In many states, an insurer not only has a duty to timely communicate with its insured and respond to demands for settlement by a claimant asserting a claim regarding the adjustment of a loss, that duty may also include the duty to follow-up on those communications. As a recent case decided by the United States District Court for the Northern District of Illinois shows, the costs of not doing so, even on a relatively small claim under a low limit policy, can be catastrophic.
Horace Mann Insurance Company provided automotive insurance limits of $25,000. Less than 45 days after a motor vehicle accident involving its insured near Tampa, Florida in which the insured’s SUV collided with a motorcycle, Horace Mann was presented with a letter from an attorney for the motorcycle driver offering to settle his claim for the $25,000 limits of the policy. The letter noted that medical records were not yet available, but included photos of the claimant’s injuries and an exchange of information form filled out at the scene of the accident. The attorney letter offered to settle the claim if Horace Mann tendered a check for its $25,000 policy limits within 20 days.
The insurer responded before the 20-day period elapsed, acknowledging that it was willing to settle the case for its policy limit, but needed to receive the claimant’s hospital records before settling. Because the records were not received in that timeframe, the insurer did not tender its settlement check within the time set forth in the demand.
Forty-five days later, suit was filed against the insured. The case was tried three years later resulting in a $17 million verdict, which was later settled for $7 million while post-trial motions were pending.
Horace Mann was insured for its own E&O by Lexington Insurance Company. Lexington denied the claim for extracontractual benefits paid by Horace Mann to the claimant on the basis that no claim had been made directly against Horace Mann triggering the E&O coverage afforded by the Lexington policy. Horace Mann, while never having been named in a claim, did at a point during the post-trial proceedings and before settlement of the underlying litigation, receive an email in which the threat of “bad faith” was made, but it was never conveyed to Lexington.
In a May 13, 2016 ruling, District Judge Charles Norgle held in Lexington Ins. Co. v. Horace Mann Ins. Co., No. 1:11-cv-02352 (N.D. Ill., May 13, 2016), that Horace Mann’s failure to meet the 20-day deadline of the underlying demand in the injury case, coupled with its failure to communicate with its own E&O insurer regarding its settlement of the underlying claim, meant Horace Mann was not only obligated to pay the $7 million settlement, but forfeited its own professional liability coverage for that settlement.
Horace Mann was also left without recourse against its broker, AON, for failing to timely report Horace Mann’s E&O claim to Lexington. The Court concluded that AON followed the directions given to it by Horace Mann to report only a potential circumstance and that Horace Mann did not ask AON to take any further action after the reporting of those circumstances. This resulted in no report of an actual claim to Lexington, which was the basis for Lexington’s denial.
This case highlights the importance of thoughtful and strategic follow-up at every stage of the claim process. Otherwise, as with this case, a $25,000 loss can turn into a $7 million loss. The insurer’s lack of follow-up in response to the underlying settlement offer and in its own E&O insurance claim resulted in the inability to obtain insurance coverage for the insurer’s failure to settle the underlying claim.
Demands within limits are fraught with potential traps. This case illustrates the importance of not only making a proper record of the claim investigation and adjustment, but also that lack of follow-up can turn even a small claim into a horrendous loss.