(concurring). I agree with the conclusion of the majority, but I write separately to emphasize that the duty to settle is not a contractual duty, as the dissent contends. Rather it is a fiduciary duty which only arises when the insurer assumes the exclusive management and control of the insured's defense. Because Badger State did not assume exclusive control of the management of the action against its insured, the insurer did not have a fiduciary duty to settle.
An insurer's duty to settle is not a contractual duty under the insurance policy in this case. The policy does not specify any such duty and this court has consistently held that the duty is not contractual in nature. In Hilker v. Western Automobile Ins. Co., 204 Wis. 1, 13, 231 N.W. 257, 235 N.W. 413 (1930, 1931), this court first considered the issue of whether an insurer had a duty to settle. Although the court recognized a duty to settle, it nonetheless carefully noted that the duty arose from the fiduciary relationship between the insurer and the insured, rather than the contract itself. The court specifically stated that "the contract imposes no duty at all a breach of which makes the insurer liable to the insured for a failure to settle or compromise a claim." Id.
In Anderson v. Continental Ins. Co., 85 Wis. 2d 675, 687, 271 N.W. 2d 368 (1978), the court again emphasized that the obligations recognized in Hilker derive *531from the fiduciary relationship between the insurer and the insured and not from a contractual duty. In fact, this court has consistently analyzed failure to settle cases as involving the "breach of a known fiduciary duty." Johnson v. American Family Mutual Ins. Co., 93 Wis. 2d 633, 646, 287 N.W. 2d 729 (1980); Alt v. American Family Mutual Ins. Co., 71 Wis. 2d 340, 348, 237 N.W. 2d 706 (1976). Consequently, the basis for liability in such cases is negligence. Id. at 354. In fact, "the burden of proof is higher than that required in most negligence cases. The claimant must assume the middle burden of proof, and the breach of the insurer's duty must be proved by clear and convincing evidence." Id.
The distinction between a fiduciary duty to settle and a contractual duty to settle has not been inadvertently recognized. This court's decision in Ott v. All-Star Ins. Corp., 99 Wis. 2d 635, 645-46, 299 N.W. 2d 839 (1981), specifically addressed the question whether the duty to settle is contractual. We stated in that decision that "[s]uch action, although it, of course, 'arises from' the contractual relation of the parties to an insurance policy, is founded in tort. . . . The insurer's liability under the action is thus often referred to as 'extracon-tractual. '" (Emphasis added.) Id. The extracontractual nature of the duty to settle was critical to the decision in Ott, in which we held that liability for failure to settle was not a proper subject for reinsurance:
"As stated above, an insurer's liability to his insured for tortious failure to settle within policy limits is 'extra-contractual.' Because such liability is not a risk against which protection is extended to the insured, it cannot, under the above definitions, be a proper subject for 'reinsurance.' By definition *532such risk cannot be reinsured." Id. at 652. (Emphasis added.)
In light of this authority, and the other authorities cited above, there can be no question that the duty to settle is not a contractual obligation.
The only contractual obligations under this liability policy are the duty to indemnify and the duty to defend. See Gross v. Lloyds of London Ins. Co., 121 Wis. 2d 78, 84, 358 N.W. 2d 266 (1984). Here, Badger State did not breach either obligation. It assumed the defense of the insured after the coverage trial, whereupon it negotiated a settlement with the claimant. Badger State also paid out the limits of the insured's policy in partial satisfaction of the settlement. The insurer therefore fulfilled its contractual duties to defend and to indemnify. The dissent therefore incorrectly would impose breach of contract liability on the insurer.
Badger State also did not breach the fiduciary duty to settle because that duty did not arise in this case until after Badger State assumed its insured's defense. The fiduciary duty to settle arises only when the insurer actually undertakes the management and control of an insured's case. The seminal case recognizing an insurer's duty to settle is Hilker. That case unequivocally bases such a duty on the fact of the insurer's exclusive control and management of the claim against the insured. The following passage from Hilker, 204 Wis. at 13-14, clearly states the basis for the duty to settle:
"In express terms the contract imposes no duty at all a breach of which makes the insurer liable to the insured for a failure to settle or compromise a claim. However, all courts are agreed that the insurer does owe to the insured some duty in this re*533spect. This duty is implied as a correlative duty growing out of certain rights and privileges which the contract confers upon the insurer. By the terms of this contract the absolute control of the defense of such actions is turned over to the insurer, and the insured is excluded from any interference in any negotiations for settlement or legal procedure. It is generally understood that these are rights and privileges which it is necessary for the insurer to have in order to justify or enable it to assume the obligations which it does in the contract of insurance. So long as the recovery does not exceed the limits of the insurance, the question of whether the claim be compromised or settled, or the manner in which it shall be defended, is a matter of no concern to the insured. However, where an injury occurs for which a recovery may be had in a sum exceeding the amount of the insurance, the interest of the insured becomes one of concern to him. At this point a duty on the part of the insurer to the insured arises. It arises because the insured has bartered to the insurance company all of the rights possessed by him to enable him to discover the extent of the injury and to protect himself as best he can from the consequences of the injury. He has contracted with the insurer that it shall have the exclusive right to settle or compromise the claim, to conduct the defense, and that he will not interfere except at his own cost and expense. It is quite apparent that this right was given to the insurance company to induce it to enter into the contract of insurance, and that it is a necessary right to be possessed by it if it is to write the insurance upon the terms stipulated. It is a right to be exercised by the insurer in its own interest."
The Hilker decision then imposed two settlement related duties on insurers: (1) the insurer must make a *534diligent effort to ascertain the facts upon which a good faith judgment may be predicated; and (2) the insurer must determine the probability that recovery will exceed the policy limits and make a full disclosure to the insured so that the insured may protect himself to the extent possible.
In Baker v. Northwestern Nat. Casualty Co., 22 Wis. 2d 77, 83, 125 N.W. 2d 370 (1963), the court added a third duty related to the duty to settle, and again, the court directly premised the duty on the insurer’s exclusive management of the case involved. The court stated:
"In addition to the duties stressed in the Hilker Case there must be added a third duty which is imposed upon the insurer as a result of the insured's surrendering to it the sole control of all settlement negotiations, namely, that of keeping the insured timely and adequately informed of any offers of settlement received from the claimant and of the progress of any settlement negotiations.” (Emphasis added.)
Finally, in Howard v. State Farm Mut. Automobile Ins. Co., 60 Wis. 2d 224, 227, 208 N.W. 2d 442 (1973), the court expressly made clear that the duty to settle is contingent on the insurer actually undertaking the exclusive management of the case:
"When, as here, the insurer undertakes and controls the defense of a claim against its insured, it has a duty not only to protect itself to the extent of its liability but it must act in good faith to protect the interest of its insured. If it fails to do so it is liable to its insured for the amount the insured required over and above the policy limits." (Emphasis added.)
*535Here, the factual predicate for the duty to settle is not present. Badger State expressly refused to defend the insured until after the coverage trial. In this situation, there is no need to make Badger State a fiduciary for the insured because the insured is not disabled from defending himself. Thus, I would conclude that Badger State did not have a duty to settle. As a result, it is unnecessary to even reach the question whether the insurer breached the duty.
The majority's conclusion does not cause the unfair result that the dissent claims. The dissent would resolve this case in favor of the insured solely on the basis that the insured cannot protect its own interests when the insurer refuses to defend or settle and, therefore, it is unfair to make the insured bear the risk of a rejected settlement offer. In fact, the fundamental premise of the dissent is false. It is unquestioned that the insured has the authority to reasonably settle a claim against him where the insurer refuses to defend, despite any consent to settlement clause in the policy. The court resolved this question in United States Guarantee Co. v. Liberty Mut. Ins. Co., 244 Wis. 317, 321, 12 N.W. 2d 59 (1943):
"The refusal of the defendant to perform its obligation to defend this action constituted such a breach of its contract as to release the assured or its sub-rogee from the condition contended for [the insurer's consent to settle]. In effect, it amounted to a waiver of this condition."
See also Patrick v. Head of Lakes Cooperative Elec. Ass'n., 98 Wis. 2d 66, 72-73, 295 N.W. 2d 205 (Ct. App. 1980) (when an insurer refuses to defend, it loses the right to control the defense or the settlement of the action).
*536The dissent's incorrect assumption that the insured cannot protect his own interests prior to the insurer's assumption of the defense also results in an incorrect measure of damages. The measure of damages when an insurer breaches its duty to defend includes: (1) the insured's costs for defending the suit; (2) the amount recovered from the insured, either by way of judgment or settlement, up to the policy limits; and (3) any additional damages caused by the insurer's breach. See American Motorist Ins. Co. v. Trane Co., 544 F. Supp. 669, 689 (W.D. Wis. 1982). The insured's damages are limited to the applicable policy limits because the insured, Under its duty to mitigate damages, must defend against the claim. See Buckner v. Buckner, 207 Wis. 303, 312, 241 N.W. 342 (1932). I believe the same rationale requires that the damages for refusing to settle, assuming liability, be similarly limited.
The refusal to defend gave the insured the right to settle, and, therefore, any excess judgment was not caused by the insurer's breach. The measure of contract damages in Wisconsin is the amount of the loss "which arise[s] 'naturally, according to the usual course of things,' from the wrong, and must be such as is ’reasonably to be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach of it.'" Reiman Associates v. R/A Advertising, 102 Wis. 2d 305, 320, 306 N.W. 2d 292 (Ct. App. 1981). Because the insured becomes obligated to defend, Buckner, 207 Wis. at 312, the size of the ultimate verdict is not increased by the insurer's failure to defend. In the absence of a bad faith refusal to defend, therefore, the insurer is only liable for the limits of policy coverage and the cost of the insured's defense.
*537The fact that the injured party did not make his settlement offer directly to the insured does not affect the majority's analysis. The insurer is not responsible for the injured party's failure to address its settlement offer to the appropriate party. This is particularly true in this case where Badger State expressly rejected the offer because it had not accepted the insured's defense. The injured party also knew that the insured was represented by alternative counsel prior to the coverage trial. In this situation, Badger State reasonably could assume that the injured party would make its offer directly to the insured, if it truly wanted to settle the case. I believe, however, that the injured party did not want to settle the case for the nominal value of its offer, and for that reason, he intentionally did not make his offer to the insured. He knew that he could only receive full compensation for his injuries, given the insured's lack of personal resources and the low policy limits, if the insured had a bad faith claim against his insurer. Thus, the injured party offered to settle only with Badger State because it knew that the insurer would not settle before the coverage trial. The injured party's insincere interest in settling clearly is indicated by his withdrawal of the offer immediately before the coverage trial. I conclude that the excess judgment against the insured is the result of the injured party's unwillingness to actually settle the case for a nominal amount, rather than any fault of the insurer.
I concur in the majority's decision.