*1 COMPANY, FIREMAN’S FUND INSURANCE PLAINTIFF-RE- CROSS-APPELLANT, SPONDENT AND IN- SECURITY HARTFORD, SURANCE COMPANY OF DEFENDANT-AP- PELLANT AND CROSS-RESPONDENT. Argued December 1975 Decided December 1976. *3 the cause Bergamino argued J.
Mr. Joseph Bergamino (Messrs. Hartford Company Insurance attorneys). DeGonge, Hoens, cause for Fireman’s Jr. argued
Mr. H. Gha/rles Lum, Biunno Tomp- (Messrs. Company Fund Insurance kins, attorneys). was delivered the court
The opinion The mal- D., Temporarily Assigned. P. A. Kolovsky, insur- defendant issued by insurance liability practice with respect following provisions includes the company ance instituted against suits asserted or claims malpractice insured: “* * * and, investigation company may such make any insured, claim or suit such settlement
written consent expedient. as deems upon company and, cooperate com- with the The insured shall suits, making settlements, request, pany’s in the conduct assist * * cost, voluntarily not, except at his The insured shall own *. expense. any any any obligation payment, incur or make assume terms the insured after actual precedent sured, No action shall pay *(cid:127) the claimant shall have been [*] this thereto, policy, the insured shall have lie and the nor until finally trial or company, determined either the amount company written * * *.” fully complied the insured’s unless, agreement by judgment against with all a condition in on this is the principal question presented appeal *4 effect, in a in to be to those situation any, given provisions in which it award appears potential against that: (a) limits; far in insured is excess the policy (b) plain- in action have offered for an malpractice tiffs to settle than the much amount limits but less than greater recovery; the amount of their the in- potential (c) concluded reasonably offer should sured and that the insurance in accepted company, refusing to settlement, limits to the contribute its is acting — a in the later action fact established instituted bad the insurance against on the insured’s behalf company. and the Division Appellate rule,
Both the court trial circumstances such the insured unrepor.ted opinions, a reasonable faith settlement to effectuate may proceed and, of the policy upon proof for an amount in excess limits amount faith, recover from it the may insurer’s bad had been en- though limits even of its policy insured. That actions against in the malpractice tered to this court appeal is defendant challenged by ruling 68 N. J. 143 On (1975). plain- granted. certification upon 68 N. granted, certification also tiff’s appeal, upon affirm- Division’s a of the Appellate reversal it seeks (1975), damages. refusal to it punitive court’s ance the trial award actions two malpractice stems from litigation The instant who a firm of attorneys which had been instituted and corporation. partnership limited had represented the limited was the receiver of the actions in one of plaintiff were the di- action the second The plaintiffs partnership. named as had been who defendants the corporation rectors of re- Division instituted in the Chancery action in an ceiver. the ex- coverage insurance that primary
It conceded insureds) firm (the the law $50,000 tent afforded lawyer’s under claims malpractice to those respect Casu- New Amsterdam issued liability policy professional Insurance of defendant a predecessor alty Company, issued A similar policy (Security). Hartford Company (Fireman’s) Insurance Company Fund Fireman’s by plaintiff extent law firm to the to the coverage afforded excess attor- one designated companies Both insurance $250,000. in- their behalf of actions on malpractice defend ney sured. trial, were to come to actions those before
Shortly settle willingness expressed therein plaintiffs *5 contribute the or to $147,000. Defendant refused to settle $50,000 of its toward policy required limit and the rec- of its insured despite request amount this it and of Fireman’s that attorney ommendation of the trial do so. Fireman’s, insured, with financial cooperation $135,000. This action actions for
then the malpractice settled $50,000 damages interest and plus punitive to recover the insured.1 The Fireman’s, assignee instituted as found, alleged, court had trial as Fireman’s the insureds settle and refusing had acted bad faith Security that $135,000 was reasonable and made that awarded Fireman’s dam- compensatory faith. The court $50,000 $11,161.60, in the interest ages plus amount denied for On prayer punitive damages. appeals but its both defendant and Division plaintiff, Appellate taken affirmed. to the that challenge finding no serious offers to contribute its refusing policy faith in in bad had acted
it Indeed, no basis settlement. proposed limits towards in the which are sum- proofs, challenge appears for such lower court opinions. in the marized $50,000, limit was knew that if whose Security, malpractice an adverse verdict actions the there were $400,000 and as exceed might go awarded would damages Nevertheless, its ac $542,000. disregard high insured, Rova Re duty to Farms fiduciary knowledged N. Ins. J. v. Investors (1974), sort of $147,500 to treat the settlement offer “as its obligation full whatever verdict be re coverage might if had limits, and covered, makes its decision regardless basis,” on or to trial Bowers Camden go to settle Assoc., 71-72 (1968), Ins. N. it gave only Fire plaintiff’s parties agree that status is no than 1 The different rights no additional insured and that flow to it because it was an excess insurer. *6 to the recommendations any, if consideration perfunctory, of familiar with the for settlement those most litigation a a evaluate the likelihood of successful best in to position — had to of action the attorney designated defense the actions, had retained the he expert defend the malpractice local firm, Security’s law trial, at the the insured testify claim and Pireman’s. manager honest, an make its ignore obligation chose to for settle faith evaluation of the case
intelligent manner. a fair probabilities and to purposes weigh ment Service, Ins Mutual Radio Taxi v. Lincoln C Inc. f. Knobloch v. Royal N. J. 305 (1960); urance 433, 344 Ins. 38 N. 381 N. Y. S. 2d Globe Y. 2d course even E. It 1976). adopted N. 2d (Ct. App. by offered it knew that favorable settlement if the though to be ac in the actions was ever the plaintiffs malpractice and in con it had to be accomplished promptly complished, which had junction with a settlement of action proposed direc been instituted the receiver by against corporate trial was im Division, tors in the which the Chancery receiver, minent. The offered by “package” Division by Chancery appointed who approved judge him, corporate only directors required agree all to be two moneys malprac settlement of the paid receiver, tice actions should to the but also that belong of directors should the receiver additional sums out pay their own funds. conduct amounted
Security’s repudiation it owed its insured under the policy. Nevertheless, Security contends that there no re- may be it based on the covery against settlement made the in- because no sureds had been in- judgment entered its against sureds in the malpractice actions and the settlement ultimately (cid:127)— made whose no reasonableness is had longer disputed not been authorized it. It that, contends its despite bad faith, it is entitled to rely on the rights reserved to it by policy- action” “settlement” and “no provisions opinion. at the outset of this
quoted contentions, Security argues: In its support deprived right should to settlement because “An insurer not be its prior refusing participate guilty of bad faith in it is right continuing A test to settle must to trial. abuse up judgment insured suffers detri- be made until is entered. The except the of trial he the outcome. ment inconvenience while awaits course, preserved and, of His the insurer recover is Farms, supra, prove Rova bad under against he need not case of If his limits is in where carrier. excess limits, there is to settle within its the carrier ‘auto- failure matically’ judgment. liable to the insured over-the-limit We adoption respectfully allowing an submit that the rule *7 pending case, prior entry judgment a to settle to then sue his of step bad carrier in holding a from the landmark faith would be backward Farms, supra. proved in Rova Bad faith would have to be by subsequent might guilty the insured in a trial be and the insured estoppel upon of where he fails to take over an settlement insurer’s participate Farms, supra, refusal to in settlement. Under Rova bad proved judgment faith need not be after the insured need not participate negotiations prior in settlement to trial.” Farms, Rova in what supra, Were the holding was, would have been no reason for it then indeed there says of the with a mal- the insured be concerned if award those actions were potential actions or the practice it tried, failure to settle would make liable Security’s since judgment ultimately the full recovered any for amount faith in rejecting even if it had acted offer. is bottomed on an er
However, Security’s argument Farms, Rova our interpretation opinion supra. roneous what Rova did not eliminate Security contends, Contrary as factors where an ac proven “bad faith” one an insured his insurer based by tion is instituted against Uor did in Rova a rule adopt refusal to we on its settle. “automatically the insurer liable to making in Rova opinion the over the limit While the did judgment.” “one such day” adopt that it be desirable might suggest rule, “it is in the unnecessary a it concluded that instant N. J. an extended rule” at (65 502), to embrace such case a been rule never adopted. and such has thus argument presented no substance being There Rova, a next to in unwarranted reliance on we turn considera- — despite that Security’s any tion of event argument recovery bad faith and fact potential its policy were far in excess its amount the settlement pro- it rely limits is entitled to on the quoted It there bar action. contends is visions to this reserved to warrant for of the it it depriving rights either it action ou recovery any against policy, conditioning or a settle- its insureds prior recovery We ment it and insureds.- disagree. both agreed in reserved to to- control settlements While the right an important provision surers is and significant In Service, Mutual Radio Lincoln contract, Taxi Inc. v. etc., Service, Co., 305; surance N. J. Condenser supra 31 at American, etc., (App. Super. Co. Ins. N. it forfeits when Div. which an insurer 1957), As insured. violates its own contractual Insurance in Warren v. The Fire Employers’ said we J.N. 308. 311-312 : (1969) “* * * allege company be heard to will Before insurance by plaintiff, com- provision the insurance of a breach contractual any pany breach.” its own lack *8 must be able assert to Ind. settled, it is as stated in J. Ins. Co. Mfgrs.
So N. Cas. v. U. S. 91 N. J. 407-408 Div. Super. 404, (App. 1966) : “® ** wrongfully coverage and Where an insurer refuses a defense insured, obliged to its so that the insured is defend in an to himself by policy, action later held to be covered the insurer liable the
for the amount of the obtained the insured or of * * * only by qualifications settlement made him. to this paid reasonable, are that the amount in be rule and that payment good faith.” made Annotation, Insurer Refusal to De “Liability
See also A. R. fend,” L. 694 (1956). 2d annotation, con specific
As noted the cited with unjustified comply the insurer’s refusal to sequences the forfeiture defend include its contractual compliance by to insist on right insurer’s action” such as the “no with prohibitory policy provisions, involved those prohibiting clause here 743- R. 2d at 49 A. L. the insured. by “voluntary” payment 754. authorities cases and would those distinguish express pro- insurers
because involve breaches they a de- insurer to afford visions of the policy requiring va- has insured. That asserted distinction fense the policy also It that there is embodied lidity. ignores dealing fair faith and contract an covenant implied good rely the insurer must before comply seeking which of the policy on language reserved to it powers literally, gives read contract, even though language, those to exercise absolute, unrestricted right insurer the powers. full measure which contract, applies, ais
The policy that: the rule “* ** implied every ‘neither covenant is an. there contract destroying or anything effect of party which will have shall do party con
injuring the fruits of to receive of the other implied every words, ; there exists contract in other tract dealing.’ Williston Contracts on fair faith and covenant Group Life, 1961).” Inc. v. 670, (3d. [Association ed. 159-160 § 150, (1972)]. S., N. J. U. War Vets. Catholic Brunetti, J. v. 44 N. Inc. Properties, also Palisades See Prod., Alcoa Building Bak-A-Lum Corp. 130 (1965) 129-130 (1976). 69 N. covenant of its express breach S'ecurity’s
That implied rather of a defense but afford its insureds an offer in considering exercise covenant to *9 for an amount in settle excess of its limits is of policy moment. good “[T]he insurer’s to act faith for the insured’s in may ways refusing neglecting terests be breached in other than or Sons, Security to defend Isadore Rosen suit.” & Inc. Mutual Co., 343, 97, 101, Ins. 31 N. Y. 2d N. Y. S. 2d 291 N. E. 2d (1972). Co., Hand v.
See also Northwestern National 255 Ark. Ins. 802, 502 S. W. 2d (1973).
The breach covenant, of an insurer’s whether it be or express implied, free, leaves the insured the lim despite iting policy provisions, to protect his own interest in min imizing potential in excess liability of the limits policy to a by agreeing reasonable faith settlement of the good then, actions negligence on insurer’s de proof fault, to recover from it the amount of its limits. as does
Although liability generally provide, policies case, “the make such this Security’s company may * * * of claim or suit as it deems any expedi investigation ent,” that considerations of recognized investiga fair the insurer make such dealing require unrea delays tion within a reasonable time. If the insurer a claim asserted sonably investigating dealing insured, make a faith rea the insured against may settlement amount sonable and then recover the insurer, conditioning from the despite policy provision entry insurer on its on the recovery prior against of a the insured or acquiescence Sons, & Isadore Rosen Inc. v. insurer in the settlement. Co., Fire supra; Mutual Ins. Otteman v. Interstate Security Co., & W. 172 Neb. 111 N. 2d 97 Ct. Casualty (Sup. National supra. Hand v. Northwestern Insurance 1961); Sons, & Inc. v. court’s comments in Isadore Rosen Mutual supra, Ins. are instructive: “ ‘unjustifiably re- The New York rule is that where insurer may suit, fuses defend a make a reasonable settlement *10 injured party’s claim, compromise and is then entitled of tile or policy purports though insurer, the from the even reimbursement ” liability consent’ made without the insurer’s for settlements avoid Co., 553, 563, Empire (Matter E. N. Y. 108 N. Sur. 214 State York, J., 825, opn. per Seabury, v. State New restated in Cardinal 573). 400, 410, 569, E. 2d N. Y. 107 N. 304 im the insured’s But the to act insurer’s for neglect- by refusing may ways or in other than interests be breached ing may by neglect a suit. and failure to It be breached defend compelled protectively settlement at act when the insured is to make peril; delay insurer, dealing by his unreasonable the justify perform claim, may be form of which one refusal could by insured. settlement by general provision This seems the rule: “The advantage insurer, it insured cannot be taken where unreason ably delays action, (45 any to take after of the claim” C. notice b, p. 1072; Snowden, 937, S. Insurance subd. Home Ind. Co. v. § see 64, 642; Ark. 223 264 S. W. 2d Interstate Co. v. Wallins Creek Cas. Ky. Co., 217). 101, Coal N. [339 176 S. W. Y. S. 2d at (Emphasis added). N. E. 382-3]. 2d at case, in this So, too, provides where a as policy, ** * with written consent make, may “the company claim or suit as insured, of any of the such settlement re thus in the power deems there is implicit expedient,” the insurer exer insurer an obligation served to the faith and with concern reserved power cise its of the insured. the interests differ that obligation a breach of
The consequences time the settlement viewed of the whether, on depending within or award is considered, potential being offer is is within If the loss potential of the policy. the limits beyond the in limits, deprive there is no reason then policy — interest to have pecuniary one only appearing surer funds source of only and the liability ultimate in the to control absolute right of its in settlement to be paid Rudco Oil Ins. Co. v. & General Traders litigation. In 1942). Cir. such F. (10th & Gas 2d refusal deem the may situation, though even faith, prima be in bad since to settle to of the insurer facie in to be interest does not appear pecuniary the insured’s insured has no hold that volved, it is appropriate await the trial action alternative but to of the negligence and, if it in a in the claimant’s favor in judgment results limits, then to institute action against excess the insurer to the amount of the limits recover the amount which exceeded addition amount for which the claimant to settle. willing & & Traders General Ins. Co. v. Rudco Oil Gas supra, at 626.
A when, different situation viewed as of presented time the received, offer is loss potential *11 far, the exceed, as proposed by settlement did here they may, limits of the In situation, such a the insured policy. but he await negli need not the outcome of the trial of the until gence action. to wait He should “be required “a after the storm with before when faced refuge” seeking potential far judgment in excess of the limits the policy.” Co., Traders & General Ins. Co. & v. Rudco Oil Cas supra, at 627. in in cases other
He should be and is permitted, to proceed which has breached its obligations, insurer an amount a to make faith settlement prudent good of the breach then, proof excess of the limits and upon and reasonableness good the insurer’s amount of the made, recover the the settlement & Co. Traders General Ins. from the insurer. policy limits Co., Cas. v. Rudco & Evans v. Continental Oil Gas supra; Indemnity Co., P. 470 Home 614, 40 Wash. 2d 245 2d (1952); Snowden, Ark. 264 W. 2d 642 64, . v. 223 S. Co — Duty Annotation: Insurer “Liability see also (1954); 168, A. R. Settle,” 40 L. 2d 193-4 (1955). what in Evans v. Continental the court said
Apposite Co., Cas. supra: judgment An insured from his insurer the amount of can recover against him, including the amount excess rendered failing
limits, guilty has been of bad faith in when the insurer 478). (at for a effect settlement smaller sum. liability for concerning question insurer’s there is no While guilty of bad judgnient has been where amount of the entire permitted to settle faith, question an insured remains: Should from the then recover circumstances and under such the tort claims together paid reasonable with his amount settlement insurer the expenses? attorney fees and opinion amounts recover the insured should that the We are provided policy limits, rea- paid, up were that such sums so to the paid faith. sonable were bility. injuries potential and faith and honest assured. juries some also to contend business the facts shown it 2d applies General. the insured to sented in the face of a storm before General by policy. Why in it has been held cision Gas ment of a claim the 822, from the insurer. Traders & land Carthage “Rudco “Therefore, “We The [*] acted, Rudco as a bar to which the insurer palpable. appear Oo. it is well established that Casualty *(cid:127) legal appropriate and present similarity situation here, The limit of think, however, were [the insurer] # to not alone in loss Traders & Its manifest attitude Stone was faced General death, arising justification appraise potential recover of we that equal should the assured be seeking refuge. was therefore far admittedly as a action makes much what the court It mitigate upon think presented Co. potential judgment A. between was it acted St. force to here. the Ins. *12 guide L. v. its with General recovery court the under those denies it Louis Dressed conscientiously may furtherance the rule liability R. Travelers’ its insurer the sum protection and factual basis. Co. damages U. In may serious and the element record, for the facts of the Rudco Oil case out here suits in its 799 8 in said: interpose S. v. Rudco Oil & Gas upholding prudent liability the had upon of good ; 173, does liability aggregating $63,000 [that greater the insured approach and course Traders fairly its determination Ins. Appleman, circumstances there is investigated under its Rudco, of far in the faith required 26 S. Ct. not differ in effecting alleged Beef the the insurer convinced its own Co., stated policy, and losses. In the face of than that of & General voluntary and dealt excess or the & Provision Co. refuses to defend. 274 Mo. may negligent paid Insurance, 33, of conduct must have to wait a favorable that it must be shown that 400, interest, the made of of the Rudco Oil & of principle must exercise likelihood of a re- settle and recover of the before its claims; had for fairly said in 537, prudent until the damages gross conduct. The negligent question pre- negotiations] L. Ed. limits of the but it must $10,000; personal Cir., the assured 203 W. Traders & settlement, Traders & and those from that after with it is its standing § duty 129 F. 4690. S. Mary settle- While made 712; lia- the de- in- its on policy. covery Rudco had far in of the limits of the the excess conditions, hut a and on its terms to demand not a settlement part General, co-operation Traders & wherein on the realistically parties and a hoth with mutual would face facts respect interest each. for parties express “Each to the contract oioed to the other duty respect rights interests, implied approach and its problem realistically open hands and common with without con- weapons. cealed recognize any permits, “We the evils inherent in rule which or justifies, compromise a or settlement the assured without yet insurer, unwilling say consent we are that no cir- justified. cumstances is such conduct peculiar facts, exist, “Under shown here hold we that pursued by course of conduct square the Traders & General does not dealing the standard faith and fair which underlies parties, contract between the and it therefore without stand- ing only (Italics ours.) assert P. 2d at 479-480]. [245 defense.” Two made in points brief dissenting opinion require comment.
The dissent concedes Traders & that the Gen holdings Co., eral Ins. Co. v. & Rudco Gas Oil Evans Con v. supra, Co., tinental Gas and Home supra, Indemnity Co. v. Snow den, supra, are authority the rule for which we have cited However, them. the decisions suggests adverse to the Evcms, in two cases, insurers of those Traders General and have been should bottomed on the bad faith refusal on insurers settle but a finding insurer each had refused to defend or had denied coverage.
In those two cases the insureds did contend, among other been, had there things that effect, refusal to be defend cause: in Evans v. Continental Cas. (a) the in supra, surer, after filing answers on its insured’s behalf in the negli actions had gence demanded that its insured sign "reserva letter; tion of rights” Traders (b) & General Ins. Co. & Gas Rudco Oil supra, had insurer filed answers in the actions negligence after obtaining reservation of letter and then rights had filed declaratory judgment action a determination seeking that there was no coverage. However, *13 case, chose not
in each the court to base its expressly decision asserted, Evans, P. 2d at (see supra, on the so ground Traders, F. 2d at and bottomed 480; supra, 626) its on the bad faith refusal of the insurer to solely decision no for justification There is those settle. cases interpreting conduct in which insurers’ was tantamount ones as or an denial of when unqualified coverage defend refusal it, each, with the full record before refused to the court do so. with assertion in the dissent we disagree
Finally, from did prove damages that plaintiff ing opinion no had because obligation breach of defendant’s actions. malpractice the insured been recovered against such a judgment, proof that absent argues dissent the settlement made has been shown because damage mal of the dispositions other possible insured aborted several a lesser a later settlement viz: actions, practice (a) defendants; or in favor of amount; a verdict at trial (b) an amount defendants at against verdict trial (e) of defendant’s policy. less than the limits in which the all cases exist However, possibilities those thus for- insured its its breaches insurer be the breach settlements, control power its reserved feits defend, implied obliga- of its express obligation that of its its im- the claim or of timely investigation tion to make concern and with exercise, in plied obligation re- insured, reserved power for the interests to settlements. spect held, situations, uniformly it is of those
In each measure disclose, that the opinion cases cited earlier this either amount of judg of the insured’s damages action in the negligence ment entered a reasonable insured in making paid by or the amount before trial. action the negligence faith settlement of & P. Casu Maryland Dressed Co. Louis also 81. See Beef S. Ct. 403-404 (1906). alty 201 U. S.
79 Where the measure recovery is the amount in settle- paid ment, all insurer defaulting receives protection which it insured, is entitled from the requirement that the — his establishing damages, prove as was here— that done the settlement was made in faith and for reasonable amount.
What have we ruled leads rejection ap- defendant’s peal, only the issue leaving whether, contends, as plaintiff it should have been awarded punitive damages. We are satis- fied, however, as were the court and the Di- trial Appellate vision, that the necessary award of requisites punitive axe damages present.
The is affirmed.
Cueeoed, I could not disagree more (dissenting). may directly conclusion the insured1 settle with the claimant on this insurance and thereafter malpractice insurer, recover from full Security, amount of the limits. stems from conviction that My disagreement sound both and the efficient public policy operation of militate this liability industry result. against The essential is: who issue to control settle- had of the claim the insured or insurer? The major- ment ity concludes that under the circumstances of Se- this ease forfeited curity “important” “significant” right own at contractual (anta 71) violating obligation majority points out, opinion plaintiff-excess 1 As the treat we having precisely purposes the status of carrier the insured general case. is this This consistent with the rule under which the rights pri subrogated is excess insurer the insured’s g.. Fidelity mary American carrier. E. & Co. v. All Cas. American Lines, Paul-Mercury (10th F. 1949); Bus nity St. Indem 2d 179 7 Cir. Martin, (10th 1951) ; v.Co. F. 2d United States 190 455 Cir. Fidelity & Co. v. Tri-State Ins. F. (10th Guar. 285 2d 579 Cir. 1960) Transport Michigan ; Liability v. Ins. Co. Mutual Ins. Co. Supp. (E. 1972) ; F. Peter v. Travelers Ins. D. Mich. 340 670 Supp. Royal (C. 1974) ; F. Home Ins. In D. Co. Calif. demnity Co., Misc. 2d (Sup. 1972). 327 N. Y. 2d S. Ct. that result the 'Court
the insured. En route to
obliterates
separate
I
to be
critical distinction between
what
believe
kind,
at
first
(ante
72).
insurer
undertakings
in the
provisions
of express
forth in specific language
set
(coverage)
the insuring agreement
policy, encompasses (a)
a creature
The second
to defend.
(b)
an im
in all
law, which
discerned
contracts
of our case
has
*15
Association
and fair dealing.
of
plied
good
covenant
S., 61 N. J.
Inc.
Catholic War Vets.
U.
v.
Group Life,
Resort, Inc. v. Investors
Rova Farms
150, 153
see
(1972);
Co.,
Comment,
474,
65
492
generally,
Ins.
N.
see
(1974);
Ex
Liability
“Insurance Carrier’s
to Settle: Strict
Duty
662,
6
L.
Cases?”,
(1975);
Hall
Rev.
Liability
Seton
cess
in
the
309,
L. Rev.
338-45
It is
Note,
(1974).
28 Rutgers
which
latter,
majority,
to the
surer’s breach of the
according
and
to
itself
to
effect settlement
gives
right
rise
the insured’s
carrier
full amount of the
thereafter
recover from the
the
—
specific
and
of the
spite
provisions
limits
this
policy
effect in the
the cus
contrary
the
to the
form of
policy
contained in
and “no action” clauses
tomary “cooperation”
66).
at
majority opinion (ante
and noted in the
the policy
at
(ante
75)
holds
the Court
Specifically
the claimants
[W]hen,
the settlement offer
time
fof
as of the
viewed
pro
potential
received,
malpractice
loss and the
the
case]
is
in the
far,
exceed,
they did
the limits of
posed
here
the
*
**
may,
the outcome of
policy
but he need not await
the insured
required
negligence
not “be
He should
action.
of the
trial
the
seeking refuge” when faced with
the storm before
after
wait until
policy.”
judgment
potential
far
in excess
the limits
“a
Co.,
2d
v.
Oil &
F.
[129
Co.
Rudco
Gas
General
Ins.
Traders &
1942)].
(2d
621, 627
Cir.
permitted,
in
as in other cases in
which
and is
should be
He
proceed
prudent
obligations,
a
make
breached its
surer has
amount
limits
for an
excess
faith settlement
upon proof
of the insurer’s
then,
breach
made,
to recover
faith of the settlement
reasonableness
Traders &
limits from the insurer.
General
amount
Co., supra; Evans
Continental Cas.
Oil &
v.
Rudco
Gas
Ins. Co. v.
;
Indemnity
614,
(1952)
Home
Co.
Traders Gas Supra, is illustrative of the There the court point. said: think, however, [allowing We the rule recover for excess judgment following applies equal bad settle] faith refusal prudent force to settlement made the assured in the face of potential policy. Why far in excess of limits of required the assured should to wait until after the storm before seeking refuge. *16 guide question pre- Therefore as a for the determination of the here, may fairly sented think we it stated that before Trader & be may interpose voluntary by General the Rudco as a bar recovery upon policy, acted, to the it must be shown that it not interest, appear alone in of furtherance its own it but must also fairly in that it acted faith and dealt with the assured. [129 2d 627-28.] F. at The court then went on to determine that the company’s denial when coverage perfectly was did coverage apparent standard, not meet this and hence the insured was allowed from to recover the insurer the amount in expended settle- ment. Even as it reached this conclusion the court readily “the inherent rule which perceived any evils or permits, justifies, a or settlement the compromise by without assured Id. the consent of the insurer.” at 638. in Evans v. Continental Cas. supra,
Likewise the court that the insurance language used carrier’s bad indicating a prohibi faith will the insured from refusal to settle release Traders settlement, measure on large tion relying & above particularly passage quoted Gen. Ins. supra, from But was a qualified that there opinion. again refusal coverage. and a denial of defend the breach of
The of this between distinction significance and fair dealing (here implied covenant on the settle) carrier’s failure guise wrongful and wrongful one the insurer’s denial' coverage hand and by out perhaps brought refusal to defend on other is best his Insur “Liability Professor Robert E. Keeton in article L. Rev. Settlement,” 67 Harv. ance for Responsibility is 1136, 1162 he this: (1954). points makes Among al defend, an insurer is when refuses substantial damage result while if acts, most certain the assured unless merely settling, insurer but decides to not gamble by defends off in a insured may his for the at gamble pay In situation, then, trial. the latter the insured receives pro under law: if the existing gamble tection unreasonable loses, any the insurer and insured is liable for not the wins, liability. If -the both are absolved gamble excess.2 from par- difficulty must time decisions made at is that The company uncertainty guilty as to whether is of a both there ties is any failing wrong as to harm will re- also to settle whether company guilty is bad Even if faith or from such failure. sult possible company’s gamble refusing settle, negligence judgment against favorably trial will result in a will turn out proposed figure. sum smaller than the or for a claimant else (whether payment insured release In that event only excess) be a would loss which would claim or entire nothing; negligence insured had if done or have been sustained company have caused would the insured no loss had faith of the bad problem, kept therefore, hands off. is not one occur, mitigation certain but a loss rather that one or (his affecting party must choose choice of both other interests in- *17 Service, Taxi v. 2 So held in Radio Inc. Lincoln Mut. Ins. (1960); Ass’n., Bowers Fire Ins. N. Camden N. J. 62 ; Resort, (1968) Co., supra. Rova Farms Inc. v. Investors Ins. company) a certain but sured between moderate loss on the one gamble hand, larger which on the other hand will result in a loss, loss, a smaller or no loss it all. [Id. at 1162-63.] The dilemma referred to at the beginning of the quoted above portion is that which exactly existed in this case. Plain- tiff determined unilaterally that Security was in bad acting Moreover, that faith. decision was made aat time when no been one could have certain about consequences carrier’s decision. Security was apparently perfectly willing to continue to adhere to defend obligation bear the of its in consequences gamble to settle in refusing a case where those consequences might well in very result for a liability substantially excess of its policy limits. what But did not do leave its insured had, defenseless. If it then of course the in- only way sured could have protected itself would have liability been to defend and on settle its own.
The purpose those policy which to the provisions grant carrier the exclusive control of al- settlement was recognized 40 years most ago Kinderwater v. Casualty Motorists Ins. J. L. (E. N. 376-77 & A. : 1938) design provision question [prohibiting The any voluntarily incurring expenses incurring any from or claims] only was not to obviate risk of a covinous or collusive combina- injured party, tion assured and the between the third but also to voluntary materially nrejudicial restrain assured from action rights, especially insurer’s contractual the exercise of its ex- policy. function defend elaims under clusive made The as- enjoined against voluntary assumption “any sured is ity.” liabil- necessary corollary stipulations reserving This is the insurer the exclusive direction and control of the defense of imposed peremptory so claims made. as thus duty upon co-operation immediately preceding him laid “any negotiations and of clause non-interference for settlement proceedings” prescribed legal succeeding provision. or the next They provisions general are hindered contrived to achieve same objective. A violation of either relieves the insurer from lia- bility, regardless prejudice of whether actual has ensued therefrom. *18 of from provisions, effect to these both giving
The wisdom from the of view and public point perspective insurance, seems administration of liability ap effective carrier to dis effectively In order for an insurance parent. defend, its over negotiation control the charge duty and complete, by sep must be undercut the litigation insurance, arate undertakings By of the insured. purchasing the the insured the acquires expertise competence carrier in claims in turn proceedings. necessitates This Likewise, over of the insurer. control to turning complete the cooperate the is under insured the “Giv insurer, independently. and to refrain from negotiating the settlement of his ing the insured the control power inex insured, own raise case would possibility claims avoid perienced desiring poten evaluating tial liability, litiga excess would settle in cases which Note, tion Cal. L. Rev. liability.” would result S. 120, 126 dictates (1968). The efficient claims disposition in sole carrier, that the one with the be party expertise, the there claim otherwise, control. If is created the risk of insured, insurer ants off the playing holding will if insurer higher pay out for the stakes the insured The ad- liability.3 does not because the threat of excess supra op. cit., Keeton, at 1166: 3 See company policy provision giving such reason for the The obvious settlement decision is to down control over keen exclusive decision, the settlement self-in- If controlled insured claims costs. higher (up make settlements induce him to would terest personal risk of limits) desire to avoid excess because power Recognition liability. in insured to make premise company binding the fundamental is inconsistent with effectively liability system will work more if com- insurance pany than if either these controls defense left to insured. matters premise situation, defend fundamental In a failure to indicated destroyed. Since control of defense has been Keeton is only keep liability way abdicated, both insured’s and claims empower the insured to defend and costs down is to settle. verse cost effects would end course up borne being public. Service, Court, This Taxi Radio Inc. Lincoln Mu tual Ins. N. J. the neces (1960) recognized *19 for the insurance sity complete carrier retention granting Francis, of control negotiation litigation.4 over Justice majority, pointed very for the out that it is speaking this of control which make right spawns duty the insurer’s a faith effort good at settlement: contract, right company, The the reserved the to control the settle- necessary operation is a ment of claims. Such incident of prohibited interfering its business. Because the insured is from of right, however, manifestly accompanied with this its be must exercise good of considerations faith. A decision not must be an settle probabilities weighing from honest It must one. result of fair decision, manner. To be it must be an in- honest and field, telligent light company’s expertise one in [em- in the
phasis added]. Assoc., In v. Camden Fire 51 N. J. 62, Bowers Ins. 70-71 (1968) the Court reiterated that was insurer’s reserved it control of the claims that rise to the gave faith. duty settle, if insurer wrongfully refuses
Consequently, it will become liable for verdict. any excess The Court Rova Resort v. Ins. Farms Investors 65 N. J. supra, at noted that may "it for the insurance tempting company gamble on outcome of trial” by not set If the insurer so, chooses to tling. may do but gamble, not with insured’s if it money; takes an unreasonable looses, the insurer must gamble price. is pay the It that which here. jeopardy Security faced At risk not, course, speaking 4 I am here of those cases in which the company plainly is in a conflict of interest situation its own my problem assured. For view of Rova that Farms Resort In see 474, 507, opin (1974) (concurring vestors Ins. 65 N. J. 509-10 ion). I would if metaphor, hold
extending unbecoming consequences to incur the willing unhappy the dice roll own it should have been folly, permitted takes not, and here occurred) If if (as itself. own the insured’s table, it be at over should gaming carrier; if of its expertise risk. It contracted insured to allow the insurer is such exercising expertise, to car- settle, contest carrier, and then second-guess essential one of the would be to undercut rier’s judgment of the insurance policy. purposes fun- another still The considerations above reflect discussed majority theory damental recovery bar to here. Security’s breach recover should because plaintiff of its to make a decision contractual implied has faith. However concerning plaintiff in good Se- not demonstrated or damage injury consequent upon *20 and, not, curity’s alleged breach, could unless the indeed, excess case first went to trial and resulted in a judgment limits. Security policy an require A essential ordinarily showing damage for breach action for damages for a judgment ment Cullere, J.N. Ruane Development Corp. of contract. to the time Super. 245, 1975). Subsequent Div. (App. all here, were unilateral settlement there of plaintiff’s action, negat each the malpractice following possibilities been had the case then to this ing damage plaintiff, during before or later settlement defendant settled: (a) less than the trial; for claimant for (b) judgment defendant; and limits; (d) judg for the (c) judgment limits from than the policy for claimant for more ment have had to be made harmless Se would which plaintiff (on assumption of law of bad curity as matter settle, opin accepted by majority refusal by Security aborted all these possibilities. Plaintiff’s action ion). show, as under elemen required has thus failed Plaintiff before law, Security’s failure to settle contract tary plaintiff caused did plaintiff any damages specifically $50,000 for which it was awarded below. damages
I see decision today’s fraught as potentiality mischievous as an unwarranted intrusion consequences, upon the insurance carrier’s contracted-for to control its own and destiny, contrary to established law sound and pub- lic I would reverse enter policy. and for defen- dant.
Justice Judge join in this opin- Mountain Coneokd ion. For Justice Hughes, Justices affirmance —Chief Sulli- Kolovsky
van and Pashman and Judge — 4. For reversal—Justices Judge Mountain Cliffokd Coneobd — 3. LINGLE,
IN THE MATTER OF THE ESTATE OF EUSTACE E. LATE OF MONMOUTH COUNTY. Argued April 6, 1976 Decided December 1976.