A commercial insured emailed their agent to tell them that they will be “exercising their consent to settle endorsement," quoting this portion of their policy:

When a deductible of at least $10,000 is applicable to a claim or "suit", settlement will be made with the consent of the insured. If the insured refuses to consent to any settlement mutually agreed upon by us and the plaintiff, recommended in writing by us, and the insured elects to contest or continue any legal proceedings, our liability will not exceed the amount for which claim could have been settled plus the costs and the expenses incurred up to the date of such refusal.

Q: This is the first time we have dealt with this scenario. How are defense costs handled in this scenario? Is the insured responsible for these costs? I know if the settlement is greater than what the carrier would have paid, then the insured is responsible for the overage. Typically, does the carrier allow a payment plan or do they require a lump sum if they do owe the difference?

Response 1: The endorsement seems to be clear. Yes, you're correct that the insured is responsible for any defense costs related to the case after they reject a settlement agreed upon by the claimant and the insurer.

However, it is not clear to me that the insurer would be required to continue with the defense if the insured refuses to consent. If they did, I don't know that there is any typical arrangement for reimbursement. It may well depend on such variables as the amount involved, the facts of the claim, the history of the insured, and the company-agent relationship.

Response 2: Since the insurer does not have the right to settle the claim without the policyholder's agreement, the case will continue. The current defense counsel should outline the consequences of not signing off with the insured. If the final outcome is better than the current total estimated cost, all benefit above the retention will go to the insurer. All the liability for additional defense expenses or higher judgments will be on the insured.

This is like a hammer clause that we often see in professional and management liability policies. I'd actually categorize it as a “hard" hammer clause since the insured takes on 100% of the downside risk instead of a portion of it. 

Response 3: Typically, defense costs are inside policy limits. The deductible issue is a discussion with the carrier, as there is not a standard answer. You need to work with the claims department on these issues.

Response 4: Your client should consult with a qualified legal counsel prior to exercising the right to refuse the settlement agreed upon by the insurer and plaintiff. Legal counsel would advise your client on the pros and cons of the client's options and attendant legal and financial responsibilities.

Response 5: The endorsement seems to be clear: The insured is on their own for defense and settlement costs in excess. There are no payment plans. The only item that is not clear from the endorsement is whether the defense transitions from the insurer to the insured or does the insurer continue the defense with the insured obligated to reimburse. Ask the carrier for clarification on that.

Response 6: The carrier will pay according to what they could have settled for and defense costs up to the date the insured refuses to consent. If the insured continues the litigation, the insured will be responsible for the additional defense and any additional amount of damages. The company is not responsible for the additional damages or the additional defense. There will be no payment plan.

This question was originally submitted by an agent through the Big “I" Virtual University's (VU) Ask an Expert service, with responses curated from multiple VU faculty members. Answers to other coverage questions are available on the VU website. If you need help accessing the website, request login information.

This article is intended for general informational purposes only, and any opinions expressed are solely those of the author(s). The article is provided “as is" with no warranties or representations of any kind, and any liability is disclaimed that is in any way connected to reliance on or use of the information contained therein. The article is not intended to constitute and should not be considered legal or other professional advice, nor shall it serve as a substitute for obtaining such advice. If specific expert advice is required or desired, the services of an appropriate, competent professional, such as an attorney or accountant, should be sought.