Insurance Policy Limits and Forced Settlement Claims: Rights of the Insured to Settle

Many insurance holders mistakenly believe they have a right to require their liability insurer to settle a claim which exceeds the policy limits for the policy limitsespecially if the claimant or plaintiff is willing to accept payment up to the policy limits as payment in full of the claim. After all, "if" the insurer has to pay a claim up to the policy limits, surely, then, you can make them simply pay up to that amount and be done.

The general rule, however, is that insurance companies must negotiate "reasonably toward settlement up to and including the policy limits." G.A. Stowers Furniture Company v. American Indemnity Company, 15 S.W.2d 544, 547 (Tex. Comm'n App.1929).

Other jurisdictions have reached similar conclusions that reached by Texas in G.A. Stowers, although precisely what constitutes a "reasonable" duty may strike juries quite differently, from one case to another.

The issue of policy limits also can be complicated when one person's claims are below the claim limits, and another person's claims (for damages or injuries arising out of the same occurrence) well above the limits, which raises a question about separate settlements. Many courts have allowed insurance companies, in this situation, to look toward the total costs of the single accident: and refuse to pay even an amount less than claim limits in settlement of the below-limit claim. Clark v. Hartford Accident & Indemnity Company, 61 Tenn.App. 596, 457 S.W.2d 35 (Tenn.App.1970); Roberie v. Southern Farm Bureau Casualty Insurance Company, 185 So.2d 619 (La.App.1966), rev'd on other grounds, 250 La. 105, 194 So.2d 713 (1967); Standard Accident Insurance Company of Detroit, Michigan v. Winget, 197 F.2d 97 (9th Cir.1952). The reasoning is that prematurely settling one claim can affect or prejudice the handling of the other claims.

The insurer's obligation is to defend you from lawsuits for covered lossese.g. when you are liable for another's lossand, if necessary to pay any claims, all up to the coverage limit. But insurance companies have a right to:

  1. Satisfy themselves that the loss is one they have to pay and defend;
  2. Only pay if liability is in fact proven or established;
  3. Only pay the appropriate, legally justified damages for the claim.

Just because someone claims a certain amount of damages due to your actions or inaction does not necessarily make it so. They could be lying; they could be exaggerating; they could be wrong. The insurer does not have to simply open their wallet. Instead, they will first investigate the matter and, if necessary, vigorously defend it, forcing the injured party to prove that he was injured as a result of your negligence (and not, for example, as a result of another person's negligence, the plaintiff's own negligence, or just by "an act of God" or bad luck). And because, generally, time is on the side of the insurer, they are often willing to take a "wait and see” attitude toward settling more doubtful claims.

The insurer can also force the plaintiff to prove the extent of his injuries and/or economic losses (like medical costs). And if you were at fault, but the plaintiff or a third party was at fault, too, the insurer can look to reduce the size of the damage award by the amount of fault borne by other people.

In short, the insurer expects the plaintiff to work for his compensation when there is any doubt as to the validity of their case.

The insurer can, and also will, look to satisfy itself that the loss really is covered by the policy. For example, say it was an auto accident; many automobile liability policies will not cover an insured who was DUI/DWI. The insurer can look into the event, to see if under the circumstances, they are fact obligated to defend and pay for you.

This strategy can backfireat least as far as the insured is concerned. There may be times when the plaintiff would accept a settlement for the policy limits, but if you force him to go to court, their attorney will almost certainly sue for more than the policy limitand if he wins, the insured will have to pay any amounts in excess of the policy limits. Of course, there's also the chance that the plaintiff will not winthat liability will not be proven, or even if it is, that the plaintiff's own negligence will reduce fault and therefore what he can recover. Or even if liability is clear, it may be that in court, it would be possible to prove that the plaintiff's injuries were less costly than he claimed. It may therefore be the case that the insurer could end up paying substantially less than the policy limits.

Conclusion

An insurer can reasonably refuse to settle, and thus run the risk of a larger ultimate award against the insured. If there is reason to doubt either liability or the extent of the injuries, the insurer can in good faith refuse to settle and contest the claim. They are not required to immediately pay out the policy limit; they are allowed to look to reduce their own exposure by only paying the amounts proven to the extent liability is proven, even when that strategy imposes a risk on the insured.