PRIMARY INSURER’S ALLEGED BAD FAITH FAILURE TO SETTLE RAISED BY EXCESS CARRIER COULD NOT BE DECIDED ON SUMMARY JUDGMENT; BAD FAITH IS DETERMINED FROM FACTS AT THE TIMES DECISIONS WERE MADE, NOT BY USING HINDSIGHT AFTER THE FINAL OUTCOME IS KNOWN (New Jersey Federal)

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The plaintiff-excess insurer sued a primary auto insurance carrier for failing to settle within its $1,000,000 policy limits. The case went to trial against the insured driver, and the jury verdict exceeded the $1,000,000 primary policy limit. Thus, the excess insurer wound up paying over $600,000, and it brought suit to recover those funds from the primary carrier.

The detailed history between the injured claimant and the primary insurer shows ongoing negotiations, a mediation, case assessments, and a suggested settlement by the trial judge. Almost none of these valuations or negotiations placed the case value in excess of $1,000,000.  In fact, the injured claimant and their counsel valued the case for settlement in the $600,000 to $750,000 range, though the claimant would not accept less than $750,000. (Claimant’s counsel would have agreed to a settlement in the $600,000 range.)  The primary carrier would not settle at $750,000, but did offer $600,000 at one time.

The case went to trial, resulting in a $1,400,000 verdict.

The umbrella carrier’s complaint alleged liability for the primary insurer’s breach of a duty to negotiate in good faith and settle, along with asserting it was equitably subrogated to the insured concerning the excess payments above the $1,000,000 limit.

Both sides moved for summary judgment, and both motions were denied. New Jersey District Judge Cecchi found material issues of fact remained to be decided.

Rova Farms analysis

Judge Cecchi set out the following standard:

Under the seminal case of Rova Farms Resort, Inc. v. Investors Ins. Co., 65 N.J. 474 (1974), a primary insurer is liable to an excess insurer for an excess verdict where the primary insurer failed to settle with a third-party claimant within the primary policy limit prior to trial, and where, prior to trial, (1) a jury could have potentially found liability for the third-party claimant and the potential verdict could have exceeded the primary policy limit, (2) the third-party claimant was willing to settle within the primary policy limit, and (3) the primary insurer did not negotiate in “good faith.”

The only disputed issue was whether the primary insurer did not negotiate in good faith.  The relevant legal principles applicable include:

  1. The primary insurer “has a positive fiduciary duty” to act in “good faith,” i.e., “to take the initiative and attempt to negotiate a settlement within the [primary] policy coverage.”

  2. Thus, a primary insurer’s “negotiation strategy” with the third-party claimant must have a “reasonable prospect for a successful outcome” for both itself and the excess insurer … such that the strategy is not infected with “dishonest[y]” or “negligence.”

  3. Moreover, consideration of “all the factors bearing upon the advisability of a settlement,” including the primary insurer’s “experience, expertise and judgment,” is required to assess this “good faith” inquiry.

  4. Finally, evaluating whether a primary insurer negotiated in “good faith” must not be done in “[h]indsight,” e.g., a “mere failure to settle within the [primary] policy limit when there was an opportunity to do so before or during trial is not a per se demonstration of bad faith.”

Disputes of material facts remain open

Disputes of fact remained open concerning the settlement value the primary carrier placed on the case at the mediation, and whether that value, once determined, was reasonably calculated.  Judge Cecchi was particularly interested in the factual question of whether the settlement authority given at the mediation differed significantly from the primary insurer’s internal valuation numbers.

Judge Cecchi further noted that while the excess carrier adduced facts that the primary insurer placed a much higher value on the case than it offered in settlement, the primary carrier argued that the “full value” it may have placed on the case, or how it determines reserves, were materially different kinds of evaluations from determining a settlement value.

There were also disputes of facts over the primary carrier’s alleged “hard ball” negotiation tactics at the mediation.  Again, the excess carrier drew on facts that made the primary carrier seem unreasonable, but the primary carrier argued it was willing to be more flexible than the picture plaintiff painted.  This factual dispute could not be resolved at the summary judgment stage.

Hindsight cannot be used to argue the presence or absence of bad faith

Judge Cecchi lastly observed that courts, and presumably the ultimate triers of fact, could not use hindsight to advance or defend their positions. She states:

For instance, Plaintiff argues that the trial verdict of over $1,000,000 awarded to Claimant demonstrates that Defendant’s limited extension of settlement authority and subsequent settlement offer at the Mediation were unreasonably low and thus made in “bad faith.” … Alternatively, Defendant argues that, irrespective of whether its settlement offer to Claimant was too low, it did not negotiate in “bad faith” at the Mediation because it was not reasonable at that time to settle with Claimant for $750,000, a figure which Defendant later learned Claimant would not have “move[d] below” …. Nevertheless, “the perfect vision of hindsight is not the lens through which our courts assess compliance with good-faith obligations.” …. Rather, whether Defendant negotiated in “good faith” at the Mediation depends only on the facts known to it at that time.  (Emphasis added)

Date of Decision: March 30, 2021

Hartford Casualty Insurance v. Liberty Mutual Fire Insurance Company, U.S. District Court District of New Jersey No. 18-CV-0444, 2021 WL 1186759 (D.N.J. Mar. 30, 2021) (Cecchi, J.)

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