Liability Insurance and Contractual Aspects of Settlement

Most civil litigation settles. Many settlements are paid by liability insurers following the negotiation of settlement agreements by the parties’ lawyers. Settlement agreements are contracts, and their interpretation and enforcement are therefore governed by contract law principles. The essential elements of a contract are offer, acceptance, and consideration.

In the liability insurance context as elsewhere, contract disputes connected to settlements typically center on either offer or acceptance. To be valid, a settlement offer must be capable of acceptance. The offer must be definite, and its material terms must be reasonably certain. When it comes to accepting a settlement offer, the “mirror image” rule applies in this context as it does in other contract formation scenarios.

Under this rule, an attempted acceptance that does not mirror the settlement offer in material respects becomes a counteroffer. If the claimant declines the counteroffer, there is no settlement. This turn of events can be enormously consequential if the insured’s potential liability exceeds its policy limits and litigation ensues.