As coverage counsel, we see the situation arise time and again: facing down substantial potential liability in a pending lawsuit, a policyholder engages in good-faith settlement discussions with the plaintiff. After animated negotiations between the parties, the plaintiff finally makes a reasonable offer, only for the policyholder’s insurance carrier to throw up a roadblock by refusing to fund or consent to the settlement. But policyholders need not always resign themselves to continuing costly and time-consuming litigation—a “covenant not to execute” may be the switch to put the settlement back on track.
In most cases, a reasonable settlement produces a better result than litigation. A good settlement should provide more of what you need at a lower cost with less interruption of your core business.
Abraham Lincoln is credited with the following advice: “Discourage litigation. Persuade your neighbors to compromise whenever you can. Point out to them how the nominal winner is often the real loser—in fees, and expenses, and waste of time. As a peace-maker the lawyer has a superior opportunity of being a good man. There will still be business enough.”
Businesses have been warned before about mandatory arbitration provisions proliferating in insurance policies, which require referral of coverage disputes to an arbitrator or arbitral panel and bar commencing civil lawsuits to resolve insurance coverage disputes. Other policies require the exhaustion of alternative dispute resolution (ADR) procedures, such as mediation, before a coverage action may commence. On July 17, a federal judge in the Northern District of California enforced such an ADR provision against an insurer that sued its policyholder for a declaratory judgment on coverage.