Insurance company Insco insures a technology company that makes parts for computers. The company sells those parts to Compco for incorporation into Compco's computers, which are then sold in the retail market. After Compco installs a number of the company's parts into its computers, the parts allegedly fail and cause physical damage to the computers sold by Compco.

Compco refuses to pay the insured its outstanding invoices for the purchase of the allegedly defective parts, and then it sues the insured for breach of contract and negligence to recoup the $13 million in costs associated with repairing and replacing the damaged computers. The insured counterclaims against Compco for $10 million — the value of the unpaid invoices — contending that its parts did not fail. The insured technology company tenders defense and indemnity of the lawsuit to Insco under the terms of its general liability policy, which accepts the defense under a reservation of rights, paying for defense counsel of the insured's choice.

After limited discovery in the litigation, representatives from Compco and the insured technology company agree to meet in an attempt to settle the litigation. A representative from Insco will not be at the meeting because Insco was only notified of the meeting via an e-mail sent after business hours the night before the meeting. In the e-mail, the insured tells Insco that it does not intend to make any cash payment to Compco to settle the matter, and that it is entirely possible the parties will agree to a “walk-away” settlement. The insured asks for Insco's position on indemnification of the insured for the settlement under these circumstances. The insured also tells Insco that it is reserving all rights to pursue covered losses not incorporated into the settlement. The morning of the meeting, Insco reads the e-mail and responds that it consents to further settlement negotiations, but because it will not be present at the settlement meeting, it reserves its rights to review the settlement for coverage and reasonableness of consideration offered by the insured.