Consider this scenario: Your business is sued.
Your liability insurer accepts the defense and appoints counsel. As the case progresses, the plaintiff makes a settlement demand within your policy limits. The evidence strongly suggests that liability is probable and that a trial could produce a verdict well above your policy limits. Your insurer’s appointed counsel recommends settlement. But your insurer refuses to settle, preferring to gamble on a favorable trial outcome.
The trial does not go well. The jury returns a verdict of $3 million. Your policy limit is $1 million. Your insurer pays its $1 million. You are personally responsible for the remaining $2 million.
An insurer’s refusal to accept a reasonable within-limits settlement demand, followed by an excess verdict against an insured, is one of the most consequential coverage situations a business policyholder can face. It is also an area of law where policyholder rights are powerful but underutilized, because many policyholders do not understand the legal framework until it is too late.
The Insurer’s Settlement Obligation
When an insurer assumes the duty to defend, it typically also assumes control over settlement decisions. Most liability policies give the insurer the right, and often the sole authority, to settle claims on the policyholder’s behalf either in practical terms or by virtue of express policy language affording the insurer that authority. The policyholder may have little or no say in whether a case settles, when it settles, or for how much, or its say may come with substantial financial risk, such as if it refuses to agree to a settlement that its insurer is pushing for.
This concentration of authority in the insurer creates an asymmetry of risk. The insurer’s financial exposure is capped at the policy limits. The policyholder’s exposure is not. If a verdict exceeds the policy limits, the insurer pays its limit, and the policyholder pays the rest out of its fixed assets, its business revenue, or through personal liability where the policyholder is an individual.
This asymmetry is precisely why the law imposes a duty on the insurer to exercise good faith in evaluating and responding to settlement demands. An insurer that controls the defense and has the authority to settle must consider the policyholder’s interests when making settlement decisions, not just its own. An insurer that unreasonably refuses to settle a claim within policy limits, exposing the policyholder to a verdict in excess of those limits, may be liable for the entire excess judgment.
The Good Faith Standard
The standard in most jurisdictions, including North Carolina, is whether a reasonably prudent insurer would have accepted the settlement demand under the circumstances. Factors courts often consider include:
- The probability of liability. How likely is it that the policyholder will be found liable at trial? Components of this question include consideration of:
- The probable range of damages. If liability is found, what is the likely range of damages?
- The relationship between the demand and the policy limits. Was the demand within the policy limits? Was it reasonable in relation to the probable exposure?
- The insurer’s investigation and evaluation. Did the insurer conduct a thorough and reasonable evaluation of the claim? Did it rely on the advice of experienced counsel?
- Defense counsel’s recommendation. Did the insurer’s own appointed defense counsel recommend settlement? An insurer that rejects its own counsel’s settlement recommendation is in a particularly vulnerable position.
- Communication with the policyholder. Did the insurer inform the policyholder of the settlement demand and the potential for an excess verdict? Did the insurer give the policyholder the opportunity to contribute to a settlement or to participate in settlement discussions?
An insurer is not required to accept every settlement demand. But when liability is reasonably clear, when the potential verdict significantly exceeds the policy limits, and when a within-limits settlement is available, the insurer’s refusal to settle raises serious good faith concerns.
The Policyholder’s Exposure and the Insurer’s Potential Liability
When an insurer’s unreasonable refusal to settle leads to an excess verdict, the policyholder has a potential claim against the insurer for the amount of the verdict that exceeds the policy limits. In North Carolina, this claim can be pursued on several theories:
- Breach of the duty of good faith and fair dealing. Every insurance contract in North Carolina carries an implied covenant of good faith and fair dealing. An insurer that prioritizes its own financial interests without regard to the policyholder’s interests breaches this duty.
- Unfair claims settlement and deceptive trade practices. Under N.C.G.S. § 58-63-15(11) and § 75-1.1, an insurer’s failure to attempt in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear is an unfair claim settlement practice, and by extension, an unfair and deceptive trade practice (UDTP). A UDTP claim can result in treble damages and attorneys’ fees.
The Time-Limited Demand: A Rising Area of Complexity
A time-limited demand, which is sometimes called a “policy limits demand”, is a settlement offer from the plaintiff that is available for a limited period and expires if not accepted within the specified timeframe. These demands are a powerful plaintiffs’ tool because they force the insurer to make a coverage and settlement decision quickly or face potential bad faith liability.
South Carolina has introduced legislation (H.4670, introduced January 2026) that would establish formal requirements for time-limited demands in tort claims, including requirements for the information that must be included in the demand and the timeframe for response. If enacted, this legislation would codify a framework that has significant implications for how claimants are required to craft settlement demands, how insurers evaluate and respond to such demands, and for policyholder rights when insurers fail to respond reasonably to a demand that complies with the requirements.
North Carolina does not currently have a comparable statute, but time-limited demands are a common litigation tactic, and the legal principles governing an insurer’s duty to respond in good faith apply with equal force.
Policyholders should understand that when a within-limits demand is made, and the insurer fails to respond or responds unreasonably, the policyholder’s exposure to an excess verdict creates a potential claim against the insurer.
Before a Settlement Demand Is Made
- Understand your policy’s settlement clause. Does the insurer have the sole right to settle, or do you, as the policyholder, have consent rights? Some policies contain a “consent to settle” clause that gives the policyholder the right to approve or reject settlements. Others give the insurer sole settlement authority.
- Engage in the defense. Even when the insurer controls the defense, the policyholder should monitor the case, attend key hearings and mediations, and communicate regularly with defense counsel about the case’s value and settlement prospects. Defense counsel has an obligation to keep you informed of settlement demands and the potential for excess exposure.
When a Settlement Demand Is Made
- Demand that the insurer inform you. Like defense counsel, the insurer has an obligation to keep its policyholder informed of settlement demands and the potential for excess exposure. If you learn of a demand from a source other than the insurer or defense counsel, that failure to communicate may itself be evidence of bad faith.
- Put the insurer on notice in writing. If you believe the demand should be accepted, say so in writing. Document your position and the reasons you believe settlement is in your best interest. Create a record that demonstrates you acted reasonably and that the insurer was fully informed of the risk.
- Offer to contribute. If the settlement demand exceeds the policy limits, consider whether you are willing to contribute the excess to facilitate a settlement. An offer to contribute (even if the insurer should not require it) demonstrates the policyholder’s good faith and strengthens the record if the insurer unreasonably refuses to settle.
If the Insurer Refuses to Settle
- Document the refusal and the reasons given. If the insurer declines a settlement demand, request a written explanation of its reasoning. This documentation will be critical if an excess verdict results.
- Engage independent coverage counsel. The insurer-appointed defense attorney represents you in the underlying lawsuit but is not positioned to advise you on a coverage dispute with the insurer, and in North Carolina, is ethically prohibited from doing so, as counsel has an attorney-client relationship with both the insurer and you as the policyholder. You need a separate attorney, ideally one experienced in representing policyholders, to evaluate your rights and options.
Ward and Smith’s Insurance Counseling and Recovery Team advises business and professional policyholders on their rights when insurers refuse to settle, and represents policyholders in excess exposure, bad faith, and coverage disputes throughout North and South Carolina.
