The Gains from Faith in an Unfaithful Agent: Settlement Conflicts between Defendants and Liability Insurers

Abstract

A pervasive problem in the settlement of liability litigation arises because liability insurers bundle their promise to indemnify the insured with a promise to represent the insured in settlement and litigation [see, e.g., Beckwith Machinery Co. v. Travelers Indemnity Co., 638 F.Supp. 1179 (W.D. Pa. 1986)]. Standard policies not only require the insurer to pay for legal representation but, more importantly, give the insurer the privilege of controlling the litigation and settlement process. The problem is how to resolve the conflict of interest between the insurer and the insured that may arise during settlement negotiations. This conflict is manifest when the insurer rejects a settlement offer within the policy limits and elects to pursue trial. 1 Inevitably, the insured defendant is displeased ex post following a damage judgment in excess of the insurance coverage. In this article, I evaluate the impact of this conflict under two different legal regimes.