David M. Alt and Andrew S. Chestnut discuss a bill expected to be signed by Illinois Governor J.B. Pritzker that will add prejudgment interest to damages awards in personal injury lawsuits and arbitrations, having a profound impact on insurers' increased exposure.

Insurers should take note that Illinois Governor J.B. Pritzker is expected to sign a bill passed by the Illinois General Assembly on January 13, 2021 that would add 9% annual prejudgment interest to damages awards in personal injury lawsuits and arbitrations, with interest starting on the date a defendant has notice of the injury or the incident. House Bill 3360 would provide for one of the highest interest rates—and earliest start dates—for prejudgment interest in the country, and would increase the potential value of jury verdicts to include years of interest that accrues before a claim is filed or an insurer even knows the claim exists.

The impact on insurers’ increased exposure will be dramatic. For example, if a claimant is injured and waits 2 years to file suit (the statute of limitations for personal injury claims in Illinois), any later judgment would automatically be increased by over 18% interest payments for the period prior to when the suit was filed. Then, for example, interest may compound for another 2 or 3 more years at 9% while the case works its way through the court system (a conservative time frame, especially in Cook County and downstate counties near St. Louis), the judgment value would increase by 41% to 53%. As of 2019, the Illinois Supreme Court reported the statewide average time to verdict in civil jury cases exceeding $50,000 was 33.8 months from the date of filing.

The legislation raises a number of concerns for insurers. While prejudgment interest would not apply to settlements, it may increase settlement values for insurers wishing to avoid trial, incentivizing insurers to consider mediation earlier in litigation. Since many insurance policies only respond to a “suit” or “claim”, insurers often find themselves in a difficult situation where they know of a circumstance which is not yet a claim or suit, but which may lead to one. With 9% interest ticking, insurers could be under more pressure to treat such “pre suit” circumstances more actively, and perhaps reach out to resolve potential claims earlier than otherwise may be merited under the policy language.

If signed, HB 3360 would create years of prejudgment interest that previously did not exist, whereas Illinois law previously allowed for post-judgment interest, also at 9% annually. Both prejudgment and post-judgment interest are covered as supplementary payments under most CGL policies, meaning they are in addition to policy limits, with some protections for insurers. 

Under the “Supplementary Payments” provision of the current Insurance Services Office, Inc. (“ISO”) Commercial General Liability Form, an insurer is liable for prejudgment interest awarded against a policyholder on its portion of a covered judgment, until the point at which the insurer offers to pay its policy limits. That provision of the ISO form states:

We will pay, with respect to any claim we investigate or settle, or any “suit” against an insured we defend: . . .

f.    Prejudgment interest awarded against the insured on that part of the judgment we pay. If we make an offer to pay the applicable limit of insurance, we will not pay any prejudgment interest based on that period of time after the offer. . . .

These payments will not reduce the limits of insurance.

Portions of such prejudgment interest would generally also be attached to excess insurers. Standard excess insurance policies do not differentiate or exclude prejudgment interest from an insured’s “ultimate net loss” to which they apply, meaning many excess insurers would generally be required to indemnify policyholders for prejudgment interest on the portion of a judgment in excess of the retained limit. (The current ISO Commercial Excess Liability coverage form also obligates excess insurers to pay pre- and post-judgment interest associated with an appeal where the policyholder and primary insurer elect not to appeal).

Under this bill, a $2 million claim that is filed 2 years after the date of injury and takes 3 years to reach a verdict would result in an additional $1,077,247.91 of prejudgment interest for which both a primary and excess insurer would generally share indemnity responsibility. This legislation theoretically creates more pressure for excess carriers to monitor underlying negotiations and incentivize primary carriers to settle—not only to cut off excess indemnity, but also the significant interest that would also flow to the portion of a judgment for which an excess carrier would be responsible.

Insurers should also keep in mind that an injured minor can wait until turning 18 to file suit, and in such instances the new prejudgment interest could be far more costly than the verdict under the text of the proposed law. This law will affect all personal injury claims already existing or in suit, with interest running from the date the law is enacted. In any event, the measure as written is not tied to the 2-year statute of limitations for tort claims, meaning plaintiffs are now incentivized to wait nearly two years to file a lawsuit in order to maximize the potential allowable prejudgment interest.

There is no question HB 3360 threatens to significantly increase the exposure to primary carriers on serious personal injury claims. If passed, the measure may encourage insurers to become more active in claims handling prior to suit being filed. The bill may also increase the pressure excess insurers bring to primary carriers to settle major claims early. Certainly, the new law will create a new set of considerations and analytical factors for both insurers and their insures to discuss early and frequently in the claims handling process.