A Settlement Number Is Only Half the Deal

Most settlements involving insurance turn on two questions that have nothing to do with the merits. First, who gets to say yes: you, or your insurer? Second, once everyone agrees, whose money pays? Policyholders often learn the answers at the worst moment, with an offer on the table and a deadline running.

When Your Insurer Wants to Settle and You Don’t

Suppose you are sued for professional malpractice. Your insurer defends you, and the claimant offers to settle for $250,000. The insurer wants to pay. Your professional liability policy requires your consent, and you would rather fight: you believe the claim is unfounded, and you worry a settlement will damage your reputation.

You can say no. What it costs depends on whether the policy has a hammer clause. If you reject a settlement the clause covers, the insurer may cap what it will pay at the proposed settlement plus defense costs incurred up to that point. Everything after that may fall on you.

The numbers add up quickly. Suppose the cap is the $250,000 settlement plus $50,000 in defense costs before you refused: $300,000. If the case later resolves for $500,000 and total defense costs reach $150,000, the combined cost is $650,000, and $350,000 of it is yours.

Not every hammer is that hard. Some policies use a “soft” hammer: after you refuse, the insurer keeps paying a share of further defense costs and any larger settlement or judgment, often 50% or 70%, rather than nothing. The percentage is negotiable at renewal and is worth knowing before you need it.

The amount is not the only issue. Before deciding, look at what the settlement actually resolves. Does it release all covered claims and every insured? Does it include an admission, a confidentiality term, or something your business must do? Some professionals must report malpractice payments to a licensing board, and a confidential settlement doesn’t necessarily avoid that duty.

When You Want to Settle and Your Insurers Won’t Agree Who Pays

The opposite problem is just as common. A general contractor agrees in principle to settle a construction injury lawsuit for $1.5 million. It has its own general liability policy with a $1 million limit, additional insured coverage under a subcontractor’s policy with another $1 million, and a $5 million excess policy. On paper, $7 million is available for a $1.5 million settlement.

Then the excess insurer says it won’t contribute until the subcontractor’s policy pays, and the subcontractor’s insurer says its coverage is excess over the contractor’s own policy. The settlement stalls, and the contractor is asked to cover the gap.

Primary Coverage Comes First, All of It

When two policies each claim to be excess over the other, the answer comes from comparing their actual “other insurance” provisions and applicable law. A subcontract that required primary and noncontributory coverage helps only if the policy actually issued matches it.

Illinois lets a policyholder choose which of its primary insurers defends and pays, a rule known as targeted tender. That choice doesn’t let it skip past other primary coverage to reach an excess layer. In Kajima Construction Services, Inc. v. St. Paul Fire & Marine Insurance Co., 227 Ill. 2d 102 (2007), the Illinois Supreme Court rejected using targeted tender that way. Selecting a primary insurer and moving into excess coverage are different steps.

What Counts as Exhaustion

Excess policies spell out how the layers beneath them must be used up, and some require actual payment of the full underlying limit. That matters when a primary insurer settles for less than its limit. If the contractor’s own insurer pays $1 million, the remaining $500,000 isn’t automatically the excess insurer’s problem: the subcontractor’s policy may have to respond first, and the excess policy’s exhaustion terms still have to be met.

Excess policies also have notice, cooperation, and consent requirements. An excess insurer that learns of a settlement after it’s agreed may argue it lost the chance to participate. Notice should go out early, well before the claim reaches the excess layer.

Before You Agree to a Number

• Read the consent and hammer terms before mediation, so you know what refusing would cost.

• List every policy: its limit, where it attaches, the insurer’s stated position, and what it is expected to contribute.

• Get funding commitments in writing, along with any required consents and exhaustion acknowledgments.

• Decide whether the settlement resolves the insurers’ dispute or preserves it for later, and say so in the paperwork.

A settlement is only as good as the money behind it. The time to line that up is before anyone shakes hands.

If your insurer is pressing you to settle, or your insurers can’t agree who pays, we can review the policies and help you protect your position. Contact us to discuss your matter.

This article provides general information and does not constitute legal advice. For guidance concerning a specific matter, see our insurance recovery services. Coverage depends on the policy wording, the facts, and applicable law. To discuss potential representation, request a consultation. Submitting an inquiry does not establish an attorney-client relationship.