Bad Faith

Rova Farms: Bad Faith Settlement Offer

 A “Rova Farms” claim stems from Rova Farms Resort v. Investors Insurance Company of America. In that case, the New Jersey Supreme Court held that an insurer’s bad-faith failure to settle a claim within policy limits can render the carrier liable for the entire judgment, including that in excess of the policy limits.

In Rova Farms, the insured resort facility was sued by a former customer who had sustained severe spinal cord injuries and permanent paralysis after diving into a shallow portion of one of the resort’s lakes. At trial, the liability insurer refused to tender its $50,000 policy limits to settle the resort’s negligence claims even though the negligence was clear. Instead, the liability insurer offered a mere $12,500 in settlement, which the plaintiff rejected. The case then went to the jury, which returned a verdict against the insured for $225,000.

Thereafter, the insured sued its liability insurer for bad faith. The court began its analysis by stating the following general rule:

“When it is probable that an adverse verdict will exceed the policy limit, the propriety of an insurer’s refusal to accept a settlement offer which is within the coverage requires a resolution of conflicting interests. In view of the duty of the insurer to act in good faith, the resolution can lead to but one fair result: Both interests can be served justly only if the insurer treats any settlement offer as if it had full coverage for whatever verdict might be recovered, regardless of policy limits, and makes its decision to settle or go to trial on that basis.”

When the court considered how one would come to a bad faith argument, not only did the court state that the decision of the insurance company to settle or not to settle must be “honest, intelligent and objective”, the court also laid out several factors that the insurance company must consider in order to decide whether or not to settle and for how much.  These factors are as follows:

  1. Consideration of the anticipated range of a verdict (should it be adverse);
  2. The strengths and weaknesses of all of the evidence to be presented on either side so far as known;
  3. The history of the particular geographic area in cases of similar nature; and
  4. The relative appearance, persuasiveness, and likely appeal of the claimant, the insured, and the witnesses at trial.

The court re-affirmed the long-standing notion that the insurer has the duty of good faith to their client, the insured.  Justice Hughes opined that the entire purpose of insurance contracts is to protect the insured within the policy limits of the agreed contract.  It is bad faith on the part of the insurer to “frustrate that purpose by a selfish decision as to settlement which exposes the insured to a judgment beyond the specific monetary protection which his premium has purchased.”  The Court held that an insurer’s bad-faith failure to settle within policy limits can render the carrier liable for the entire judgment, including that in excess of the policy limits.

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