Insurance Bad Faith Demand Letter - Illinois

INSURANCE BAD FAITH DEMAND LETTER

State of Illinois — Vexatious and Unreasonable Delay / 215 ILCS 5/155

[LAW FIRM LETTERHEAD]

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
SETTLEMENT COMMUNICATION — INADMISSIBLE UNDER ILL. R. EVID. 408
TIME-LIMITED DEMAND

VIA CERTIFIED MAIL, RETURN RECEIPT REQUESTED
Article No.: [____________________________]
AND VIA EMAIL TO: [________________________________]

Date: [__/__/____]

[INSURANCE COMPANY FULL LEGAL NAME]
[________________________________]
[________________________________]
[CITY], IL [ZIP]

Attention: [________________________________], [________________________________]
Re: FORMAL BAD FAITH / VEXATIOUS DELAY DEMAND PURSUANT TO 215 ILCS 5/155
Insured: [________________________________]
Policy Number: [________________________________]
Claim Number: [________________________________]
Date of Loss: [__/__/____]
Type of Claim: [________________________________]
Policy Limits: $[________________________________]
Amount in Dispute: $[________________________________]
Response Deadline: [__/__/____] at 5:00 p.m. Central Time

Dear [________________________________]:

I. INTRODUCTION AND NATURE OF DEMAND

This office represents [________________________________] ("our client") in connection with a claim under the insurance policy issued by [________________________________] ("the Company"), Policy No. [________________________________] ("the Policy"), arising from a loss that occurred on [__/__/____].

This letter constitutes a formal demand for immediate payment of all policy benefits wrongfully withheld, together with notice that the Company's conduct in handling this claim constitutes vexatious and unreasonable delay within the meaning of 215 ILCS 5/155 of the Illinois Insurance Code.

The Company had an obligation to promptly, fairly, and honestly evaluate and pay this claim. Instead, the Company has [☐ denied without reasonable basis / ☐ unreasonably delayed payment / ☐ systematically undervalued the claim / ☐ misrepresented policy provisions / ☐ conducted a sham investigation]. This conduct has caused our client substantial harm beyond the unpaid policy benefits, including [________________________________].

This demand expires at 5:00 p.m. Central Time on [__/__/____]. Failure to tender the demanded amount by that deadline will result in immediate litigation in which our client will seek, in addition to policy benefits, all remedies available under 215 ILCS 5/155, including attorney fees and the statutory penalty.

II. ILLINOIS BAD FAITH LAW — THE COMPLETE FRAMEWORK

A. Illinois Does Not Recognize Common-Law Bad Faith

At the outset, it is important to correctly characterize the applicable law. Illinois does not recognize an independent common-law tort of bad faith against an insurer. The Illinois Supreme Court definitively held in Cramer v. Insurance Exchange Agency, 174 Ill. 2d 513, 675 N.E.2d 897 (1996), that Section 155 of the Illinois Insurance Code "provides an extracontractual remedy to policyholders whose insurer's refusal to recognize liability and pay a claim under a policy is vexatious and unreasonable," and that this statutory remedy is exclusive — no parallel common-law bad faith tort exists in Illinois.

This means our client's bad faith claim arises entirely under 215 ILCS 5/155 and must be litigated in the same action as the underlying breach of contract claim.

B. The Vexatious and Unreasonable Standard

Under 215 ILCS 5/155, if an action is pending "wherein there is in issue the liability of a company on a policy or policies of insurance or the amount of the loss payable, or for an unreasonable delay in settling a claim," and the court finds that the insurer's action or delay is vexatious and unreasonable, the court:

"shall allow as part of the taxable costs in the action reasonable attorney fees, other costs, plus an amount not to exceed any one of the following amounts: (a) 60% of the amount which the court or jury finds such party is entitled to recover against the company, exclusive of all costs; (b) $60,000; (c) the excess of the amount which the court or jury finds such party is entitled to recover, exclusive of costs, over the amount which the company offered to pay in settlement of the claim prior to the action."

215 ILCS 5/155(1).

C. How Courts Determine "Vexatious and Unreasonable"

Courts examine the totality of circumstances, including:

• The insurer's attitude toward the insured throughout the claim
• Whether a bona fide dispute existed over the claim's merit or value
• Whether the insurer had an arguable legal or factual basis for its position
• Whether the insurer's conduct was designed to harass, compel, or coerce the insured into accepting an inadequate settlement
• How quickly the insurer acted after receiving the insured's claim and supporting documentation
• Whether the insurer hid behind pretextual investigations or manufactured reasons to delay

A mere denial does not automatically trigger Section 155. But where the facts and law clearly support the claim and the insurer stonewalls, lowballs, or misrepresents without reasonable justification, the vexatious standard is met. See Cramer, 174 Ill. 2d at 522–23.

D. Penalty Structure Under 215 ILCS 5/155

The penalty amounts available under Section 155 are mutually exclusive — the court awards the largest of the three alternatives that is also less than or equal to $60,000:

The $60,000 figure is a flat cap per action — it is not calculated per annum or per occurrence. Attorney fees awarded under Section 155 are separate from and in addition to the penalty, and may substantially exceed the penalty itself in complex or protracted litigation.

Note on Surplus Lines Insurers: The $60,000 cap under Section 155(1)(b) applies to admitted Illinois insurers. For surplus lines insurers, Illinois courts have held that the cap may not apply, potentially allowing for uncapped penalties. See Neal, Gerber & Eisenberg LLP, "Bad Faith Damages Against Surplus Line Insurers Might Not Be Capped in Illinois." Confirm the Company's license status when evaluating this issue.

E. Prerequisite: Prevailing on Breach of Contract

A court may only award Section 155 penalties if the insured prevails on the underlying breach of contract claim. Cramer, 174 Ill. 2d at 519. Our client is prepared to prove both the breach of contract and the vexatious nature of the Company's conduct.

F. 215 ILCS 5/154.6 — Unfair Claims Practices (Regulatory Context)

215 ILCS 5/154.6 specifies acts that constitute "improper claims practices" when committed in violation of 215 ILCS 5/154.5. These acts include:

(a) Knowingly misrepresenting relevant facts or policy provisions;
(b) Failing to acknowledge pertinent communications with reasonable promptness;
(c) Failing to implement reasonable standards for prompt investigation and settlement;
(d) Not attempting in good faith to effectuate prompt, fair, and equitable settlements when liability is clear;
(e) Compelling policyholders to litigate by offering substantially less than amounts ultimately recovered.

Critical limitation: Sections 154.5 through 154.7 are regulatory in nature and vest enforcement authority in the Illinois Director of Insurance under 215 ILCS 5/154.7 — they do not create a private cause of action by the insured against the Company. The private remedy for the conduct described in Section 154.6 is through Section 155. See ILGA Official Comments; see also Ill. App. Ct. decisions confirming no private right of action under § 154.6.

However, the Company's violations of Section 154.6 and Ill. Admin. Code tit. 50, pt. 919 are admissible evidence of vexatious conduct under Section 155.

G. Illinois Administrative Code, Title 50, Part 919

The IDOI's Improper Claims Practice Regulations (Ill. Admin. Code tit. 50, pt. 919) impose specific deadlines on all Illinois insurers:

Violations of these deadlines constitute evidence of the vexatious conduct actionable under Section 155.

III. POLICY INFORMATION

A. Policy Details

B. Coverage Analysis

The Policy covers [________________________________]. The loss clearly falls within the Policy's insuring agreement and [☐ no exclusion applies / ☐ the exclusion asserted by the Company does not apply because [________________________________]].

The Company [☐ initially acknowledged coverage / ☐ denied coverage from the outset / ☐ accepted coverage but disputes the amount]. Having [accepted / denied] coverage, the Company has taken the following position: [________________________________].

This position is incorrect and unreasonable because:

1. [________________________________]
2. [________________________________]
3. [________________________________]

IV. FACTUAL BACKGROUND

A. The Underlying Loss

On [__/__/____], [________________________________]. [DETAILED NARRATIVE: ________________________________].

B. Chronological Timeline of Claims Handling and Bad Faith Conduct

V. SPECIFIC BAD FAITH CONDUCT

The Company's conduct in handling this claim has been vexatious and unreasonable under 215 ILCS 5/155 for the following specific reasons:

A. Unreasonable Delay

☐ Failure to acknowledge within 15 working days: The Company did not acknowledge receipt of this claim until [__/__/____] — [____] working days after notice was provided on [__/__/____], in violation of Ill. Admin. Code tit. 50, § 919.50(a).

☐ Failure to pay undisputed amount within 30 days: After affirming liability on [__/__/____], the Company failed to pay the undisputed amount of $[____________] within 30 days, as required by § 919.50(c). As of the date of this letter, payment remains outstanding.

☐ Protracted investigation without justification: The Company has been investigating this claim since [__/__/____] — a period of [____] months — without a legitimate basis for the delay. [DESCRIBE: ________________________________].

☐ Repeated requests for information already provided: The Company has repeatedly requested documentation that was already provided, as a delay tactic. Specifically: [________________________________].

B. Inadequate and Pretextual Investigation

☐ Failure to conduct a fair and objective investigation: The Company's investigation was designed to reach a predetermined conclusion. Specifically: [________________________________].

☐ Hired a biased expert: The Company retained [________________________________] to conduct a [________________________________] inspection. This expert's findings contradict the physical evidence and are inconsistent with [________________________________].

☐ Ignored contrary evidence: The Company disregarded the following evidence that supports our client's claim: [________________________________].

☐ Refused to consider insured's expert / contractor: The Company rejected the findings of [________________________________] without adequate explanation, despite their qualifications and documented methodology.

C. Grossly Inadequate Settlement Offers

The Company's settlement history demonstrates a pattern of bad faith:

The Company's offers represent only [____]% of the documented claim value, with no credible evidentiary or legal basis for the shortfall. This is precisely the type of conduct that triggers Section 155 liability — forcing the insured to litigate to recover what is obviously owed.

D. Misrepresentation of Policy Provisions (215 ILCS 5/154.6(a))

The Company has misrepresented the following Policy provisions to our client:

☐ Misrepresented the scope of coverage by stating [________________________________], when in fact the Policy provides [________________________________].
☐ Misrepresented an exclusion by claiming it applies to [________________________________], when the exclusion's plain language is limited to [________________________________].
☐ Misrepresented applicable Illinois law by stating [________________________________].

E. Failure to Communicate (215 ILCS 5/154.6(b); § 919.50(b))

☐ The Company failed to respond to our client's written communications dated [________________________________] within 15 working days, in violation of § 919.50(b).
☐ The Company's adjuster, [________________________________], failed to return [____] telephone messages left by our client between [__/__/____] and [__/__/____].
☐ The Company has failed to provide a written explanation — citing specific policy language — for its [☐ denial / ☐ underpayment], as required by § 919.50(d).

F. Compelling Litigation (215 ILCS 5/154.6(e))

The Company's consistent offers of $[____________] against a documented claim of $[____________] are not the product of a legitimate valuation dispute. They are designed to compel our client to choose between accepting a grossly inadequate payment and incurring the expense of litigation. This is the classic vexatious conduct that Section 155 was enacted to deter and punish.

VI. DAMAGES

A. Contract Damages (Policy Benefits)

B. Consequential Damages

Illinois courts recognize consequential damages in breach of insurance contract cases where the damages were foreseeable at the time of contracting and flow naturally from the breach:

[DESCRIBE CONSEQUENTIAL DAMAGES IN DETAIL: ________________________________]

C. Section 155 Penalty Calculation

Assuming our client prevails at trial on a judgment of $[____________]:

D. Attorney Fees Under Section 155

Reasonable attorney fees in an Illinois Section 155 action are assessed by the court based on the work performed. In complex insurance disputes, fee awards of $[____________] to $[____________] are not unusual. The Company should factor this exposure into its evaluation of this demand.

E. Punitive Damages

Illinois courts have recognized that punitive damages may be recoverable in first-party insurance actions where the insurer's conduct is particularly egregious, oppressive, or fraudulent — beyond mere vexatiousness. See Illinois case law addressing punitive damages in fraud-based insurance cases. If the Company's conduct in this matter involved affirmative misrepresentation, concealment, or fraud, our client will also seek punitive damages under Illinois common law principles.

VII. DEMAND FOR PAYMENT

We hereby demand that the Company tender, by [__/__/____] at 5:00 p.m. Central Time, the sum of $[________________________________], as follows:

This demand does not include attorney fees or the Section 155 penalty, which our client reserves the right to seek in full in litigation if this matter is not resolved. Payment of this demand is a condition of settlement and does not waive any additional claims.

VIII. SETTLEMENT CONDITIONS

In addition to the monetary payment, our client requires:

☐ Written confirmation that all claims arising from this loss are fully resolved
☐ Correction or withdrawal of any adverse information reported by the Company to industry databases (ISO ClaimSearch or similar)
☐ Withdrawal of any reservation of rights or coverage defense asserted in the Company's correspondence dated [________________________________]
☐ [________________________________]

IX. TIME-LIMITED NATURE OF THIS DEMAND

THIS DEMAND EXPIRES AT 5:00 P.M. CENTRAL TIME ON [__/__/____].

This deadline is genuine and will be enforced. After expiration:

1. This offer will be withdrawn and our client will no longer consider the amount demanded herein as an acceptable settlement.

2. Suit will be filed immediately in the Circuit Court of [________________________________] County, Illinois (or USDC for the [________________________________] District of Illinois), seeking:
   - Full policy benefits and consequential damages
   - Attorney fees and costs under 215 ILCS 5/155
   - The maximum available Section 155 penalty (60% of judgment or $60,000, whichever is less)
   - Punitive damages (if supported by evidence)
   - Pre- and post-judgment interest under 735 ILCS 5/2-1303

3. Complaint will be filed with the Illinois Department of Insurance, Consumer Division, 320 W. Washington Street, Springfield, IL 62767; (217) 782-4515; insurance.illinois.gov, asserting violations of 215 ILCS 5/154.6 and Ill. Admin. Code tit. 50, pt. 919.

4. Public record: Litigation filings are public records in Illinois. The Company should consider the reputational and regulatory implications of forcing this matter into court.

X. DOCUMENT PRESERVATION NOTICE

This letter constitutes formal notice to immediately preserve — and not destroy, overwrite, alter, or delete — all documents and electronically stored information (ESI) related to this claim, including without limitation:

☐ The complete claim file in all versions (drafts, supplements, closings, reopenings)
☐ All internal emails, texts, instant messages, and voicemails regarding this claim
☐ All adjuster notes, diary entries, activity logs, and field inspection reports
☐ All photographs, videos, drone footage, and imaging
☐ All estimates, appraisals, and valuation reports
☐ Reserve information and all reserve change authorization records
☐ All communications with outside experts, engineers, consultants, or IME physicians
☐ Claims handling guidelines, manuals, playbooks, and training materials applicable to this claim type
☐ Supervisor approvals, escalation records, and quality assurance / SIU reports
☐ Any coverage analysis, coverage opinion, or coverage recommendation memoranda
☐ All communications with reinsurers regarding this claim

Failure to preserve this information will be characterized as spoliation of evidence and will be brought to the attention of the court at the earliest opportunity.

XI. REGULATORY COMPLAINT NOTICE

Concurrent with or immediately following the filing of suit, we will file a formal complaint with the Illinois Department of Insurance documenting the following violations:

☐ 215 ILCS 5/154.6(a): Misrepresentation of policy provisions
☐ 215 ILCS 5/154.6(b): Failure to acknowledge communications within 15 working days
☐ 215 ILCS 5/154.6(c): Failure to adopt reasonable investigation standards
☐ 215 ILCS 5/154.6(d): Failure to attempt good faith settlement when liability is clear
☐ 215 ILCS 5/154.6(e): Compelling litigation by offering substantially less than owed
☐ Ill. Admin. Code tit. 50, § 919.50: Specific deadline violations documented above

The IDOI has authority under 215 ILCS 5/154.7 to order the Company to cease and desist improper claims practices, impose administrative penalties, and revoke or suspend the Company's license to do business in Illinois.

XII. CONCLUSION

The Company's handling of our client's claim is a textbook example of the conduct that 215 ILCS 5/155 was enacted to deter. The claim is meritorious. The documentation is comprehensive. The legal support is clear. There is no legitimate basis for the Company's continued refusal to pay the full amount owed.

We strongly urge the Company to use this opportunity to fulfill its contractual obligations and avoid the substantial additional exposure — including attorney fees, the Section 155 penalty, and potential punitive damages — that will follow if this matter proceeds to litigation.

Please direct all responses to the undersigned at the contact information below.

Respectfully submitted,

[________________________________]

By: ___________________________________
[________________________________], Esq.
ARDC No.: [________________________________]
[________________________________]
[________________________________], IL [________]
Tel.: ([____]) [____]-[________]
Fax: ([____]) [____]-[________]
Email: [________________________________]

Counsel for [________________________________]

ENCLOSURES:

☐ Exhibit A — Policy Declarations Page and Relevant Endorsements
☐ Exhibit B — Claim Correspondence Chronology (indexed)
☐ Exhibit C — Proof of Loss / Supporting Documentation
☐ Exhibit D — Our Client's Expert / Contractor Report(s)
☐ Exhibit E — Photographs / Inspection Documentation
☐ Exhibit F — Insured's Settlement Demand History
☐ Exhibit G — Evidence of Bad Faith Conduct (specify: [________________________________])
☐ Exhibit H — [________________________________]

CC:

• [________________________________] (Client)
• Illinois Department of Insurance, Consumer Division, 320 W. Washington St., Springfield, IL 62767

ILLINOIS SECTION 155 / BAD FAITH LAW — QUICK REFERENCE

SOURCES AND REFERENCES

• 215 ILCS 5/155 (Vexatious Delay): https://www.ilga.gov/legislation/ilcs/fulltext.asp?DocName=021500050K155
• 215 ILCS 5/154.6 (Unfair Claims Practices): https://www.ilga.gov/legislation/ilcs/documents/021500050K154.6.htm
• Ill. Admin. Code tit. 50, pt. 919 (Improper Claims Practice): https://www.law.cornell.edu/regulations/illinois/title-50/part-919
• Ill. Admin. Code tit. 50, § 919.50 (Required Practices): https://regulations.justia.com/states/illinois/title-50/part-919/section-919-50/
• 735 ILCS 5/13-205 (5-Year Contract SOL): Illinois Code of Civil Procedure
• 735 ILCS 5/2-1303 (Pre-Judgment Interest — 5% per annum): Illinois Code of Civil Procedure
• Cramer v. Insurance Exchange Agency, 174 Ill. 2d 513, 675 N.E.2d 897, 221 Ill. Dec. 473 (Ill. 1996): https://law.justia.com/cases/illinois/supreme-court/1996/79943.html
• Neal, Gerber & Eisenberg, "Bad Faith Damages Against Surplus Line Insurers Might Not Be Capped in Illinois": https://www.nge.com/news-insights/publication/bad-faith-damages-against-surplus-line-insurers-might-not-be-capped-in-illinois/
• Illinois Courts, Chapter 710.00 Bad Faith Synopsis: https://ilcourtsaudio.blob.core.windows.net/antilles-resources/resources/0bdd3051-5645-478f-b00b-f5c8a9bff0c4/710.00.pdf
• Parker & Parker, "Bad Faith Denial of UM/UIM Claims in Illinois": https://www.parkerandparkerattorneys.com/blog/bad-faith-denial-um-uim-claims-illinois/
• Illinois Legal Aid Online, "Litigating Policyholder Claims Against Insurance Companies": https://www.illinoislegalaid.org/legal-information/litigating-policyholder-claims-against-insurance-companies
• Illinois Department of Insurance (IDOI): https://insurance.illinois.gov