As a general rule an insurer is liable to an insured for failing to settle a case within the policy limits “if no reasonable insurer would have failed to settle the case within the policy limits.” Hartford Casualty Ins. Co. v. New Hampshire Ins. Co., 417 Mass. 115, 121 (1994).
I am not aware of any Massachusetts case that discuss the duty of an insurer to settle where the insurer is defending under a reservation of rights. However, an insurer and an insured may agree that the insurer will settle a case within the policy limits and then seek indemnification from the insured on the grounds that there was no coverage under the policy. Medical Malpractice Joint Underwriting Ass’n v. Goldberg, 425 Mass. 46, 56 and fn 26 (1997). If the insured agrees to those terms, there is no reason why the general rule should not apply.