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INSURANCE SETTLEMENT ISSUES

QUESTION: One of our members filed a bogus lawsuit against the board and our insurance appointed a law firm to defend us. After a year of being put through the ringer by a nutcase plaintiff and his lawyer, our attorney is recommending settlement. We don't want our insurance paying him a dime. We know we can beat this guy in court. Are we in our rights to refuse settlement and demand that the case go to trial?

ANSWER: It depends on the language in your insurance policy. Except in some D&O policies, settlement is solely the decision of the insurance company.

Economics of Settling. Insurance companies don't look at who's right or wrong--they look at the economics, i.e., the cost of taking a case to trial verses the cost of settling. Not only are trials costly, there is a risk of losing. A loss could burden the insurance company with damage awards and plaintiff's attorneys' fees. To avoid the risk, insurance carriers like to settle. Accordingly, except in certain malpractice policies, the average insurance policy for associations allows the carrier to do what they think best when it comes to settlement.

D&O Hammer Clause. If the association's D&O policy allows the board to have a say in settling the case, the policy likely has a "hammer clause." If it does, boards need to carefully weigh the pros and cons of continued litigation. In the event a board refuses to settle and takes a case to trial and loses, the association, not the insurance company, pays the difference between the rejected settlement offer and (i) any additional legal fees incurred by the carrier, plus (ii) any judgment against the association, plus (iii) any award of legal fees against the association.

ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.

Adams Stirling PLC