In their article appearing in the March/April 2010 issue of Coverage, "Time-Sensitive Demands," James M. Hofert and Jennifer K. Gust initially describe the debate as to the legitimacy of time-sensitive demands. Such a demand is a settlement offer made by an underlying plaintiff that the defendant's insurer must accept by the deadline set forth in the demand. If the insurer does not accept the settlement offer in time, the insured defendant may be exposed to an excess judgment. This may prompt the insured to issue a bad faith claim against its insurer, which may be assigned to the underlying plaintiff as part of a settlement. Insurers have asserted that time-sensitive demands are "legal gamesmanship" involving unreasonable conditions designed to evade coverage limits and illegitimately reach the insurers' deep pockets for extra-contractual damages.
Plaintiffs' attorneys assert that time-sensitive demands instead are a legitimate means to compel unwilling insurers to timely pay policy limits where the actual damages are clearly greater than the coverage limits. The authors find that while either side of the debate may be correct in a given case depending on the specific facts involved, the overriding principle is that the insurer must act in good faith in deciding how to handle the settlement offer, not unwarrantedly exposing its insured to excess liability. The authors identify numerous factors the insurer must take into account beyond objectively assessing the defensibility of the case in terms of liability, e.g., the relative persuasiveness of the parties and their witnesses. They also identify jurisdictional differences as to the standards governing an insurer's duty to settle in response to a time-sensitive demand. Importantly, the authors note, "... it is the insurer's conduct-not the underlying plaintiff's-that is at issue for in a bad faith claim for failure to settle."
The article examines a number of bad faith cases involving delayed responses to time-sensitive demands, identifying the dispositive facts or totality of circumstances that led each court to find for or against the insurer. The article concludes with several prudent recommendations for insurers handling time-sensitive demands. An overarching recommendation is that "[t]he insurer's best defense to potential bad faith liability arising from a time-sensitive demand is honest and timely communication with both the underlying plaintiff who is making the demand and its insured."
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