DEFINITION of 'Buyout Settlement Clause'

An insurance contract provision that allows the insured to refuse a settlement offer proposed by the insurer and the claimant. A buyout settlement clause removes the insurer from having any further responsibility for defending against the claim.

BREAKING DOWN 'Buyout Settlement Clause'

When an insurance company underwrites a new policy, it is agreeing to defend the interests of the policyholder against claims from third-parties. This is referred to as indemnification. If an individual or business files a claim against the insured’s policy, the insurance company will collect the relevant information to the claim, and will often handle the legal expenses associated with defending the policyholder in court. Often, the insurer is looking to reach a settlement with the claimant in order to avoid the courts making a decision on the amount of damages awarded.

In many cases, the policyholder will be open to settling the case quickly. This allows the policyholder to reduce any expenses associated with working on the case, and for a business, can reduce the possibility that a drawn out negotiation will damage the business’ reputation.

In some cases, however, the policyholder doesn’t approve of the terms of the settlement. This may be because the policyholder does not believe that the claim has merit, and that providing any settlement is similar to an admission of wrongdoing. Rejecting the claim puts the interests of the policyholder at odds with the desire of the insurer to reduce the cost of defending against a claim.

Buyout settlement clauses allow the insurer to remove itself from defending against the claim, thereby turning over the defense against the claim to the policyholder. To remove itself from further defense of the policyholder, the insurer will “buy out” by providing to the policyholder, the amount of the claim settlement that it negotiated. The insured will benefit from this option if it is able to fight the claim and settle for less than the amount of the buyout, but does bear the risk that the cost of defense could exceed the settlement amount.

RELATED TERMS
  1. Additional Expense Coverage

    Insurance coverage that provides funds for expenses above what ...
  2. Policyholder Surplus

    Policyholder surplus are assets of a mutual insurance company ...
  3. Return On Policyholder Surplus

    The ratio of an insurance company’s net income to its policyholder ...
  4. Developed Premium

    A premium based on estimates of a policyholder’s risk profile ...
  5. Claims Reserve

    The claims reserve is funds that are set aside for the future ...
  6. Future Purchase Option

    A future purchase option is a feature of long-term disability ...
Related Articles
  1. Insurance

    Understanding Taxes on Life Insurance Premiums

    Learn about the tax implications of life insurance premiums, including when they might be taxable and whether they are tax deductible.
  2. Insurance

    Is Loan Protection Insurance Right For You?

    Loan protection insurance can keep you from defaulting on your loans when you're in financial trouble, but it's not for everyone. Learn more on how it can help you.
  3. Insurance

    For Life Insurers, Making Money Is A Numbers Game

    Life insurance is a data-driven industry that relies on complex financial models to predict future expenses and income from premiums and investments.
  4. Insurance

    Behind the Law of Large Numbers in the Insurance Industry

    Discover how the law of large numbers helps insurance companies cope with risk, and why the theory does not always live up to reality.
  5. Insurance

    Life Insurance: How Long Does It Take To Get Paid?

    How to file for a life insurance payout – and how long it takes to receive it. Plus, new ways to plan for payments that provide an income stream.
  6. Managing Wealth

    An Introduction To Life Settlements

    A life settlement is the trading of a life insurance policy under specific circumstances. Learn what it's all about.
  7. Insurance

    The History Of Insurance In America

    Insurance was a latecomer to the American landscape, largely due to the country's unknown risks.
RELATED FAQS
  1. Can my insurance company refuse me coverage?

    Insurance isn't always as straightforward as other products. Insurers can deny coverage in many different instances:Non-Renewal ... Read Answer >>
  2. Can your insurance company cancel your policy without notice?

    Learn about your rights as an insured when it comes to your insurance policy being canceled, including how to access your ... Read Answer >>
  3. What are some examples of when insurance bundling is a bad idea?

    Learn about situations where insurance bundling may not be a favorable option. Bundling insurance is often a good idea, but ... Read Answer >>
  4. How are open market operations and monetary policy related?

    Understand the meaning of an aggregate limit in an insurance policy as well as which types of insurance companies are most ... Read Answer >>
  5. Why do insurance policies have deductibles?

    Learn the basic concept of an insurance deductible and why they mitigate moral hazards and provide financial viability to ... Read Answer >>
Hot Definitions
  1. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  2. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  3. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  4. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  5. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  6. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
Trading Center