In law, the duty to settle is an insurer's implied obligation to accept a settlement in a case against one of its insured parties if it is likely that a potential judgement against the insured will exceed policy limits. If a liability insurer exposes the insured to excess risk by failing to settle within policy limits, they may be liable for any damages incurred.[1]
United States law
editLiability insurance policies in the United States typically make no express contractual promise to settle.[2]
California
editIn California, "an insurer, who wrongfully refuses to accept a reasonable settlement within the policy limits is liable for the entire judgment against the insured even if it exceeds the policy limits."[3] California Insurance Code §790-790.15 states that the insurer has an obligation to attempt "in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear."[4]
A rationale for this duty is that "[w]hen an offer is made to settle a claim in excess of policy limits for an amount within policy limits, a genuine and immediate conflict of interest arises between carrier and assured."[5] "An insurer who denies coverage does so at its own risk. Such factors as a belief that the policy does not provide coverage, should not affect a decision as to whether the settlement offer in question is a reasonable one."[6] "It is the duty of the insurer to keep the insured informed of settlement offers."[7] "[A]n insurer potentially can be liable for unreasonably coercing an insured to contribute to a settlement fund."[8]
An insurer may not "discriminate in its claims settlement practices based upon" certain protected classes.[9]
Texas
editThe Texas Supreme Court ruled in G. A. Stowers Furniture Co. v. American Indemnity Co., that insurers can be held liable for negligently refusing a settlement within policy limits.[10]
References
edit- ^ Quinn, Michael Sean (2000). "The Defending Liability Insurer's Duty to Settle: A Meditation Upon Some First Principles". Tort & Insurance Law Journal. 35 (4): 929–993. ISSN 0885-856X. JSTOR 25763479.
- ^ Typical language is: "We may, at our discretion, investigate any ‘occurrence' and settle any claim or 'suit' that may result." Peter J. Kalis et al., Policyholder's Guide to the Law of Insurance Coverage F-15 (Aspen Publishers Online 1997).
- ^ Comunale v. Traders & Gen. Ins. Co., 50 Cal. 2d 654, 659–61 (1958) (ellipses omitted).
- ^ Cal. Ins. Code § 790.03(h)(5) Archived 2016-05-16 at the Wayback Machine.
- ^ Merritt v. Reserve Ins. Co., 34 Cal. App. 3d 858, 870 (1973).
- ^ Johansen v. California State Auto. Assn. Inter-Ins. Bureau, 15 Cal. 3d 9, 15-16 (1975) (citations and ellipses omitted).
- ^ Kinder v. Western Pioneer Ins. Co., 231 Cal. App. 2d 894, 901 (1965).
- ^ Aguerre, Inc. v. American Guar. & Liab. Ins. Co., 59 Cal. App. 4th 6, 15 (1997).
- ^ Cal. Code Regs § 2695.7.
- ^ Thornton, Russell G. (2002). "Settling a Claim Within Policy Limits". Baylor University Medical Center Proceedings. 15 (3): 336–337. doi:10.1080/08998280.2002.11927862. ISSN 0899-8280. PMC 1276634. PMID 16333461.
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