August 30, 2017 Articles

To Settle or Not to Settle? Bad-Faith Implications in Resolving Underlying Actions

The stakes for insurers in improperly declining a settlement demand can be quite high—as can be the stakes for policyholders who would prefer, for a variety of reasons, not to settle

by Rina Carmel, Tred R. Eyerly, and Karin S. Aldama

Settling liability claims can be one of the most challenging areas of insurance law. The insurer and insured may disagree as to whether to settle at all or how much to pay to settle. Multiple claimant/multiple insured claims, mixed claims, excess demands, demands for punitive damages, and claims where the insured has an affirmative claim for relief may further complicate the analysis and the negotiations. Whether the insurer should seek from the policyholder, or the policyholder offers to make, a settlement contribution presents thorny issues, including whether such a contribution can convert an excess demand into a demand within limits—which, in turn, affects the standard for evaluating the insurer’s response to the third-party demand.

Policyholders and third-party claimants are aware of these issues and may look at settlement demands as opportunities to try to make insurers liable for excess verdicts. Thus, the stakes for insurers in improperly declining a settlement demand can be quite high—as can be the stakes for policyholders who would prefer, for a variety of reasons, not to settle.

The next three sections of this article discuss these issues under general liability policies. The fourth section addresses the significantly different issues presented under professional liability policies, which often allow the insured to refuse to consent to settlement. The article also suggests, for both insurers and policyholders, how to address and navigate these issues.

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