Settlement at Policy Limits and the Duty to Settle: Evidence From Texas
David A. Hyman
Bernard S. Black
Northwestern University - Pritzker School of Law; Northwestern University - Kellogg School of Management; European Corporate Governance Institute (ECGI)
University of Texas at Austin - School of Law
July 26, 2010
U Illinois Law & Economics Research Paper LE09-002
Northwestern Law & Econ Research Paper No. 09-16
U of Texas Law, Law and Econ Research Paper No. 142
CELS 2009 4th Annual Conference on Empirical Legal Studies Paper
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 insured bears the risk of an above-limits verdict. In response, virtually every state has imposed a “duty to settle” on insurers, which creates incentives for plaintiffs to make at-limits offers and for insurers to accept those offers when expected damages exceed limits. We study the association between the duty to settle, settlement at limits, claim duration, and defense costs using detailed data from Texas for 1988-2005 on closed, commercially insured personal injury claims. We focus principally on medical malpractice suits against physicians, but find consistent evidence for other types of cases.
We find strong evidence that the duty to settle affects settlement dynamics. Essentially all physician-defendant cases that settle at-limits are preceded by an at-limits demand. Roughly 20% of physician-defendant cases settle at 90-100% of policy limits (“broad at-limits”) and 13% settle exactly at limits (“exact at-limits”). Broad- and exact-at-limits cases close about five months faster than similar “below-limits” cases -- a roughly 20% shorter time from suit to settlement, controlling for payout and type of harm. Broad- and exact-at-limits cases also have substantially lower defense costs, controlling for case duration and complexity. More broadly, as the payout/limits ratio approaches 1 from below, duration declines (controlling for payout) and defense costs decline (controlling for payout and duration). Payouts above-limits are uncommon; when they occur, insurers are the primary payers. Policy limits alone cannot explain these results; most likely reflect a combination of policy limits and the duty to settle.
Number of Pages in PDF File: 38
Keywords: at-limits offer, medical malpractice settlement, tort reform, bad faith
JEL Classification: K13, K32, K41
Date posted: May 24, 2008 ; Last revised: July 26, 2010