Opinion ID: 1225573
Heading Depth: 3
Heading Rank: 1

Heading: Good Faith in Settlement Negotiations

Text: {12} It is well settled that, absent a statute to the contrary, `insurance contracts are construed by the same principles which govern the interpretation of all contracts.' Rummel v. Lexington Ins. Co., 1997 NMSC 041, ¶ 18, 123 N.M. 752, 758, 945 P.2d 970, 976 (quoting 2 Lee R. Russ & Thomas F. Segalla, Couch on Insurance 3D § 21:1 (1996)). Thus, with insurance contracts, as with every contract, there is an implied covenant of good faith and fair dealing that the insurer will not injure its policyholder's right to receive the full benefits of the contract. See Ambassador Ins. Co. v. St. Paul Fire & Marine Ins. Co., 102 N.M. 28, 30, 690 P.2d 1022, 1024 (1984) (New Mexico recognizes this duty of good faith between insurer and insured.); Comunale v. Traders & Gen. Ins. Co., 50 Cal.2d 654, 328 P.2d 198, 200 (1958) (stating [t]here is an implied covenant of good faith and fair dealing in every contract). More specifically, this means that an insurer cannot be partial to its own interests, but must give its interests and the P.2d 673, 680 (Ct.App.1972). Lujan v. Gonzales, 84 N.M. 229, 236, 501 P.2d 673, 680 (Ct.App.1972). {13} Regarding a good-faith duty to settle, there is no presupposition that settlement is always the preferred means of protecting the policyholder's interests. However, good faith does impose upon the insurer the duty to settle whenever practicable. See Ambassador Ins. Co., 102 N.M. at 30, 690 P.2d at 1024 (It is the policy of this state to favor settlement whenever feasible.). It is common knowledge that a large percentage of the claims covered by insurance are settled without litigation and that this is one of the usual methods by which the insured receives protection. Under these circumstances the implied obligation of good faith and fair dealing requires the insurer to settle in an appropriate case although the express terms of the policy do not impose such a duty. Comunale, 328 P.2d at 201 (citations omitted). {14} The insurer's good-faith evaluation of the costs and benefits of settlement is generally accorded deference. See Ambassador Ins. Co., 102 N.M. at 30, 690 P.2d at 1024. However, judicial deference lessens whenever there is a substantial likelihood of a recovery that exceeds policy limits. See Kelly v. Farmers Ins. Exch., 194 Cal.App.3d 1, 239 Cal.Rptr. 259, 261 (1987) (The implied covenant, which is part of every insurance contract, imposes a duty on the insurer to settle a claim against its insured within policy limits whenever there is a substantial likelihood of a recovery in excess of policy limits.). The prospect of liability in excess of the policy limits presents an inherent conflict of interest between the insurer and its insured. The insurer may be willing to risk litigation in the hopes of avoiding the payment of the maximum policy limits; on the other hand, the insured will wish to avoid litigation for fear of being forced to pay an excess judgment out-of-pocket. See generally Merritt v. Reserve Ins. Co., 34 Cal.App.3d 858, 110 Cal.Rptr. 511, 517-20 (1973). Under such circumstances, the insurer should place itself in the shoes of the insured and conduct itself as though it alone were liable for the entire amount of the judgment. Johansen v. California State Auto. Ass'n Inter-Ins. Bureau, 15 Cal.3d 9, 123 Cal.Rptr. 288, 292, 538 P.2d 744, 748 (1975). When there is great risk of a recovery beyond the policy limits so that the most reasonable manner of disposing to the claim is a settlement which can be made within those limits, a consideration in good faith of the insured's interest requires the insurer to settle the claim. Comunale, 328 P.2d at 201. When a claimant makes a firm reasonable offer to settle an excess claim within policy limits, the implied covenant of good faith and fair dealing may require the insurer to settle. See Lehto v. Allstate Ins. Co., 31 Cal.App.4th 60, 36 Cal. Rptr.2d 814, 817 (1994) (as modified Jan. 13, 1995). {15} We conclude that when there is a substantial likelihood of recovery in excess of limits, an insurer's unwarranted refusal to settle is a breach of the implied covenant of good faith and fair dealing. See Foundation Reserve Ins. Co. v. Kelly, 388 F.2d 528, 531 (10th Cir.1968); Comunale, 328 P.2d at 200-01. This is because when damages are likely to exceed policy limits, the insurer risks exposing its insured to even greater liability by going to trial rather than settling. Should an insurer, in violation of its duty of good faith, refuse to accept a reasonable settlement offer within policy limits, it will be liable for the entire judgment against the insured, including the amount in excess of policy limits. Kelly, 239 Cal.Rptr. at 262. The courts of this state will not permit insurers to profit by their own wrongs. See Comunale, 328 P.2d at 202.