What is a Buyout Settlement Clause and Why You Should Know About It

What is a Buyout Settlement Clause – If you have a liability insurance policy, you may have come across a term called the buyout settlement clause. This is a provision that gives you the right to reject a settlement offer made by your insurer and the claimant, and instead receive the settlement amount as a buyout payment from your insurer. Sounds confusing? Let’s break it down.


How Does a Buyout Settlement Clause Work?

A buyout settlement clause is usually found in liability insurance contracts, such as business liability, media liability, or professional liability insurance. These types of insurance protect you from lawsuits arising from your actions or omissions that cause harm or damage to others.

For example, suppose you own a restaurant and a customer slips and falls on your premises, injuring themselves. They sue you for negligence and demand compensation for their medical bills, lost wages, and pain and suffering. Your business liability insurance policy covers this type of claim and provides you with legal defense and indemnification.

However, your insurer may not agree with your view of the case. They may think that the claim is valid and that it is better to settle it quickly and avoid going to court. They may offer to pay the claimant a certain amount of money to drop the lawsuit and release you from any further liability.

But what if you disagree with this decision? What if you think that the claim is frivolous or exaggerated, or that you can negotiate a lower settlement amount later? In this case, you can exercise your right under the buyout settlement clause and refuse the settlement offer.

By doing so, you are telling your insurer that you want to handle the case on your own, without their involvement. Your insurer will then pay you the amount they had offered to the claimant as a buyout payment. This payment effectively ends your relationship with your insurer for this claim. You are no longer covered by them and they are no longer responsible for any future costs or liabilities arising from this claim.

You can then use the buyout payment to either settle the case with the claimant on your own terms or fight the lawsuit in court. However, you also bear the risk that the outcome may not be favorable to you. You may end up paying more than the initial settlement offer or losing the case altogether.

Why Should You Care About a Buyout Settlement Clause?

A buyout settlement clause can be beneficial or detrimental to you, depending on the situation. Here are some possible advantages and disadvantages of using this clause:


  • You have more control over your case and can decide whether to settle or litigate.
  • You may be able to save money by settling for less than the buyout payment or winning the case in court.
  • You may be able to protect your reputation by avoiding an admission of guilt or liability.
  • You may be able to avoid future claims from the same incident by obtaining a full release from the claimant.


  • You lose the protection and support of your insurer for this claim.
  • You may have to pay more than the buyout payment if you lose the case or settle for more later.
  • You may have to incur additional legal fees and expenses to handle the case on your own.
  • You may face more stress and uncertainty by going through a lengthy and complex litigation process.

How to Use a Buyout Settlement Clause Wisely

A buyout settlement clause is not something that you should use lightly or impulsively. It is a serious decision that can have significant consequences for you and your business. Therefore, before exercising this clause, you should consider the following factors:

  • The strength of your case and the likelihood of winning or losing in court
  • The amount of the settlement offer and how it compares to your potential damages and costs
  • The reputation and credibility of your insurer and their willingness to defend you
  • The reputation and credibility of the claimant and their willingness to negotiate
  • The impact of settling or litigating on your public image and customer relations
  • The availability and quality of legal counsel and representation
  • The time and resources required to handle the case on your own

You should also consult with your lawyer before making any decision regarding a buyout settlement clause. They can advise you on the pros and cons of using this clause, as well as help you negotiate with your insurer and the claimant.

What is the Difference Between a Buyout Settlement Clause and a Consent to Settle Clause?

A buyout settlement clause is a contractual provision often found in liability insurance contracts. This clause provides the policyholder with the right to reject a settlement offer made by the insurer. If the insured party exercises this right, the insurance company buys out the policy. The policyholder can use this money to settle the claim on their own, without the support of their insurance provider.

On the other hand, a consent-to-settle clause generally requires that an insurer obtain its insured’s consent before settling a claim, where the insured’s consent shall not be unreasonably withheld. These clauses are included in most professional liability policies and are often found within a policy’s defense and settlement provisions.

What are the Tax Implications of a Buyout Settlement Clause?

The tax implications of a buyout settlement clause depend on the nature and origin of the claim, as well as the terms of the insurance policy and the settlement agreement.

Generally, the buyout payment is treated as a reimbursement of the insured’s legal expenses and is not taxable to the insured. However, if the buyout payment exceeds the insured’s legal expenses, the excess amount may be taxable as income or capital gain, depending on the type of claim. For example, if the claim relates to lost profits or income, the excess amount may be taxable as ordinary income. If the claim relates to damage to a capital asset, the excess amount may be taxable as a capital gain.

The insurer, on the other hand, may deduct the buyout payment as an ordinary and necessary business expense, unless it is specifically excluded by law. For example, fines and penalties are not deductible by the payer.

The tax treatment of a buyout settlement clause may vary depending on the facts and circumstances of each case. Therefore, it is advisable to consult a tax professional before exercising or agreeing to a buyout settlement clause.

How to Avoid Conflicts with Your Insurer Over a Buyout Settlement Clause

There are some possible ways to avoid conflicts with your insurer over a buyout settlement clause, such as:

  • Communicate with your insurer regularly and transparently about the status and prospects of the claim, and seek their input and consent before making any settlement decisions.
  • Review your insurance policy carefully and understand the terms and conditions of the buyout settlement clause, including the scope, limitations, and consequences of exercising it.
  • Negotiate with your insurer to modify or waive the buyout settlement clause if you think it is unfair or unreasonable, or if you prefer to have more control over the settlement process.
  • Consult a legal professional to advise you on your rights and obligations under the buyout settlement clause, and to represent you in any disputes or litigation with your insurer or the claimant.
  • Consider alternative dispute resolution methods, such as mediation or arbitration, to resolve any conflicts with your insurer amicably and efficiently.

These are some general suggestions that may help you avoid or minimize conflicts with your insurer over a buyout settlement clause. However, every case is different and may require a specific approach depending on the facts and circumstances. Therefore, it is advisable to seek professional guidance before exercising or agreeing to a buyout settlement clause.

In conclusion, A buyout settlement clause is a provision in an insurance policy that allows you to reject a settlement offer made by your insurer and the claimant, and receive the settlement amount as a buyout payment from your insurer. This clause gives you more control over your case but also exposes you to more risk and responsibility.

Frequently Asked Questions (F&Qs)

How does insurance pay money?

Insurance is a contract in which a policyholder receives financial protection or reimbursement against losses from an insurance company. The company pools clients’ risks to make payments more affordable for the insured. When you buy insurance, you make payments to the company called “premiums”. In exchange, you are covered by certain risks, and the company agrees to pay you for losses if they occur. Insurance is based on the idea that spreading the risk of a loss among many people makes the risk lower for all.

What is a 50% hammer clause?

A 50% hammer clause is a type of coinsurance hammer clause in an insurance policy. With a 50/50 coinsurance hammer clause in place, the insurer and the insured split costs evenly. This is a fairly standard arrangement, although it does occur less frequently than the 80/20 split.

What is an example of a buyout clause?

There are many different types of buyout clauses, and they can be found in various types of contracts. One example of a buyout clause is in a lease agreement, where the lessee has the option to purchase all the rights of the lease by making a payment to the lessor. Another example is in an executive agreement, where the company agrees to pay the executive a buyout payment in an amount equal to twelve months of the executive’s base salary in effect at the time of the buyout payment.