Refused settlements and excess judgments: the insurer's duty to settle

When a liability insurer is offered the chance to settle an injury claim for no more than its policy limit, it must treat the policyholder's financial exposure as seriously as its own. If it turns down a reasonable offer and a jury later awards more than the limit, many states let the policyholder, or someone who takes over the policyholder's rights, recover the excess from the insurer. The standard, the deadlines and who can sue are set by each state, which is why the same refusal can cost an insurer millions in one state and nothing in another.

Why a limits demand changes the insurer's position

Liability coverage promises to pay what the policyholder owes after a crash, up to a ceiling. Anything above that ceiling is the policyholder's own debt. The insurer also controls the claim, because the policy typically gives it the right to settle or defend, and the policyholder usually cannot settle on the insurer's behalf.

That arrangement creates a conflict. Suppose an injured person is willing to accept the full $30,000 limit to release the driver. For the insurer, paying $30,000 is a certain cost. Fighting, perhaps hoping to pay less, is a gamble in which the worst outcome costs the insurer only the limit plus defense costs. For the driver, the same gamble has an open-ended downside. The legal duty to settle exists to stop the insurer from taking a gamble with the driver's money that it would never take with its own.

This is the reason a policy-limits demand (a written offer to settle for the limit, usually with a deadline) is a high-stakes document. It starts a clock, and the insurer's response is the first evidence in any later dispute. Our article on excess letters and time-limit demands: what to do as the insured explains these letters from the policyholder's side. This article follows one case from the demand through the verdict, and then shows what each party can do.

Anatomy of a policy-limits demand

A demand that is likely to put the insurer on the hook usually has these features, and a defective one often fails on one of them.

• An amount no higher than the limit. A demand above the limit cannot create a duty to pay more than the policy provides.
• A reasonable deadline. Courts look at whether the insurer had a fair chance to evaluate the claim. Windows of 10, 20 or 30 days are common. A short deadline may be fine if the facts were clear and the insurer had the records; it is a weak position if the claimant held back the evidence until the last moment.
• Clear terms. The release should cover the insured driver, say what liens are the claimant's responsibility, and not add conditions the insurer cannot meet. An offer that demands more than a release, such as an admission or a payment from an unrelated source, may not count.
• Supporting documents. Medical records, bills, and proof of wage loss let the insurer evaluate the claim. If it never received them, it can reasonably say it could not evaluate.
• Delivery to the right person. Mailing to the wrong address or an adjuster who left the company is a classic way for a demand to fail.

Some states have written the mechanics into law. Georgia's statute governing pre-suit settlement offers in motor vehicle injury cases, O.C.G.A. 9-11-67.1, was overhauled by Senate Bill 83, which the governor signed on April 22, 2024. According to a Taft Law summary, the amended law treats these offers as offers to form a bilateral contract, specifies which terms are material, applies even if an offer says the statute does not, and includes a safe harbor against bad faith claims. It applies to offers made on or after that date, so a demand sent from Georgia is subject to technical rules that a demand sent elsewhere might not be. Read the current text or ask a Georgia attorney, because statutes like this are amended often.

Florida took a different route. As of the 2023 changes to Florida Statute 624.155, an insurer can avoid a bad faith claim, statutory or common-law, by paying the lesser of the policy limit or the claimant's demand within 90 days of receiving notice of a claim supported by sufficient evidence, as summarized by Troutman Pepper. If it misses the 90 days, the failure to pay is not admissible as proof of bad faith, and the limitations period gets an additional 90 days. Mere negligence alone does not amount to bad faith under the amended statute. See Florida for the state's other rules.

The legal test: what a "reasonable" refusal looks like

Courts have written the duty to settle in different words, and the differences affect the result.

California. In Crisci v. Security Insurance Co. (1967), the California Supreme Court held an insurer liable for a judgment beyond its limit after it refused to settle within the limit. The case involved a $10,000 policy limit, and the trial court had awarded the insured $91,000 plus interest, according to summaries of the Crisci opinion. California courts frame the inquiry in terms of whether a prudent insurer with no policy limit would have accepted the offer. The earlier decision in Comunale v. Traders & General Insurance Co. (1958) is the companion case on an insurer's refusal to settle within limits.

Florida. Florida courts use a totality of the circumstances test that goes back to Boston Old Colony Insurance Co. v. Gutierrez (1980). In Harvey v. GEICO General Insurance Co. (2018), the Florida Supreme Court reinstated a verdict in a case where the policy limit was $100,000 and the trial court's judgment was $9.2 million, by a 4-3 vote, and said the test is not a checklist, according to a summary of the opinion. The 2023 statute, discussed above, now adds that negligence alone is not bad faith.

Texas. Texas uses the Stowers doctrine, named for a 1929 case, G.A. Stowers Furniture Co. v. American Indemnity Co. The Texas Supreme Court's 1994 decision in American Physicians Insurance Exchange v. Garcia is usually cited for three elements: the claim is within the policy's coverage, the demand is within the limits, and its terms are such that an ordinarily prudent insurer would accept. Commentators describe a valid demand as one that is unconditional and offers a full release of the insured.

Everywhere else. Some states apply an ordinary negligence standard to the insurer's handling of a demand, others require bad faith or something close to it, and many ask whether the insurer gave the insured's interests at least equal consideration. Which standard applies in your state is a question for a lawyer who knows its cases.

These variations do not change the main point. In all of them, the insurer has to look past its own interest. The question is whether the offer was one that a prudent insurer would take if it alone bore the whole risk of a larger verdict.

From demand to judgment: a timeline

Say a driver carries a 30/60/25 policy ($30,000 per person for injuries). A crash seriously injures a pedestrian. These numbers are invented to show how the steps connect.

The question in any later fight is whether the insurer's choices between day 35 and day 65 were reasonable on what it knew then. A court does not ask only whether the verdict was bigger than the limit; every excess judgment is. The question is whether a prudent insurer would have taken the settlement given the injuries, the fault evidence, and the likely value of the claim. Where the injuries were severe and fault was clear, the offer looks reasonable in hindsight. Where fault was heavily disputed, the insurer's decision may be defensible.

What the insured driver can do

If you are the driver in that timeline, the actions below matter, whatever your state.

1. Read every letter and respond. Tell the insurer in writing that you want the claim settled within your limit. This establishes where you stood. Our article on what happens when damages exceed your liability limits describes what the insurer owes you in writing.
2. Hire your own attorney. A lawyer for the insurer defends the suit, but your personal exposure above the limit is your problem, so you may want someone who works only for you. A personal lawyer can write to the insurer demanding that it settle, and can raise a failure-to-settle claim later.
3. Contact any umbrella or excess insurer. An umbrella policy sits on top of your auto limit. Tell the umbrella carrier when a serious claim begins, because late notice can cause trouble. See umbrella insurance: liability protection above your auto policy for how these policies work.
4. Consider contributing money. If you can pay part of a gap between your limit and a demand, that sometimes closes a deal. It is your decision; the insurer should not demand it.
5. Do not sign a consent judgment or assignment on your own. Agreements between an insured and a claimant after a refusal can have powerful legal effects, and the rules are state-specific.

What a failure-to-settle claim looks like after the verdict

If the verdict is above the limit and the insurer's refusal looks wrong, the usual path is a separate suit against the insurer. The plaintiff in that suit is typically the insured driver, and often the injured person, who takes over the driver's rights through an assignment.

States differ on the mechanics, but several themes recur:

• Timing. In many states the claim does not ripen until there is a judgment above the limit. Some states let the insured sue sooner. Limitation periods apply, and Florida's 2023 change shows how statutes are altering them.
• Who may sue. The insured always can. Whether a claimant can sue directly, without an assignment, depends on the state; in many, no. Some states restrict assignments or allow them only in certain forms.
• Consent judgments. In some states an insured and claimant may agree on a judgment in exchange for a promise not to collect from the insured, then pursue the insurer. Courts scrutinize those deals for fairness and collusion.
• Damages. Typically the excess judgment, sometimes with interest and fees, and in some states more if the conduct was egregious. An insurer found in bad faith may pay far more than the limit it refused to pay. The Harvey judgment was 92 times the policy limit.
• The insurer's defenses. The demand was not valid, it was impossible to evaluate in time, the claimant added unreasonable terms, the insured did not cooperate, or the claim fell outside coverage.

Our guide on insurance bad faith explained covers the doctrine, and excess judgments: when a verdict is larger than your policy limit covers what the claimant can collect from the driver's own assets.

Umbrella and excess carriers in the picture

Many drivers with significant assets carry umbrella coverage. That changes the story in three ways.

First, the umbrella insurer has an interest in how the primary insurer handles a demand. If the primary insurer wrongly refuses a limits settlement and the case goes over, the umbrella may have to pay the verdict above the primary limit. Some states let the umbrella insurer seek recovery from the primary insurer for that loss, under the label of equitable subrogation, but the rules differ.

Second, a demand within the primary limit may leave the umbrella insurer out of the decision entirely. The primary insurer controls its limit. Telling the umbrella insurer about the claim early still helps.

Third, an umbrella limit changes the plaintiff's strategy. A claimant who knows the driver has a $1 million umbrella may demand more than the primary limit, and then the primary insurer's duty is to pay its own limit toward a settlement. Coordination between insurers matters.

What a claimant can do

If you are the injured person, you cannot force a company to settle, but how you make and document an offer affects what happens afterward.

• Send a clean demand. State the amount, the deadline, the release terms and the deliverables (the check and by when). Do not hide unusual conditions in the fine print.
• Provide the evidence before the deadline. Medical records, bills, proof of lost income and photos. If you ask for 30 days but deliver key records on day 28, a court may regard the window as unreasonably short.
• Give a realistic window. The more complex the injury, the more time the insurer legitimately needs.
• Send it to the right place. Use the insurer's designated claim contact, and keep proof of delivery.
• Read the state's rules. In a state with a statute, technical compliance is a requirement for the demand to count.
• Check the other coverage that can help you. If the at-fault driver's limits are small, your own underinsured motorist coverage may pay the difference. Do that before you release the driver, because a release can affect your UIM rights; underinsured motorist claims: offset vs excess and consent to settle explains the consent rules.
• Talk to a lawyer. Rules on demands are technical enough that most claimants with serious injuries use an attorney; our guide on when to hire a lawyer after a car accident discusses the decision.

A claimant should also understand that a refused demand does not guarantee a windfall. The claim against the insurer is another lawsuit, it can take years, and it requires proving that the refusal was unreasonable under your state's standard.

When several claimants share one limit

Everything above assumes a single claimant. If a crash injures several people and their claims exceed the per-accident limit, an insurer can face an impossible choice, because paying one claimant in full reduces what remains for the others. Courts in many states allow the insurer to resolve this by paying into court and asking a judge to divide the money. Florida's amended statute offers a safe harbor for this situation if the insurer files an interpleader or offers its limits through binding arbitration within 90 days, per Troutman's summary above. See multiple claimants, one policy limit: interpleader and pro rata splits for the mechanics.

Common questions

Does the insurer have to accept every demand for the limit?

No. The duty is to give the insured's interests fair weight and to accept a reasonable offer, not every offer. If liability is doubtful, the injuries are minor, or the demand carries unreasonable conditions, a refusal can be defended. What the insurer cannot do is ignore a strong demand, or make a lowball counteroffer without explanation.

Does the insurer have to tell me about the demand?

Practice and rules differ. Many insurers send an excess letter, and a good-faith insurer keeps its insured informed about settlement opportunities. If your lawyer or the claimant's lawyer sends you a copy of a demand, answer it in writing and send your response to the insurer.

Can the injured person sue the insurer directly?

In many states, not until they hold a judgment against the insured or an assignment of the insured's rights. Some states have direct-action rules in limited cases. A lawyer in your state can say which applies.

What if the insurer offers its limit after the lawsuit starts?

The claimant may say it is too late, because the demand has expired, and the insured may say the insurer is still exposed for its earlier refusal. Whether a later offer cures the problem depends on the state; Florida's 90-day safe harbor shows that timing can matter by statute. This is a point for counsel.

Can the driver be forced into bankruptcy?

A judgment above the limit is a debt that can be collected from the driver's assets, subject to the exemptions in state law, which vary widely. Some drivers settle with the claimant, some negotiate a payment plan, and some file for bankruptcy. Those are legal questions that require a licensed attorney.

Key takeaways

• A policy-limits demand puts the insurer in the position of weighing the driver's risk as if the limit did not exist; refusing a reasonable one can make it liable for the excess.
• The standard differs by state: California asks what a prudent insurer without a limit would do, Florida uses totality of the circumstances (and, since 2023, says negligence alone is not bad faith), and Texas uses the Stowers elements.
• Georgia and Florida have statutes that shape demands and safe harbors, so a letter that works in one state may not in another.
• Drivers facing a serious claim should write to their insurer asking it to settle, notify any umbrella carrier, and consider a personal attorney.
• Claimants make a stronger record with a clean demand, a realistic deadline and the records in the insurer's hands early.