Insurance bad faith

Demand Letters or Settlement Proposal Letters?

Should we be calling our letters to insurers a "Demand Letters" or a "Settlement Opportunity Letter"?

Despite the Insurance Research Council and US Department of Justice Bureau of Statistics studies on state court filings demonstrating that nearly 99% of all civil tort cases settling prior to trial, very little has been written about the process of writing settlement letters for insurers.  Leading legal publisher, Trial Guides, has released the only two books on this topic in the past 20 years; Aaron DeShaw's Colossus: What Every Trial Lawyer Needs to Know (2004) and Nick Rowley and Courtney Rowley's Running with the Bulls.  The two books present significantly different approaches with DeShaw's method mainly focused on pre-litigation settlement and institutional insurance claim practice violations, and the Rowley's book focused on demand letters written during litigation and trial, as well as the insurance bad faith implications.  The method discussed in DeShaw's book is now available within the Settlement Intelligence program.  We felt that it was important to address what lawyers should title these letters.

"Demand Letter" versus a "Settlement Opportunity Letter"

Most personal injury lawyers only view a letter to the insurer to offer settlement as having a single purpose - whether you can settle the case. But, when an insurer makes a lowball offer, the letter holds the potential of serving a secondary purpose; a document demonstrating the attorney's good faith attempt to inform the insurer of the facts of a claim and settle the case.  An insurer owes a duty of good faith and fair dealing (in first party and/or third party cases depending upon state law) often based upon the NAIC Model Rules, called the Unfair Claims Settlement Practices Act. The insurance claim practices cases (often called insurance bad faith" cases) arise when the insurer improperly denies, delays, improperly evaluates a case, or intentionally undervalues a case as a pattern and practice of their operation.

In some cases, the attorney in the underlying personal injury case becomes a witness in the insurance claim practice or "bad faith" case.  Insurance bad faith lawyers have long held that one of the worst pieces of evidence in such a case is the tone of the demand letter or the attorney in the underlying case.  While aggressive conduct may be common in some parts of the country, it can also turn off jurors in the bad faith case when they see it.

Both DeShaw and the Rowleys address the concern about making threats (like litigation) that lawyers will not deliver upon.  The aggressive tone in the underlying case communications can backfire in the bad faith case.

In a recent insurance claim practice conference with some of the country's leading insurance claim practice lawyers, the issue was recently raised about whether for this reason lawyers should use the term "Settlement Offer Letter" or some phrase conveying the cooperative nature of the communication, rather than the more aggressive term "Demand Letter." This may particularly be the case in first party claims on behalf of policyholders where under historical insurance practices the claim was not supposed to be adversarial in nature.  (Settlement Intelligence provides special language in our first party demand format that addresses some important historical insurance concepts that convey these important concepts.) 

Given modern insurers disregard for traditional insurance coverage and payment concepts, and increasing attempts by insurers to obtain improper profits from their claims departments by underpaying claims (particularly in first party cases), we believe that "demand letters" should always be sent with the expectation that a bad faith claim is very possible.

The Settlement Intelligence program helps you fully demonstrate your client's case using the factors and order that the insurance companies are using to evaluate claims, as well as including important facts to a jury for which some insurers no longer provide value.  We encourage the full disclosure of facts to insurers even when we know the insurer may not correctly evaluate the loss, and that you maintain absolute credibility in terms of what you say in your communications with insurers.  

Interestingly, Nick Rowley also recently addressed this issue in a free Trial Guides webinar with Rick Friedman, Courtney Rowley and James Abernethy following their recent $275 million verdict against Monsanto.  While Running with the Bulls is a more aggressive litigation-centered settlement method that can only be employed by lawyers who actively litigate cases, Nick spontaneously raised the same issue - that the letters should be retitled "Settlement Offer Letter." While he did not address the reason why, we believe it is because when he goes on to obtain one of his significant excess verdicts, he wants the evidence to be clear to jurors in a bad faith claim that he consistently and repeatedly made good faith efforts to allow the insurer to properly pay the claim before the excess verdict was obtained and that despite doing so in a civil way, the insurer refused to properly investigate, evaluate and pay the claim.

In closing, we believe using the title "Settlement Offer Letter" makes sense, and suggest using this in your practice moving forward.