The Impact of the 'Duty to Settle' on Settlement: Evidence from Texas

Abstract:     
All insurance has coverage limits, and insurers usually control whether a case is settled or tried. If the insurer rejects a within-limits settlement offer, the risk of an above-limits verdict is borne by the insured. In response, virtually every state has enacted a “duty to settle,” which creates incentives for plaintiffs to make at-limits offers and for insurers to accept those offers where expected damages exceed limits. We study how the duty to settle affects claim duration and defense costs using detailed closed claims data from Texas for 1988-2005.

We find that medical malpractice cases against physicians that settle at limits close about five months faster than similar below-limits cases - a 20% reduction in time from suit filing to settlement, controlling for payout, type of harm, and other observable factors. At-limits cases also have substantially lower defense costs, controlling for case duration and complexity. It is difficult to obtain an at-limits payout without a lawyer. When there is an above-limits payout, it is primarily paid by the insurer. We find consistent results for other types of personal injury cases.

Keywords: at-limits offer, medical malpractice settlement, tort reform, bad faith

JEL Classifications: K13, K32, K41

Working Paper Series