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The consent to settle provisions provide important safeguards for those insured under the Fiduciary Liability Insurance Policy issued by Lloyd's of London. Many professional liability policies available in today's market vest the insurance carrier with full discretion to settle any claim on whatever terms the carrier deems appropriate.
Unfortunately, the carrier's and Assured's interests do not always align. For example, the Assured may be much more interested in maintaining their professional reputation and good standing with any licensing board than the carrier. In fact, in some jurisdictions an adverse suit can seriously jeopardize a practitioner's licensure.
The carrier, on the other hand, being more concerned with the bottom line cost, is generally incentivized to look for the least expensive route to resolution, which may be an early settlement rather than risking a full defense of the case.
In light of this, the consent and settlement provisions contained in the Lloyd's policy are quite reassuring. The relevant provisions read as follows:
Defense and Settlement (Included in the Limit of Liability)
- The Underwriters shall have the right and duty to defend, subject to the Limits of Liability, any Claim against the Assured seeking Damages which are payable under the terms of this Insurance, even if any of the allegations of the Claim are groundless, false or fraudulent. However, Underwriters shall not formally appoint defense counsel without the consent of the Named Assured, such consent not to be unreasonably withheld.
- It is agreed that the Limit of Liability available to pay Damages shall be reduced and may be completely exhausted by payment of Claims Expenses. Damages and Claims Expenses shall be applied against the Deductible.
- The Underwriters shall have the right to make any investigation they deem necessary, including, without limitation, any investigation with respect to the application and statements made in the application and with respect to coverage.
- If the Assured shall refuse to consent to any settlement or compromise recommended by the Underwriters and acceptable to the claimant and elects to contest the Claim, Underwriters' liability for any Damages and Claims Expenses shall not exceed the amount for which the Claim could have been settled plus the Claims Expenses incurred up to the time of such refusal, or the applicable Limit of Liability, whichever is less, and the Underwriters shall have the right to withdraw from the further defense thereof by tendering control of said defense to the Assured.
Without waiving the foregoing, in order to enhance the likelihood of resolving Claims covered by this Insurance in a mutually agreeable manner to both Underwriters and the Assured, Underwriters agree to: (1) seek the Assured's views regarding any potential settlement or compromise recommended by Underwriters and acceptable to the claimant; and (2) substantively respond to any such views, explaining Underwriters' position and the reason(s) therefor.
You will note that the Assured's consent to the appointment of defense counsel as well as the approval of any settlement is required. Virtually all policies which give the Assured the right to consent to settlement also include a clause designed to discourage the insured from embracing risky litigation strategies. This is euphemistically referred to as the "hammer" clause which normally limits the carrier's total liability to the amount the case could have been settled for.
The Lloyd's policy includes a significant softening of this "hammer" provision by providing a method by which the carrier and Assured can work out their differences regarding settlement strategy. This is just another example of how Lloyd's works to meet and fulfill the coverage expectations of its policyholders.
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