Buyout Settlement Clause

Reviewed by Athena | Updated on Aug 27, 2020

Introduction

A buyout settlement clause is a provision in an insurance policy that allows the insured to reject a proposed claim settlement made by the insurance company and the claimant.

The aim of an insurance company is to defend the interests of the person taking the insurance policy, against third party claimants. If a claim is filed against the insured party, the insurance company collects all information related to the claim, as well as handles the legal expenses of defending the policyholder in a court of law. The insurance company, then, makes a settlement to the claimant, which the insured may not agree with and can hence choose to reject the claim.

Understanding Buyout Settlement Clause

Most often, insurance companies settle amounts with third-party claimants without taking matters into court. However, in some cases, the insured persons do not agree with the amount or terms of the settlement.

Under the buyout settlement clause, the insurer settles the amount with the insured, and therefore “buys out” the claim. It is done to remove the insurer from any further obligation for defending claims once they have been rejected by the insured.

The insured may still proceed with the case, but it will be thereafter done at their own risk. The costs could exceed the buyout settlement where the insured pays for it out of their own pocket or could be less than it, where the insured can keep the difference.

Why is a Buyout Settlement Clause Needed?

Many policyholders prefer to settle cases quickly rather than undertake prolonged negotiations, which could possibly damage the business’ reputation in addition to excessive legal fees.

However, in some cases, the policyholder may feel that the case lacks basis and would prefer to not settle the claim on the terms of the claimant. Hence, the insurance company, in its need to close the claim and not expend any more money on legal costs, has a buyout settlement clause in its contract.