A collusive suit (also referred to as a friendly suit) is a lawsuit where the parties are not actually in disagreement but are cooperating to steer the court towards some agreed-upon conclusion. As seen in United States v. Johnson, collusive suits are not allowed in federal court because they are not adversarial.
The possibility of collusive suits is particularly important in the field of insurance law. For example, two parties may agree to cause a car crash in an effort to collect an auto-insurance payout. To help mitigate this possibility, most insurance contracts include an exclusion for any injuries caused intentionally. In the event that the insurance company can show a given injury was caused with the intent to pursue a collusive suit, they will be absolved of their duty to indemnify the policyholder.
Nonetheless, collusive suits can occur in scenarios where an injury was not caused intentionally. Collusive suits sometimes arise when people accidently cause harm to their friends or family members. In these scenarios, the risks of a collusive suit are large because an insurance policyholder may want their friend/family member to receive a payout and thus the parties are not in disagreement.
To prevent this sort of collusive suit, most insurance contracts include a duty to defend. This duty to defend gives the insurance company the right, and the obligation, to provide and control counsel for any lawsuit that involves a claim for coverage. Similarly, the policyholder has a duty to cooperate with the reasonable interests of the insurance company which, if breached, absolves the insurance company of their duty to indemnify. In combination, these two duties help to limit the risk of a collusive suit.
[Last updated in July of 2022 by the Wex Definitions Team]