Insurers often have a duty to settle underlying claims against their insureds. While that duty generally requires insurers to accept reasonable settlement offers, insurers and insureds alike face many other issues regarding settlement of the underlying case. For example, can an insurer be liable for a bad-faith failure to settle the underlying claim when the insurer never received a settlement demand within the policy limits of the applicable insurance policy? Must an insurer show prejudice when an insured enters into a settlement without first receiving the insurer’s consent? How does a claim of bad-faith failure to settle affect otherwise valid claims of attorney-client privilege and work-product protection over an insurer’s documents? As shown below, the answers to these questions and others are dependent on the applicable law governing the interpretation of the insurance contract and the law governing an insured’s claim of bad faith.
Because of the varying state laws on these questions, parties to disputes involving insurance coverage must act carefully and deliberately at all steps of the process. All parties, insurers and insureds alike, must remain aware of the realm of possibilities with respect to the settlement of the underlying claim and the potential bad-faith failure-to-settle litigation arising out of that settlement.