When your business is sued by a third party, your liability insurance company has a good-faith obligation to honor the promises it made to you in your insurance contract. This includes defending you in court and indemnifying you for any judgments or settlements for covered claims, up to the policy limit. The insurer also has a good-faith duty to protect your interests when making decisions regarding settlements. If your insurer fails to settle an action within your policy limit, resulting in a judgment against you in excess of the policy limit, you have a right to bring a direct action against the insurer for bad faith to recover the excess judgment.
Settling a Claim
The vast majority of lawsuits are settled before reaching a final verdict. This protects both parties from the risk of the unknown result at the end of the trial. If you are sued and your case goes to final verdict, for instance, you may wind up owing a sum that is higher than your insurance policy limit and you would thus be on the hook for part of the payout. Therefore, if the insurance company has an opportunity to settle for a sum within your policy limit, it would generally be in your best interest for the insurer to settle the case. The insurer may think it’s best for its own bottom line to reject the settlement, however, and roll the dice to see what happens at trial. But if the insurer acts solely in its own interest and rejects a reasonable settlement offer, it would be breaching its good-faith obligation to protect your interests.
New York Bad Faith Laws
New York’s bad faith laws with regard to liability insurance have focused primarily on insurers’ wrongful refusal to settle a case. In 1993, the New York Court of Appeals held that, for a finding of bad faith, “the plaintiff must establish that the insurer’s conduct constituted a ‘gross disregard’ of the insured’s interests – that is, a deliberate or reckless failure to place on equal footing the interests of its insured with its own interests when considering a settlement offer. In other words, a plaintiff alleging bad faith must establish that the defendant insurer engaged in a pattern of behavior evincing a conscious or knowing indifference to the probability that an insured would be held personally accountable for a large judgment if a settlement offer within the policy limits were not accepted.” The court went on to state that this “gross disregard” standard “strikes a fair balance between two extremes by requiring more than ordinary negligence and less than a showing of dishonest motives” for a finding of bad faith.1
Failure to Settle in New York
In New York State, it is well-established that “compensatory damages in excess of the policy limits may be recovered where an insurer, in violation of its implied obligation to act in good faith, has failed to make a reasonable settlement of a claim within policy limits.”2 This full recovery only applies when the evidence shows that the case could have been settled without any contribution by the insured (or its excess insurers).3 If a settlement would have required a contribution from the insured (or an excess insurer), the primary insurer must pay the difference between the amount ultimately paid by the insured (or excess insurer) and what would have been paid if the primary insurer had offered its policy limit.4
In addition to an insurer refusing to settle within the policy limits, bad faith can be found against a liability insurer for other reasons, including a failure to investigate claims and a failure to inform you of a settlement offer.5
In a personal injury case involving a truck accident, one court held that an insurer breached its duty of good faith because, on the eve of trial, the insurer was unaware of the coverage amount, and this lack of knowledge made “good-faith negotiations impossible.”6
If you are involved in a dispute with your business insurance company, contact Schwartz Conroy & Hack. We have the expertise, experience and tenacity to make sure insurance companies keep their promises to you and your business.
1 Pavia v. State Farm Mutual Automobile Insurance Co., 82 N.Y.2d 445, 626 N.E.2d 24, 605 N.Y.S.2d 208 (1993)
2 AFIA v. Continental Ins. Co., 140 A.D.2d 167, 168, 527 N.Y.S.2d 420, 421 (1st Dep't 1988)
3 United States Fidel. & Guar. Co. v. Copfer, 48 N.Y.2d 871, 873, 400 N.E.2d 298, 298, 424 N.Y.S.2d 356, 356 (1979)
4 Cf. Feliberty v. Damon, 129 A.D.2d 207, 209-10, 517 N.Y.S.2d 632, 634 (4th Dep't 1987), aff’d, 72 N.Y.2d 112, 527 N.E.2d 261, 531 N.Y.S.2d 778 (1988)
5 Oppel v. Empire Mutual Insurance Co., 517 F. Supp. 1305 (S.D.N.Y. 1981)
6 Fredericks v. Home Indemnity Co., 101 A.D.2d 614, 474 N.Y.S.2d 870 (3d Dep't 1984)
