Good Faith and Breach of the Duty to Settle: Perspectives from the American Law Institute Principles/Restatement Project on Liability Insurance

33 Pages Posted: 2 Jul 2015

See all articles by Jeffrey E. Thomas

Jeffrey E. Thomas

University of Missouri at Kansas City - School of Law

Date Written: June 30, 2015

Abstract

This paper addresses the standard of good faith to be applied to the duty to settle. All insurance policies contain an implied covenant of good faith and fair dealing. This implied covenant has been applied by U.S. courts to an implied duty to settle contained in most liability insurance policies. The implied duty to settle arises from the insurers’ right to settle cases under terms of most liability policies. Because insurers have the duty to defend and the right to settle, courts have found that insurers have an obligation to act in good faith when considering a settlement offer within the policy limits of the liability insurance policy. The American Law Institute “restatement” project to restate the law of liability insurance explicitly adopts a test for the duty to settle that an insurer “has a duty to the insured to make reasonable settlement decisions,” and that a “reasonable settlement decision is one that would be made by a reasonable person that bears the sole financial responsibility for the full amount of the potential judgment”. This standard is referred to as the Disregard the Limits (DTL) standard. This paper provides background on the DTR standard and will compare that standard to the Equal Consideration (EC) standard which requires that an insurer, in addressing settlement offers, give equal consideration to the interests of the insured as to its own interests. It will then situate Missouri law within the context of these two tests and the state of the law more generally.

Keywords: Liability insurance, implied covenant, good faith, duty to settle, fair dealing, Disregard the Limits standard, Equal Consideration standard

JEL Classification: G22; K10; K12; K19; K20; K29

Suggested Citation

Thomas, Jeffrey E., Good Faith and Breach of the Duty to Settle: Perspectives from the American Law Institute Principles/Restatement Project on Liability Insurance (June 30, 2015). Available at SSRN: https://ssrn.com/abstract=2625294 or http://dx.doi.org/10.2139/ssrn.2625294

Jeffrey E. Thomas (Contact Author)

University of Missouri at Kansas City - School of Law ( email )

5100 Rockhill Road
Kansas City, MO 64110-2499
United States

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