Baer - Absolute Liability

[Darkness Falls]

When an insurer is offered the possibility of setting a case below the policy limits and rejects it. If the final decision is above the policy limits they are absolutely liable to pay for the full amount.

However, if there is a settlement offer just above the policy limits (say 105k with 100k limit) are they in a similar situation. I.e. If they do not settle for 100k (+5k from policy holder) and the final result is 200k are they liable for the extra amount (95k difference)?

[Koloman]

Good question, I would think if there was enough evidence that an offer to settle was presented for 5K above the policy limit and the final settlement was 95K above that, that the insurer would only be liable for the amount that was lost above what the settlement would have been.

ie:
Policy limit = $100,000
Settlement offer = $105,000 . . . insurer refuses
Final Judgment = $200,000 (whoopsie!) :judge:
Policyholder originally liable for $5,000 and should stay that way
Insurer would have paid $100,000, but now has to pay $195,000

[Koloman]

This is bugging me . . . there is a lack of literature on the internet about this.

Let's make the case more extreme . . .

ie:
Policy limit = $100,000
Settlement offer = $500,000 . . . insurer refuses to pay $100,000
Final Judgment = $1,000,000

I think a court would require the insurer to pay the entire amount (tort law is more concerned with returning the plaintiff to their original position). The insurer might need to subrogate against the plaintiff . . . but it was at the insurer's discretion whether or not to accept the settlement offer.

[Koloman]

I read this case, it gives some good guidance, but does not necessarily answer the question.

http://www.isc.idaho.gov/opinions/wsm.pdf

If an insurer is offered a settlement outside of the policy limits, it must properly communicate the settlement to the insured to avoid a bad faith claim. Once communicated, it is up to the insured to decide whether or not to pursue alternative forms of defence at its own cost.

Some major points I thought of:
- Settlement offers are likely to be less than the costs of full out litigation
- Insurers cannot accept offers outside of their policy limits without first consulting the insured, this would easily lead to a successful bad faith claim, and this is the issue at hand in the link I provided (I think at least)
- If an insurer did refuse a settlement in which it had, say, a 1/5th share in, then it would in essence be refusing to provide coverage to the insured and this is a contractual issue

[Darkness Falls]

Wow, interesting research Koloman.

I guess it's not a question they could realistically ask given that no study material brings up the scenario. Still all these legal questions do bring lots of discussion points.

Thanks

[Koloman]

Wow, interesting research Koloman.


I look for any excuse possible to avoid studying accounting.

[Darkness Falls]

lol,

Strangely enough the accounting section is the one that is clicking the best for me. I'm having a lot of difficulty remembering all the details in the law section. I mean I get the general concepts, but to remember all details in there to write an acceptable answer on the exam. tough!