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.

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