Bad Faith Claims Against Insurers

New York jurisprudence is clear that liability insurers owe their insureds the duty of good faith and fair dealing to act in their insureds best interests in defending and settling claims. This duty arises as implied covenants of the contract between the insurer and insured and includes the duty of thorough investigation of all claims and defenses that may be asserted for or against the insured. New York law does not generally recognize a tort action based on insurer bad faith. However, where the insurer fails to settle an action within the policy limits resulting in a judgement against the insured for a sum in excess of the policy limits, the insured may bring a direct action against the insurer for bad faith to recover the excess judgement above the policy limits. This is premised on the fact that the insurer has complete control over all claims handling and defenses asserted on behalf of the insured during the litigation proceedings. This right of action may be assigned by the insured defendant to the injured plaintiff allowing a direct action against the insurer for bad faith refusal to settle and if proven the injured party may recover the excess judgement above the policy limits from the insurer.

The Court of Appeals, in the seminal case of Pavia v. State Farm Mut. Auto. Ins. Co., 82 N.Y.2d 445 (1993), set forth the following requisites in order for plaintiff to make out a prima facie case of bad faith for refusal to settle:

“Faced squarely with the question for the first time, we reject defendant’s proposed requirement of a “sinister motive” on the part of the insurer (see, Cappano v Phoenix Assur. Co., 28 AD2d 639, 640), and hold instead that, in order to establish prima facie case of bad faith, the plaintiff must establish that the insurer’s conduct constituted a “gross disregard” of the insured’s interests–that is, a deliberate or reckless failure to place on equal footing the interests of its insured with its own interests when considering a settlement offer (see, Lozier v Auto Owners Ins. Co., 951 F2d 251 [9th Cir]). In other words, a bad-faith plaintiff must establish that the defendant insurer engaged in a pattern of behavior evincing a conscious or knowing indifference to the probability that an insured would be held personally accountable for a large judgment if a settlement offer within the policy limits were not accepted.”