Liability Insurance and Contractual Aspects of Settlement.

AuthorRichmond, Douglas R.

TABLE OF CONTENTS ABSTRACT 195 TABLE OF CONTENTS 196 I. INTRODUCTION 197 II. THE SETTLEMENT OFFER 201 A. Illustrative Cases 201 B. Lessons from Browning and First Acceptance 209 III. ACCEPTANCE OF THE SETTLEMENT OFFER 210 A. Representative Acceptance Cases 211 B. Tying the Mirror Image Rule to Material Terms 221 IV. SETTLEMENT TERMS INSURERS NEED NOT ACCEPT 222 V. CONCLUSION 227 I. INTRODUCTION

In federal courts, only around two percent of cases go to trial. (1) In state courts, only about three percent of civil cases go to trial. (2) As these statistics indicate, most civil litigation settles. (3) Certainly, most tort cases settle. (4) The settlements in many civil cases are paid by liability insurers. (5) Standard liability insurance policies grant the insurance company the right to settle a lawsuit against an insured as the insurer deems expedient. (6) An insurance company may opt to settle a lawsuit against an insured for several reasons. For example, the insurer may favor settlement because it estimates that the cost of defending the litigation will exceed the cost of settlement; because its investigation of the underlying accident revealed that the insured likely will bear substantial liability for the accident and the plaintiff's claimed damages are within the liability limits of the insured's policy; or because there is a reasonable probability of a verdict against the insured in excess of the policy limits and an equal chance that the insured will be held liable for the plaintiff's damages. (7)

Of course, settlements are achieved by agreement between the parties. (8) Settlement agreements are contracts. (9) Their interpretation and enforcement are therefore governed by contract law principles. (10)

The essential elements of a contract are offer, acceptance, and consideration. (11) In the liability insurance context as elsewhere in litigation, contract disputes connected to settlements typically center on either offer or acceptance. (12) For instance, to be valid, a settlement offer must be capable of acceptance. (13) Thus, a settlement offer that requires the insurer to produce copies of the declarations pages of every insurance policy that covers the insured for the subject accident--including policies issued by other insurance companies--is not valid because the insurer has no ability, authority, or right to produce other insurance companies' records. (14) Alternatively, consider a case that involves a progressive occurrence, such as the plaintiff's exposure to asbestos or toxic chemicals over a period of years, such that multiple insurers may be obligated to indemnify the insured. An offer by the plaintiff to one of them to settle for the limits of all applicable insurance policies is not capable of acceptance by the single insurer to which the offer is made because that insurer does not have the authority to bind the other insurers; it can only offer its own policy limits in settlement. (15)

When it comes to accepting a settlement offer, the "mirror image" rule applies in this context as it does in other contract formation scenarios. (16) The mirror image generally holds that "[a]n acceptance of a settlement offer must be a 'mirror image' of the offer in all material respects. Otherwise, it will be considered a counteroffer that rejects the original offer." (17) So, for example, an insurer that sends a claimant a settlement check accompanied by a proposed release that is materially broader than the release the claimant said she would agree to may in some jurisdictions convert the attempted acceptance of the claimant's settlement offer into a counteroffer. (18) If the claimant declines the counteroffer, there is no settlement. (19) This turn of events can be enormously consequential if the insured's potential liability exceeds its policy limits and litigation ensues. (20) If there is a judgment in excess of the insurance policy limits, the insurer may be liable for the full amount of the judgment and possibly other damages under the law of bad faith for failing to settle the case within policy limits. (21) In fact, adherence to the mirror image rule in cases of potential excess liability can encourage bad faith litigation:

It has become clear that, to a plaintiff whose injuries greatly exceed the available coverage, a policy-limits settlement can be less valuable than a rejected offer and consequent bad-faith claim--however dubious the claim. In the context of proceedings to enforce purported settlements, plaintiffs sometimes structure offers not to reach settlements, but rather to elicit rejections. (22) The importance of achieving enforceable settlement agreements is difficult to overstate. The law and public policy strongly favor the settlement of disputes, and courts would be overwhelmed if most cases went to trial. (23) This Article examines contractual aspects of settlement in the liability insurance context, concentrating on the elements of offer and acceptance. Part II discusses the requirements of a valid settlement offer. In short, settlement offerors are masters of their offers and offers must be definite and include material terms that are reasonably certain. Part III analyzes the second step in the contracting process--acceptance. Here the principal impediment to settlement is the mirror image rule, although that rule presents less of an obstacle if its application is confined to the material terms of the offer. Finally, Part IV briefly addresses insurers' ability to reject settlement offers that are intended to facilitate later bad faith litigation without incurring extracontractual liability as a result.


    For parties to reach a settlement agreement there must first be a definite offer to settle. (24) Under established contract law, "[a]n offer cannot be vague." (25) If an offer is vague, there is no intent on the offeror's part to be bound. (26) In addition, an offer must also be certain with respect to its material conditions and terms. (27) In short, even if parties intend to contract, there will be no enforceable agreement if the material terms of the contemplated agreement are not reasonably certain. (28) A valid offer does not, however, require the offeror to use "any specific terms of art." (29)

    1. Illustrative Cases

      American Family Mutual Insurance Co. v. Browning illustrates how a settlement offer can come up short. In Browning, David Browning was injured when he wrecked his car after he swerved to avoid hitting Kyle Himmelberg's car. (30)

      Himmelberg was insured under an American Family personal auto policy with per person bodily injury liability limits of $50,000. (31) The policy also included an "additional payments" provision with a "first aid clause" that provided American Family would "'pay in addition to [its] limit of liability... expenses incurred by an insured person for first aid to others at the time of an auto accident involving your insured car.'" (32) Browning was treated by medical professionals at the accident scene, in the ambulance en route to the hospital, and in the hospital emergency room, but Himmelberg never rendered first aid to him. (33)

      In a letter to American Family offering to settle his claims against Himmelberg, Browning "agreed 'to unconditionally release Kyle Himmelberg from all present and future liability under RSMo. [section] 537.058 ... in exchange for all applicable policy limits and payments.'" (34) Browning further wrote that he was making his settlement offer "'under RSMo. [section] 537.058 and intend[ed] th[e] offer to comply with that section.'" (35) The Missouri statute to which Browning referred provided in pertinent part:

      A time-limited demand to settle any claim for personal injury, bodily injury, or wrongful death shall be in writing, shall reference this section, shall be sent certified mail return-receipt requested to the tortfeasor's liability insurer, and shall contain the following material terms:

      (1) The time period within which the offer shall remain open for acceptance by the tort-feasor's liability insurer, which shall not be less than ninety days from the date such demand is received by the liability insurer;

      (2) The amount of monetary payment requested or a request for the applicable policy limits;

      (3) The date and location of the loss;

      (4) The claim number, if known;

      (5) A description of all known injuries sustained by the claimant;

      (6) The party or parties to be released if such time-limited demand is accepted;

      (7) A description of the claims to be released if such time-limited demand is accepted; and

      (8) An offer of unconditional release for the liability insurer's insureds from all present and future liability for that occurrence under section 537.060. (36)

      Browning left his offer open for ninety-one days from the date American Family received his letter. (37)

      American Family timely responded by letter and stated "that it was 'meeting the demand of all applicable policy limits which [are] $50,000 for this claim.'" (38) Browning's lawyer replied that American Family's response was a counteroffer rather than an acceptance of Browning's settlement offer because American Family did not include amounts allegedly due under the first aid clause in Himmelberg's policy. (39)

      The parties thereafter agreed that American Family would file a declaratory judgment action to determine whether Browning was owed more than the $50,000 per person bodily injury limit of Himmelberg's policy. (40) In its declaratory judgment petition, American Family alleged that (1) Browning's letter did not mention first aid expenses allegedly incurred by Himmelberg, such that it had no duty to include first aid coverage in its letter attempting to accept Browning's settlement offer; and (2) Himmelberg did not incur any first aid expenses, such that it could have no duty to pay them in response to Browning's offer. (41) The trial court awarded American Family summary judgment on the basis that Himmelberg incurred...

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