Title: Haddick v. Valor Insurance
Citation: N/A
Docket Number: 90226
State: Illinois
Issuer: Illinois Supreme Court
Date: November 21, 2001

Docket No. 90226-Agenda 28-March 2001.
ELLA HADDICK, Special Adm'r of the Estate of James Griffith, 
Appellee, v. VALOR INSURANCE, Appellant.
Opinion filed November 21, 2001.
	JUSTICE GARMAN delivered the opinion of the court:
	The issue in this case is at what point in time does an
insurance provider's duty to settle arise. Plaintiff, Ella Haddick, as
the special administrator of the estate of James Griffith, filed a
single-count complaint against defendant, Valor Insurance,
alleging that defendant acted in bad faith by failing to settle a
claim against its policyholder within the policy limits. The trial
court granted defendant's section 2-615 motion to dismiss the
complaint and the appellate court reversed. We consider all well-pleaded facts contained in the allegations of the complaint and the
exhibits attached thereto.


BACKGROUND


	On May 6, 1996, James Griffith and Larry Woodley, Jr., were
involved in a single-car accident, which resulted in Griffith's
death. According to the police report, Woodley owned the vehicle
and was driving the vehicle at the time of the accident. Shortly
after the accident, the men were transported to separate hospitals.
The reporting officer attempted to speak with Woodley at the
hospital, but he was unresponsive. At the request of the officer, an
emergency room doctor woke Woodley to ask who was driving the
vehicle. Woodley responded that he was driving. After detecting
an odor of alcohol, the officer issued Woodley a ticket for driving
under the influence. On May 13, 1996, Woodley informed the
same officer that he did not remember the accident and did not
know who had been driving the vehicle.
	Woodley had liability coverage through defendant of $20,000
per person. On August 13, 1996, the attorney for the decedent's
estate wrote defendant, informing the insurer that the decedent had
incurred medical bills totaling $82,544.80 as a result of the
accident. After the attorney made a demand for settlement,
defendant responded by letter dated August 22, 1996, that it would
discuss settlement after it received a copy of the police report. On
November 1, 1996, defendant wrote to the attorney acknowledging
receipt of the police report and indicating that an investigation was
still pending to ascertain the actual driver of the vehicle.
According to defendant, Woodley was still unable to recall the
accident; therefore, upon completion of the police investigation,
defendant would determine its position and a possible resolution
of the claim.
	On March 7, 1997, plaintiff, decedent's mother, was named
as the special administrator of his estate. By letter of the same
date, she presented to defendant her claim against Woodley for
wrongful death. Plaintiff demanded that defendant settle the claim
for the policy limits within 14 days of receipt of the letter,
otherwise she would "no longer settle [the] claim within the policy
limits." Defendant responded that the settlement demand was
premature and that it was still investigating to determine who was
driving the vehicle. Plaintiff subsequently extended the settlement
deadline to April 7, 1997. When defendant did not offer to settle
by the requested date, plaintiff informed defendant by letter dated
April 9, 1997, that she had filed a wrongful death suit and had "no
intention of settling the case at this time."
	Approximately one year later, defendant offered to settle the
case for the policy limits. Plaintiff refused this offer. The trial
court entered summary judgment in plaintiff's favor on the issue
of liability and, after trial, entered a judgment in the amount of
$150,924.80.
	Following the judgment, Woodley assigned all claims against
his insurer to plaintiff, who then filed the present action. Plaintiff
alleged that defendant acted in bad faith by failing to settle her
claim against Woodley within the policy limits. Pursuant to
section 2-615 of the Code of Civil Procedure (735 ILCS 5/2-615
(West 1998)), the trial court dismissed the complaint, finding that
defendant had no duty under Illinois law to settle the claim prior
to suit being filed and that plaintiff could not maintain a bad-faith
claim once she withdrew her policy demand.
	On review, the appellate court reversed. Citing Cernocky v.
Indemnity Insurance Co. of North America, 69 Ill. App. 2d 196,
207-08 (1966), the court concluded that the duty to settle is created
by the "conception of the insurance contract" (315 Ill. App. 3d
752, 756) because the policyholder relinquishes his right to
negotiate settlement on his own behalf when he enters into the
contract. "Thus, the same threat exists to the policyholder that the
insurer will wrongly refuse to settle within the policy limits and a
judgment will be entered against him in excess of the policy
whether the third party attempted to negotiate a settlement prior to
or after filing suit." 315 Ill. App. 3d at 757. Further, noting that
many insurance contracts specifically provide for a duty to settle
both before and after a suit is filed, the court opined that if it
affirmed the trial court's blanket holding, "such a ruling could
retroactively limit the duties of an insurer to a policyholder, which
were bargained for in the insurance contract." 315 Ill. App. 3d at
757. Finally, the court held that plaintiff could maintain her cause
of action for bad faith even though she revoked her offer to settle
within the policy limits. 315 Ill. App. 3d at 759.
	We granted defendant's petition for leave to appeal (177 Ill.
2d R. 315(a)) and allowed the Illinois Trial Lawyers Association
to file an amicus curiae brief in support of plaintiff (155 Ill. 2d R.
345).

ANALYSIS
	A section 2-615 motion to dismiss challenges the legal
sufficiency of a complaint. Upon review, all well-pleaded facts in
the complaint are taken as true. Facts apparent from the face of the
pleadings, including the exhibits attached thereto, may be
considered. Weatherman v. Gary-Wheaton Bank of Fox Valley,
N.A., 186 Ill. 2d 472, 491-92 (1999). The reviewing court
determines whether the allegations of the complaint, when
interpreted in the light most favorable to the plaintiff, are
sufficient to establish a cause of action upon which relief can be
granted. A cause of action will not be dismissed unless it is clear
that the plaintiff cannot prove any set of facts entitling her to
relief. Board of Directors of Bloomfield Club Recreation Ass'n v.
Hoffman Group, Inc., 186 Ill. 2d 419, 424 (1999). We review a
dismissal pursuant to section 2-615 de novo. Neade v. Portes, 193 Ill. 2d 433, 439 (2000).
	This court has recognized that an insurance provider has a
duty to act in good faith in responding to settlement offers.
Cramer v. Insurance Exchange Agency, 174 Ill. 2d 513, 526
(1996), citing Krutsinger v. Illinois Casualty Co., 10 Ill. 2d 518,
527 (1957). If the insurer breaches this duty, it may be liable for
the entire judgment against its insured, including any amount in
excess of policy limits. Cramer, 174 Ill. 2d  at 526; Mid-America
Bank &amp; Trust Co. v. Commercial Union Insurance Co., 224 Ill.
App. 3d 1083, 1087 (1992); 14 Couch on Insurance §203:12 (3d
rev. ed. 1999).
	An insurer derives the authority to engage in settlement
negotiations from the language of the insurance contract.
Generally, such language gives the insurer the right to "make such
investigation, negotiation, and settlement of any claim or suit as it
deems expedient." 14 Couch §203:7. Therefore, the basis for the
duty to settle is the insurer's exclusive control over settlement
negotiations and defense of litigation. See Cernocky, 69 Ill. App.
2d at 207; see also Cramer, 174 Ill. 2d  at 526 (policyholder
relinquishes defense of suit); 14 Couch §203:13 (insurer controls
settlement negotiations). This exclusive control, however,
necessarily results in a conflict of interest between the insurance
provider and its insured. We explained in Cramer that:
		"In the typical 'duty to settle' case, the third party has
sued the policyholder for an amount in excess of the
policy limits but has offered to settle the claim against the
policyholder for an amount equal to or less than those
policy limits.
			In this circumstance, the insurer may have an incentive
to decline the settlement offer and proceed to trial. The
insurer may believe that it can win a verdict in its favor.
In contrast, the policyholder may prefer to settle within
the policy limits and avoid the risk of trial. The insurer
may ignore the policyholder's interest and decline to
settle." Cramer, 174 Ill. 2d  at 525-26.
In such cases, the insurance contract itself does not provide a
remedy to the insured faced with a judgment in excess of policy
limits; therefore, the law imposes upon the insurer the duty to
settle in good faith. See Cramer, 174 Ill. 2d  at 526.
	Defendant relies upon language from Cramer, including the
statement that "[t]he 'duty to settle' arises because the
policyholder has relinquished defense of the suit to the insurer"
(Cramer, 174 Ill. 2d at 526), to argue that the duty to settle derives
from the duty to defend and, thus, does not arise until a lawsuit is
filed. Defendant also cites Krutsinger, 10 Ill. 2d  at 527, in which
we noted that an insurer who undertakes defense of a suit against
the policyholder, where the damages sought are in excess of policy
limits, cannot arbitrarily refuse a settlement offer within the policy
limits. Defendant's argument is unpersuasive. In Cramer, this
court considered whether a plaintiff could pursue a common law
fraud action against his insurer arising from the purported
cancellation of his insurance policy. Krutsinger involved a suit
against an insurance company for failure to satisfy judgments
against its insured. Neither case stands for the proposition that the
duty to settle arises only after the filing of a lawsuit.
	Plaintiff, on the other hand, argues that the duty to settle arises
from the "conception of the insurance contract," i.e., from the time
the insurer and its insured enter into the policy. We also reject this
argument.
	When damages sought by a third party against the insured do
not exceed policy limits, " 'the question of whether the claim be
compromised or settled, or the manner in which it shall be
defended, is a matter of no concern to the insured.' " Olympia
Fields Country Club v. Bankers Indemnity Insurance Co., 325 Ill.
App. 649, 670-71 (1945), quoting Hilker v. Western Automobile
Insurance Co., 204 Wis. 1, 14, 235 N.W. 413, 414 (1931). In such
an instance, the insured is not at risk for personal liability.
However, the insured becomes concerned with personal liability
once a claim arises in which there is a reasonable probability that
the insured will be found liable for an excess judgment. In this
instance, the insurer must take the insured's settlement interests
into consideration. See Cernocky, 69 Ill. App. 2d at 206; Casualty
Insurance Co. v. Town &amp; Country Pre-School Nursery, Inc., 147
Ill. App. 3d 567, 569 (1986); Adduci v. Vigilant Insurance Co., 98
Ill. App. 3d 472, 475 (1981); Olympia Fields, 325 Ill. App. at 670,
quoting Hilker, 204 Wis. at 13-14, 235 N.W.  at 414.
	For example, in Adduci, the First District of the appellate
court addressed whether the plaintiffs, assignees of the insured,
alleged sufficient facts in their amended complaint to state a cause
of action against an insurer for bad faith refusal to settle. The court
noted that to state a cause of action for bad faith, the plaintiffs
must allege that the duty to settle arose; the insurer breached the
duty; and the breach caused injury to the insured. With respect to
duty, the court found that the complaint alleged sufficient facts to
establish the existence of the insurer's duty in that it alleged that
the insurer was aware of the almost certain liability of the insured
and that recovery in excess of policy limits was likely. Adduci, 98
Ill. App. 3d at 476. Although the court in Adduci was not faced
with the question we address in the case at bar, we find Adduci
helpful to our analysis.
	To survive a motion to dismiss a bad-faith claim, the plaintiff
must allege facts sufficient to establish the existence of the duty to
settle in good faith. The duty does not arise at the time the parties
enter into the insurance contract, nor does it depend on whether or
not a lawsuit has been filed. The duty of an insurance provider to
settle arises when a claim has been made against the insured and
there is a reasonable probability of recovery in excess of policy
limits and a reasonable probability of a finding of liability against
the insured. Since Illinois law generally does not require an
insurance provider to initiate settlement negotiations(1) (Adduci, 98
Ill. App. 3d at 478; Kavanaugh v. Interstate Fire &amp; Casualty Co.,
35 Ill. App. 3d 350, 356 (1975); Oda v. Highway Insurance Co.,
44 Ill. App. 2d 235, 253 (1963)), this duty also does not arise until
a third party demands settlement within policy limits.
	Having established when the duty to settle arises, we turn now
to the facts of this case as alleged in plaintiff's complaint.
Woodley's policy provides that defendant "may make such
investigation and settlement of any claim or suit as it deems
expedient." At the time of plaintiff's March 7, 1997, settlement
demand for the policy limits, defendant was aware that decedent's
medical bills were in excess of $80,000. This amount clearly
exceeded Woodley's $20,000 liability coverage. In addition,
defendant possessed the police report, which indicated that
Woodley had informed an emergency room doctor that he had
been driving the vehicle at the time of the accident. Defendant was
further aware that Woodley owned the vehicle. Although Woodley
subsequently informed a police officer that he could not remember
who was driving the vehicle at the time of the accident, we must
interpret the facts in the light most favorable to plaintiff.
Additionally, in automobile injury cases, proof of ownership raises
a presumption that the owner of the vehicle was in control of the
vehicle at the time of the accident. Robinson v. Workman, 9 Ill. 2d 420, 427 (1956); Tolefree v. March, 99 Ill. App. 3d 1011, 1014
(1981). Since Woodley was unable to recall the accident at the
time of plaintiff's settlement demand, he would have been unable
to rebut this presumption.
	We conclude that these facts allege a reasonable probability
of recovery in excess of policy limits and a reasonable probability
of a finding of liability against Woodley. Plaintiff demanded
settlement on March 7, 1997. Therefore, the allegations are
sufficient to allege the existence of the duty to settle in good faith
on that date.(2)
	Finally, the trial court, without explanation, held that plaintiff
could not maintain her bad-faith claim because she withdrew her
demand for settlement within policy limits. We disagree. Once the
duty of the insurer to settle arises, the next question is whether the
insurer breached that duty. Plaintiff alleged in her complaint that
on March 7, 1997, she demanded that defendant settle her claim
for the policy limits of $20,000 within 14 days of receipt of the
demand. Defendant responded that the demand was premature and
that it was still investigating to determine the driver of the vehicle.
Plaintiff extended the time for settlement to April 7, 1997.
Defendant failed to respond to this extension; consequently,
plaintiff withdrew her offer and filed suit. Thus, plaintiff allowed
defendant about one month to settle the claim and approximately
11 months to investigate the accident. Defendant did not offer to
settle for the policy limits until April 1, 1998, almost one year
after plaintiff withdrew her settlement demand. We conclude that
these facts, along with others alleged in the complaint, are
sufficient to allege a breach of the duty to settle in good faith.
	Whether defendant did, in fact, act in bad faith by failing to
settle plaintiff's claim within her unilaterally imposed deadline, is,
of course, a question for the finder of fact. We express no view
with respect to defendant's actions. Our decision today affirms the
appellate court's holding, but rejects its blanket conclusion that the
duty to settle arises from the "conception of the insurance
contract." We conclude that an insurance provider's duty to settle
arises once a third-party claimant has made a demand for
settlement of a claim within policy limits and, at the time of the
demand, there is a reasonable probability of recovery in excess of
policy limits and a reasonable probability of a finding of liability
against its insured. For these reasons we affirm the judgment of
the appellate court, which reversed the judgment of the circuit
court and remanded the cause for further proceedings.
Appellate court judgment affirmed.


1.      1There is an exception to this general rule where the probability of
an adverse finding on liability is great and the amount of probable
damages would greatly exceed policy limits. Adduci, 98 Ill. App. 3d at
478. 

2.      2We conclude that defendant's duty to settle
may have arisen at this time rather
than as a result of decedent's attorney's initial demand for settlement.
The specific date of the initial demand is unclear from the complaint
and the attached exhibits. It is discernible, however, that the demand
was made sometime prior to August 22, 1996. Plaintiff has not alleged
facts sufficient to establish the existence of a duty to settle prior to that
time. According to the record, plaintiff did not make a subsequent
settlement demand until March 7, 1997. Since the insurer is not required
to initiate settlement negotiations, the duty to settle could not have arisen until
the demand of March 7, 1997.