An insurance company’s rejection of a settlement can be malicious, even if the policyholder ultimately wins the case

When a policyholder is reasonably attempting to settle a case for an amount equal to or within the limits of his insurance policy, the insurance company must usually put the policyholder’s interests ahead of its own. If the insurance company does not accept a reasonable settlement within the limits, it can usually be held responsible for a judgment amount in excess of the policy limits if the insurance company’s refusal to settle was unreasonable. Failure to regulate by the insurance company can result in a malicious claim. But what if the insurance company refuses to settle and the policyholder wins in court? According to a federal district court in New Jersey, if the insurance company’s decision not to refuse a settlement was unreasonable, the insurance company can still be held liable for bad faith.

Summary of the New Jersey Federal Court’s Recent Decision

BrightView Enterprise Solutions, LLC v. Farm Family Casualty Insurance Company, No. 20cv7915 (EP) (AME), 2023 US Dist. LEXIS 20764 (DNJ February 7, 2023) is not a typical malicious “disagreement case”. This involved three different companies insured under a single public liability insurance policy issued by Farm Family. The three companies were involved in a project to overhaul an irrigation system at a Bank of America branch in New Jersey. A Bank of America employee “slipped and fell” in a puddle of water and hit her head. The injured employee filed lawsuits against all three companies, claiming her “slips and falls” resulted in her being permanently disabled. Farm Family agreed to defend and cover all three defendants up to their $1 million policy limit.

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At a settlement conference just days before the trial began, the judge indicated that an offer of $650,000 to $750,000 from Farm Family on behalf of all three defendants would settle the case. The day before that settlement conference, Farm Family’s claims adjuster recommended that Farm Family should “try and settle” the case and that it “could be fully resolved up to 650,000 rather than trying the case.” However, Farm Family decided to limit his residency license to $400,000.

Farm Family’s litigator testified that he arrived at the $400,000 figure after “a fairly thorough discussion” with Farm Family’s Claims Committee, “which may have lasted about 15 to 20 minutes.” Farm Family did not even provide this number to the insured defendants. Instead, it only approved $250,000 for pre-trial settlement.

One of the additional policyholders sent a “hammer” letter demanding that Farm Family settle the dispute within policy limits, stating that Farm Family’s $250,000 settlement offer was “amazingly low” and warning that he would settle the lawsuit (on his own behalf and on behalf of the other additional insured) and then attempt to recover that settlement amount from Farm Family. The two additional insureds settled for $350,000 and the remaining defendant (the policyholder) went to trial. In the process, the policyholder dismissed the plaintiff’s claim.

Following the trial, the additional insureds filed a lawsuit against Farm Family, alleging bad faith breach of contract and attempting to recover the $350,000 settlement payment, among other damages. Farm Family sought summary judgment, arguing that there was no genuine dispute as to material facts which Farm Family negotiated in good faith. The court disagreed.

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What does all this mean for policyholders?

Although cases of “disagreement” are very factual, it is important for policyholders to understand that their insurance company cannot reject the settlement simply because it believes the plaintiff’s claims are unfounded. Litigation is risky. Jurors can be unpredictable. There are no guarantees. An insurance company may decide not to settle a particular case, but its decision must be made in good faith and supported by actual evidence. The evidence must show that the insurance company made a “thoroughly honest, intelligent and objective” decision. See Rova Farms Resorts, Inc. v. Investors Insurance Co. of America, 65 NJ 474, 489 (1974).

The BrightView court based its decision on two filing pieces of evidence that could lead a jury to conclude that Farm Family’s settlement negotiations “were conducted in a cursory and unintelligent manner such that these negotiations were conducted in bad faith.” First, Farm Family ignored his expert’s recommendation for a settlement. Second, Farm Family spent little time evaluating the comparative value (“about 15 to 20 minutes”) and failed to implement objective procedures to do so (the claims panel simply applied its own subjective expertise and judgment).

If an insurance company “drags” in settlement negotiations or decides to “roll the dice” in court, the policyholder should consult an experienced coverage attorney as soon as possible. Some jurisdictions require that the insurance company receive an indemnity claim within the policy limits as a condition of loss settlement failure. Even in jurisdictions that do not require a claim as a requirement, it can be helpful to gather information to verify that the insurance company’s decision is at least “thoroughly honest, intelligent, and objective.”

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