Extra-Contractual Liability in the Restatement of the Law, Liability Insurance: Breach of the Duty to Settle or Bad Faith?

21 Pages Posted: 18 May 2017

See all articles by Jeffrey E. Thomas

Jeffrey E. Thomas

University of Missouri at Kansas City - School of Law

Date Written: May 17, 2017

Abstract

This paper focuses on the Restatement’s treatment of an insurer’s duty to settle and the duty of an insurer to act in good faith in handling liability claims. The duty to settle is framed as an objective “duty to the insured to make reasonable settlement decisions.” At the same time, however, a separate claim is retained for an insurer’s “bad faith” breach of its duties (including the duty to settle). Further, a subjective element is adopted for the bad faith standard. To be liable for “bad faith,” an insurer must act “without a reasonable basis for its conduct” and must also act with “knowledge of its obligation to perform or in reckless disregard of whether it had an obligation to perform.” This use of the objective and subjective standards creates a new paradigm, one that distinguishes between the duty to settle and “bad faith” conduct and applies different standards for liability. This paper begins with a general description of the standards and the case law in support of them. It then turns to some implications of the new paradigm, both in terms of the damages available to insureds and the application of the standards to insurer conduct at the margins of reasonableness.

Keywords: Restatement, Liability Insurance, Duty to Settle, Good Faith, Bad Faith, Objective Standard, Reasonableness, Subjective Test, Intent, Reasonable Settlement

JEL Classification: G22, K13, K23, K41

Suggested Citation

Thomas, Jeffrey E., Extra-Contractual Liability in the Restatement of the Law, Liability Insurance: Breach of the Duty to Settle or Bad Faith? (May 17, 2017). Available at SSRN: https://ssrn.com/abstract=2970232 or http://dx.doi.org/10.2139/ssrn.2970232

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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