James F. Mahoney, Attorney
Commentaries
 
     

February 2018

Insurance Company's Duty to Settle

When the policyholder’s liability is clear, and a judgment in excess of policy limits is likely, an insurance company has a duty to initiate settlement negotiations.

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A company purchases liability insurance coverage to protect itself in the event it gets sued. Assuming that a claim against the policyholder triggers its liability insurance policy, the insurance company will have a duty to defend the policyholder in the litigation against it and pay for a judgment against the policyholder.

At some point in the litigation, the policyholder’s liability may become clear. The insurance company may prefer to roll the dice and proceed to trial, while the policyholder may want the insurance company to pay to settle the dispute. While the insurance company’s liability is generally capped at the policy’s limit of liability, the policyholder could end up liable for amounts in excess of policy limits.

To protect the policyholder in situations like these, courts have recognized a duty to settle on the part of the insurance company. When the policyholder’s liability is clear, and a judgment in excess of policy limits is likely, an insurance company has a duty to initiate settlement negotiations. When a substantial likelihood exists that a verdict will exceed policy limits, an insurance company must accept a settlement offer that is reasonable and within policy limits. This duty applies to primary as well as excess insurance companies.

The insurance company’s failure to settle under such circumstances may constitute a breach of the insurance company’s duty of good faith, a breach of the insurance company’s fiduciary duty, or a breach of the implied covenant of good faith and fair dealing, or it may give rise to a negligence claim.