Settlement issues.

• Position: Part 8 - Manual for lawyers representing insured defendants

A Defense Lawyer Need Not Handle Settlement Issues

Today, most liability carriers reserve control of settlement to their claims professionals, at least initially. This is their right and also is efficient. It would be ridiculously expensive and essentially pointless to require lawyers to negotiate, review or otherwise participate in all settlements, most of which involve small sums and clear liability. Nor is lawyer involvement contractually required. Neither defense clauses nor settlement clauses in standard insurance contracts obligate insurers to use lawyers. These clauses do not mention lawyers at all. Carriers use lawyers to defend lawsuits because only lawyers can practice law, not because liability contracts say they must.

No rule of professional responsibility requires an insurance defense lawyer to handle settlement issues. Claims professionals handle the vast majority of liability claims before defense lawyers are called in. They can continue to do so thereafter without stepping on defense lawyers' toes.

A defense lawyer who is wholly excluded from the settlement process can have few settlement-related duties to the clients. The only certain duty is that of making sure that the clients understand the lawyer's limited role. A lawyer can satisfy this duty simply and efficiently by sending a form engagement letter to the clients when the lawyer is retained.

A defense lawyer who has been excluded from settlement issues may nonetheless be confronted with them by a plaintiff's attorney who wants to settle. That defense lawyer has a simple and proper course. Tell the plaintiff's attorney to contact the claims professional so that the matter can be considered further by the proper authority. A defense lawyer also may offer to contact the claims professional personally, but the lawyer should not commence settlement negotiations without the carrier's prior consent.

When Excluded from Settlement Functions, a Defense Lawyer Should Offer Impartial Assessments of Trial Outcomes

One could question in the following way the sharp distinction between the defense and settlement functions drawn in the preceding section. Surely, it is reasonable for an insurer and an insured to ask a defense lawyer to evaluate a lawsuit's prospects at trial. However, because the predicted trial outcome may influence the decision to settle a claim, by offering such an assessment a defense lawyer would seem to venture into the area of settlement.

This complaint is muddled. It conflates a settlement-related service with a defense-related service that merely affects the likelihood of settlement or its price. Any defense-related service can impact the probability or cost of settling. Even so, defense and settlement remain separate operations. The former is the process of preparing for trial. The latter is the process of negotiating toward an agreement.

Because defense and settlement are different operations, no one should be surprised to learn that a case evaluation differs from a settlement recommendation in many respects. Most obviously, a settlement recommendation rests on a comparison of two different states of the world--one in which the parties keep litigating and another in which they bury the hatchet and go their separate ways. A case evaluation requires no such comparison. Only the world of continued litigation is described and explored.

Because a settlement recommendation involves the comparison described, it also requires a normative judgment that a defense evaluation does not. Which state of the world is better--that in which litigation continues or that in which it ends? To make this judgment, one must answer many questions. First, one must decide whose perspective(s)--the carrier's or the policyholder's--to consider and how much weight to give to each. Second, one must consider the variance associated with the predicted trial outcome as well as the prediction itself. It is one thing to pay $500,000 to settle a claim when the range of possible trial outcomes is $400,000 to $600,000. It is quite another to do so when the range is $0 to $1 million. Third, one must consider any external factors that may be relevant to the settlement decision.

There may be a host of these, including:

* the policyholder's desire to minimize lost employee time;

* the policyholder's desire to help the claimant;

* the impact that a trial may have on the policyholder's reputation;

* the carrier's desire to maintain a good relationship with the policyholder;

* the carrier's desire to bargain strategically;

* the existence of other related claims whose value may be affected by a settlement;

* the possibility that a settlement will exhaust the limits of coverage, leaving the policyholder without a paid defense for other claims;

* the likelihood that the policyholder will sue for bad faith if the offer is rejected;

* the costs that bad faith litigation would require the co-clients to incur; and

* the likelihood, if a settlement demand is rejected, that the policyholder will have to declare bankruptcy and the consequences this would entail.

When assessing possible trial outcomes, a defense lawyer can ignore external considerations like these.

In sum, when a carrier assigns responsibility for settlement issues to in-house claims personnel, a defense lawyer can offer a candid assessment of likely trial outcomes without stepping on the toes of a claims representative. Such an assessment can help both clients get a better fix on its exposure to loss a trial and may therefore be quite valuable.

A Carrier Has Only the Authority to Appoint a Lawyer as Its Own Agent for Settlement

Insurers' widespread use of claims professionals shows that, in practice, the settlement function can be severed from the defense function and often is. Professor Robert E. Keeton noted this long ago, observing that the "problem of advisability of settlement ... normally does not affect the conduct of the defense in court." See Robert E. Keeton, Liability Insurance and Responsibility for Settlement, 67 HARV. L. REV. 1136, 1170 (1954). A competent defense can cause the price of settlement to fall, but it is one thing to defend a lawsuit and another to settle a claim. Standard liability forms reflect this distinction, providing for the defense and settlement in separate provisions.

Carriers nonetheless may choose to combine the defense and settlement functions by using a defense lawyer to settle a claim. Nothing in a standard liability contract prohibits them from doing this, and it turns out to be both convenient and efficient for insurers to use defense lawyers as settlement agents in many situations. Standard policies leave carriers free to use claims professionals or lawyers to settle claims. They also allow carriers carve up settlement responsibilities, assigning some to lawyers and others to claims personnel. They can use lawyers as conduits for the flow of offers and demands...