Serving Michigan Since 1979

Legal Update

Policyholder’s Rights Regarding Settlement

By Lindsay Dangl, Murphy & Spagnuolo PC

Published in The Journal of Insurance and Indemnity Law

Volume 16 Number 3, July 2023

Envision the hypothetical situation where a children’s play venue is sued when a child sustains personal injury while playing on the equipment. The child slipped and fell due to allegedly defective play equipment, resulting in head trauma and significant medical treatment. Fortunately, the venue has liability insurance which takes over handling of the claim. The liability defenses are strong, but the potential damages are astronomical. The venue knows it did everything right and wants a trial to clear its reputation with the public. If not vindicated publicly, the venue is concerned it will lose so many customers that it will go out of business. The insurance carrier wants to pursue settlement rather than take the risk of trial. When such a disagreement occurs, who prevails?

The first, and often last, step to answer this question is to look at the insurance contract. Michigan courts uphold the freedom of the parties to contract.[1] And, Michigan courts interpret insurance contracts in the same manner as other contracts, “giving its terms their ‘ordinary and plain meaning if such would be apparent to a reader of the instrument.’”[2] Where there is no ambiguity, the court will enforce the contract as written. As, “[a]n insurance policy is similar to any other contractual agreement, and, thus, the court’s role is to ‘determine what the agreement was and effectuate the intent of the parties.’”[3] In short, except for extraordinary circumstances, once a policy is in place, both parties are bound by its terms and the terms of the policy control. This is because our courts have concluded that “…an unambiguous contract reflects the parties’ intent as a matter of law.”[4]

Insurance policies often contain specific provisions that address settlement disagreements and establish procedures for resolving such disputes. This makes sense. Because it is the insurance company’s dollars at issue, the insurance company has the ability to decide how these funds are spent. In exchange for agreeing to provide coverage for damages, “[l]iability policies that contain provisions granting the insurer the authority to settle claims without seeking the insured’s permission are not uncommon.”[5] Many insurance contracts contain detailed clauses that “limit an insurer’s obligation to pay any judgement beyond the figure that would have settled the case and any defense costs beyond the point when the insured withheld consent to settle.”[6] The applicable policy might contain language such as:

The company shall not settle any claim without the written consent of the insured. If, however, the insured shall refuse to consent to any settlement recommended by the company and shall elect to contest the claim or continue any legal proceeding in connection with such claim, then the company’s liability for the claim shall not exceed the amount for which the claim would have been settled, plus the cost and expenses incurred, with its consent, up to the date of such refusal.[7]

This clause does not grant the insurance company the absolute right to override the insured’s wishes and settle the claim but rather states that should the insured refuse to settle, the insurer’s exposure is capped at the amount for which the claim could have settled. In other words, if the insured wants to take the chance at trial, it is in the insured’s dollars at risk, no longer insurance dollars. This ensures the insurer is no worse off than had the insured agreed to the settlement.

However, insurance contracts must be read carefully because different policies strike a different balance between the rights of the insurer and the insured. For example, the policy could state simply, “We [the Insurer] may, at our discretion, investigate any ‘occurrence’ and settle any claim or ‘suit’ that may result.”[8] Or it may have more detailed language granting the insurance company the absolute right to settle such as:

The insurers shall have the exclusive right to contest or settle any of said suits or claims. The assured shall not interfere in any way respecting any negotiations for the settlement of any claim or suit, nor in the conduct of any legal proceedings, but shall, at all times, at the request of the insurers, render to them all possible cooperation and assistance. The assured shall not voluntarily admit or assume any liability for an accident, nor incur any expense other than for immediate surgical relief, nor settle any claim, except at the assured’s own cost.[9]

A policy provision like this gives the insurer the contractual right to decide whether to settle and mandates the insured “Cooperate with us [the Insurer] in the…settlement…of the ‘suit.’”[10] In such instance, in the absence of ambiguity, the insurer likely has the sole decision making authority to settle a case—even against the insured’s wishes at the time of settlement—because the insured freely agreed to contract away or limit the right to settle in exchange for insurance coverage. On the opposite end of the spectrum, some professional malpractice liability insurance policies allow greater rights to the insured to accept or reject a proposed settlement of a claim to ensure greater control over claims that affect professional reputation. As different policies contain different terms, if insureds read their insurance policies, insureds have the ability to choose the policy terms that best fir their business and risk tolerance.

In practice, it is rare that an insurer will arbitrarily settle a claim over the insured’s blatant objections, despite a right to do so under the policy. In my experience, whether out of genuine concern or even just good customer service, in practice these disagreements between the insurer and insured are often resolved through thorough discourse. Going back to the hypothetical at the beginning of this article, in that situation, the insured needs to be advised about the unpredictability of a trial, the unfortunate fact that the truth does not always prevail, and about measures to protect the client’s business interest that can be negotiated into the settlement, such as confidentiality. Of course, the ideal is to avoid this situation in the first place. When the insured is properly advised about the risks o the case and the realities of trial from the beginning of the litigation and kept informed of case developments throughout discovery, the insureds are not likely to refuse a reasonable resolution which addresses its concerns.

What about the opposite situation? What if you have an insured who, for business reasons or to avoid bad publicity, wants to quickly settle a case, but the insurance company refuses? Again, in practice, the number one goal is to make sure both the insurer and insured are well informed regarding all case developments, including the risks involved, from the beginning to minimize the chance a disagreement will arise. If differences of opinion do arise regarding settlement, these are often resolved informally through conversations about the needs of both parties and customizing the terms of the settlement. It has been Michigan law since 1929 that in such a situation “…the insurer is liable to the insured for an excess of judgment over the face of the policy when the insurer, having exclusive control of settlement, fraudulently or in bad faith refuses to compromise a claim for an amount within the policy limit.”[11] The key limitation is that the refusal to settle must have been either fraudulent or “in bad faith.” Where the insurer had a “’bona fide belief that they might defeat the action’ or ‘have a fighting chance to win’ or make ‘a mistake of judgement’” in refusing to settle, there is likely no negative consequence to the insurer for exercising its contractual right of control over settlement decisions.[12] And “the insurer does not act in bad faith if it refuses settlement in the honest belief that it has a fair chance of victory, or of keeping the verdict within the policy limit, or, upon reasonable grounds, that the compromise amount is excessive, or if it has legal defenses… which fairly seem applicable…”[13] In analyzing whether an insurer acted in bad faith, Michigan courts consider the several non-exclusive factors:

  • Failure to keep the insured fully informed of all developments in the claim or suit that could reasonably affect the interests of the insured,
  • Failure to inform the insured of all settlement offers that do not fall within the policy limits,

  • Failure to solicit a settlement offer or initiate settlement negotiations when warranted under the circumstances,

  • Failure to accept a reasonable compromise offer of settlement when the facts of the case or claim indicate obvious liability and serious injury,

  • Rejection of a reasonable offer of settlement within the policy limits,

  • Undue delay in accepting a reasonable offer to settle a potentially dangerous case within the policy limits where the verdict potential is high,

  • An attempt by the insurer to coerce or obtain an involuntary contribution from the insured in order to settle within the policy limits,

  • Failure to make a proper investigation of the claim prior to refusing an offer of settlement within the policy limits,

  • Disregarding the advice or recommendations of an adjuster or attorney.

(10) serious and recurrent negligence by the insurer,

(11) refusal to settle a case within the policy limits following an excessive verdict when the chances of reversal on appeal are slight or doubtful, and

(12) failure to take an appeal following a verdict in excess of the policy limits where there are reasonable grounds for such an appeal, especially where trial counsel so recommended.[14]

No single factor is dispositive.[15] Fundamentally, to prevail against an insurer for a bad faith failure to settle claim, the plaintiff must show that the insurer acted arbitrarily, recklessly, with indifference, or with intentional disregard of the interests of the insured.[16] In practice, as long as the insurer, having the contractual right of control over settlement, acts reasonably and diligently under the facts and circumstances of the case and keeps the insured informed regarding the evolving circumstances of the litigation, the insurer is free to refuse to settle the case.

This analysis represents the current state of the law. However, emerging legislative developments suggest an inclination toward potentially revising the threshold for bad faith claims. In spring 2022, the Michigan House introduced numerous bills directed toward insurance companies, including House Bill 5997 of 2022 which would place penalties on insurance companies that show bad faith denials of claims. While these bills do not specifically address settlement, they may reflect a sentiment toward change. That being said, considering Michigan’s historical commitment to protecting the freedom to contract, we can reasonably expect that the terms of insurance policies will retain their decisive role in resolving settlement disputes between an insurer and its insured.

About the Author

Lindsay Dangl is the Managing Shareholder of Murphy & Spagnuolo, P.C. Ms. Dangl has experience in the areas of family law, workers’ compensation, insurance defense litigation, municipal law, and civil litigation.

[1] Wilkie v Auto-Owners Ins Co, 469 Mich 41,63 (2003) citing Morehead v New York ex rel Tipaldo, 298 US 587 (1936).

[2] Defrain v State Farm Mut auto Ins Co., 491 Mich 359, 367 (2012) citing Wilkie, supra at 47.

[3] Hunt v Drielick, 496 Mich 366 (2014) citing Auto-Owners Ins Co v Churchman, 440 Mich 560 (1992).

[4] Hastings Mut Ins Co v Safety King Inc, 286 Mich App 287 (2009) citing In re Smith Trust, 480 Mich 19 (2008).

[5] Williams, Vanessa Peterson. Michigan Insurance Law and Practice, Chapter 2: Duties of the Insured and Insurer in Liability Cases (ICLE) Section 2.2..

[6] Id.

[7] Bad Faith, Excess Liability and Extracontractual Damages: Counsel for the Excess Carrier Looks at the Issues, 72, U Det Mercy L Rev 49, 72 (1994).

[8] Great American Insurance Group Aviation General Liability Coverage Form,

[9] Wakefield v Globe Indem Co, 246 Mich 645, 647 (1929).

[10] Williams,  supra, Section 2.34 citing Wakefield, supra at 651.

[11] Wakefield, supra, at 648.

[12] Williams, supra, Section 2.34 citing Wakefield, supra at 651.

[13] Wakefield, supra, at 652-53. See also Commercial Union Ins Co v Liberty Mutual, 426 Mich 127 (1986).

[14] Commercial Union, supra, at 138-39.

[15] Id. At 137.

[16] Id. At 136.