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Do Liability Insurers Have A Duty To Make An Offer Where There Is No Claim Against The Insured?

January 21, 2004

This is one of a series of articles under the by line “Butler on Bad Faith” originally published in Mealey’s Litigation Report: Insurance Bad Faith, Vol. 17, #18, p. 18 (January 21, 2004). © Copyright Butler 2004.

A liability insurer has a duty to handle and settle claims made against its insured in good faith. Courts have grappled with whether this duty requires an insurer to make a settlement offer when there is no claim against the insured.

Some courts have imposed this duty, requiring an insurer to make a settlement offer when there is no claim against the insured. These courts sometimes observe that there is an inherent conflict of interest between the insurer and the insured whenever the claim value is approximately policy limits. If the insurer were not required to initiate settlement negotiations in such cases, the insurer would presumably have nothing to lose by proceeding to trial, while the insured would face a potential excess judgment. Courts finding this duty often do so in cases involving affirmative misconduct by the insurer in disregarding a settlement opportunity. Some states have statutorily imposed duties requiring an insurer to settle where liability is clear. For instance, Oregon’s Insurance Code creates such an duty once liability becomes “reasonably clear.” Most courts that impose this duty do so only where liability is clear and damages clearly exceed the limits.

Other courts have refused to impose this duty upon insurers. These courts have observed that the potential claimant is in the best position to evaluate her own claim and make the first offer. If courts impose a duty to make a settlement offer when there is no claim against the insured, potential plaintiffs have an incentive to delay settlement in hope of perfecting a potential bad faith claim which is contrary to the policy of encouraging settlement. Additionally, a potential claimant receiving an initial settlement offer from an insurer usually has no incentive to settle immediately because the claimant bears little risk of losing the opportunity to settle for the policy limits. Moreover, a claimant has no incentive to settle until she determines whether the defendant’s assets other than liability insurance would make an excess judgment worth trying to collect.

In the typical liability insurance contract, the insured surrenders the exclusive right to litigate or settle a claim to the insurer.(1) Courts have observed that this relationship creates a fiduciary or quasi-fiduciary duty between the insurer and the insured. In Bernhard v. Farmers Insurance Exchange,(2) the court explained that the relationship between the insurer and insured in a third-party context falls short of a true fiduciary relationship because an insured can regain some control over her defense by retaining independent counsel, either immediately at her own cost or by later suing the insurer for those costs. The Bernhard court described this relationship as quasi-fiduciary and limited the relationship to those areas where the insurer exercised a strong degree of control over the insured’s interests.(3) Because this quasi-fiduciary duty is contractually created, it follows that this duty is triggered only pursuant to the language of the contract that creates it. However, because good faith and fair dealing are not express contractual obligations, an insurer is always bound to treat its insured in good faith and fair dealing because these obligations are implied under the contract; at least one observer has noted that an insurer’s good faith duties are not limited to the fiduciary duty that attaches upon the assumption of an insured’s defense.(4) At least one other court, however, has noted that the duty to settle in good faith does not arise until a claim has been made against an insured and there is a reasonable probability of recovery in excess of policy limits and a reasonable probability of a finding of liability against the insured.(5)

I. Illustrative Examples Of States That Impose A Duty Upon A Liability Insurer To Make A Settlement Offer Where There Is No Claim

Some courts have found that insurers have a good faith duty to make a settlement offer when there is no claim against the insured. These courts often impose this duty in light of other insurer misconduct.

A. New Jersey

In Rova Farms Resort Incorporated v. Investors Insurance Company, the insured-operator of a resort property was sued for injuries sustained by a guest during a diving accident that rendered him “almost a total quadriplegic.”(6) Despite the urging of the insured’s attorney that the insurer offer its policy limits of $50,000, the insurer offered only $12,500 and solicited a contribution to the settlement from its insured.(7) The Rova Farms court was troubled by the insurer’s solicitation of a contribution to the settlement from its insured without committing its own policy limits.(8) Under such circumstances, the Supreme Court of New Jersey held that a settlement demand by the plaintiff is not an absolute “prerequisite for finding the insurer to have acted other than in good faith.”(9) The Supreme Court of New Jersey held that, where injuries for which recovery against an insurer were sought were very substantial, and where the potential liability of the insured should have been reasonably obvious to the insurer irrespective of advice of counsel, the insurer’s failure of insurer to offer its $50,000 policy limits without qualification constituted sufficient lack of good faith, thereby making the insurer responsible for the entire subsequent verdict of $225,000.

In reaching its decision, the New Jersey high court looked to the Tennessee case of State Auto Insurance Company v. Rowland,(10) in which the Supreme Court of Tennessee held that an insurance company may be held liable for bad faith for a judgment in excess of its policy limits although it never received a settlement demand for or within the face amount of coverage. The Supreme Court of Tennessee held: “We do not hold that the insurance company has an affirmative duty to negotiate with the injured claimant in all cases. We would only say that a refusal to discuss a settlement may be considered along with other evidence in determining the issue of bad faith.”(11)

The New Jersey Supreme Court observed that, having contractually restricted the independent negotiating power of its insured, the insurer had a positive fiduciary duty to take the initiative and attempt to negotiate a settlement within the policy coverage.(12) Any doubt as to the existence of an opportunity to settle within the face amount of the coverage or as to the ability and willingness of the insured to pay any excess required for settlement must be resolved in favor of the insured unless the insurer, by some affirmative evidence, demonstrates there was not only no realistic possibility of settlement within policy limits, but also that the insured would not have contributed to whatever settlement figure above that sum might have been available.(13) The court observed that the opposite fact pattern occurred in Rova. Under such circumstances, the New Jersey Supreme Court held that a settlement demand by the plaintiff is not an absolute “prerequisite for finding the insurer to have acted other than in good faith.”(14)

B. Arizona

An Arizona appeals court later rejected the apparent absolute duty to initiate settlement negotiations imposed upon an insurer in Rova Farms.(15) In Fulton v. Woodford, the court discussed circumstances where there was a high potential of claimant recovery and a high potential of damages exceeding policy limits. The court observed that the claimant may not be interested in settlement negotiations, especially where a financially responsible insured is present.(16) Under such circumstances, the insurer, which had complete control of settlement negotiations, had nothing to lose by “going for broke” while the insured stood to suffer financially unless the matter was settled within policy limits or close to.(17) The court found that under such circumstances the insurer and the insured had a conflict of interest which resulted in the imposition of a duty upon the insurer to initiate and attempt settlement. The failure to do so could constitute “bad faith” that would subject the insurer to liability in excess of policy limits.(18)

C. Kansas

The Tenth Circuit Court of Appeals, applying Kansas law, observed that an insurer has a duty to make a good faith attempt at negotiating a settlement when faced with a claim involving admitted liability and permanent disability.(19) The court went on to discuss that the duty to consider the interests of the insured arises not because there has been a settlement offer from the plaintiff, but because there has been a claim for damages in excess of the policy limits.(20) The claim creates a conflict of interest between the insured and the carrier which requires the carrier to give equal consideration to the interests of the insured.(21) The court noted that an insurer should consider any such claim without looking to the policy limits and as though the insurer alone would bear responsibility for paying any judgment rendered.(22) The court observed that, when the insurer’s duty was measured against this standard, it became apparent that the duty to settle does not hinge on the existence of a settlement offer from the plaintiff. Rather, the duty to settle arises if the carrier would initiate settlement negotiations on its own behalf if its potential liability equaled that of its insured.(23)

D. Florida

In Florida, one appellate court held that an insurer has an affirmative duty to initiate settlement negotiations if the insured’s liability is clear and the injuries are so serious that judgment in excess of policy limits is likely. In Powell v. Prudential Property & Casualty Insurance Company,(24) the insured struck two pedestrians from behind as they walked along the road. One of the pedestrians, Goldner, suffered serious injuries. The insurer evaluated Powell’s liability as 80-100% and, in acknowledgment of the severity of the victim’s injuries, placed the $10,000 policy limits in reserve to pay Goldner’s claim. Nine days after the accident, Goldner’s attorney sent the insurer a letter describing the injuries, informing the insurer that his client would be hospitalized for an extended period, and requesting that the insurer disclose the policy limits. The insurer did not respond. The claimant’s attorney then sent a follow-up letter on February 3. The attorney informed the insurer that his client was in need of immediate funds because the medical bills had already exceeded $20,000, and his client had no other insurance. The attorney again requested the policy limits.

The insurer did not respond by February 9, and Goldner’s attorney sent a third letter describing his client’s dire financial situation and asking to be informed of the policy limits within the next three days. Finally, on March 16, a claims adjuster called Goldner’s attorney and left word with his secretary that it was tendering the policy limits. Two days later, the attorney called the insurer and informed the claims adjuster that the lawsuit had already been filed and that the policy limits were rejected. The trial resulted in a jury verdict of $250,000 against Powell. Powell then sued the insurer alleging that the insurer breached its duty of good faith by not exploring settlement possibilities and by failing to advise of him of the probable outcome of the litigation.

The trial court granted the insurer’s motion for a directed verdict. In reversing and remanding, the appellate court reasoned material issues of fact existed appropriate only for a jury.(25) In reaching its opinion, the district court held that the lack of a formal offer to settle did not preclude a finding of bad faith.(26) Where liability was clear and the injuries were so serious that a judgment in excess of policy limits was likely, the court held that an insurer had an affirmative duty to initiate settlement negotiations.(27) Any question about the possible outcome of a settlement effort should be resolved in favor of the insured.(28) Whether the insurer’s delay in disclosing the policy limits foreclosed settlement negotiations and prevented an offer of settlement was a relevant and material fact issue that the court determined was appropriate for only the fact finder.(29)

E. West Virginia

Consistent with Florida’s Powell decision, the Supreme Court of Appeals of West Virginia in Shamblin v. Nationwide Mutual Insurance Company explained that the proper test asks whether the reasonably prudent insurer would have refused to settle within policy limits under the facts and circumstances of the case, bearing in mind its duty of good faith and fair dealing with its insured.(30) Further, the court noted an insurer might have a genuine and reasonable issue as to its insured’s liability, but if the settlement offer can be considered fair when cast against the possibility of a substantial excess verdict against the insured, the liability issue in and of itself may not be sufficient grounds for the insurer to have refused to settle.(31) The court then stated: “[l]ikewise, it is the insurer’s burden to act in good faith in actively seeking settlement and a release of its insured from personal liability, as opposed to the obligation being solely that of the injured party, his attorney, or the insured.”(32)

F. Michigan

In Commercial Union Insurance Company v. Liberty Mutual Insurance Company,(33) the Supreme Court of Michigan enumerated twelve factors which can be “indicators” of bad faith to be considered by the jury in determining whether the insurer acted in bad faith. The court explained that the factors were supplemental factors, which may be considered in determining whether liability exists for bad faith.(34) The court noted that the fact finder may take these factors into account, together with all other evidence in deciding whether or not the defendant acted in bad faith.(35) The third of these indicators is the insurer’s “failure to solicit a settlement offer or initiate settlement negotiations when warranted under the circumstances.” (Emphasis added.)(36) The court then discussed the dangers of “20—20 hindsight vision” because the conduct of the insurer under scrutiny must be considered in light of the circumstances existing at the time.(37) Thus, it appears that the Michigan court, like many other courts, would impose this duty only when warranted under the circumstances, which would not be regarded under a “microscopic examination” years later.(38)

G. Minnesota

In Minnesota, a liability insurer may become liable in excess of its undertaking under the terms of the policy if it does not exercise “good faith” in considering offers to compromise the claim for an amount within the policy limits.(39) The court explained that the insurer’s duty of good faith is breached where the insured is clearly liable and the insurer refuses to settle within the policy limits not in good faith and not based upon reasonable grounds to believe that the amount demanded is excessive.(40) This case is consistent with Florida’s Powell case and West Virginia’s Shamblin case.

Yet, in a subsequent Minnesota case, the appellate court in Iowa National Mutual Insurance Company v. Auto-Owners Insurance Company affirmed the trial court’s finding that the primary liability carrier was not liable to the excess liability carrier under the theory that it had failed to initiate and vigorously pursue settlement.(41) The court observed that the trial court properly found that there was sufficient evidence to support that the insurer acted in good faith in negotiation and liability was not clear.(42) The trial court found that Auto-Owners honestly thought that it could win the case because liability was not clear, and the company initiated settlement negotiations as soon as plaintiff’s counsel was willing to do so. The appellate court noted that it was significant to the trial court that at no time did plaintiff’s counsel demand Auto-Owners’ policy limits.(43) The appellate court affirmed the trial court’s ruling that an insurer is not required to accept an offer of settlement, even if within the policy limits, if it believes in good faith that its insured is not liable.(44) The court reasoned that if an insurer were required to accept every offer of settlement, every trial that results in an excess judgment would, in fact, make the insurer liable for bad faith.(45)

H. Massachusetts

In a case involving a patient’s parents who sued a psychiatrist’s professional liability insurer, Behn v. Legion Insurance Company(46) the court discussed what “reasonably clear” liability meant. The Behns asserted that the insurer’s actions in failing to settle the liability case violated Massachusetts law, specifically violating Chapter 176D, by failing to adopt and implement reasonable standards for the prompt investigation of claims arising under insurance policies; refusing to pay claims without conducting a reasonable investigation based upon all available information; failing to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear; and failing to provide promptly a reasonable explanation of the basis in the insurance policy in relation to the fact or applicable law for denial of a claim or for the offer of a compromise settlement.(47) The court noted that whether the insurer’s liability is “reasonably clear” calls for an objective inquiry into the facts and the applicable law.(48) The court explained by quoting a Massachusetts’s state court: “’The test is not whether a reasonable insurer might have settled the case within the policy limits, but rather whether no reasonable insurer would have failed to settle the case within the policy limits.’”(49) The court also quoted from another state court: “’So long as the insurer acts in good faith, the insurer is not held to standards of omniscience or perfection.’”(50)

The court then went on to hold that, even if an insurer has not completed its investigation when it rejects a demand, if it is later shown that liability is not reasonably clear, the plaintiffs have not been adversely affected and there is no violation of Chapter 176D. Because liability in this context encompasses both fault and damages, liability is not reasonably clear where either fault or damages are contested in good faith.(51)

I. Illinois

In Illinois, insurance companies are not required to initiate negotiations to settle a case.(52) The Illinois courts have reasoned that requiring insurers to initiate settlement negotiations would put the insurer into a negotiating disadvantage which is imposed on no other litigant.(53) However, as with every rule, there are exceptions. The exception exists where the probability of an adverse finding on liability is considerable and the amount of probable damages would greatly exceed the insured’s coverage.(54) The court in Adduci then cautioned that this exception “should be sparingly used, and then only in the most glaring cases of an insured’s liability” because “’trial attorneys are not endowed with the gift of prophecy so as to be able to predict the precise outcome of personal injury litigation.’”(55)

II. Illustrative Examples Of States That Do Not Impose A Duty Upon A Liability Insurer To Make A Settlement Offer Where There Is No Claim

A. Wisconsin

In Mowry v. Badger State Mutual Casualty Company,(56) the Wisconsin court discussed the three obligations that arise as a result of the insurer’s general duty to its insured to settle a claim. First, the insurer must exercise reasonable diligence in ascertaining facts upon which a good-faith decision to settle or not settle must be based.(57) Second, where a likelihood of liability in excess of policy limits exists, the insurer must so inform the insured so that the insured might property protect himself.(58) Third, the insurer must keep the insured timely abreast of any settlement offers received from the victim and of the progress of settlement negotiations.(59) The court explained that the three obligations arise as a result of the insurer’s general duty owed to its insured to settle a claim. The duty to settle, in turn, emanates from the contractual terms giving the insurer the control of the defense. However, the court then discussed that an insurer’s duty to settle under the contract is doubtful whenever a question of policy coverage exists.(60) This is because the insurer’s duty to settle is dependent upon whether the policy extends coverage for the circumstances underlying the harm sustained.(61)

The court further explained that an insurer has a right to exercise its own judgment in deciding whether to settle or contest a claim, within parameters of good faith considerations.(62) An insured does not need to accept every offer of settlement within policy limits under sanction of liability for an excess judgment against its insured.(63) Whether an insurer who rejects an offer to settle within policy limits because of a coverage question shall be liable for some measure of damages upon a determination of coverage depends upon whether the insurer acted in bad faith in determining that a coverage question existed.(64) In short, under Wisconsin law, an insurer commits the tort of bad faith only when it has denied a claim without a reasonable basis for doing so, that is, when the claim is not fairly debatable.(65)

B. Texas

In Texas, under the seminal case of G.A. Stowers Furniture Company v. American Indemnitee Company,(66) a third-party liability insurer must exercise “’that degree of care and diligence which an ordinarily prudent person would exercise in the management of his own business’” in responding to settlement demands within policy limits. Under Stowers, evidence concerning claims investigation, trial defense, and conduct during settlement negotiations is subsidiary to the ultimate issue of whether the claimant’s demand was reasonable under the circumstances, such that an ordinarily prudent insurer would accept it. The duty under Stowers does not require an insurer to make or solicit offers to settle third-party insurance claims.(67) Since the decision in Stowers, Texas courts have placed a reasonable saving clause on the duty of the insurance carrier to an insured. There must be an unconditional offer to settle before there can be said to be a breach of the insurer’s duty.(68)

C. Florida

The First District Court of Appeal of Florida in Davis v. Nationwide Mutual Fire Insurance(69) explained the general rule in Florida: insurance companies will not be liable for an excess verdict if there is no offer of settlement within the policy limits. While this case precedes Powell, the court indicated exceptions to this general rule when it observed: “. . .under some circumstances the offer of settlement is not a prerequisite to excess liability.”(70) In view of the facts in Davis, the court opined that the defense attorney’s misconduct in misrepresenting coverage may have negated the requirement of an offer of settlement before finding the insurer in bad faith because there may have been an offer of settlement had the true liability limits been revealed.(71) The court, however, did not specifically rule on the issue but instead reversed the insurer’s motion to dismiss.(72) The Davis court recognized the general rule in Florida that insurance companies will not be liable for an excess verdict if there is no offer of settlement within policy limits, except under certain circumstances.(73)

III. Conclusion

A fiduciary or quasi-fiduciary duty arises when a claim is presented in a third-party case based upon the terms of the liability insurance contract. The insurance contract imposes a duty of good faith and fair dealing upon the insurer. In many jurisdictions, an insurer has an affirmative duty to initiate settlement negotiations where liability is clear and injuries will likely exceed the policy limits. Otherwise, the insurer generally has no duty to initiate settlement negotiations. Some jurisdictions refuse to impose such a duty regardless of the liability and damage posture, and at least one jurisdiction refuses to impose such a duty when there is a coverage question.


  1. Douglas R. Richmond, Trust Me: Insurers Are Not Fiduciaries To Their Insureds, 88 Ky. L. J. 1, 6 (2000).
  2. 915 P.2d 1285 (Colo. 1996)
  3. Id. at 1289.
  4. Matthew D. Schultz, Bad Faith or No Faith? Finding a Place for Wrongful Refusal to Defend in Florida’s Bad Faith Jurisprudence, 29 Fla. St. U. L. Rev. 1389, 1392 (Summer 2002).
  5. Haddick v. Valor Insurance, 763 N.E.2d 299, 304 (Ill. 2002).
  6. Rova Farms Resort Inc. v. Investors Ins. Co. of America, 323 A.2d 495, 498 n.1 (N.J. 1974).
  7. Id.
  8. Id. at 502 & n. 3; see also W.E. Shipley, Annotation, Duty of Liability Insurer to Settle or Compromise, 40 A.L.R.2d 168, 205—08 (1965).
  9. Id. at 505.
  10. 427 S.W.2d 30 (Tenn. 1968).
  11. Id. at 35.
  12. Rova Farms, 232 A.2d at 505.
  13. Id.
  14. Id.
  15. Fulton v. Woodford, 545 P.2d 979, 984 (Ariz. Ct. App. 1976).
  16. Id.
  17. Id.
  18. Id.
  19. Coleman v. Holecek, 542 F.2d 532 (10th Cir. 1976).
  20. Id. at 537.
  21. Id.
  22. Id.
  23. Id.
  24. 584 So. 2d 12 (Fla. 3d DCA 1991).
  25. Id. at 14.
  26. Id.
  27. Id.
  28. Id.
  29. Id.
  30. Shamblin v. Nationwide Mutual Insurance Company, 396 S.E.2d 766, 776 (W. Va. 1990)
  31. Id.
  32. Id.
  33. 393 N.W.2d 161 (Mich. 1986).
  34. Id. at 165.
  35. Id.
  36. Id.
  37. Id.
  38. Id.
  39. Short v. Dairyland Ins. Co., 334 N.W.2d 384, 387 (Minn. 1983).
  40. Id.
  41. Iowa National Mutual Insurance Co. v. Auto-Owners Ins. Co., 371 N.W.2d 627 (Minn. 1985).
  42. Id. at 628.
  43. Id.
  44. Id.
  45. Id.
  46. 173 F. Supp. 2d 105 (D. Mass. 2001)
  47. Id.
  48. Id. at 113.
  49. Id., quoting Hartford Casualty Ins. Co. v. New Hampshire Ins. Co., 628 N.E.2d 14 (Mass. 1994).
  50. Id., quoting Bolden v. O’Connor Café, 734 N.E.2d 726 (Mass. 2000).
  51. Id.
  52. Haas v. Mid-America Fire & Marine Ins. Co., 343 N.E.2d 36 (Ill. App. Ct. 1976); Powell v. Prudence Mutual Cas. Co., 232 N.E.2d 155 (Ill. App. Ct. 1967); Adduci v. Vigilant Ins. Co., 424 N.E.2d 645 (Ill. App. Ct. 1981).
  53. Adduci, 424 N.E.2d at 678.
  54. Id.
  55. Id.
  56. 385 N.W.2d 171, 178 (Wis. 1985).
  57. Id.
  58. Id.
  59. Id.
  60. Id.
  61. Id.
  62. Id. at 180.
  63. Id.
  64. Id.
  65. Id.
  66. 15 S.W.2d 544, 547 (Tex. Comm’n App. 1929)
  67. Id.
  68. Danner v. Iowa Mut. Ins. Co., 340 F.2d 427 (5th Cir. 1964).
  69. 379 So. 2d 1162 (Fla. 1st DCA 1979).
  70. Id. at 1163.
  71. Id.
  72. Id.
  73. Id.