Robert Heidt


This paper suggests how the duty to settle, which requires liability insurers to pay damages awarded against their insured in excess of the policy limits when the insurers reject a reasonable settlement offer within the limits, may have indirectly led certain of their insureds--small business recreational vendors like horse riding stables or some motels offering swimming pools with diving boards--to sanitize the recreational activities they offer. More generally, the duty to settle's effect on the lawsuits injured customers brought against small business recreational vendors may have led a wide variety of such vendors to sanitize activities the vendors previously offered in a manner that disassociates the activities from the most severe injuries, but leaves them less enjoyable for many. This paper's scope is narrow. In sum, the duty to settle helps the severely injured plaintiff, or, more precisely, any plaintiff whose suit might result in a larger judgment, bargain for the limits of the defendant's liability insurance. The duty to settle achieves this effect by making it harder for the small business defendant and its liability insurer to exploit the advantages that arise from the defendant's judgment-proof status. The liability insurer can no longer take advantage of the plaintiff's knowledge of the defendant's judgment-proof status and of the ceiling that imposes upon the best possible outcome for a plaintiff continuing to litigate. In the absence of the duty to settle, or of some other method for giving plaintiffs access to unlimited liability insurance, the plaintiffs understandably resign themselves to bargaining down from those limits. By undermining the effect of those limits, the duty to settle dramatically increases the insurer's exposure, especially for severe injuries, and, hence, leads the insurer to pressure its insured to alter its activities so as to reduce the chance, for whatever reason, of a customer suffering a severe injury.

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