Court Opinion

ID: 9645273
Source: CourtListenerOpinion
Date Created: 2023-08-22 21:19:14.349334+00
Date Added: 2024-06-11T18:11:26.520767
License: Public Domain

Cueeoed, J.
(dissenting). I could not disagree more with the conclusion that the insured1 may settle directly with the claimant on this malpractice insurance policy and thereafter recover from the insurer, Security, the full amount of the policy limits. My disagreement stems from a conviction that both sound public policy and the efficient operation of the liability industry militate against this result.
The essential issue is: who had the right to control settlement of the claim — the insured or the insurer? The majority concludes that under the circumstances of this ease Security forfeited that “important” and “significant” right (anta at 71) by violating its own contractual obligation to *80the insured. En route to that result the 'Court obliterates what I believe to be a critical distinction between separate undertakings of the insurer (ante at 72). The first kind, set forth in specific language of express provisions in the policy, encompasses (a) the insuring agreement (coverage) and (b) the obligation to defend. The second is a creature of our case law, which has discerned in all contracts an implied covenant of good faith and fair dealing. Association Group Life, Inc. v. Catholic War Vets. of U. S., 61 N. J. 150, 153 (1972); see Rova Farms Resort, Inc. v. Investors Ins. Co., 65 N. J. 474, 492 (1974); see generally, Comment, “Insurance Carrier’s Duty to Settle: Strict Liability in Excess Liability Cases?”, 6 Seton Hall L. Rev. 662, 681 (1975); Note, 28 Rutgers L. Rev. 309, 338-45 (1974). It is the insurer’s breach of the latter, according to the majority, which gives rise to the insured’s right to effect settlement itself and thereafter recover from the carrier the full amount of the policy limits — and this in spite of the specific provisions in the policy to the contrary effect in the form of the customary “cooperation” and “no action” clauses contained in the policy and noted in the majority opinion (ante at 66).
Specifically the Court holds (ante at 75) that
[W]hen, viewed as of the time the settlement offer fof the claimants in the malpractice case] is received, the potential loss and the proposed settlement exceed, as they did here by far, the limits of the policy * * * 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 & Gas Co., [129 F. 2d 621, 627 (2d Cir. 1942)].
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 Annota*81tion: “Liability Insurer — Duty to Settle,” 40 A. L. R. 2d 168, 193-4 (1955).
But while the cases cited in support of the proposition that “bad faith” triggers a right in the insured to settle do in fact lead to that result, Traders General and Evans do not compel it. In those two instances the company’s refusal to settle was accompanied by a refusal to defend or a denial of coverage, which, I suggest, should have been the ground for those decisions (specifically not reached in Evans), and to the extent that those eases square with the majority’s thesis (as is most closely the situation with Home Indemnity, inspiring a vigorous dissent there), I would disavow them as guiding authority.
Traders & Gen. Ins. Co. v. Rudco Oil & Gas Co., Supra, is illustrative of the point. There the court said:
We think, however, the rule [allowing insured to recover for excess judgment following bad faith refusal to settle] 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 Trader & General may interpose the voluntary settlement 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.
[129 F. 2d at 627-28.]
The court then went on to determine that the company’s denial of coverage when coverage was perfectly apparent did not meet this standard, and hence the insured was allowed to recover from the insurer the amount expended in settlement. Even as it reached this conclusion the court readily perceived “the evils inherent in any rule which permits, or justifies, a compromise or settlement by the assured without the consent of the insurer.” Id. at 638.
Likewise in Evans v. Continental Cas. Co., supra, the court used language indicating that the insurance carrier’s bad *82faith refusal to settle will release the insured from a prohibition against settlement, relying in large measure on Traders & Gen. Ins. Co., supra, particularly the passage quoted above from that opinion. But again there was a qualified refusal to defend and a denial of coverage.
The significance of this distinction between the breach of an implied covenant of good faith and fair dealing (here in the guise of the carrier’s wrongful failure to settle) on the one hand and the insurer’s denial' of coverage and wrongful refusal to defend on the other is perhaps best brought out by Professor Robert E. Keeton in his article “Liability Insurance and Responsibility for Settlement,” 67 Harv. L. Rev. 1136, 1162 (1954). Among the points he makes is this: when an insurer refuses to defend, substantial damage is almost certain to result unless the assured acts, while if the insurer defends but merely decides to gamble by not settling, his gamble may pay off in a judgment for the insured at trial. In the latter situation, then, the insured receives protection under existing law: if the gamble was unreasonable and loses, the insurer and not the insured is liable for any excess.2 If -the gamble wins, both are absolved from liability.
The difficulty is that at the time decisions must be made by the parties there is uncertainty both as to whether company is guilty of a wrong in failing to settle and also as to whether any harm will result from such failure. Even if company is guilty of bad faith or negligence in refusing to settle, it is possible that company’s gamble will turn out favorably — that trial will result in a judgment against claimant or else for a sum smaller than the proposed settlement figure. In that event the payment by insured for a release (whether of the entire claim or only the excess) would be a loss which would not have been sustained if insured had done nothing; the negligence or bad faith of the company would have caused the insured no loss had the insured kept hands off. The problem, therefore, is not one of mitigation of a loss certain to occur, but rather that one or the other party must choose (his choice affecting interests of both in*83sured and company) between a certain but moderate loss on the one hand, and on the other hand a gamble which will result in a larger loss, a smaller loss, or no loss it all.
[Id. at 1162-63.]
The dilemma referred to at the beginning of the quoted portion above is exactly that which existed in this case. Plaintiff determined unilaterally that Security was acting in bad faith. Moreover, that decision was made at a time when no one could have been certain about the consequences of the carrier’s decision. Security was apparently perfectly willing to continue to adhere to its obligation to defend — and to bear the consequences of its gamble in refusing to settle in a case where those consequences might very well result in liability for a judgment substantially in excess of its policy limits. But what Security did not do was leave its insured defenseless. If it had, then of course the only way the insured could have protected itself against liability would have been to defend and settle on its own.
The purpose of those policy provisions which grant to the carrier the exclusive control of settlement was recognized almost 40 years ago in Kinderwater v. Motorists Casualty Ins. Co., 120 N. J. L. 373, 376-77 (E. & A. 1938) :
The design of the provision in question [prohibiting the insured from voluntarily incurring any expenses or incurring any claims] was not only to obviate the risk of a covinous or collusive combination between the assured and the injured third party, but also to restrain the assured from voluntary action materially nrejudicial to the insurer’s contractual rights, especially in the exercise of its exclusive function to defend elaims made under the policy. The assured is enjoined against the voluntary assumption of “any liability.” This is a necessary corollary of the stipulations reserving to the insurer the exclusive direction and control of the defense of claims so made. The obligation thus imposed is as peremptory as the duty of co-operation laid upon him by the immediately preceding clause and of non-interference in “any negotiations for settlement or legal proceedings” prescribed by the next succeeding provision. They are hindered provisions contrived to achieve the same general objective. A violation of either relieves the insurer from policy liability, regardless of whether actual prejudice has ensued therefrom.
*84The wisdom of giving effect to these provisions, both from a public policy point of view and from the perspective of effective administration of liability insurance, seems apparent. In order for an insurance carrier effectively to discharge its duty to defend, its control over the negotiation and litigation must be complete, not undercut by the separate undertakings of the insured. By purchasing insurance, the insured acquires the expertise and competence of the carrier in claims proceedings. This in turn necessitates a turning over of complete control to the insurer. Likewise, the insured is under the obligation to cooperate with the insurer, and to refrain from negotiating independently. “Giving the insured the power to control the settlement of his own case would raise the possibility that the insured, inexperienced in evaluating claims and desiring to avoid potential excess liability, would settle in cases in which litigation would result in no liability.” Note, 41 S. Cal. L. Rev. 120, 126 (1968). The efficient disposition of claims dictates that the one party with the expertise, the carrier, be in sole control. If it be otherwise, there is created the risk of claimants playing off the insurer against the insured, holding out for the higher stakes the insured will pay if the insurer does not because of the threat of excess liability.3 The ad*85verse cost effects would of course end up being borne by the insured public.
This Court, in Radio Taxi Service, Inc. v. Lincoln Mutual Ins. Co., 31 N. J. 299, 305 (1960) recognized the necessity for granting the insurance carrier complete retention of control over negotiation and litigation.4 Justice Francis, speaking for the majority, pointed out that it is this very right of control which spawns the insurer’s duty to make a good faith effort at settlement:
The company, by the contract, reserved the right to control the settlement of claims. Such right is a necessary incident of the operation of its business. Because the insured is prohibited from interfering with this right, however, manifestly its exercise must be accompanied by considerations of good faith. A decision not to settle must be an honest one. It must result from a weighing of probabilities in a fair manner. To be a good faith decision, it must be an honest and intelligent one in light of the company’s expertise in the field, [emphasis added].
In Bowers v. Camden Fire Ins. Assoc., 51 N. J. 62, 70-71 (1968) the Court reiterated that it was the insurer’s reserved control of the settlement of claims that gave rise to the duty of good faith.
Consequently, if the insurer wrongfully refuses to settle, it will become liable for any excess verdict. The Court in Rova Farms Resort v. Investors Ins. Co., supra, 65 N. J. at 492, noted that "it may be tempting for the insurance company to gamble on the outcome of a trial” by not settling. If the insurer chooses to gamble, it may do so, but not with the insured’s money; if it takes an unreasonable gamble and looses, the insurer must pay the price. It is that jeopardy which Security faced here. At the risk of *86extending an unbecoming metaphor, I would hold that if Security was willing to incur the unhappy consequences of its own folly, it should have been permitted to roll the dice itself. If not, and if (as here occurred) the insured takes over the gaming table, it should be at the insured’s own risk. It contracted for the expertise of its carrier; if the insurer is exercising such expertise, to allow the insured to second-guess the carrier, settle, and then contest the carrier’s judgment would be to undercut one of the essential purposes of the insurance policy.
The considerations discussed above reflect still another fundamental bar to recovery here. The theory of the majority is that plaintiff should recover because of Security’s breach of its implied contractual obligation to make a decision concerning settlement in good faith. However plaintiff has not demonstrated damage or injury consequent upon Security’s alleged breach, and, indeed, could not, unless the case first went to trial and resulted in a judgment in excess of the Security policy limits.
A showing of damage is ordinarily an essential requirement for a judgment for damages in an action for breach of contract. Ruane Development Corp. v. Cullere, 134 N. J. Super. 245, 252 (App. Div. 1975). Subsequent to the time of plaintiff’s unilateral settlement here, there were all of the following possibilities in the malpractice action, each negating damage to this plaintiff, had the case not then been settled: (a) later settlement by defendant before or during trial; (b) judgment for claimant for less than the policy limits; (c) judgment for the defendant; and (d) a judgment for claimant for more than the policy limits from which plaintiff would have had to be made harmless by Security as a matter of law (on the assumption of bad faith refusal by Security to settle, accepted by the majority opinion). Plaintiff’s action aborted all of these possibilities. Plaintiff has thus failed to show, as required under elementary contract law, that Security’s failure to settle before *87plaintiff did caused plaintiff any damages — specifically the $50,000 for which it was awarded damages below.
I see today’s decision as fraught with the potentiality for mischievous consequences, as an unwarranted intrusion upon the insurance carrier’s contracted-for right to control its own destiny, and as contrary to established law and sound public policy. I would reverse and enter judgment for defendant.
Justice Mountain and Judge Coneokd join in this opinion.
For affirmance — Chief Justice Hughes, Justices Sullivan and Pashman and Judge Kolovsky — 4.
For reversal — Justices Mountain and Cliffokd and Judge Coneobd — 3.

 As the majority opinion points out, we treat the plaintiff-excess carrier as having precisely the status of the insured for purposes of this case. This is consistent with the general rule under which the excess insurer is subrogated to the insured’s rights against the primary carrier. E. g.. American Fidelity & Cas. Co. v. All American Bus Lines, 179 F. 2d 7 (10th Cir. 1949); St. Paul-Mercury Indemnity Co. v. Martin, 190 F. 2d 455 (10th Cir. 1951); United States Fidelity & Guar. Co. v. Tri-State Ins. Co., 285 F. 2d 579 (10th Cir. 1960); Transport Ins. Co. v. Michigan Mutual Liability Ins. Co. 340 F. Supp. 670 (E. D. Mich. 1972); Peter v. Travelers Ins. Co., 375 F. Supp. 1347 (C. D. Calif. 1974); Home Ins. Co. v. Royal Indemnity Co., 68 Misc. 2d 737, 327 N. Y. S. 2d 745 (Sup. Ct. 1972).

 So held in Radio Taxi Service, Inc. v. Lincoln Mut. Ins. Co., 31 N. J. 299 (1960); Bowers v. Camden Fire Ins. Ass’n., 51 N. J. 62 (1968); Rova Farms Resort, Inc. v. Investors Ins. Co., supra.

 See Keeton, op. cit., supra at 1166:
The obvious reason for the policy provision giving company such exclusive control over the settlement decision is to keen down claims costs. If insured controlled the settlement decision, self-interest would induce him to make higher settlements (up to policy limits) because of the desire to avoid the personal risk of excess liability. Recognition of a power in insured to make a settlement binding company is inconsistent with the fundamental premise that the liability insurance system will work more effectively if company controls the defense and settlement than if either of these matters is left to insured.
In a failure to defend situation, the fundamental premise indicated by Keeton is destroyed. Since the control of the defense has been abdicated, the only way to keep both insured’s liability and claims costs down is to empower the insured to defend and settle.

 I am not, of course, here speaking of those cases in which the company is plainly in a conflict of interest situation with its own assured. For my view of that problem see Rova Farms Resort v. Investors Ins. Co., 65 N. J. 474, 507, 509-10 (1974) (concurring opinion).