The insurer may repudiate liability and refuse to defend, in which case the insurer must accept the risk that its determination of no coverage was incorrect; or the insurer may protect itself by providing a defense under a reservation of rights. Elliott v. Cas. Ass'n of Am., 254 Mich. 282, 286-87, 236 N.W. 782, 783 (1931); see also Kirschner v. Process Design Assocs., Inc., 459 Mich. 587, 593-94, 592 N.W.2d 707, 709 (1999) (stating that "once an insurance company has denied coverage to an insured and stated its defenses, the insurance company has waived or is estopped from raising new defenses"). Where an insurer breaches its duty to defend, the insured is released from its obligation to give the insurer an opportunity to contest liability and is free to settle the claim with the third party.Alyas v. Gillard, 180 Mich. App. 154, 160, 446 N.W.2d 610, 613 (1989) (per curiam).

Under the second option, the failure to undertake a defense is a breach of the policy. Elliott v. Cas. Ass'n of Am., 236 N.W. 782, 783 (Mich. 1931); Zurich Ins. Co. v. Rombough, 180 N.W.2d 775, 778 (Mich. 1970). “Upon notice, there is some burden on the insurer to act to protect its interests or those of its insured.

"Elliott v. Cas. Ass'n of Am., 254 Mich. 282, 288, 236 N.W. 782 (1931) (quoting Butler Bros. v. Am. Fidelity Co., 139 N.W. 355 (Minn. 1913)).

Most courts that have considered this issue have held that a settlement is presumptive evidence of the liability of the insured and the amount of damages, and that the insurer has the burden of rebutting this presumption by showing that the settlement was unreasonable or in bad faith. E.g., St. LouisDressed Beef Provision Co. v. Maryland Casualty Co., 201 U.S. 173, 182, 26 S.Ct. 400, 403, 50 L.Ed. 712, 717 (1906); Boutwell v. Employers' Liability Assurance Corp., 175 F.2d 597, 601 (5 Cir. 1949); Kershaw v. Maryland Casualty Co., 172 Cal.App.2d 248, 256-257, 342 P.2d 72, 78 (1959); Missionaries of Co. Mary, Inc. v. Aetna Cas. S. Co., 155 Conn. 104, 230 A.2d 21, 26 (1967); Elliott v. CasualtyAssociation of America, 254 Mich. 282, 236 N.W. 782, 783-784 (1931); Butler Brothers v. American Fidelity Co., 120 Minn. 157, 139 N.W. 355, 359 (1913); Brinkman v. Western AutomobileIndemnity Association, 205 Mo.App. 71, 218 S.W. 944, 945-46 (1920); Mitchell v. Lindstrom, 12 App. Div.2d 813, 209 N.Y.S.2d 923, 927, motion for leave to appeal den., 9 N.Y.2d 613, 217 N.Y.S.2d 1025, 176 N.E.2d 407 (1961). This rule is consistent with the general assumption that in the absence of contrary evidence, persons act fairly, honestly, and in good faith.