Bad faith is established only where the liability is clear and the potential recovery far exceeds the insurance coverage. However, it does not follow that whenever an injury is severe and the policy limits are significantly lower than a potential recovery the insurer is obliged to accept a settlement offer. The bad-faith equation must include consideration of all of the facts and circumstances relating to whether the insurer's investigatory efforts prevented it from making an informed evaluation of the risks of refusing settlement.
The claimant was injured while a passenger in the insured's vehicle, and in the ensuing personal injury action the jury returned a verdict for the claimant. The insured subsequently assigned all potential causes of action he had against the insurer to the claimant, and together they commenced an action against the insurer alleging bad faith in the insurer's failure to accept the claimant's previous settlement offer within the policy limits despite clear liability and obvious damages exceeding the policy limits. At trial, the jury determined that the insurer acted in gross disregard to the insured's interest, and the trial court entered an excess judgment against the insurer. The appellate division affirmed.
Was bad faith established where an insurer failed to accept a settlement offer while investigating liability?
The court held that that the insurer's failure to respond to the claimant's time-restricted demand for settlement within the full policy limits, at a time when the insured's liability remained under investigation, was insufficient to establish a prima facie case of bad faith. Moreover, there was nothing more in the conduct or inaction of the insurer that would qualify as bad faith under the circumstances. The court reversed the appellate division's judgment.