The Standard for Breach of a Liability Insurer’s Duty to Make Reasonable Settlement Decisions: Exploring the Alternatives
91 Pages Posted: 30 Oct 2015
Date Written: October 29, 2015
This Article considers the standard to be applied to determine whether an insurer has breached its duty to make reasonable settlement decisions. It focuses primarily on two standards: the disregard the limits (“DTL”) standard endorsed by section 24 of the Restatement of the Law of Liability Insurance (hereinafter “Restatement” or “Discussion Draft”), and the equal consideration (“EC”) standard, which I consider to be the primary competitor to DTL. The DTL standard says an insurer’s behavior is evaluated from the standpoint of a person who faces the full exposure of potential liability from a claim; to do this, the insurer (and the court) must “disregard the limits” of the applicable insurance policy. The EC standard requires that in making settlement decisions, an insurer must give equal consideration to the interests of the insured as it gives to its own interests. This Article will analyze these two standards in light of the case law applying them, and how the standards are and might be used in section 24 of the Restatement.
By way of a roadmap, the Article begins with a description of the treatment of the two tests in section 24 of the Restatement. It then addresses the question of whether the two standards are the same. I contend that while they overlap, they are not the same. We then turn to an analysis of the current state of the case law regarding the standards being used by the courts to evaluate whether an insurer has breached its duty to make reasonable settlement decisions. That discussion will show that neither DTL nor EC in their “pure” forms are the majority rule, but that EC has a larger following than DTL and that a significant number of states take a blended approach using both DTL and EC. The Article then turns to the assessment of section 24 in light of the case law and makes a number of recommendations.
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