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
Date Written: June 30, 2015
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: Suggested Citation