Corp. v. Munich Reinsurance Am., Inc., 526 F. Supp.3d 1133 (M.D. Al. 2021).

[5] Patel v. United Fire & Cas. Co., 80 F. Supp. 2d 948, 951 (D. In. 2000); Hartford Roman Catholic Diocesan Corp. v. Interstate Fire & Cas. Co., 199 F. Supp. 3d 559, 599-600 (D. Conn. 2016).

[6] Reid v. Mercury Ins .Co., 162 Cal. Rptr. 3d 894, 897 (Cal .Ct. App. 2013) (holding that even if the insured’s liability is reasonably certain, an insurer cannot be held liable for the bad faith failure to settle a claim absent a demand within the policy limits or some “other manifestation the injured party is interested in settlement.”); First Acceptance Ins. Co. of Ga. v. Hughes, 826 S.E.2d 71, 73 (Ga. 2019) (“[A]n insurer’s duty to settle arises when the injured party presents a valid offer to settle within the insured’s policy limits.”).

[7] Rhodes v. AIG Domestic Claims, Inc., 2008 Mass. Super LEXIS 169, at *21 (Mass. Super. June 3, 2008), aff’d as modified, 78 Mass. App. Ct. 299 (2010), aff’d 461 Mass. 486 (2012) (concluding that the excess insurer “had no duty to ‘examine or determine the extent of its liability’ because . . . the primary insurer[] had no yet indicated that it was prepared to tender its policy limits”); Keck v. Nat’l Union Fire Ins. Co., 20S.W.3d 692, 701 (Tex. 2000) (“An excess insurer owes its insured a duty to accept reasonable settlements, but that duty is also not typically invoked until the primary insurer has tendered its policy limits.”); SRM, Inc. v. Great Am. Ins. Co., 798 F.3d 1322, 1327-28 (10th Cir. 2015) (holding that an expert insurer had no duty to settle until the primary insurer exhausted its policy limits and that the excess insurer had no obligation to proactively investigate and initiate settlement negotiations).

[8] Badillo v. Mid Century Ins. Co., 2005 OK 48, ¶ 33, 121 P.3d 1080, 1095 (an insurer has an “affirmative duty to initiate settlement negotiations” when the insured’s liability is clear and the injuries are so severe that a judgment in excess of the policy limits is likely); Powell v. Prudential Prop. & Cas. Ins. Co., 584 So.2d 12, 14 (Fla. Dist. Ct. App. 1991).

[9] It is well-settled under Massachusetts law where a primary and an excess insurer are involved, “an excess insurer is generally not subject to the fair and prompt settlement obligations of Mass. Gen. Laws Ch. 176D § 3(9)(f) until the primary insurer has acted.” Wahlstrom v. Zurich Am. Ins. Co., 2022 U.S. Dist. LEXIS 243931, at *3 (D. Mass. Aug. 17, 2022) (quoting Mut. Ins. Co., Ltd. v. Murphy, 630 F. Supp. 2d 158, 164 (D. Mass. 2009)); see also Clegg v. Butler, 424 Mass. 413, 421 n.8 (1997) (explaining that the excess insurer had “no reason to examine or determine the extent of its liability” until the primary insurer “was prepared to address the possibility that the [plaintiffs] were entitled to its policy limits,” since an “excess insurer has no obligation or incentive to make an explicit commitment until the primary insurer has acted”); Rhodes v. AIG Domestic Claims, Inc., 2008 Mass. Super LEXIS 169, at *21 (Mass. Super. June 3, 2008), aff’d as modified, 78 Mass. App. Ct. 299 (2010), aff’d 461 Mass. 486 (2012) (concluding that the excess insurer “had no duty to ‘examine or determine the extent of its liability’ because . . . the primary insurer[] had no yet indicated that it was prepared to tender its policy limits”).

[10] Haddick ex rel. Griffith v. Valor Insurance, 763 N.E. 2d 299, 304-05 (Ill. 2001) (an insurer’s duty to settle arises when (1) a claim has been made against the insured; (2) there is a reasonable probability of recovery in excess of policy limits; and (3) there is a reasonable probability of a finding of liability against the insured; State ex rel. Kilroy Was Here, LLC v. Moriarty, 633 S.W.3d 406, 416 (Mo. Ct. App. 2021) (in determining whether the insurer’s failure to settle constituted bad faith, courts will consider the severity of the third-party’s damages and the probability that a verdict would exceed the policy limits); Allstate Ins. Co. v. Miller, 212 P.3d 318 326-27 (Nev. 2009) (in the context of the duty to settle Nevada courts will consider (1) the probability of the insured’s liability; (2) the adequacy of the insurer’s investigation of the claim; (3) the extent of damages recoverable in excess of policy coverage; (4) the rejection of offers in settlement after trial; (5) the extent of the insured’s exposure as compared to that of the insurer; and (6) the nondisclosure of relevant factors by the insured or insurer); Fertita v. Allstate Ins. Co., 439 So. 2d 531, 533 (La. Ct. App. 1983) (same).

[11] Insurer “accepted” the insured’s demand but tendered payment too soon, failed to include a necessary comma on the settlement check, and included language stating that the check was “void after 180 days.” 890 S.E.2d 402 at 404-05. Based on contract principles, the appellate court reversed the trial court and held that there was no meeting of the minds and the trial court improperly enforced the settlement. Id. at 408.

[12] Cotton States Mut. Ins. Co. v. Brightman, 580 S.E.2d 519, 522 (Ga. 2003) (An insurer is negligent in refusing to settle when an ordinarily prudent insurer would consider trying the case as creating an unreasonable risk to the insured); Peterson v. USAA Life Ins. Co., 814 Fed. App’x 408, 414 (10th Cir. 2020) (applying Colorado law) (standard for considering an insurer’s bad faith is whether “a reasonable insurer under the circumstances [would] have delayed payment of the claim under the facts and circumstances.”); Grand Sheet Metal Products Co. v. Protec Mut Ins. Co., 375 A.2d 428, 429 (Conn. Super. Ct. 1977) (“[W]hen the insurer unreasonably and in bad faith withhold payment of the claim of its insured, it is subject to liability in tort.”);