August 12, 2010
Written By Attorneys: John M. Clark and Erin Nulty
This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.
In New Jersey, an insurer's failure to settle a lawsuit against its insured within the limits of the insurance policy can give rise to bad faith claims by the insured or an assignee of the insured when a judgment is entered in excess of those limits. As set forth in the seminal case of Rova Farms Resort, Inc. v. Investors Ins. Co., 65 N.J. 474, 483-84 (1974), the insurer has a fiduciary duty to take the initiative and attempt to negotiate settlement within the policy limits. Since the issuance of the Rova Farm decision, there has been a trend at the trial court level-encouraged by plaintiffs' attorneys-to consider any failure by an insured to settle within the policy limits as a breach of the duty of good faith, regardless of the reasonableness of the insurer's position. Recently, however, in Wood v. New Jersey Mfr. Ins. Co., 2010 WL 2990960 (unpublished), the New Jersey Appellate Court declined to support such a strict liability approach to a bad faith claim against an insurer. Instead, the Court emphasized that the established substantive principles set forth in Rova Farms must be followed in determining whether the insurer acted in bad faith.
In Wood, the Court was faced with a case in which summary judgment had been granted to the insured on its Rova Farms bad faith claim against the insurer. Without allowing for a plenary hearing or trial on the bad faith issues, the trial court held that the insurer had breached its duties by declining to settle a tort action against its insureds within the policy's coverage limits. In determining that the trial court's decision was premature, the Appellate Court examined in depth the development of the Rova Farms doctrine and explained in detail the manner in which it should be applied. By examining the record evidence and applying the principles of Rova Farms, the Court found that genuine and triable issues of material fact existed as to whether the insurer acted in bad faith by rejecting the opportunity to settle the underlying case within the policy limits. The Court also emphasized that the mere failure to settle within the policy limits before or during trial is not a per se demonstration of bad faith, which rejects a strict liability application of Rova Farms.
In its ruling, the Appellate Court also noted the existence of the insurer's internal claims committee and the detailed process it followed in evaluating and authorizing the amount of settlement offered to the plaintiff. In addressing the existence of the committee and the claims reviews procedures as a defense to the bad faith allegations, the Court held that their existence cannot be dispositive of the issue of good faith. The Court further stated, "[a]n insurer cannot fend off bad faith allegations by simply pointing to the quality of its internal protocols for claims review." With that being said, the Court acknowledged that the insurer should have been allowed to have its witnesses testify to explain the decision to reject the opportunity to settle within the policy limits.
The Court's emphasis on the correct legal analysis that must be taken by trial courts in determining the existence of bad faith and its recognition that material issues of triable fact precluded summary judgment in this case demonstrates a move away from "rubber stamping" bad faith Rova Farms judgments against insurers. By underlining the application of the multi-faceted analysis set forth in Rova Farms, this case shows that a more measured approach to looking at all the facts involved in an insurer's decision regarding settlement should be completed before a bad faith judgment is granted.
