A federal court lets a CGL insurer
settle a case on its own terms
In North Carolina, an insured under a CGL policy recently
learned the hard way how a high deductible combined
with the insurer’s discretion regarding settlements can severely reduce coverage.
By Joseph S. Harrington, CPCU
Regular readers of “Coverage Concerns” may detect a common pattern to these postings: We lay out some well-established principles of property and liability insurance, then demonstrate how logic and circumstances can lead to some surprising outcomes.
Well, here we go again. This time the topic is commercial general liability (CGL) insurance.
When it comes to acquiring a CGL or any type of policy, even a novice buyer understands that, holding all else equal, the greater the deductible you accept, the less you’ll pay in premium.
Novice buyers also learn quickly that CGL coverage pays for defense costs “outside of policy limits.” In other words, insurance payments for legal defense do not detract from the amount available for paying awards or settlements.
Defining feature
“Defense outside limits” is one of the defining features of CGL and personal liability insurance. The practice is intended to make sure full limits are available to compensate those who have suffered bodily injury or property damage, and to make sure defendants are provided a robust defense without hurting their ability to pay damages.
Things are different in professional, managerial, and specialty lines of liability insurance, where defense costs are commonly paid “within limits,” thus reducing the amount available for damages, and where “hammer clauses” are used to make defendants who reject a settlement bear a share of any award over the rejected settlement amount.[1]
In short, general liability insurance (both personal and commercial) is structured to promote full compensation of victims and robust defense of policyholders, while specialty lines are structured to give parties incentives to settle.
Implications
All that said, even seasoned risk managers may not appreciate the full implications of “defense outside limits.”
To offset the benefits of defense outside limits for policyholders, CGL insurers have latitude to settle a claim, or their share of it, without approval by the insured. To this end, the industry standard CGL form developed by the Insurance Services Office (ISO) reads: “We may, at [the insurer’s] discretion, investigate any occurrence and settle any claim or suit that may result.” Without this condition, an insured would have no financial incentive to accept a reasonable settlement offer.
In North Carolina, an insured under a CGL policy recently learned the hard way how a high deductible combined with the insurer’s discretion regarding settlements can severely reduce coverage.[2]
In this case, a bodily injury claim was lodged against a building supply company, which had a CGL policy with a $3 million deductible. The insurer estimated the claim would amount to between $2 million and $3 million, but the insured insisted it would amount to far less due to contributory negligence by the claimant. Based on that belief, the insured rejected a settlement offer.
The case went to trial, where the plaintiff announced it would seek $9 million to $12 million in damages. On the second day of the trial, the carrier exercised its right to settle the claim on its own for $2.85 million. The insurance company then paid the claimant and sought reimbursement from the insured, since the payment fell within the deductible. The insured sued, claiming the settlement agreement overlooked its interests.
Misaligned interests
It’s quite clear that the interests of the insurer and its insured had become profoundly misaligned.
It was in the insurer’s interest to turn off any defense payments and settle the claim at or near the deductible amount. It was in the insured’s interest to carry on the fight at the insurer’s expense, hoping to reduce the amount the insured would have to pay, with the insurer bearing the risk that a final award might exceed the deductible.
So what happened?
The insurer won in a U.S. district court, which ruled that the insurer under North Carolina law had a right to consider and act upon its own interests in the matter. The ruling doesn’t absolve insurers of the duty to consider the interests of their policyholders, but it’s clear that duty is not absolute or necessarily paramount.
It’s probably not what the policyholder envisioned when it assumed a $3 million deductible.
[1] In other words, if a defendant insured under, say, a professional liability policy rejects a settlement offer of $1 million, a hammer clause would make the insured liable for a percentage of a final award or settlement in excess of $1 million. The amount up to $1 million would still be paid by insurance (subject to a deductible and other insurance provisions), but the insured would bear some risk for the final award being greater than the rejected settlement offer.
[2] Martin Marietta Materials, Inc. v. Ace American Ins. Co., et al., No. 5:23-cv-313-FL, 2025 WL 1944020 (E.D.N.C., July 15, 2025)
The author
Joseph S. Harrington, CPCU, is an independent business writer specializing in property and casualty insurance coverages and operations. For 21 years, Joe was the communications director for the American Association of Insurance Services (AAIS), a P&C advisory organization. Prior to that, Joe worked in journalism and as a reporter and editor in financial services.
