For this throwback Thursday we are going way back to 1974. While Rova Farms Resort Inc. v. Investors Insurance Company of America1 is a personal injury case, it does have transitive language for broker negligence actions involving E&O policies.

It all started when a severe personal injury happened at the premises of Rova Farms, which operated as a recreational resort. Investors Insurance Company of America issued a general liability policy to Rova Farms up to $50,000. The policy also obligated Investors to defend any suit against the insured alleging such an injury. The policy was in full force and effect when a patron of Rova Farms dove head first into a 3-4 foot deep section of the lake and was severely injured when his head struck the bottom of the lake. During the investigation, Rova Farms retained its own counsel, Nathaniel Roth, due to the potential of the added charge of willful and wanton negligence on behalf of Rova Farms. All counsel for Rova discussed the very real possibility of excess liability loss in view of the grave injuries to the patron (they knew their liability could go well past the $50,000 policy limits). Roth continuously advised counsel for Investors to offer policy limits as a settlement due to the potential damages to the patron being well in excess of $50,000. Counsel for Investors refused to offer because they thought the patron was also liable for his injuries. Not surprisingly, in view of the grave injury involved and its lifetime consequences, the jury returned a verdict for the plaintiffs for $225,000.

Investors had nothing to lose beyond the $50,000 (or so they thought) while Rova Farms was stuck finding a way to pay the additional $175,000 plus interest owed under the verdict. Having suffered what it deemed bad faith of Investors in not settling or attempting in good faith to settle the case, Rova Farms sued Investors. After a hearing, the trial court entered judgment for Rova in the amount of $175,000, plus the interest which Rova had to pay.

The insurer appealed, making its way to the New Jersey Supreme Court. In his opinion affirming the trial court, Judge Hughes noted that “substantial evidence before the court revealed a multitude of circumstances which should have impelled Investors to energize a clearly attainable settlement of the claim, which could’ve been had for $75,000.” “[T]he questions is not whether the carrier, its attorney, or the insured considers a defendant liable but that the jury could be justified in finding from the evidence available and adduced.”

The court declared that where any adverse verdict at trial is likely to exceed the policy limit, the boundaries of good faith become more compressed in favor of the insured, and the carrier can justly serve its interests and those of its insured only by treating the claim as if it alone might be liable for any verdict which may be recovered.

The court further clarified its position by stating:

[A]n insurer, having contractually restricted the independent negotiating power of its insured, has a positive fiduciary duty to take the initiative and attempt to negotiate a settlement within the policy coverage. Any doubt as to the existence of an opportunity to settle within the face amount of the coverage or as to the ability and willingness of the insured to pay any excess required for settlement must be resolved in favor of the insured unless the insurer, by some affirmative evidence, demonstrates there was not only no realistic possibility of settlement within policy limits, but also that the insured would not have contributed to whatever settlement figure above that sum might have been available.

This conflict of interest arises because, “it is the insured and not the company which is called upon to pay an excess when the carrier’s evaluation goes awry and is not adopted by the jury, so long as the company’s judgment is not viewed as being actually dishonest, unreasonably optimistic or otherwise in bad faith, or infected with negligence such as to impede the reaching, or having the capacity to reach, a ‘good faith’ decision.”

The court concluded by stating:

In view of such expectation an insurer should not be permitted to further its own interests by rejecting opportunities to settle within the policy limits unless it is also willing to absorb losses which may result from its failure to settle.

Settlement, whether by mediation, arbitration or through some other means is always in the parties’ best interest on most claims because it usually shortens the litigation process. In situations regarding broker negligence claims, the broker may be liable for damages beyond the limits of the E&O policy which puts the insurance carrier in the same position as Investors was in Rova Farms.

I leave you with a quote from the Sultan of Swat, regarding his view on teamwork:

“The way a team plays as a whole determines its success. You may have the greatest bunch of individual stars in the world, but if they don’t play together, the club won’t be worth a dime.” 
            —Babe Ruth

1 Rova Farms Resort Inc. v. Investors Ins. Co. of America, 65 N.J. 474 (1974).