When a liability insurance policyholder is being sued, they refer that legal case to their insurer. If a claim in question falls within the four corners of a policy, the insurer handles the claim on behalf of the policyholder. If the matter goes to court, the court papers cite the policyholder (not the insurer) as the litigant. Also, a policyholder plays a critical role in assisting an insurer to defend the claim. In defending the claim, an insurer is at liberty to defend the action or settle it. Like any other litigant, there are many factors that an insurer considers in deciding whether to litigate or settle a matter. However, there may be an instance whereby an insurer decides to settle a claim whereas a policyholder believes that they are not legally liable, and therefore, the claim should not be settled. Unless properly addressed, this can be problematic because, if an insurer decides to settle such a claim, a policyholder is almost always expected to pay an excess (depending on the policy wording). Therefore, a decision to settle a claim may have financial implications for a policyholder, and if they believe that they are not legally responsible, a decision to settle may cause serious issues between an insurer and a policyholder.
To avoid problems in settling claims, almost all policies specifically include a clause that addresses the abovementioned predicament. This clause states that once a claim is referred to an insurer, an insurer takes over the claim and decides on how best to resolve it. Therefore, a decision to litigate or settle ordinarily lies with the insurer. It must be noted, however, that even in the absence of such a clause, the insurer would, by operation of law, still decide on the way forward – due to the principle of subrogation. Insurers, however, are encouraged to include this clause to avoid potential disputes with policyholders. No South African case law was found where such a dispute has arisen; however, there is an English case where a similar dispute arose, albeit with slightly different facts. In Beacon Insurance Co v Langdale, the insurer settled a claim without the knowledge of the policyholder. The insurer did not, however, admit the negligence of the policyholder. After the insurer settled the third-party's claim, the insurer sued the policyholder for the excess, as provided for in the policy. The policyholder disputed that he was liable and, therefore, he refused to pay. The court found that the insurer had acted properly and in a manner that was advantageous to both the policyholder and the insurer. This case demonstrates the kind of issues that may ensue where the policy does not sufficiently address the extent to which an insurer is able to control the litigation.
Whilst an insurer takes charge of a matter and handles it in a manner it deems fit, it must not unjustifiably admit liability. As stated above, settlement of a claim has financial implications for a policyholder, and therefore, any unjustifiable admission of liability may disadvantage the policyholder – for which an insurer may attract liability. The insurer must act reasonably at all times and settle a matter in line with the stipulations of the policy wording.
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