When a Self-Insured Retention Is Not Enough – An Argument for a New Approach to Consent to Settle for Casualty Exposures

Self-insured retentions (SIRs) are a common tool used by insureds to control claims, but many times they just aren’t sucient to prevent a bad settlement.

How often do agents hear insureds complain about an insurer settling a case that could have been won if only the case went to trial? Rather than developing a strategy to avoid this occurring in the future, generally the policy terms and structure (deductible or SIR) remain largely the same year to year. The assumption is that nothing can be done.

What about requesting the carrier provide a true consent to settle endorsement in the policy provisions?

Consent to Settle Endorsements

Consent to settle is a common clause or endorsement in professional liability policies. The policy language typically states that the insurer will not settle any claim without written consent of the named insured, and that such consent shall not be unreasonably withheld. Insurance carriers evidently recognize the reputational harm to professionals that settling claims can cause, so they include this language to give professionals a say in the resolution of a claim.

Shouldn’t manufacturers and other businesses be given this same say in products and other casualty exposures? While some general liability policies contain consent to settle provisions, they are not nearly as common as they are in professional liability policies.

A consent to settle clause obviously requires the insurer to communicate with the insured prior to settling a claim and aord the insured the right to either consent or not consent to a proposed settlement. Given that the insured often understands certain aspects of a claim that a carrier’s adjuster may not have considered, just the requirement that the parties are communicating is a positive. This type of communication may also change the valuation of the claim when the insurer has a better understanding of all potential defenses. Obviously, this type of structure is not suited to all insureds, but for those that take an active interest in investigating and understanding their claims, the right to consent to settlements may be very useful.

Hammer Clause

Unfortunately for insureds, many consent to settle provisions are accompanied by what is commonly referred to as a hammer clause, which punishes an insured for not settling a claim if that is what the carrier desires.

Here is an example of a hammer clause excerpted from a GL Casualty policy:

If you refuse to agree to a settlement we recommend and the resulting judgment or settlement exceeds our recommended settlement, our liability for that “occurrence”, claim or “suit”, subject to the Limits of Insurance, will not exceed our recommended settlement amount (less any amount of the Retained Limit remaining). In such event the company will have no further obligation with respect to “Allocated Loss Adjustment Expense” subsequent to the date of such refusal.

The hammer clause serves to cap the insurer’s liability exposure to an amount the carrier and claimant would agree can settle the claim. Critically, it also cuts o payment of defense expenses from the date of the refusal to settle. In other words, it hammers the insured for not capitulating to the settlement. Hammer clauses are currently almost universal for consent to settle provisions in general liability policies.

Given the impact of significant settlements on a product or company’s reputation, along with future premiums, the hammer clause disincentivizes the insured from litigating further, which can be contrary to the insured’s best interest. If an insured insists on proceeding with the claim, not only do they bear the costs going forward, but they also take on the exposure above the proposed settlement. In essence, the carrier wins, the insured loses.

Instead of such an unfair arrangement for the insured, a dierent approach to the consent to settle provision, absent the hammer clause, is warranted. The insurer can be protected while aording the insured the opportunity to get the satisfaction of a verdict, hopefully in its favor. This is a win-win.

Fair Consent

What could a fairer consent to settle provision look like? The following, excerpted from a GL policy for Products Liability, is one way to draft the language:

1. If we recommend a settlement which is acceptable to the claimant and would result in disposition of the claim or “suit”, but you do not consent to the settlement, then the most we will pay in the event of any later settlement or judgment is the amount of our recommended settlement, less the remaining amount under your “self-insured retention” at the time we recommend such settlement subject to the following:

a.

We will pay 20% of any claim expenses, including defense, if the final settlement is equal to or greater than the amount of our recommended settlement; and

b.

We will pay 100% of any claim expenses excess of your self-insured retention if the final settlement is less than the amount of our recommended settlement.

2.

If we recommend a settlement which is acceptable to the claimant and would result in disposition of the claim or “suit”, but you do not consent to the settlement, and any court or adjudicating entity requires payments that are not a subject of this insurance (also known as extra-contractual payments) or are in excess of the limits of this insurance, then you will be responsible for said amounts.

3.

At all times, we shall retain the right and duty to defend any claim brought against the Insured seeking damages caused by an occurrence to which this insurance applies, including the right to appoint counsel.”

How would this policy language work in practice? Assume the carrier and claimant agree to an amount that would settle the claim, and the settlement amount is then presented to the insured for consent. If the insured consents, the claim is settled. If the insured declines to consent, the insurer’s exposure, including both indemnity and expense, is capped at the amount that would have settled the claim, and the insured takes on any exposure above the settlement amount. To be fair to the insured, however, the insurer continues to pay defense costs. If the insured ultimately prevails, any amount remaining of the proposed settlement after payment of defense expenses is saved by the carrier. If the insured does not prevail, the insured is responsible for any judgment above the non-consented-to settlement amount, plus the insured must reimburse a negotiated percentage of the defense expenses paid by the carrier after the insured did not consent.

How is this a win-win? One, it provides the insured with a vehicle to avoid a settlement but doesn’t saddle them with the responsibility of paying all defense expenses plus the risk of judgment should they refuse. Two, it caps the carrier’s exposure at an amount it was willing to pay to buy the certainty of closing the claim. And three, the agent benefits by providing a solution to both real and perceived problems.

When to Consider

Obviously, having an insured assume the risk of a verdict is not something that many insureds will be willing to do unless they are very confident in their ability to prevail and the agreed upon settlement amount is large enough compared to their perceived exposure for the insured to take the risk of going to trial. However, it is definitely a tool any insured would benefit having at their disposal.

While certainly not a standard provision in products’ liability policies, the authors of this article have successfully negotiated to have consent to settle language included in policies from several carriers. In fact, one client of ours has invoked the provision successfully twice in the last 10 years and achieved defense verdicts after refusing to consent to a settlement. By the insured not consenting to settlement, the carrier ended up paying much less than the settlement would have cost–only defense expenses for trial preparation and attendance. As for the insured, it undoubtedly saved money on future premiums given that no indemnity payments were made to the plainti.

The excerpted policy language oered in this article is just one example of a consent to settle provision that is more fair to the insured.

Agents and brokers can be creative. One carrier provided our insured client language that rewarded the insured for taking the risk of not settling and prevailing by oering to share a portion of the savings the carrier received by not paying the claimant the agreed upon settlement if the insured achieved a more favorable outcome after refusing to settle. As is evidenced by this example, this approach to empower an insured in the decisions that directly aect not only their bottom line but also their reputation is only limited by the creativity of the parties and the agents/brokers that represent them.

In summary, a consent to settle clause is a great tool for insureds, particularly for those with an SIR and who take an active role in defending themselves in litigation. We believe that agents and brokers need to negotiate this provision with carriers and discuss how it can be used with insureds.

Junis and Bartos are claims attorneys at Risk Retention Services Inc., a claims and litigation management company located in a Milwaukee, Wisconsin suburb.

Topics Casualty