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Third-Party Failure to Settle & Excess Liability in Washington

Liability insurance gives the insurer substantial control over settlement, but that control carries a duty to protect the insured. When a serious claim threatens to exceed the policy limits, Washington requires the insurer to evaluate settlement with fair and equal consideration for the insured's personal exposure—not merely the insurer's limited financial risk.

Current-law review: Sept. 13, 2026 Equal consideration Hamilton “no-limit” analysis Excess exposure can exceed policy limits
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Basic Settlement Duty The No-Limit Test Claim Evaluation Policy-Limit Demands Protecting the Insured Excess Judgments Assignments & Covenants Reasonableness Hearing Third-Party Standing Citizen Workflow Authorities

Washington imposes a good-faith settlement duty when the insured faces liability

A liability insurer ordinarily controls investigation, negotiation and settlement of claims against its insured. The insured, however, bears the financial consequences if a judgment exceeds the available insurance.

Washington therefore requires the insurer to give fair and equal consideration to the insured's interests when deciding whether a case should be settled or tried.

Hamilton v. State Farm Insurance Co.
83 Wn.2d 787, 523 P.2d 193 (1974)

Washington's foundational modern failure-to-settle decision. When the investigation discloses liability on the insured's part, the insurer has an affirmative duty to make a good-faith attempt to effect settlement.

The insurer has no absolute obligation to settle every claim. A carrier may reasonably litigate a bona fide dispute over liability or damages. The question is whether the settlement decision fairly considered the insured's risk.

Washington uses the “no-limit” test to measure equal consideration

Policy limits create an obvious conflict.

Suppose the insurer has only $100,000 at risk but the insured faces a potential $1 million judgment. A trial gamble can therefore look much more attractive to the insurer than to the insured.

Washington's solution is to evaluate the decision as though that financial asymmetry did not exist.

Hamilton v. State Farm Insurance Co.
83 Wn.2d 787, 523 P.2d 193 (1974)

Approved use of the “no-limit” approach: settlement should be evaluated as though there were no policy limit restricting the insurer's financial exposure.

No-limit test: ask how an ordinarily prudent insurer would evaluate settlement if it effectively bore the entire potential judgment rather than only the amount of its policy limit.
This does not guarantee settlement. It prevents the carrier from taking a litigation risk primarily because the insured—not the carrier—will bear most of the loss if the gamble fails.

Settlement analysis requires realistic evaluation of both liability and damages

A proper Washington evaluation should account for the complete trial risk.

Liability

How likely is an adverse verdict?

Consider witnesses, police evidence, comparative fault, admissions, physical evidence and applicable law.

Damages

How large could the verdict be?

Evaluate medical evidence, future care, earnings, permanent impairment, noneconomic damages and wrongful-death exposure where applicable.

Limits

How much is the insured personally exposed?

Compare realistic verdict exposure with all available primary, umbrella and excess insurance.

Hamilton v. State Farm Insurance Co.
83 Wn.2d 787, 523 P.2d 193 (1974)

The Supreme Court upheld submission to the jury of whether the carrier had failed to give proper weight to the seriousness of the injuries and the possibility of a verdict substantially exceeding policy limits.

Confidence in the defense is not enough. A carrier must evaluate the downside risk realistically rather than assuming that a favorable defense verdict is certain.

A policy-limit demand should create a clear settlement opportunity

A serious-injury claimant may offer to resolve the claim within the available liability limits.

A useful demand should make the settlement opportunity understandable and capable of evaluation. Depending on the case, it may identify:

  • the insured and claim number;
  • the date and circumstances of the crash;
  • the liability evidence;
  • comparative-fault issues;
  • the injuries and medical treatment;
  • economic and noneconomic damages;
  • the amount demanded;
  • what claims and parties will be released;
  • material liens or reimbursement issues;
  • the information needed to complete evaluation; and
  • a reasonable deadline appropriate to the circumstances.
The objective is a genuine opportunity to protect the insured. The demand should allow the carrier to understand what settlement will accomplish and to evaluate it against the insured's exposure.
There is no substitute for clarity. Uncertain release terms, unresolved parties, ambiguous conditions or an impracticable deadline can create disputes over whether a genuine settlement opportunity actually existed.

The insurer should investigate enough to make an informed settlement decision

The settlement duty and investigation duty operate together.

An insurer cannot intelligently decide whether to expose its insured to trial without knowing enough about:

  • fault;
  • causation;
  • injury severity;
  • past and future damages;
  • available defenses;
  • other claimants competing for limits;
  • other insurance;
  • settlement opportunities; and
  • the insured's potential excess exposure.
Besel v. Viking Insurance Co. of Wisconsin
146 Wn.2d 730, 49 P.3d 887 (2002)

The underlying claim involved repeated policy-limit demands, serious injuries, poor insurer communications, delayed investigation and failure to protect the insured before litigation. Washington ultimately treated the insurer's bad-faith settlement conduct as capable of producing damages well beyond its $25,000 liability limit.

The insured must be kept informed when personal assets are at risk

Settlement negotiations affect the insured directly when the potential judgment exceeds available coverage.

Important information can include:

  • the claimant's settlement demand;
  • the available liability limits;
  • the insurer's liability assessment;
  • realistic verdict exposure;
  • the possibility of an excess judgment;
  • whether additional insurance has been located;
  • whether the claimant is willing to settle within available limits; and
  • whether the insured may need independent advice concerning personal exposure.
Tank v. State Farm Fire & Casualty Co.
105 Wn.2d 381, 715 P.2d 1133 (1986)

Requires fair dealing and equal consideration of the insured's interests. In a reservation-of-rights defense, all settlement offers must be communicated and the insured must be kept fully informed.

The carrier's $100,000 limit does not make a $1 million verdict a $100,000 problem for the insured. The insurer's settlement analysis must account for the insured's entire risk.

What if the settlement demand exceeds the policy limits?

A demand above the primary limit does not necessarily eliminate the carrier's responsibility to respond intelligently.

Depending on the circumstances, the insurer may need to:

  • communicate the demand to the insured;
  • identify the amount exceeding the insurer's limit;
  • determine whether the insured is willing or able to contribute;
  • notify an excess carrier;
  • evaluate whether paying the carrier's own limit can facilitate settlement; and
  • engage in meaningful negotiations rather than simply reject the demand.
Truck Insurance Exchange v. Century Indemnity Co.
76 Wn. App. 527, 887 P.2d 455 (1995)

Explains that an insurer's good-faith settlement duty includes investigation, informed negotiation and evaluation as though the insurer bore the entire risk. An above-limits offer should be communicated to the insured so possible contribution can be considered.

Several injured claimants can complicate a policy-limits settlement

One collision can produce claims whose combined value greatly exceeds the available per-accident limit.

The insurer then must consider the competing interests of its insured and the claimants rather than mechanically paying the first demand without evaluating the consequences.

Coverage inventory becomes critical. Determine per-person and per-accident limits, all injured claimants, additional liability policies, employer or commercial coverage, umbrella insurance and other sources before assuming the primary policy represents the complete settlement fund.

Bad-faith failure to settle can expose the insurer beyond its policy limit

The reason the settlement duty matters is straightforward: a carrier that improperly rejects a reasonable opportunity to protect its insured can become responsible for damage caused by that decision.

Hamilton v. State Farm Insurance Co.
83 Wn.2d 787, 523 P.2d 193 (1974)

State Farm had a $10,000 liability limit. Settlement opportunities below that limit were rejected, and the second trial produced a $45,000 judgment. Washington allowed the insured's excess-loss claim to proceed.

Besel v. Viking Insurance Co. of Wisconsin
146 Wn.2d 730, 49 P.3d 887 (2002)

Reaffirms Washington's long-standing rule that bad-faith refusal to settle can result in liability exceeding the contractual policy limits.

An excess verdict alone does not prove bad faith. The settlement decision is judged from the information and circumstances confronting the carrier when it acted—not simply from hindsight after trial.

The insurer is not required to possess the gift of prophecy

Washington recognizes that trials are uncertain.

A reasonable, informed decision to defend a genuinely disputed case does not become bad faith merely because the jury later returns a large verdict.

Hamilton v. State Farm Insurance Co.
83 Wn.2d 787, 523 P.2d 193 (1974)

Recognizes that a mistaken prediction about a jury verdict is not by itself proof of insurer misconduct. The question is whether the carrier used proper care and gave the insured's risk fair consideration.

The insured and claimant may respond to bad-faith settlement handling with an assignment and covenant

When an insurer leaves an insured facing serious excess exposure, the claimant and insured may sometimes resolve the underlying liability case through a structured settlement.

A common Washington structure can include:

  • a stipulated or covenant judgment;
  • a covenant not to execute against specified insured assets;
  • assignment of the insured's claims against the insurer; and
  • a judicial determination that the settlement amount is reasonable.
Besel v. Viking Insurance Co. of Wisconsin
146 Wn.2d 730, 49 P.3d 887 (2002)

Holds that a covenant not to execute does not eliminate the insured's harm from insurer bad faith. A covenant judgment judicially determined to be reasonable can become the presumptive measure of the insured's bad-faith damages.

Washington does not treat the covenant as automatically eliminating injury to the insured. Otherwise the carrier whose misconduct created the excess exposure could benefit because the insured found a means to protect personal assets.

Washington uses a reasonableness hearing to protect against inflated covenant settlements

RCW 4.22.060 establishes the statutory procedure for specified releases, covenants not to sue, covenants not to enforce judgment and similar agreements.

Before entering such an agreement during litigation, a party generally must provide five days' written notice to the other parties and the court, including a copy of the proposed agreement. The court then conducts a reasonableness hearing.

The party requesting approval bears the burden of proving reasonableness.

Washington reasonableness analysis considers nonexclusive factors including:

  • the claimant's damages;
  • the merits of the claimant's liability theory;
  • the merits of the settling defendant's defenses;
  • relative fault;
  • risks and expense of continued litigation;
  • the defendant's ability to pay;
  • evidence of bad faith, collusion or fraud;
  • the extent of investigation and preparation; and
  • the interests of parties who are not released.
Besel v. Viking Insurance Co. of Wisconsin
146 Wn.2d 730, 49 P.3d 887 (2002)

Uses Washington's reasonableness process to balance encouragement of legitimate settlements against the danger of collusive or inflated covenant judgments.

A stipulated number does not become binding merely because the claimant and insured agree to it. Judicial reasonableness is an essential safeguard when that amount will later be asserted against the insurer.

The insurer's bad-faith settlement duty runs to its insured—not directly to the injured claimant

Tank v. State Farm Fire & Casualty Co.
105 Wn.2d 381, 715 P.2d 1133 (1986)

The Washington Supreme Court held that an injured third-party claimant may not directly sue the tortfeasor's insurer for breach of the insurer's good-faith duty under the liability policy.

The duty exists because of the insurer-insured relationship. The carrier's obligation is to protect its policyholder from unreasonable exposure while exercising the settlement authority conferred by the policy.

A third-party claimant may later stand in a different procedural position if valid rights are assigned by the insured, as occurred in Besel.

Washington's claims regulation also addresses clear-liability settlements

WAC 284-30-330 identifies specific unfair claims settlement practices.

Under the version effective on September 13, 2026, the regulation includes:

Not attempting in good faith to effectuate prompt, fair and equitable settlement of claims in which liability has become reasonably clear.

The regulation specifically notes prompt payment of property-damage claims to innocent third parties in clear-liability situations.

Regulatory violation and assigned insurer bad-faith liability are separate legal questions. The WAC establishes claims-handling standards; the insurer's liability to its insured depends on the applicable bad-faith law and resulting harm.

A proper settlement record should show what the insurer knew and when it knew it

Record Why it matters
Policy and declarations Establish available liability limits and settlement authority.
Liability investigation Shows evidence concerning fault and comparative fault.
Medical and damage evidence Shows the carrier's information concerning potential verdict value.
Settlement demands Establish opportunities to resolve the claim and their terms.
Insurer responses Show acceptance, rejection, counteroffers, requests for information or silence.
Communications with insured Show whether excess exposure and settlement opportunities were disclosed.
Defense evaluations May show realistic assessments of liability, damages and trial risk.
Excess-carrier communications Can establish additional insurance and evaluation of catastrophic exposure.

Citizen workflow for a Washington policy-limits settlement

Identify every liability policy. Do not make a limits demand before determining whether owner, driver, employer, commercial, umbrella or excess insurance also exists.
Verify the actual limits. Distinguish per-person, per-accident and property-damage limits.
Document liability. Preserve police evidence, witnesses, photographs, video, vehicle data and admissions.
Document damages sufficiently for meaningful evaluation. Supply material medical and loss information appropriate to the demand.
Make the settlement proposal clear. State the amount, release terms, parties and material conditions.
Allow a reasonable evaluation opportunity. The appropriate period depends on complexity, available information, injury severity and circumstances.
Keep the demand and proof of delivery. Preserve the complete settlement communication rather than only an adjuster's summary.
Track the carrier's response. Record requests for additional information, counteroffers, denials and periods of silence.
Determine whether the insured was informed. Serious excess exposure should not remain hidden from the person whose assets are at risk.
If a demand exceeds limits, identify possible contribution and excess insurance. Do not assume an above-limits demand ends settlement responsibility.
Preserve evidence existing when the settlement decision was made. Failure-to-settle conduct is evaluated from that contemporaneous record, not merely from the eventual verdict.
If the insured and claimant later enter a covenant settlement, follow RCW 4.22.060. Address notice, judicial reasonableness and the burden of proving the amount reasonable.
Separate the claimant's tort case from the insured's insurer-conduct claim. The insurer's settlement duty belongs to its insured; assignments and covenant procedures can affect who later prosecutes that claim.

Primary authority behind this guide

RCW 48.01.030 — Insurance good faith

Supplies Washington's statutory good-faith foundation requiring honesty, equity and fair dealing in insurance matters.

WAC 284-30-330 — Unfair claims settlement practices

Identifies insurer conduct Washington defines as unfair, including failure to attempt prompt, fair and equitable settlement when liability has become reasonably clear.

RCW 4.22.060 — Effect and reasonableness of settlement agreements

Establishes notice and judicial reasonableness procedures governing specified releases, covenants not to sue, covenants not to enforce judgment and similar agreements.

Leading Washington cases

Hamilton v. State Farm Insurance Co.
83 Wn.2d 787, 523 P.2d 193 (1974)

Foundational failure-to-settle authority. Requires fair consideration of the insured's interests and approves evaluation of settlement as though no policy limit insulated the insurer from the full trial risk.

Tank v. State Farm Fire & Casualty Co.
105 Wn.2d 381, 715 P.2d 1133 (1986)

Establishes fair dealing and equal consideration, requires settlement communication in reservation-of-rights cases, and holds that third-party claimants do not directly possess the insurer's good-faith duty owed to the insured.

Safeco Insurance Co. of America v. Butler
118 Wn.2d 383, 823 P.2d 499 (1992)

Important authority on bad-faith harm, covenant-not-to-execute agreements and remedies extending beyond ordinary contract limits.

Besel v. Viking Insurance Co. of Wisconsin
146 Wn.2d 730, 49 P.3d 887 (2002)

Holds that a covenant not to execute does not eliminate harm caused by insurer bad faith and that a reasonable covenant judgment can serve as the presumptive measure of bad-faith damages.

Truck Insurance Exchange v. Century Indemnity Co.
76 Wn. App. 527, 887 P.2d 455 (1995)

Explains investigation, negotiation and settlement duties where primary and excess exposure exist and requires settlement evaluation from the standpoint of the insured's entire risk.

Bottom line

Washington gives liability insurers substantial settlement control but requires them to exercise that control with equal consideration for the insured's interests. When serious damages threaten an excess judgment, the carrier must realistically investigate liability and damages, communicate material settlement opportunities, and evaluate the case as though it—not merely the insured—bore the full risk of an adverse verdict. A carrier is not required to settle every disputed claim, and hindsight alone does not establish bad faith. But a bad-faith refusal to use a reasonable opportunity to protect the insured can expose the insurer to damages far beyond its stated policy limit. Washington's covenant- judgment and reasonableness procedures provide an additional mechanism for protecting an insured abandoned to excess exposure.

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Public legal education only. Current Washington insurance policies, statutes, regulations and controlling appellate decisions govern. Failure-to-settle disputes are highly fact dependent and can turn on contemporaneous liability evidence, damages, settlement terms, available limits, insurer communications, defense evaluations, excess insurance, and the information reasonably available when the settlement decision was made.