Settlement of Third Party Liability Insurance Claims

I. Introduction

It has been said that insurance companies pay no claims before their time.  While it is true that policyholders often believe that their claims are denied or deferred so that their premium dollars can be retained and invested, insurance companies also must weigh the costs of litigation, and their exposure to an adverse judgment, in deciding whether and for how much to settle.

In this brief article, a few recommendations are offered from the policyholder’s or risk manager’s perspective as to how to improve the opportunity for achieving a fair settlement before litigation, or at least before trial.  These observations relate to (i) the presentation of claims; (ii) the timing for seeking settlements; (iii) the role of litigation;(iv) settlement techniques; and (v) the use of arbitrators or mediators.

II. Presentation of Claims

In order for a settlement to be possible, the provisions of the insurance policy must be met.  If there is even a possibility of coverage and an underlying "suit" has been filed against the policyholder, most primary policies provide that the insurance company has a duty to defend.  A question arises whether a "suit" includes non-judicial proceedings, such as an administrative process, for duty to defend purposes, and case law varies widely on this point.  If there is any doubt on the subject, the policyholder should notify its carrier immediately and request that it be defended.

Most excess policies provide that defense costs are part of the coverage for losses that of course consist of exposure to liability as well.  If there is no primary coverage, or if the primary carrier refuses to provide a defense, or if the coverage for a defense is subsumed within the concept of the potential loss, the policyholder must defend itself and keep the carrier(s) advised as to the course of the underlying proceedings.  The policyholder also should be fully forthcoming with information about the underlying liability claim(s) asserted against it, not only to comply with duty-to-cooperate clauses in insurance policies, but also to provide the carrier with information to evaluate, and perhaps to reach an early settlement of, the claim.

If a claim is relatively small, insurance companies often will settle reasonably and in timely fashion,although some less reputable carriers will deny claims believing, correctly, that most policyholders will not go to the trouble and expense of a lawsuit seeking coverage.  In larger matters, in excess of seven figures, insurance companies are more cautious in reaching settlements, mindful that coverage defenses may be available and that any settlement has the potential of becoming a precedent for the handling of similar claims.  If the policyholder is reasonably diligent in transmitting pertinent information, and the insurance company unfairly asks for further particulars or denies coverage outright, coverage litigation is usually inevitable.

III. Timing of Settlements

Except for minor claims, settlements usually are not accomplished in a reasonable amount, from the policyholder’s perspective, absent coverage litigation.  The sooner that coverage litigation is commenced, the better the prospects for an early settlement, because the likelihood of settlement increases dramatically as the trial date approaches.  While there is no reason not to proceed with litigation and settlement discussions on parallel tracks, the main emphasis for the policyholder should be to prepare the coverage case for trial, which is the only way to resolve the matter absent a settlement.

IV. Litigation As A Settlement Tool

Coverage litigation often is important in the settlement process, but not just because of the threat of trial and judgment.  Insurance companies need justification for the settlements they reach, and often the necessary information can be obtained only through the compulsory process of the judicial system.

V. Settlement Techniques

Candor in the settlement process is as important as in the presentation of claims and in the litigation of coverage disputes.  If a policyholder appears to be exaggerating its damages or likelihood of underlying liability, the insurance company understandably will be reluctant to settle for any reasonable amount.

The policyholder’s credibility also will be enhanced for settlement purposes if its initial demand is within the range of reasonableness, albeit on the high end.  A ridiculously-high demand likely will be met with an equally ridiculous offer, or no offer at all.  Credibility will be enhanced further if the policyholder sticks to its initial demand until the insurance company makes an initial offer also within the range of reasonableness – albeit on the low end.  In no event should either side be expected to "bid against itself."

Respectful exchanges of correspondence are important in settlement negotiations, because each side needs its unfiltered positions to reach the decision-maker of the other.  But telephone conversations and face-to-face meetings can convey meanings through voice inflections and body language that are hidden on the printed page.

The contribution to the settlement process of principal-to-principal settlement negotiations is problematic.  Because lawyers generally are more knowledgeable about insurance, and more experienced in negotiating, than most decision-makers within a policyholder’s organization, the chances are better for a favorable settlement if the parties’principals are not left alone.  In contrast, the business of carriers is to understand insurance and to negotiate coverage issues so that the principal-to-principal negotiation often provides the insurance company with a distinct advantage in the settlement context.

VI. Arbitration and Mediation

Alternative dispute resolution works well in insurance coverage disputes so long as it is a supplement to, not a substitute for, litigation.  Once both sides acknowledge that sufficient information is available for an intelligent evaluation of the coverage claim, the intervention of a neutral party can prove invaluable.

If a coverage claim is not particularly strong,binding arbitration may be advantageous to a policyholder because of a tendency of arbitrators to "split the baby."  If a claim is strong, non-binding arbitration or mediation may be preferable to allow the parties to reject a proposed settlement deemed to be unreasonable.

The reason why a neutral, but knowledgeable, third party is frequently helpful for settlement purposes is because communication can take place through the mediator that cannot occur directly.  For example, the insurance company may be unwilling to confess a weakness in its position directly to the policyholder for fear that the information may be exploited in litigation not withstanding the confidentiality of the settlement process.  Or the policyholder may be willing to settle for a modest amount but is concerned that a statement to that effect directly to the carrier may be viewed as an invitation for the carrier to "call the bluff"as to the policyholder’s willingness to go to trial.  The arbitrator as an intermediary in such situations can tell each side privately that a specified amount likely will be accepted by the other and in many cases bring about a mutually-acceptable settlement.

VII. Conclusion

Settlements of coverage disputes are usually desirable, especially for policyholders, and sometimes possible, but only if the policyholder’s display of resolve to prosecute its claim to final judgment is unwavering.