In State National Insurance Company v. County of Camden, the County was sued for a serious personal injury sustained when the injured party drove off the road and into a guardrail owned and maintained by the County. After a series of events, including the jury awarding over $31 Million and the trial judge reducing the award to over $19 Million, the County eventually settled, while the case was pending on appeal, for over $15 Million. The insurer contended that the County: delayed in notifying it of the lawsuit, repeatedly represented that the case was within the County’s $300,000 self-insured retention, made errors in investigating and defending the case, and that the County’s re-valuation of the case four days into trial breached the insurance contract’s notice provision and the adequate investigation and defense condition to coverage.

The insurer brought an action (1) seeking declaratory relief that there was no coverage; (2) claiming a breach of the duty of good faith based on the County’s alleged failure to settle the Anderson claim within the County’s self-insured retention of $300,000; and (3) claiming breach of the duty of good faith for the County’s alleged failure to tender the self-insured retention. The County raised counterclaims against the insurer, including: (1) a claim for breach of contract (2) a claim for a declaratory judgment that there was coverage; and (3) a claim for bad faith with respect to the insurer’s handling of the underlying tort matter, thereby exposing the County to a verdict of over $20 million in excess of its policy limits. The insurer sought summary judgment on three issues: (1) whether the insurance contract required the carrier to defend and investigate the underlying litigation; (2) the adequacy of the County’s defense and investigation of the underlying suit; and (3) whether insurer acted in bad faith or breached any duty of good faith and fair dealing.

After a lengthy analysis denying the insurer’s first two arguments on summary judgment, the court addressed the bad faith claim. This came down to an analysis on the proper bad faith standard to apply in a third party context involving an excess verdict situation, being either the “reasonably debatable” standard, as exemplified in Pickett v. Lloyd’s, 131 N.J. 457, 621 A.2d 445 (N.J. 1993), or the standard set out in Rova Farms Resort, Inc. v. Investors Ins. Co. of America, 65 N.J. 474, 323 A.2d 495 (N.J. 1974).

The County argued that the insurer never issued a coverage denial, never performed an independent coverage evaluation, refused to engage in settlement discussions, and failed to protect the County from an excessive verdict even though it knew the matter could be settled within the policy limits. The insurer argued that the County misled the insurer and did not live up to its bargain under the insurance policy. Without going into the detail of all facts, the court concluded that there were disputed issues of fact, but then observed that it must decide the issue of law as to whether the insurer’s actions should be viewed under the “fairly debatable” standard, which requires a finding that the insurer had no debatable basis to deny coverage, and that the insurer acted with reckless disregard to the facts and proof submitted by the insured or whether the “fairly debatable” standard did not apply to the case at hand because that standard is only employed in cases involving first-party claims, rather than bad faith claims in the third party failure to settle context. The court also noted that under the fairly debatable standard, a claimant who could not have established as a matter of law a right to summary judgment on the substantive claim would not be entitled to assert a claim for an insurer’s bad-faith refusal to pay the claim.

As noted by the court, the standard for evaluating good faith under Rova Farms is that a decision not to settle must be a thoroughly honest, intelligent and objective one, which is realistic when tested by the necessarily assumed expertise of the insurance company. Such expertise must be applied, in any given case, to a consideration of all factors bearing upon the advisability of settling for insured’s protection.   The insurer’s or its attorney’s views on liability are an important factor, a good faith evaluation under Rova Farms requires more, including consideration of the anticipated verdict range (should it be adverse); the strengths and weaknesses of all of the evidence to be presented by both sides to the extent known; the history of the particular geographic area in similar cases; and the relative appearance, persuasiveness, and likely appeal of the claimant, the insured, and the witnesses at trial. The court concluded that the “fairly debatable” standard did not apply to the analysis of the bad faith claim in the case before it. It observed that even though no bright-line rule was established in the case law as to whether the “fairly debatable” standard only applies to first-party claims, and there was no specific case precluding the application of that standard here, it still found that the rationale of Rova Farms was more applicable to the County’s action than the rationale of Pickett.

The court looked at both Pickett and Rova Farms in coming to its conclusion. It observed that Picket explained Rova Farms, and stated that Rova Farms held that an insured may recover more than the policy limit for a liability insurer’s bad-faith refusal to settle a third-party claim against its insured within that limit, when the refusal results in the third party obtaining a judgment against the insured that exceeds the policy limit. The terms of a liability policy prevent the insured from settling on its own behalf except at its own expense, and thus the carrier makes itself the agent of the insured in this respect, creating an inherent fiduciary obligation. This duty to act on the insured’s behalf means that a decision not to settle within the policy limits must be an honest one, resulting from a weighing of probabilities in a fair manner. To be a good faith decision, it must be an honest and intelligent one in the light of the insurer’s expertise in the field. Thus, where reasonable and probable cause appears for rejecting a settlement offer and for defending the damage action, the good faith of the insurer will be vindicated. The court noted that a Rova Farmsbad faith claim is a simple breach of contract claim and is a cause of action against an insurer in those instances where certain circumstances coalesce, i.e., there is a settlement demand within the policy limits, the insurer in bad faith refuses to settle the claim, and the verdict above the policy limits is returned. In that defined setting, the carrier’s bad faith failure to settle the claim within the policy limits may render the carrier liable for the entire judgment, including the excess above the policy limits.Pickett itself, however, involved a first party claim. In that context, the court adopted a “balanced approach” to analyzing first party bad faith claims. Thus, to show a claim for bad faith, a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and the defendant’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim. This was distinguished from the Rova Farms standard. The court then cited a Third Circuit case for the proposition that although the issue of whether the insured would be held liable for the third-party plaintiff’s injuries was “fairly debatable,” in the context of a third-party claim with a possibility of an excess verdict, Pickett supplies only part of the equation.

Thus, the fairly debatable standard is analogous to the probability that liability will attach in a third-party claim, but it does not consider the likelihood of an excess verdict. A third-party claim that may exceed the policy limit creates a conflict of interest in that the limit can embolden the insurer to contest liability while the insured is indifferent to any settlement within the limit. Such a conflict is not implicated when the insured is a first-party beneficiary, where the claimant and the insurer are in an adversarial posture and the possibility of an excess verdict is absent. Thus, Rova Farms, not Pickett, protects insureds who are relegated to the sidelines in third-party litigation from the danger that insurers will not internalize the full expected value of a claim due to a policy cap.

Applying its analysis to the facts asserted by the County, the County claimed that there was a refusal to perform an independent analysis of the underlying case or participate in preparing for trial, and after the trial was underway, there was a refusal to participate in settlement talks, even though the demand was $10 million, and the trial judge had recommended settlement in the $6 million — $8 million range, both within policy limits. The County also alleged that counsel had been appointed for the insurer to observe the penultimate day of trial and reported that a jury verdict potential was in the $10 million to $15 million range, that a reasonable settlement value was $4 million, and that there was a small window to settle the case the next day before the jury returned its verdict. The County argued that instead of settling within policy limits, the carrier instead focused on supporting its case to disclaim coverage under the policy based on the County’s alleged breach of the adequate defense provision. The insurer argued that the facts should have taken this matter out of a Rova Farms analysis, and into Pickett: (1) the County maintained full control over the defense; (2) the insurer was relegated to the sidelines, (3) the insurer denied coverage on the last day of trial just before the jury returned its verdict, and (4) the County had the ability to settle the case itself. Were there no dispute of fact on these issues, the court stated that Pickett might have applied. However, there were disputes as to the insurer’s duty to provide a defense, as to whether the County’s control over the litigation was by its own choice or was the result of necessity due to the alleged refusal of the carrier to get involved, and the County’s ability to settle on its own without input from the insurer, particularly when any proposed settlement would exceed the County’s SIR and implicate duties and obligations in the CGL policy. Thus, in denying summary judgment, viewing the insurer’s action in the light most favorable to the County, it could be found by a jury that the insurer did not diligently seek a possible settlement to protect the larger interest of its insured, and instead focused on its own interest in its attempt to pay nothing by disclaiming coverage instead of the $10 million policy limit. The case differed from the Pickett determination of whether the insurer had a reasonable basis for denying the County’s claim for defense and coverage under the $10 million policy, and it was instead more analogous to the Rova Farms analysis.

Date of Decision: March 31, 2014

State National Ins. Co. v. County of Camden, CIV. NO. 08-5128(NLH)(AMD), 2014 U.S. Dist. LEXIS 43229 (D.N.J. March 31, 2014) (Hillman, J.)