Opinion ID: 1721762
Heading Depth: 1
Heading Rank: 1

Heading: Negligent Failure to Settle

Text: Simply put, this case presents the question of whether an insurer can be liable in tort for failing to settle a claim when the issue of liability is questionable and the amount of damages, if liability is found, will clearly exceed the policy limits. The question is asked in some of the authorities, `What would constitute negligence in the failure to settle a case as distinguished from bad faith?' 131 A.L.R. 1501. The answer is that it is a question for the jury from all the facts and circumstances to determine whether the failure on the part of the insurer to make settlement is an act of negligence or one of bad faith. Both of those terms have a well understood meaning, and we do not see any reason why we should stumble over their application. In this connection it is well to observe that the mere failure on the part of the insurer to make a settlement within the limits of his contract when he has an opportunity to do so is not alone evidence of negligence or bad faith. The allegation of negligence is made in one count of the complaint and bad faith in the other. In order to succeed it is necessary for the plaintiff to prove either negligence or bad faith. There is no presumption under the circumstances of this case of either negligence or bad faith. The principle of res ipsa loquitur has no application here and, therefore, the issue is simply made here as in all negligence cases whether, considering all the circumstances, the insurer failed to exercise ordinary care on the one hand or good faith on the other. Waters v. American Casualty Co. of Reading, Pa., 261 Ala. 252, 258, 73 So.2d 524, 529 (1954). (Emphasis added.) On rehearing, the Court elaborated on the standards of liability: We have been urged to extend the opinion in this cause as to the application of the rules of negligence and bad faith and as to the effect of the opinion upon the liability of attorneys representing the insured upon appointment by the insurer. We first consider negligence and bad faith in cases of this nature. There is a field of operation for both aspects of liability: that is, negligence in one, and bad faith in the other. We cannot set aside the principle of liability for negligently performing a contract as set forth in the opinion supra. It may arise when an insurer is engaged in performing his contractual duty owing to the insured to defend the suit. The law raises a duty not contractual, but by reason of the contract, to exercise ordinary diligence in doing so. A failure to exercise ordinary diligence proximately causing damage to the insured is actionable in tort. The contract of insurance gives the insurer the exclusive right to make a settlement of the claim against insured. That right imposes a corresponding duty raised by law to observe ordinary diligence in performing that power, when in the exercise of it. So that, when an opportunity is presented to the insurer to make a settlement of the claim in an amount not more than the limit of liability, the law raises a duty on his part to use ordinary care to ascertain the facts on which its performance depends if he has not already done so. If the insurer neglects to exercise ordinary diligence in ascertaining these facts, if he has not already done so, and as a proximate result of such neglect he fails to make such a settlement, which is available, and when such knowledge would have caused a reasonably prudent person to do so and a verdict and judgment are rendered against insured in an amount more than the limit of liability in the policy, the insurer should be held liable to the insured for the full amount of the judgment.  If the insurer has already made the investigation and ascertained the facts, to which we have referred supra, and refuses to make such proffered settlement, if such refusal is due to the honest judgment of insurer that the facts do not warrant such a settlement, and the insurer was not negligent in the manner of defending the suit, he would not be liable to insured for an amount in excess of the limit of liability provided in the policy, although the verdict and judgment were in excess of it. But, if such refusal to settle under those circumstances is the proximate result of bad faith on the part of the insurer, he would be liable for the full amount of the judgment, notwithstanding it is in excess of the limit fixed in the policy. Id., 261 Ala. at 260-61, 73 So.2d at 531-32. (Emphasis added.) The Court reaffirmed the Waters criteria in Nationwide Mutual Insurance Co. v. Smith, 280 Ala. 343, 351, 194 So.2d 505, 512 (Ala.1966): And we ask, would not the refusal of an insurer, after diligent investigation of the facts, and having under the insurance contract exclusive control of the litigation and sole right of settlement, be negligent if under all the facts the offer of settlement was one which an ordinarily prudent person would accept under like or similar circumstances? And would not a refusal to settle under such circumstances negative in law a claimed exercise of `honest judgment,' and raise a question of fact for submission to a jury? In its extended opinion on rehearing in the Waters case, supra, the court made it clear it was not departing from the doctrines enunciated in its original opinion. There is no allegation that State Farm was negligent in failing to ascertain facts necessary to make an informed decision about whether to settle. Therefore, the issue is whether State Farm exercised honest judgment in refusing to settle. In evaluating this contention, we must be careful to heed the admonishment in Waters that the fact that a verdict came back in excess of the policy limits is not, standing alone, evidence of negligence. To hold otherwise would require insurers to be prophets. No one disputes the fact that liability was hotly contested. State Farm's insured insisted throughout the proceedings that he was not at fault, even though he did eventually request that State Farm settle the claim. Other evidence supported the defendant's claim. The facts that allegedly impugn State Farm's honest judgment argument is plaintiff's expert testimony. The plaintiff's experts testified that if liability were established, damages would be in excess of the policy limits and possibly far in excess of those limits. With respect to the defendant's contention on appeal that it was entitled to JNOV on the claims, the question is whether this expert testimony amounts to a scintilla of evidence of a lack of honest judgment or a lack of due diligence. It has been suggested that an insurer in State Farm's position use the following guideline in considering a demand for settlement with its insured: Would I accept this demand if the policy coverage were unlimited? Annot., 63 A.L.R. 725, § 2[b] (1975). See also Dumas v. Hartford Accident & Indemnity Co., 94 N.H. 484, 56 A.2d 57 (1947); Betts v. Allstate Ins. Co., 154 Cal.App.3d 688, 201 Cal.Rptr. 528 (1984); 7C J. Appleman, Insurance Law and Practice, § 4713 (1979); Hartford Accident & Indemnity Co. v. Foster, 528 So.2d 255 (Miss.1988). With respect to a good faith standard of liability, a Pennsylvania superior court said in a case in a very similar posture: Appellant's mistake is its apparent belief that proof of sincerity is equivalent to proof of good faith. For purposes of disposition, we may assume that appellant's refusal to offer to settle was based on the sincere belief that Reed had not been negligent. The good faith standard requires more than proof of sincerity: `[A] decision not to settle must be a thoroughly honest, intelligent and objective one. It must be a realistic one when tested by the necessarily assumed expertise of the company. [ Bowers v. Camden Fire Ins. Assoc., 51 N.J. 62, 71, 237 A.2d 857, 861 (1968)]. This expertise must be applied, in a given case, to a consideration of all the factors [emphasis in the original] bearing upon the advisability of a settlement for the protection of the insured. While the view of the carrier or its attorney as to liability is one important factor, a good faith evaluation requires more. [Emphasis added in Shearer. ] It includes consideration of the anticipated range of a verdict, should it be adverse; the strengths and weaknesses of all of the evidence to be presented on either side so far as known; the history of the particular geographic area in cases of similar nature; and the relative appearance, persuasiveness, and likely appeal of the claimant, the insured, and the witnesses at trial. Garner v. Am. Mut. Lia. Ins. Co., 31 Cal.App.3d 843, 107 Cal.Rptr. 604, 607-608 (1973). Rova Farms Resort, Inc. v. Investors Insurance Company of America, 65 N.J. 474, 489-90, 323 A.2d 495, 503-04 (1974).' Here, the jury was entitled to find that even assuming the sincerity of appellant's representatives, their appraisal of the case was not either intelligent or objective, and their refusal to offer to settle, therefore, was not in good faith. Given appellee's injuries, it was obvious that any verdict in her favor would exceed the policy limit. It was therefore especially critical to appraise the likelihood of such a verdict. In making that appraisal, one could anticipate that aif not theprincipal issue at trial would be the degree of visibility, that is to say, considering the fog, was Reed driving too fast? Appellant knew that there would be conflicting testimony on this point. Appellant further knew that appellee would present an appealing sight to the jurya middle-aged woman, visibly and permanently injured, clearly through no fault of her own. One could further anticipate, therefore, that the jury might very well resolve conflicts in the testimony in appellee's favor. Confronted with such a case, the intelligent and objective claims adjuster does not refuse to offer to settle. Or so the jury was entitled to conclude. The fact, so emphasized by appellant, that the trial judge evidently would have concluded otherwise is immaterial, as the judge recognized in his opinion refusing to grant appellant's motion for judgment n.o.v. The jury having reached its verdict, the court's duty is not to ask whether it would have reached the same verdict but whether the verdict is in accordance with law and supported by the evidence, as the jury could have regarded that evidence. Brown v. Shirks Motor Express, 393 Pa. 367, 143 A.2d 374 (1958). Shearer v. Reed, 286 Pa.Super. 188, 428 A.2d 635, 638-39 (1981). While the Pennsylvania standard is one of good faith and Alabama's is negligence, the criteria set forth in Shearer are useful in determining whether the insurer was negligent. [2] If there is some probability of harm sufficiently serious that ordinary men would take precaution to avoid it, then failure to do so is negligence. Dumas, 94 N.H. at 489, 56 A.2d at 60. In Dumas the facts showed the question of liability to be close, but the severity of injury to be great. The court affirmed a judgment based on a verdict for the insured. The Mississippi Supreme Court in Foster supra, recognized that tort liability can exist in the context of a failure to settle a claim, saying, [T]he insurer has a fiduciary duty to look after the insured's interest at least to the same extent as its own, and to make a knowledgeable, honest and intelligent evaluation of the claim commensurate with its ability to do so. If the carrier fails to do this, then it is liable to the insured for all damages occasioned thereby. 528 So.2d at 265. The court then held that the insured's claim must fall because the insured was guilty of neither negligence nor bad faith in handling the settlement. The court stated that the claimant's only asset in the underlying tort action was the dreadful injury to his arm. In an appendix to the opinion the court characterized the evidence as showing that it was highly unlikely that the insured was on the wrong side of the road. Unlike in Foster, here the claimant's case did not hinge solely on his testimony and severe injuries. The only eyewitness other than the parties stated that the insured was at fault. In addition, the claimant's accident reconstruction expert placed the insured's car in the claimant's lane of traffic. While we recognized that the expert's testimony was highly suspect, we nonetheless deemed it not incompetent. Hollis v. Scott, 516 So.2d 576 (Ala.1987). The insured in this case put on expert witnesses, two of whom said that there was a reasonable probability that a verdict for the plaintiff in excess of the policy limits would be returned. In light of the above, a jury question was presented on the issue of negligence.