ADDITIONAL INSUREDS CAN PROCEED ON BAD FAITH CLAIM TO RECOVER THEIR SETTLEMENT PAYMENTS MADE WITHOUT THE CARRIER’S PERMISSION (New Jersey Federal)

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This case involved one named insured and two additional insureds under a single policy. All three were sued for negligence in a serious personal injury action, and the carrier provided a defense to all three in that action.

The policy limit was $1,000,000.  The underlying plaintiff sought $7,000,000 in the litigation, but agreed to settle for $650,000 for all three insureds. The carrier offered $250,000 to settle for all three of its insureds. Plaintiff did not respond to that offer.

The two additional insureds settled on their own, without the carrier, for $350,000.  The case proceeded against the named insured, which was still being defended by the carrier’s appointed defense counsel.  The named insured’s defense successfully focused on blaming the two “empty chair” defendants.

The settling additional insureds brought this action for bad faith breach of contract to recover the $350,000 settlement payment from the carrier. The carrier moved to dismiss the claim, and the court denied that motion.

General Bad Faith Standards

The court observed generally:

  1. Under New Jersey law, an insurer “has a positive fiduciary duty to take the initiative and attempt to negotiate a settlement within the policy coverage.”

  2. An insured has a cause of action against an insurer “whose bad faith in refusing to settle a personal injury action within its policy limits exposed its insured to a jury verdict substantially in excess of the policy limits.”

  3. “Good faith” requires an insurer consider both the insured’s and its own interests “in deciding whether or not to settle the case within the limits of the policy. The [insurer] must weigh the conflicting interests by making its decision to settle or go to trial as if it had full coverage for whatever verdict may be recovered, regardless of policy limits.”

  4. Where the insurer acts in bad faith in not settling, “an insured [is] permitted to [s]ettle the tort claims … and then recover from the insured the amount paid in settlement … up to the policy limits, provided that such sums were reasonable and were paid in good faith.”

Insureds Taking Settlement into Their Own Hands, and Bad Faith

Applying these principles, the court denied the insurer’s motion to dismiss.

The court first rejected the argument that the insured had breached the duty to cooperate by settling without the insurer’s permission. It observed, “where the insurer first violates its own contractual obligation to consider, in good faith, the insured’s interests in settlement, the insurer forfeits the right to control the settlement.” Under those circumstances, an insured “may ‘proceed to make a prudent good faith settlement,’ then ‘upon proof of the breach of the insurer’s obligation and the reasonableness and good faith of the settlement made … [the insured may] recover the amount [paid],’ up to the policy limit.”

Thus, the issue became whether the insured adequately pleaded the insurer’s bad faith failure to settle within policy limits.

Case does not have to be Tried to Verdict to Raise a Bad Faith Claim

The court rejected the argument that a case had to be tried to verdict before a bad faith claim could be pursued. Rather, the insured only has to plead it was exposed to a potential excess verdict. In this case, the insured adequately pleaded the potential liability exceeded the $1,000,000 policy limits.

The Factual Allegations are Adequate to State a Bad Faith Claim

The court also found plaintiff alleged sufficient facts “to raise a right to relief above the speculative level.” The complaint alleged a potential multi-million dollar exposure; that the $250,000 offer did “not reflect a good faith effort to consider the insureds’ interests, and instead was a self-interested calculation that trial was worth the risk, given its own exposure was limited to $1 million”; the insurer’s “refusal to appropriately consider settlement forced [the insureds] to independently settle, leaving [the named insured], represented by [the carrier]-paid and directed attorneys, the sole defendant at trial.”

As to this last averment, that the carrier controlled the defense of one insured while the additional insureds were effectively defenseless before the jury, “[t]his allegedly allowed [the insurer] to use the ultimately successful strategy at trial of placing total fault on the ‘empty chairs’….” The additional insureds alleged bad faith maneuvering in how defense counsel purportedly manipulated the jury verdict form to omit the additional insureds from allocation of fault. The additional insureds alleged that this conflicted with the carrier’s trial strategy of blaming the empty chairs, and reflected a post hoc effort to justify the insurer’s failure to engage in settlement.

The carrier’s response went primarily to the facts, which functionally undermined its argument at the motion to dismiss stage. For example, the insurer argued its $250,000 offer was meaningful, and that there were significant liability questions on which the case could be defended. At the pleading stage, however, the court had to take the insured’s facts as true, and draw all reasonable inferences from the insured’s facts as pleaded, while discounting the insurer’s facts that included matters outside the complaint.

Date of Decision: October 15, 2020

Brightview Enterprise Solutions, LLC v. Farm Family Cas. Ins. Co., U.S. District Court District of New Jersey No. 20-CV-7915 SDW/LDW, 2020 WL 6074474 (D.N.J. Oct. 15, 2020)

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