Put Your Money Where Your Mouth Is: Defending Commercial Reasonableness in Insurance Law's Duty to Make Reasonable Settlement Decisions

Sarah Melikian

No zncb5_v1, LawArchive from Center for Open Science

Abstract: This Comment examines the Restatement of the Law, Liability Insurance’s adoption of an objective commercial reasonableness standard for an insurer’s duty to make reasonable settlement decisions and argues that the standard appropriately balances the interests of insurers and policyholders. After reviewing the origins of liability insurance, the insurer’s duties to defend and indemnify, and the development of the duty to settle, the Comment analyzes the controversy surrounding the American Law Institute’s Restatement project and the criticism directed at its treatment of settlement obligations. The Comment contends that a commercial reasonableness standard is necessary because insurers possess exclusive control over settlement decisions and may otherwise be incentivized to expose policyholders to excess judgments while risking only policy-limit liability. By requiring insurers to evaluate settlement opportunities as though they alone would bear the full financial consequences of an adverse judgment, the Restatement aligns insurer incentives with the interests of insureds and promotes fair decision-making. The Comment further argues that concerns about excessive insurer liability are overstated, as courts applying objective reasonableness standards continue to uphold insurer decisions when settlement demands are unreasonable. Ultimately, the Comment concludes that the Restatement’s approach both clarifies a historically confusing area of insurance law and provides a sound framework for protecting policyholders without unfairly burdening insurers. [This abstract was written by Microsoft Copilot, a generative artificial intelligence.]

Date: 2026-09-30
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Persistent link: https://EconPapers.repec.org/RePEc:osf:lawarc:zncb5_v1

DOI: 10.31228/osf.io/zncb5_v1

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