Negotiations, Settlements, and Litigation for Liability Insurance Claims: Practice Questions and Solutions

This section of the study guide is intended to provide practice problems and solutions to accompany the pages of Insurance Operations, Regulation, and Statutory Accounting, cited below. Students are encouraged to read these pages before attempting the problems. This study guide is entirely an independent effort by Mr. Stolyarov and is not affiliated with any organization(s) to whose textbooks it refers, nor does it represent such organization(s).

Some of the questions here ask for short written answers based on the reading. This is meant to give the student practice in answering questions of the format that will appear on Exam 5. Students are encouraged to type their own answers first and then to compare these answers with the solutions given here. Please note that the solutions provided here are not necessarily the only possible ones.

Source:

Myhr, A.E.; and Markham, J.J. Insurance Operations, Regulation, and Statutory Accounting (Second Edition). American Institute for Chartered Property Casualty Underwriters. 2004. Chapter 10, pp. 10.22-10.26.

Original Problems and Solutions from The Actuary's Free Study Guide

Problem S5-70-1. Which of the following statements about negotiation strategies in liability claim settlements are true? More than one answer may be correct.

(a) Negotiations typically begin with the claimant's attorney demanding a specific amount of money.
(b) The negotiation process is typically a simple exchange of offers and counteroffers that does not involve extensive discussion between the claimant's attorney and the claim adjuster.
(c) If a claimant is not represented by an attorney, it will typically be more difficult for an offer close to the claimant's first expectation to be accepted. Having an attorney greatly enhances the bargaining power of the claimant and can often motivate the adjuster to accept the attorney's initial demands.
(d) If a claimant is not represented by an attorney, the adjuster will typically make the first settlement offer.
(e) Willingness to negotiate a settlement is considered a weakness on the part of the party that initiates negotiations; it is seen as a sign that this party's case may not be strong enough to withstand a trial.
(f) Every claim adjuster only has the authority to settle a claim up to a specified dollar limit; thereafter, it is necessary to obtain authority from claim personnel at higher levels.
(g) In making an initial settlement offer, the adjuster should offer as low a value as possible, even if an intelligent evaluation of the claim would suggest that this low value is unreasonable.

Solution S5-70-1. This question is based on the discussion of negotiation strategies in liability claim settlements by Myhr and Markham, p. 10.22. The following answers are correct:
(a) Negotiations typically begin with the claimant's attorney demanding a specific amount of money.
(d) If a claimant is not represented by an attorney, the adjuster will typically make the first settlement offer.
(f) Every claim adjuster only has the authority to settle a claim up to a specified dollar limit; thereafter, it is necessary to obtain authority from claim personnel at higher levels.

Choice (b) is not correct; negotiations will often involve discussions between the adjuster and the claimant's attorney in an attempt to reach a mutually acceptable settlement.

Choice (c) is not correct; adjusters are more likely to make realistic initial offers with unrepresented claimants, knowing that such claimants are typically not familiar or comfortable with the negotiation process.

Choice (e) is not correct; negotiation in liability claim settlements is the norm. Willingness to negotiate intelligently can be a strength and is rarely, if ever, considered a weakness by the other party.

Choice (g) is not correct; if an adjuster grossly undervalues a claim in his offer, this can discredit the adjuster and make it more difficult for him to reach a reasonable claim settlement.

Problem S5-70-2.

(a) How is payment for liability claim settlements usually made?

(b) What is a structured settlement?

(c) Describe a situation in which a structured settlement would be especially useful.

(d) Why are structured settlements sometimes attractive to insurers?

Solution S5-70-2. This question is based on the discussion of settlement techniques in Myhr and Markham, p. 10.23.

(a) Payment for liability claim settlements are usually made as a single lump sum.

(b) A structured settlement is an "agreement in settlement of a lawsuit involving specific payments made over a period of time."

(c) A structured settlement would be especially useful in the following cases:

1. If the recipient of the settlement can be expected to incur "regular damages into the future";

2. If the recipient of the settlement cannot be expected to "effectively manage a lump-sum payment".

(d) Structured settlements are sometimes attractive to insurers because, for the same dollar amount of ultimate settlement, there is a lower present value, since some of the settlement does not have to be paid right away but is deferred into the future. These obligations can be funded by the insurer's purchase of annuities.

Problem S5-70-3.

(a) What is an advance payment?

(b) What is one purpose of an advance payment, from an insurer's perspective?

(c) What must the recipient of advance payment do?

(d) What is a walk-away settlement?

(e) For what kinds of claims are walk-away settlements most appropriate?

(f) Name two advantages that insurers cite for using walk-away settlements.

Solution S5-70-3. This question is based on the discussion of settlement techniques in Myhr and Markham, p. 10.23.

(a) An advance payment is a "payment made to a claimant following a loss to cover the immediate expenses resulting from that loss."

(b) One purpose of an advance payment, from an insurer's perspective, would be to discourage the claimant from hiring an attorney. Other valid answers may be possible.

(c) The recipient of an advance payment "must sign a receipt acknowledging payments and that the advance payments count toward final settlement."

(d) A walk-away settlement is a "settlement that involves lump-sum payments made by insurers to settle claims and that does not require a release from the claimant."

(e) Walk-away settlements are most appropriate for small claims.

(f) According to Myhr and Markham, p. 10.23, the following three advantages of walk-away settlements are cited by insurers:

1. They promote excellent public relations;

2. They enhance assertive claim handling;

3. They encourage claimants not to sue the insurer;

4. If claimants do sue the insurer, the insurer will receive credit for the money it paid in the walk-away settlements.

Any two of the above suffice as an answer. Other valid answers may be possible.

Problem S5-70-4.

(a) Why are claims that are litigated to a conclusion so important, even though they comprise only a small fraction of all claims?

(b) What factors might make it difficult for a liability claim to be settled? Give two examples.

Solution S5-70-4.

(a) Claims that are litigated to a conclusion are important because the verdicts pertaining to those claims can set a precedent for how courts would rule in other situations as well. The nature of the relevant legal precedents can greatly influence how negotiations and claim settlements proceed (Myhr and Markham, p. 10.24).

(b) The following two examples of factors that might make it difficult for a liability claim to be settled are given by Myhr and Markham, p. 10.25:

1. Plaintiffs or defendants may be unreasonable and make either unreasonably high or unreasonably low settlement offers.

2. There may be multiple codefendants that all insist that they are not liable and so refuse to settle.

3. The claim may be frivolous, fraudulent, or meritless.

Any two of the above suffice as an answer. Other valid answers may also be possible.

Problem S5-70-5.

(a) What rights does an insurer obtain in combination with its duty to defend the insured under a liability policy? Give two examples.

(b) If an attorney has been hired by an insurer to defend an insured, what should that attorney never be instructed to do?

(c) For a complex claim in which the claimant has made several allegations which are clearly not covered under the defendant's liability insurance policy, along with several allegations that are or may be covered, what is the extent of the insurer's duty to defend? What right does the insured always have?

Solution S5-70-5.

(a) The insurer's duty to defend comes with the following rights, according to Myhr and Markham, p. 10.25:

1. The right to select the defense attorney;

2. The right to "unilaterally decide to settle or to continue a claim's defense";

3. The right to direct the defense attorney "as long as the insured is not financially exposed to the claim".

Any two of the above suffice as an answer. Other valid answers may also be possible.

(b) If an attorney has been hired by an insurer to defend an insured, that attorney "should never be used to advise the insurer on coverage issues in the same case" (Myhr and Markham, p. 10.26).

(c) The insurer must typically defend the insured against the entire claim even if the allegations of the plaintiff pertaining to only a part of the claim are covered. The insured always has the right to hire another attorney representing the insured, at the insured's expense.

See other sections of The Actuary's Free Study Guide for Exam 5.