JULY 2017 BAD FAITH CASES: SETTLING AND EXHAUSTING POLICY LIMITS AS TO LESS THAN ALL INSUREDS PERMISSIBLE IF REASONABLE AND DONE IN GOOD FAITH (New Jersey Law Division)

An interesting New Jersey 2016 trial court opinion on settling for less than all insureds.

As the court framed the issue: Did the insurer have “the discretion under the policy to settle the claims against [one insured] and thereby exhaust the policy without also obtaining a release from the Plaintiff of the claims against the [other insureds?]” The party resisting the partial settlement was a different insurer for these other insureds, which brought suit to stop the partial settlement.

The settling insurer wanting brought its own arguments to the table that it did have “discretion to exhaust its policy limit in good faith to settle the underlying claims against one of its insureds even if that settlement does not extinguish the claims against its other insureds….”

The opposing carrier countered “that any proposed settlement on behalf of only one of [the] insureds would be unreasonable under the circumstances and would constitute bad faith.” The court found in favor of discretionary partial settlement, holding that the insurer “has discretion to exhaust its policy limit in good faith to settle the underlying claims against one of its insureds even if that settlement does not extinguish the claims against its other insureds….”

The court recognized that “an insurance company owes its insured a duty of good faith that applies when, as here, the insurer reserves control of settlement negotiations….” It examined both New Jersey and other states’ case law on bad faith settlements.

This included a Pennsylvania Commonwealth Court decision standing for the proposition that an “insurer should not be precluded from accepting reasonable settlement offer for fewer than all insureds when no evidence establishing that the proposed settlements are unreasonable” and finding “that [an] insurer may be subject to bad faith action if evidence of unreasonable settlement.” Citing relevant New Jersey case law, the court emphasized a carrier’s “broad discretion to evaluate and settle claims in good faith as they see fit.”

The court considered it significant that a partial settlement would not leave the other insureds bare of any defense or coverage; rather, two other carriers provided potential defense and indemnification for them.

The court found “no impediment to the [insurer’s] exhaustion of its policy to settle the claims against [one insured] without also obtaining a release of the claims against the [other insureds]. The plain language of the policy affords the carrier discretion to investigate occurrences and settle claims as they see fit, so long as the decision is made in good faith.”

Moreover, as stated above, “the two additional insureds in this case each have their own primary liability policies.” Further, “one of the additional insureds … [had] rebuffed Plaintiff’s request to make a meaningful contribution to a global settlement. …. [H]aving failed despite extensive efforts to achieve a global settlement, the carrier has decided to effect a partial settlement to cap the exposure of [the settling insured].

Moreover, in this case, given the amount of coverage both primary and excess available to the [other insureds], the prospect that the settlement would be found in bad faith are in the court’s judgment remote.”

Thus, summary judgment was granted to the settling insurer.

Date of Decision: November 18, 2016

National Surety Corp. v. First Specialty Insurance Corp., No. L-3983-16, 2016 N.J. Super. Unpub. LEXIS 2570 (N.J. L. Div. Essex County Nov. 18, 2016) (Mitterhoff, J.)