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Understanding the duty to settle

Insurance companies throughout Washington and the United States owe a number of duties to their policyholders. According to FindLaw, some of these duties are universal, including the duties to defend, indemnify and investigate. However, there is also a fourth duty that is not universal throughout the United States but recognized in some jurisdictions: the duty to settle. 

To settle a claim means to make an agreement out of court in which one party agrees to pay a certain amount to the other, who agrees in turn to pursue no further legal action in regard to the matter. In cases in which a lawsuit would expose the insured to damages beyond the limit of their insurance policy, settling could be to his or her advantage. However, in such a situation the insurer may be reluctant to settle because a trial offers the possibility of reducing its financial liability. Refusing to settle the case to preserve the insurer's self-interest at the expense of the policyholder's interest represents a breach of duty and, in jurisdictions that recognize the duty to settle, could be grounds for a bad faith lawsuit against the insurer. 

According to the American Bar Association, deciding whether or not to settle a case is largely at the insurer's discretion. There is an inherent expectation that the insurer will consider its own interests; however, in jurisdictions that recognize a duty to settle, the expectation is that the insurer will give equal consideration to the policyholder's interests.

To determine if an insurer has acted in bad faith, the courts consider a wide range of factors, including the following:

  • Defense counsel's recommendations
  • Likelihood of an excess or adverse verdict
  • Demands by the policyholder for the insurer to settle within limits
  • Financial risks to insurer and policyholder

Not all jurisdictions recognize a duty to settle, and standards are not completely uniform for those that do. For example, some jurisdictions specifically require that the insurer give "at least" equal consideration to the insured's interests. 

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