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

37 Pages Posted: 14 Mar 2011

See all articles by David A. Hyman

David A. Hyman

Georgetown University Law Center

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

Multiple version iconThere are 2 versions of this paper

Date Written: February 17, 2011

Abstract

All liability insurance policies have 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 19882005 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 percent of physician-defendant cases settle at 90100 percent of policy limits (broad at-limits) and 13 percent settle exactly at limits (exact at-limits). Broad- and exact-at-limits cases close about five months faster than similar below-limits- casesa roughly 20 percent 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 they reflect a combination of policy limits and the duty to settle.

Suggested Citation

Hyman, David A. and Black, Bernard S. and Silver, Charles M., Settlement at Policy Limits and the Duty to Settle: Evidence from Texas (February 17, 2011). Journal of Empirical Legal Studies, Vol. 8, Issue 1, pp. 48-84, 2011. Available at SSRN: https://ssrn.com/abstract=1784115 or http://dx.doi.org/10.1111/j.1740-1461.2010.01207.x

David A. Hyman

Georgetown University Law Center ( email )

600 New Jersey Avenue, NW
Washington, DC 20001
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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