Illinois 6% Prejudgment Interest Law Taking Effect on July 1, 2021, With Protections Encouraging Defendants and Insurers to Make Early Settlement Offers
Insurers should take note that Illinois Governor J.B. Pritzker signed legislation providing for 6% prejudgment interest on judgments in personal injury claims. Under the new law, prejudgment interest will begin accruing on the date an action is filed. The law will go into effect July 1, 2021, and will not apply to government entities or settlements.
There is no question 6% prejudgment interest will drive up exposure in personal injury cases. 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.
Critically, defendants and insurers can protect against excessive interest awards by making early settlement offers. The law provides that prejudgment interest will accrue only on portions of judgments in excess of a defendant’s highest written settlement offer if made within 1 year of filing the action. If a judgment is less than a defendant’s highest written settlement offer, a court will not award prejudgment interest.
To take advantage of this protection, it should become almost routine for insurers to make a written offer within 1 year of filing in nearly all cases. Claim departments should consider becoming more active early in the claims process in order to make informed, reasonable settlement offers. For instance, claim handlers should automatically diary the one-year date to make a written offer for any case pending in Illinois, and should request their defense counsel to aggressively obtain discovery and treatment records right away to provide fast initial case evaluations.
Early settlement offers will also provide an additional benefit by precluding prejudgment interest from accruing on punitive damages, sanctions, statutory attorney’s fees, and statutory costs. In the absence of a written settlement offer, 6% prejudgment interest will also be added to these portions of judgments.
To illustrate, consider a personal injury case that takes 3 years to reach verdict (slightly longer than the 33.8-month Illinois statewide average as of 2019), resulting in a $5 million judgment. If the defendant makes no settlement offer, 6% prejudgment interest compounding for 3 years would result in an additional $955,080 interest award. However, if the primary insurer makes had made a $2 million offer at the inception of the case, prejudgment interest would only accrue on the $3 million in excess of the verdict, resulting in $573,048 added interest, and would not apply to any punitive damages, sanctions, statutory attorney’s fees, and statutory costs.
While the law takes effect in July, defendants in cases already pending will have up to one year (July 1, 2022) to make written settlement offers cutting off prejudgment interest on portions of awards below the offer. Of note, the bill provides that prejudgment interest will not accrue during the period a plaintiff voluntarily dismisses then re-files a lawsuit. In addition, the maximum period of interest in any case will be 5 years.
This legislation constitutes a compromise of an earlier bill passed by the General Assembly that would have added 9% prejudgment interest to personal injury cases starting on the date of injury, without settlement offer protections. Governor Pritzker vetoed that version of the bill in March.
The law is codified in the Illinois Code of Civil Procedure as 735 ILCS 5/2-1303(c). The full text of the statute is available here.