As a general rule, if a policyholder reasonably attempts to settle a case for an amount at or within the limits of its insurance policy, the insurance company must put the policyholder’s interests above its own. Typically, if the insurance company does not accept a reasonable settlement within limits, then it may be responsible for a judgment amount in excess of the policy limits if the insurance company’s refusal to settle was unreasonable. The insurance company’s failure to settle may result in a bad faith claim. But what if the insurance company refuses to settle and the policyholder prevails at trial? According to a federal district court in New Jersey, if the insurance company’s decision not to settle was unreasonable, it may still be liable for bad faith.

Summary of recent New Jersey federal court decision

BrightView Enterprise Solutions, LLC v. Farm Family Casualty Insurance Company, No. 20cv7915 (EP) (AME), 2023 U.S. Dist. LEXIS 20764 (D.N.J. Feb. 7, 2023) is not your typical bad faith “failure to settle” case. It involved three different companies that were insured under a single commercial general 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” on a puddle of water and hit her head. The injured employee filed suit against all three companies, alleging that her “slip and fall” caused a permanent disability. Farm Family agreed to defend and provide coverage for all three defendants up to its $1 million policy limit.

At a settlement conference just days before the start of trial, the judge indicated that an offer in the range of $650,000 to $750,000 from Farm Family offered on behalf of all three defendants would settle the case. The day before that settlement conference, the Farm Family claim examiner recommended that Farm Family try and settle the case and that it could “be resolved fully up to 650k rather than try the case.”  However, Farm Family decided to limit its settlement authority to $400,000.

Farm Family’s litigation examiner testified that he arrived at the $400,000 number after a fairly thorough discussion with the Farm Family claims committee “that may have lasted around 15 to 20 minutes.” Farm Family did not even convey that number to the insured-defendants.  Instead, it authorized only $250,000 to settle prior to trial.

One of the additional insureds sent a “hammer” letter demanding that Farm Family settle the lawsuit within policy limits, stating that Farm Family’s $250,000 settlement offer was “astonishingly low,” and warning that it would settle the lawsuit (on behalf of itself and the other additional insured) and then seek to recover that settlement amount from Farm Family. The two additional insureds settled for $350,000, and the remaining defendant (the policyholder) proceeded to trial. At trial, the policyholder defeated the plaintiff’s claim.

After trial, the additional insureds filed a lawsuit against Farm Family, asserting a bad faith breach of contract claim, and seeking to recoup the $350,000 settlement payment, among other damages. Farm Family moved for summary judgment, arguing that there was no genuine dispute of material fact that Farm Family negotiated in good faith. The court disagreed.

What does all of this mean for policyholders?

While “failure to settle” cases are highly fact-intensive, it is important for policyholders to understand that their insurance company cannot refuse to settle simply because it believes the plaintiff’s claims have no merit. Litigation is risky. Juries can be unpredictable. There are no guarantees. An insurance company may decide not to settle any given case, but its decision must be made in good faith and supported by actual evidence. The evidence must demonstrate that the insurance company made a thoroughly honest, intelligent, and objective decision. See Rova Farms Resort, Inc. v. Investors Insurance Co. of America, 65 N.J. 474, 489 (1974).

The court in BrightView based its decision on two pieces of record evidence that could lead a jury to conclude that Farm Family’s settlement negotiations were cursory and not made intelligently, such that those negotiations were in bad faith. First, Farm Family ignored its adjuster’s recommendation to settle. Second, Farm Family spent little time assessing the settlement value (“around 15 to 20 minutes”) and failed to implement any objective procedures to do so (the claims committee simply applied their own subjective expertise and judgment).

When an insurance company “drags its feet” in settlement negotiations, or decides to “roll the dice” at trial, the policyholder should involve experienced coverage counsel as soon as possible. Some jurisdictions require that the insurance company receive a settlement demand within policy limits as a prerequisite to a failure to settle claim. Even in jurisdictions where a demand is not required as a prerequisite, it may be helpful to seek information to test whether the insurance company’s decision is at least thoroughly honest, intelligent, and objective.