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.2nd 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.”
Further, proof of the insurers ordinary negligence will not
suffice. The Court in Pavia, supra, further elaborates additional factors for the
trier of facts to consider:
“Naturally, proof that a
demand for settlement was made is a prerequisite to a
bad-faith action for failure to settle (United States Fid. &
Guar. Co. v Copfer, 48 NY2d 871, 873). However,
evidence that a settlement offer was made and not
accepted is not dispositive of the insurer’s bad faith. It is
settled that an insurer “cannot be compelled to concede
liability and settle a questionable claim” (St. Paul,
supra, at 978) simply “because an opportunity to do so
is presented” (Knobloch v Royal Globe Ins. Co., 38
NY2d 471, 479). Rather, the plaintiff in a bad-faith action
must show that “the insured lost an actual opportunity to
settle the … claim” (Copfer, supra, at 873) at a time
when all serious doubts about the insured’s liability removed (St. Pa
