Court Opinion

ID: 9645272
Source: CourtListenerOpinion
Date Created: 2023-08-22 21:19:14.343042+00
Date Added: 2024-06-11T18:11:26.514985
License: Public Domain

The opinion of the court was delivered by
Kolovsky, P. J. A. D.,
Temporarily Assigned. The malpractice liability insurance policy issued by defendant insurance company includes the following provisions with respect to malpractice claims asserted or suits instituted against its insured:
“* * * the company may make such investigation and, with the written consent of the insured, such settlement of any claim or suit as it deems expedient.
The insured shall cooperate with the company and, upon the company’s request, assist in making settlements, in the conduct of suits, * * *. The insured shall not, except at his own cost, voluntarily make any payment, assume any obligation or incur any expense.
*• *
No action shall lie against the company unless, as a condition precedent thereto, the insured shall have fully complied with all the terms of this policy, nor until the amount of the insured’s obligation to pay shall have been finally determined either by judgment against the insured after actual trial or by written agreement of the insured, the claimant and the company, * * *.”
The principal question presented on this appeal is the effect, in any, to be given to those provisions in a situation in which it appears that: (a) the potential award against the insured is far in excess of the policy limits; (b) the plaintiffs in the malpractice action have offered to settle for an amount greater than the policy limits but much less than the amount of their potential recovery; and (c) the insured reasonably concluded that the settlement offer should be accepted and that the insurance company, in refusing to *67contribute its policy limits to the settlement, is acting in bad faith — a fact established in the later action instituted on the insured’s behalf against the insurance company.
Both the trial court and the Appellate Division rule, in unrepor.ted opinions, that in such circumstances the insured may proceed to effectuate a reasonable good faith settlement for an amount in excess of the policy limits and, upon proof of the insurer’s bad faith, may recover from it the amount of its policy limits even though no judgment had been entered in the malpractice actions against the insured. That ruling is challenged by defendant in its appeal to this court upon certification granted. 68 N. J. 143 (1975). On plaintiff’s appeal, upon certification also granted, 68 N. J. 278 (1975), it seeks a reversal of the Appellate Division’s affirmance of the trial court’s refusal to award it punitive damages.
The instant litigation stems from two malpractice actions which had been instituted against a firm of attorneys who had represented a limited partnership and a corporation. The plaintiff in one of the actions was the receiver of the limited partnership. The plaintiffs in the second action were the directors of the corporation who had been named as defendants in an action in the Chancery Division instituted by the receiver.
It is conceded that primary insurance coverage to the extent of $50,000 was afforded to the law firm (the insureds) with respect to those malpractice claims under a lawyer’s professional liability policy issued by New Amsterdam Casualty Company, a predecessor of defendant Security Insurance Company of Hartford (Security). A similar policy issued by plaintiff Fireman’s Fund Insurance Company (Fireman’s) afforded excess coverage to the law firm to the extent of $250,000. Both insurance companies designated one attorney to defend the malpractice actions on behalf of their insured.
Shortly before those actions were to come to trial, the plaintiffs therein expressed a willingness to settle for *68$147,000. Defendant refused to settle or to contribute the $50,000 limit of its policy toward the required settlement amount — this despite the request of its insured and the recommendation of the trial attorney and of Fireman’s that it do so.
The insured, with the financial cooperation of Fireman’s, then settled the malpractice actions for $135,000. This action to recover $50,000 plus interest and punitive damages was instituted by Fireman’s, as assignee of the insured.1 The trial court found, as Fireman’s and the insureds had alleged, that Security had acted in bad faith in refusing to settle and that the $135,000 settlement was reasonable and made in good faith. The court awarded Fireman’s compensatory damages of $50,000 plus interest in the amount of $11,161.60, but denied its prayer for punitive damages. On appeals taken by both defendant and plaintiff, the Appellate Division affirmed.
Security offers no serious challenge to the finding that it had acted in bad faith in refusing to contribute its policy limits towards the proposed settlement. Indeed, no basis for such a challenge appears in the proofs, which are summarized in the lower court opinions.
Security, whose policy limit was $50,000, knew that if there were an adverse verdict in the malpractice actions the damages awarded would exceed $400,000 and might go as high as $542,000. Nevertheless, in disregard of its acknowledged fiduciary duty to its insured, Rova Farms Resort v. Investors Ins. Co., 65 N. J. 474, 496 (1974), and its obligation to treat the settlement offer of $147,500 “as if it had full coverage for whatever verdict might be recovered, regardless of policy limits, and makes its decision to settle or go to trial on that basis,” Bowers v. Camden Fire Ins. Assoc., 51 N. J. 62, 71-72 (1968), it gave only *69perfunctory, if any, consideration to the recommendations for settlement of those most familiar with the litigation and best in a position to evaluate the likelihood of a successful defense of the action — the attorney it had designated to defend the malpractice actions, the expert he had retained to testify at the trial, the insured law firm, Security’s local claim manager and Pireman’s.
Security chose to ignore its obligation to make an honest, intelligent and good faith evaluation of the case for settlement purposes and to weigh the probabilities in a fair manner. Cf. Radio Taxi Service, Inc. v. Lincoln Mutual Insurance Co., 31 N. J. 299, 305 (1960); Knobloch v. Royal Globe Ins. Co., 38 N. Y. 2d 471, 381 N. Y. S. 2d 433, 344 N. E. 2d 364 (Ct. App. 1976). It adopted that course even though it knew that if the favorable settlement offered by the plaintiffs in the malpractice actions was ever to be accomplished, it had to be accomplished promptly and in conjunction with a proposed settlement of an action which had been instituted by the receiver against the corporate directors in the Chancery Division, in which the trial was imminent. The “package” settlement offered by the receiver, and approved by the Chancery Division judge who appointed him, required the corporate directors to agree not only that all the moneys to be paid in settlement of the two malpractice actions should belong to the receiver, but also that the directors should pay the receiver additional sums out of their own funds.
Security’s conduct amounted to a repudiation of the obligation it owed its insured under the policy.
Nevertheless, Security contends that there may be no recovery against it based on the settlement made by the insureds because no judgment had been entered against its insureds in the malpractice actions and the settlement ultimately made — whose reasonableness is no longer disputed •— had not been authorized by it. It contends that, despite its bad faith, it is entitled to rely on the rights reserved to it by *70the “settlement” and “no action” provisions of the policy-quoted at the outset of this opinion.
In support of its contentions, Security argues:
“An insurer should not be deprived of its right to settlement because it is guilty of bad faith in refusing to participate in settlement prior to trial. A continuing test of its abuse of the right to settle must be made up until judgment is entered. The insured suffers no detriment except the inconvenience of trial while he awaits the outcome. His right to recover against the insurer is preserved and, of course, under Rova Farms, supra, he need not prove a case of bad faith against the carrier. If the judgment is in excess of his limits where there is a failure to settle within its limits, the carrier is ‘automatically’ liable to the insured for the over-the-limit judgment. We respectfully submit that the adoption of a rule allowing an insured to settle a pending case, prior to entry of judgment and then sue his carrier in bad faith would be a step backward from the landmark holding in Rova Farms, supra. Bad faith would have to be proved by the insured in a subsequent trial and the insured might be guilty of estoppel where he fails to take over settlement upon an insurer’s refusal to participate in settlement. Under Rova Farms, supra, bad faith need not be proved after judgment and the insured need not participate in settlement negotiations prior to trial.”
Were the holding in Rova Farms, supra, what Security says it was, then indeed there would have been no reason for the insured to be concerned with a settlement of the malpractice actions or the potential award if those actions were tried, since Security’s failure to settle would make it liable for the full amount of any judgment ultimately recovered even if it had acted in good faith in rejecting the settlement offer.
However, Security’s argument is bottomed on an erroneous interpretation of our opinion in Rova Farms, supra. Contrary to what Security contends, Rova did not eliminate “bad faith” as one of the factors to be proven where an action is instituted by an insured against his insurer based on its refusal to settle. Uor did we in Rova adopt a rule making the insurer “automatically liable to the insured for the over the limit judgment.” While the opinion in Rova did suggest that it might be desirable “one day” to adopt such a rule, it concluded that “it is unnecessary in the instant *71case to embrace such an extended rule” (65 N. J. at 502), and such a rule has never been adopted.
There being no substance in the argument thus presented in unwarranted reliance on Rova, we turn next to a consideration of Security’s argument that in any event — despite its bad faith and the fact that the potential recovery and the amount of the settlement were far in excess of its policy limits — it is entitled to rely on the quoted policy provisions as a bar to this action. It contends that there is no warrant for depriving it of the rights reserved to it by the policy, conditioning recovery in any action against it ou either a prior recovery of a judgment against its insureds or a settlement agreed to by both it and its insureds.- We disagree.
While the right to- control settlements reserved to insurers is an important and significant provision of the policy contract, Radio Taxi Service, Inc. v. Lincoln Mutual Insurance Co., supra 31 N. J. at 305; Condenser Service, etc., Co. v. American, etc., Ins. Co., 45 N. J. Super. 31, 41 (App. Div. 1957), it is a right which an insurer forfeits when it violates its own contractual obligation to the insured. As we said in Warren v. The Employers’ Fire Insurance Co., 53 N. J. 308. 311-312 (1969) :
“* * * Before an insurance company will be heard to allege the breach of a contractual provision by plaintiff, the insurance company must be able to assert its own lack of any breach.”
So it is settled, as stated in N. J. Mfgrs. Ind. Ins. Co. v. U. S. Cas. Co., 91 N. J. Super. 404, 407-408 (App. Div. 1966) :
“® * * Where an insurer wrongfully refuses coverage and a defense to its insured, so that the insured is obliged to defend himself in an action later held to be covered by the policy, the insurer is liable for the amount of the judgment obtained against the insured or of the settlement made by him. * * * The only qualifications to this rule are that the amount paid in settlement be reasonable, and that the payment be made in good faith.”
*72See also Annotation, “Liability Insurer — Refusal to Defend,” 49 A. L. R. 2d 694 (1956).
 As noted in the cited annotation, the specific consequences of the insurer’s unjustified refusal to comply with its contractual obligation to defend include the forfeiture of the insurer’s right to insist on compliance by the insured with prohibitory policy provisions, such as the “no action” clause here involved and those prohibiting settlement and “voluntary” payment by the insured. 49 A. L. R. 2d at 743-754.
Security would distinguish those cases and authorities because they involve breaches by the insurers of express provisions of the policy requiring the insurer to afford a defense to the insured. That asserted distinction has no validity. It ignores that there is also embodied in the policy contract an implied covenant of good faith and fair dealing with which the insurer must comply before seeking to rely on the powers reserved to it by the language of the policy contract, even though that language, read literally, gives the insurer the absolute, unrestricted right to exercise those powers.
The policy is a contract, to which applies, in full measure the rule that:
“* * * every contract there is an. implied covenant that ‘neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract ; in other words, in every contract there exists an implied covenant of good faith and fair dealing.’ 5 Williston on Contracts § 670, 159-160 (3d. ed. 1961).” [Association Group Life, Inc. v. Catholic War Vets. of U. S., 61 N. J. 150, 153 (1972)].
See also Palisades Properties, Inc. v. Brunetti, 44 N. J. 117, 130 (1965) and Bak-A-Lum Corp. v. Alcoa Building Prod., 69 N. J. 123, 129-130 (1976).
That S'ecurity’s breach was not of its express covenant to afford its insureds a defense but rather of its implied covenant to exercise good faith in considering an offer to *73settle for an amount in excess of its policy limits is of no moment.
“[T]he insurer’s obligation to act in good faith for the insured’s interests may be breached in other ways than by refusing or neglecting to defend a suit.” Isadore Rosen & Sons, Inc. v. Security Mutual Ins. Co., 31 N. Y. 2d 343, 339 N. Y. S. 2d 97, 101, 291 N. E. 2d 380, 382 (1972).
See also Hand v. Northwestern National Ins. Co., 255 Ark. 802, 502 S. W. 2d 474 (1973).
The breach of an insurer’s covenant, whether it be express or implied, leaves the insured free, despite the limiting policy provisions, to protect his own interest in minimizing a potential liability in excess of the policy limits by agreeing to a reasonable good faith settlement of the negligence actions and then, on proof of the insurer’s default, to recover from it the amount of its policy limits.
Although liability policies generally provide, as does Security’s in this case, that “the company may make such investigation * * * of any claim or suit as it deems expedient,” it is recognized that considerations of good faith and fair dealing require that the insurer make such investigation within a reasonable time. If the insurer delays unreasonably in investigating and dealing with a claim asserted against its insured, the insured may make a good faith reasonable settlement and then recover the settlement amount from the insurer, despite the policy provision conditioning recovery against the insurer on its policy on the prior entry of a judgment against the insured or acquiescence by the insurer in the settlement. Isadore Rosen & Sons, Inc. v. Security Mutual Ins. Co., supra; Otteman v. Interstate Fire & Casualty Co., 172 Neb. 574, 111 N. W. 2d 97 (Sup. Ct. 1961); Hand v. Northwestern National Insurance Co., supra.
The court’s comments in Isadore Rosen & Sons, Inc. v. Security Mutual Ins. Co., supra, are instructive:
The New York rule is that where an insurer “ ‘unjustifiably refuses to defend a suit, the insured may make a reasonable settlement *74or compromise of tile injured party’s claim, and is then entitled to reimbursement from the insurer, even though the policy purports to avoid liability for settlements made without the insurer’s consent’ ” (Matter of Empire State Sur. Co., 214 N. Y. 553, 563, 108 N. E. 825, opn. per Seabury, J., restated in Cardinal v. State of New York, 304 N. Y. 400, 410, 107 N. E. 2d 569, 573).
But the insurer’s obligation to act im good faith for the insured’s interests may be breached in other ways than by refusing or neglecting to defend a suit. It may be breached by neglect and failure to act protectively when the insured is compelled to make settlement at his peril; and unreasonable delay by the insurer, in dealing with a claim, may be one form of refusal to perform which could justify settlement by the insured.
This seems the general rule: “The provision against settlement by insured cannot be taken advantage of by insurer, where it unreasonably delays to take any action, after notice of the claim” (45 C. J. S. Insurance § 937, subd. b, p. 1072; see Home Ind. Co. v. Snowden, 223 Ark. 64, 264 S. W. 2d 642; Interstate Cas. Co. v. Wallins Creek Coal Co., 164 Ky. 778, 176 S. W. 217). [339 N. Y. S. 2d at 101, 291 N. E. 2d at 382-3]. (Emphasis added).
So, too, where a policy, as in this case, provides that “the company may make, * * * with the written consent of the insured, such settlement of any claim or suit as it deems expedient,” there is implicit in the power thus reserved to the insurer an obligation that the insurer exercise its reserved power in good faith and with concern for the interests of the insured.
The consequences of a breach of that obligation differ depending on whether, viewed as of the time the settlement offer is being considered, the potential award is within or beyond the limits of the policy. If the potential loss is within the policy limits, then there is no reason to deprive the insurer — the only one appearing to have a pecuniary interest in the ultimate liability and the only source of the funds to be paid in settlement — of its absolute right to control the litigation. Traders & General Ins. Co. v. Rudco Oil & Gas Co., 129 F. 2d 621, 626 (10th Cir. 1942). In such a situation, even though the insured may deem the refusal of the insurer to settle to be in bad faith, since prima facie the insured’s pecuniary interest does not appear to be involved, it is appropriate to hold that the insured has no *75alternative but to await the trial of the negligence action and, if it results in a judgment in the claimant’s favor in excess of the policy limits, then to institute an action against the insurer to recover the amount of the policy limits and in addition the amount by which the judgment exceeded the amount for which the claimant was willing to settle. Traders & General Ins. Co. v. Rudco Oil & Gas Co., supra, at 626.
A different situation is presented when, viewed as of the time the settlement offer is received, the potential loss and the proposed settlement exceed, as they did here by far, the limits of the policy. In such a situation, the insured may, but he need not await the outcome of the trial of the negligence action. He should not “be required to wait until after the storm before seeking refuge” when faced with “a potential judgment far in excess of the limits of the policy.” Traders & General Ins. Co. v. Rudco Oil & Cas Co., supra, at 627.
He should be and is permitted, as in other cases in which the insurer has breached its obligations, to proceed to make a prudent good faith settlement for an amount in excess of the policy limits and then, upon proof of the breach of the insurer’s obligation and the reasonableness and good faith of the settlement made, to recover the amount of the policy limits from the insurer. Traders & General Ins. Co. v. Rudco Oil & Gas Co., supra; Evans v. Continental Cas. Co., 40 Wash. 2d 614, 245 P. 2d 470 (1952); Home Indemnity Co. v. Snowden, 223 Ark. 64, 264 S. W. 2d 642 (1954); see also Annotation: “Liability Insurer — Duty to Settle,” 40 A. L. R. 2d 168, 193-4 (1955).
Apposite is what the court said in Evans v. Continental Cas. Co., supra:
An insured can recover from his insurer the amount of a judgment rendered against him, including the amount in excess of the policy limits, when the insurer has been guilty of bad faith in failing to effect a settlement for a smaller sum. (at 478).
*76While there is no question concerning the insurer’s liability for the entire amount of a judgnient where it has been guilty of bad faith, the question remains: Should an insured be permitted to settle the tort claims under such circumstances and then recover from the insurer the amount paid in settlement together with his reasonable attorney fees and expenses?
We are of the opinion that the insured should recover the amounts so paid, up to the policy limits, provided that such sums were reasonable and were paid in good faith.
* *• #
The situation presented here does not differ in principle from that in which the insurer denies liability and refuses to defend. While it has been held that under those circumstances there is no duty on the insured to mitigate damages by effecting a favorable settlement, Carthage Stone Co. v. Travelers’ Ins. Co., 274 Mo. 537, 203 S. W. 822, it is well established that the insured may settle and recover from the insurer. St. Louis Dressed Beef & Provision Co. v. Maryland Casualty Co., 201 U. S. 173, 26 S. Ct. 400, 50 L. Ed. 712; Traders & General Ins. Co. v. Rudco Oil & Gas Co., 10 Cir., 129 F. 2d 621, 627, 142 A. L. R. 799; 8 Appleman, Insurance, 33, § 4690.
The similarity between the facts of the Rudco Oil case and those of the present action makes much of what the court said in that decision appropriate here. In upholding the right of the Rudco Oil & Gas Oo. to recover of its insurer the sum paid in prudent settlement of a claim the court said:
“We think, however, the rule [that the insurer must exercise good faith and honest judgment in its approach to settlement negotiations] applies with equal force to a prudent settlement made by the assured in the face of a potential judgment far in excess of the limits of the policy. Why should the assured be required to wait until after the storm before seeking refuge.
“Therefore, as a guide for the determination of the question presented here, we think it may be fairly stated that before Traders & General [the insurer] may interpose the voluntary settlement made by Rudco as a bar to recovery upon the policy, it must be shown that it acted, not alone in furtherance of its own interest, but it must also appear that it acted in good faith and dealt fairly with the assured. Its manifest attitude and course of conduct must have some legal justification and factual basis.
“Rudco was faced with suits aggregating $63,000 for personal injuries and death, arising out of its alleged negligent conduct. The injuries were admittedly serious and the element of damages gross and palpable. It was conscientiously convinced of its negligent liability. The limit of its protection under its policy was $10,000; its potential loss was therefore far greater than that of the Traders & General. Traders & General had investigated the claims; it is its business to appraise potential liability and losses. In the face of the facts shown upon the record, Traders & General had no standing to contend against the liability of Rudco, or the likelihood of a re*77covery far in excess of the limits of the policy. Rudco had the right to demand not a settlement on its terms and conditions, hut a good faith co-operation on the part of Traders & General, wherein hoth parties would face the facts realistically and with a mutual respect for the interest of each.

“Each of the parties to the contract oioed to the other an express and implied duty to respect its rights and interests, and to approach the common problem realistically with open hands and without concealed weapons.

“We recognize the evils inherent in any rule which permits, or justifies, a compromise or settlement by the assured without the consent of the insurer, yet we are unwilling to say that in no circumstances is such conduct justified.
“Under the peculiar facts, shown here to exist, we hold that the course of conduct pursued by the Traders & General does not square with the standard of good faith and fair dealing which underlies the contract between the parties, and it is therefore without standing to assert its only defense.” (Italics ours.) [245 P. 2d at 479-480].
Two points made in the dissenting opinion require brief comment.
The dissent concedes that the holdings in Traders & General Ins. Co. v. Rudco Gas & Oil Co., supra, Evans v. Continental Gas Co., supra, and Home Indemnity Co. v. Snowden, supra, are authority for the rule for which we have cited them. However, it suggests that the decisions adverse to the insurers in two of those cases, Traders General and Evcms, should have been bottomed not on the bad faith refusal of the insurers to settle but on a finding that the insurer in each had refused to defend or had denied coverage.
In those two cases the insureds did contend, among other things that there had been, in effect, a refusal to defend because: (a) in Evans v. Continental Cas. Co., supra, the insurer, after filing answers on its insured’s behalf in the negligence actions had demanded that its insured sign a "reservation of rights” letter; and (b) in Traders & General Ins. Co. v. Rudco Gas & Oil Co., supra, the insurer had filed answers in the negligence actions after obtaining a reservation of rights letter and then had filed a declaratory judgment action seeking a determination that there was no coverage. However, *78in each case, the court expressly chose not to base its decision on the ground so asserted, (see Evans, supra, 245 P. 2d at 480; Traders, supra, 129 F. 2d at 626) and bottomed its decision solely on the bad faith refusal of the insurer to settle. There is no justification for interpreting those cases as ones in which the insurers’ conduct was tantamount to a refusal to defend or an unqualified denial of coverage when the court in each, with the full record before it, refused to do so.
Finally, we disagree with the assertion in the dissenting opinion that plaintiff did not prove damages from the breach of defendant’s obligation because no judgment had been recovered against the insured in the malpractice actions. The dissent argues that absent proof of such a judgment, no damage has been shown because the settlement made by the insured aborted several possible other dispositions of the malpractice actions, viz: (a) a later settlement for a lesser amount; (b) a verdict at trial in favor of the defendants; or (e) a verdict at trial against the defendants in an amount less than the limits of defendant’s policy.
However, those possibilities exist in all cases in which the insurer breaches its obligation to its insured and thus forfeits its reserved power to control settlements, be the breach that of its express obligation to defend, of its implied obligation to make a timely investigation of the claim or of its implied obligation to exercise, in good faith and with concern for the interests of the insured, its reserved power with respect to settlements.
In each of those situations, it is uniformly held, as the cases cited earlier in this opinion disclose, that the measure of the insured’s damages is either the amount of the judgment entered against the insured in the negligence action or the amount paid by the insured in making a reasonable good faith settlement of the negligence action before trial. See also 81. Louis Dressed Beef & P. Co. v. Maryland Casualty Co., 201 U. S. 173, 26 S. Ct. 400, 403-404 (1906).
*79Where the measure of recovery is the amount paid in settlement, the defaulting insurer receives all the protection to which it is entitled from the requirement that the insured, in establishing his damages, prove — as was done here— that the settlement was made in good faith and for a reasonable amount.
What we have ruled leads to a rejection of defendant’s appeal, leaving only the issue of whether, as plaintiff contends, it should have been awarded punitive damages. We are satisfied, however, as were the trial court and the Appellate Division, that the necessary requisites to an award of punitive damages axe not present.
The judgment is affirmed.

 The parties agree that plaintiff’s status is no different than that of the insured and that no additional rights flow to it because it was an excess insurer.