Settlement at Policy Limits and the Duty to Settle: Evidence From Texas

38 Pages Posted: 24 May 2008 Last revised: 26 Jul 2010

David A. Hyman

Georgetown University

Bernard S. Black

Northwestern University - Pritzker School of Law; Northwestern University - Kellogg School of Management; European Corporate Governance Institute (ECGI)

Charles Silver

University of Texas at Austin - School of Law

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Date Written: July 26, 2010

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 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.

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

JEL Classification: K13, K32, K41

Suggested Citation

Hyman, David A. and Black, Bernard S. and Silver, Charles, Settlement at Policy Limits and the Duty to Settle: Evidence From Texas (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. Available at SSRN: https://ssrn.com/abstract=1134202 or http://dx.doi.org/10.2139/ssrn.1134202

David A. Hyman (Contact Author)

Georgetown University ( email )

Washington, DC 20057
United States

Bernard S. Black

Northwestern University - Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States
312-503-2784 (Phone)

Northwestern University - Kellogg School of Management

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-5049 (Phone)

European Corporate Governance Institute (ECGI)

Brussels
Belgium

Charles M. Silver

University of Texas at Austin - School of Law ( email )

727 East Dean Keeton Street
Austin, TX 78705
United States
512-232-1337 (Phone)
512-232-1372 (Fax)

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