Law students — please be aware that this is understatement:
Unsurprisingly, caselaw on coverage for inserting boar tusks into anesthetized patients is rather thin.
Actually, the whole article from which this is drawn Can This Pig Fly? How A Dentist Assaulted A Patient And Made A Million Dollars: Part One in a Two-Part Series and especially part two is pretty interesting and will teach you something about insurance law.
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Why are the damages for failure to defend higher than the amount of the actual settlement?
This does not seem to me to be a case where punitive damages against the insurer are justified. It is not right for the dentist to commit malpractice and end up richer as a result.
I suspect it is to discourage the insurance company from engaging in what would otherwise be economically rational efficient breach. The policy makes systemic sense if we consider the power/wealth disparity between the insurance company and the ordinary insured — even if it makes for potentially odd results in particular cases.