In law, the duty to settle is an insurer's implied obligation to accept a settlement in a case against one of its insured parties if it is likely that a potential judgement against the insured will exceed policy limits. If a liability insurer exposes the insured to excess risk by failing to settle within policy limits, they may be liable for any damages incurred.
United States law.
Liability insurance policies in the United States typically make no express contractual promise to settle.
California.
In California, "an insurer, who wrongfully refuses to accept a reasonable settlement within the policy limits is liable for the entire judgment against the insured even if it exceeds the policy limits." California Insurance Code §790-790.15 states that the insurer has an obligation to attempt "in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear."
A rationale for this duty is that "[w]hen an offer is made to settle a claim in excess of policy limits for an amount within policy limits, a genuine and immediate conflict of interest arises between carrier and assured." "An insurer who denies coverage does so at its own risk. Such factors as a belief that the policy does not provide coverage, should not affect a decision as to whether the settlement offer in question is a reasonable one." "It is the duty of the insurer to keep the insured informed of settlement offers." "[A]n insurer potentially can be liable for unreasonably coercing an insured to contribute to a settlement fund."
An insurer may not "discriminate in its claims settlement practices based upon" certain protected classes.
Texas.
The Texas Supreme Court ruled in "G. A. Stowers Furniture Co. v. American Indemnity Co.", that insurers can be held liable for negligently refusing a settlement within policy limits.
References.
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