Duty to settle refers to an insurance company’s (insurer’s) obligation to make reasonable efforts to settle a claim against its insured (policyholder). This duty comes from the implied promise (covenant) of good faith and fair dealing that most courts recognize in liability insurance policies.

Most states require a demand within policy limits to trigger an insurer's duty to settle—and some states require a demand within policy limits or some expression of interest (from the injured claimant) in settlement or an "opportunity to settle.”

But in some states the insurer has an affirmative duty to initiate settlement negotiations and cannot wait for a policy limits demand. And in Florida, bad faith may be inferred from a delay in settlement negotiations that is willful and without reasonable cause.

An insurance company generally must accept a settlement offer that is (1) reasonable and (2) within policy limits when there is a substantial likelihood that a verdict at trial will exceed the policy limits. This duty to settle applies to primary insurance coverage as well as excess insurance coverage.

When an insurance company breaches its duty to settle, it can be held liable for the full verdict against its insured policyholder—including amounts in excess of the policy limits. And some jurisdictions (state courts, federal district courts) also allow the recovery of punitive damages, attorney fees, prejudgment interest, postjudgment interest, economic losses caused by the insurer’s breach of its duty to settle, and emotional distress.

In Arizona, the duty to settle is an obligation of an insurance company to make reasonable efforts to settle a claim against its policyholder. This duty arises from the implied covenant of good faith and fair dealing inherent in liability insurance policies. Arizona law requires that an insurer act in good faith and deal fairly with its insured by not exposing them to the financial risks of a judgment exceeding policy limits when there is a reasonable opportunity to settle within those limits. If an insurer receives a reasonable settlement offer that is within the policy limits and there is a substantial risk of a verdict exceeding those limits, it generally must accept the offer. Failure to do so may constitute bad faith, and the insurer could be held liable for the entire judgment amount, even if it exceeds the policy limits. Additionally, the insurer may be responsible for other damages, such as attorney fees and emotional distress, if it is found to have breached its duty to settle. Unlike some states, Arizona does not require a demand within policy limits to trigger the duty to settle, but the insurer must act reasonably when a settlement opportunity arises.