The opinion of the Court was delivered by HUGHES, C.J.
We consider here cross appeals from the Appellate Division affirmance (Rova v. Investors, 124 N.J.Super. 248 (1973)) of a judgment entered by a trial court, sitting without a jury, generally in favor of a plaintiff against the defendant, its insurer. The claim rested on alleged bad faith by the insurer in exposing its insured to payment of substantial sums in excess of policy limits, for which sums recovery was sought and awarded below. Plaintiff, responding here in defense of its judgment, is Rova Farms Resort, Inc., a New Jersey corporation, which we shall call variously "Rova" or "the insured." Appealing from the judgment against it is Investors Insurance Company of
The sequence of relevant events began with an accident entailing severe personal injuries, which occurred on the premises of Rova, on which it operated a recreational resort in Jackson Township, New Jersey, including a lake used by commercial guest patrons for diving and bathing. Investors had issued to Rova its policy of comprehensive general liability insurance which was in full force and effect on the date of accident. In the usual form, it bound Investors to pay on behalf of Rova "* * * all sums which the insured shall become legally obligated to pay as damages because of bodily injury, * * * sustained by any person and caused by accident," with a limitation of $50,000. The policy also obligated Investors to defend any suit against the insured alleging such injury and seeking damages on account thereof. The contract further entitled Investors to make such investigations, negotiations and settlement of any claim or suit as it might deem expedient and, while binding the insured to cooperation with Investors, forbade the insured, except at its own cost, to make or pay any settlement.
Such was the contractual relationship between Investors and Rova on July 25, 1965, when Rova's commercial invitee, Lawrence McLaughlin, dove from a "diving platform" into 3 or 4 feet of murky water under circumstances described in the carefully detailed opinion of Justice Francis, writing for this Court, in McLaughlin v. Rova Farms, Inc., 56 N.J. 288 (1970). And no gesture was made in the instant litigation or otherwise to question or palliate the significance of the terrible physical injury sustained when McLaughlin's head struck the unseen bottom of the lake.
At one stage before trial, plaintiffs were successful over objection in adding to their original allegation of negligence against Rova an additional charge of willful and wanton misconduct on its part in the operation and maintenance of the facility. The investigations and pretrial discovery were chiefly oriented toward the main issue in the case, i.e., the conduct of Rova, whether negligent or willfully and wantonly tortious, and the alleged contributory negligence of McLaughlin. Naturally, this pretrial preparation did not bear importantly on the damage issue inasmuch as McLaughlin's injuries were so severe as to be quite beyond question.
The injection of the additional issue of willful and wanton negligence caused Investors to warn its insured of its denial of coverage of any such wrongful conduct, as distinguished from ordinary negligence, and to invite Rova's attention to the advisability of its retaining independent counsel for its own protection. Heeding such admonition, Rova did retain counsel, Mr. Nathaniel H. Roth, to act in its interest. Thereafter, although he was not permitted to participate in the actual trial because of Investors' preemption of the defense (as was its contractual right),
The McLaughlin case came to trial on June 10, 1969, before Judge Rosenberg and a jury in Passaic County. McLaughlin was present the first trial day, strapped in a wheelchair, and was presumably seen by judge and jury, but that night became so ill that he was not released from the hospital to return on subsequent days and his testimony entered the case by way of reading his deposition (R. 4:16-1(c)). On that first trial day Investors offered $12,500 in settlement of the case, that figure approximating the "special" damages of Mr. McLaughlin at some earlier stage during discovery. At no time thereafter did Investors increase that offer, albeit its policy limit was $50,000 and any verdict beyond that would have to be paid by its insured.
Not surprisingly, in view of the grave injury involved and its lifetime consequences, the jury returned a verdict for the plaintiffs in a total amount of $225,000, $15,000 thereof being allocated to the wife for consequential losses. An appeal was directed by Investors to the Appellate Division. Even the magnitude of the verdict returned did not impel Investors to increase its offer nor to explore otherwise the possibility of settlement. The Appellate Division reversed in an unreported opinion, holding that the insured's negligence as
Having thus suffered from what it deemed the bad faith of Investors in not settling or attempting in good faith to settle the case against it, Rova sued Investors in the instant action for such losses plus counsel fees, and for interest on the total excess loss paid by it from the time such sums were paid until the time of entry of judgment in the present case. (Interest thereafter on the judgment here reviewed runs from the date of entry of judgment under R. 4:42-11(a) and that question is not issuable here.)
The Appellate Division having affirmed the trial court's judgment, this Court granted certification (63 N.J. 580 (1973)). Investors challenges the judgment against it on the principal ground that it had not, on the whole case, validly been adjudged to have exercised bad faith in the premises. Collaterally, it suggests (1) the relevance of a specific offer to settle within policy limits (which latter it denies) as bearing on the legitimacy of a "bad faith" issue, and (2) that Rova by equivocation as to its financial capacity to contribute thereto, "prevented" settlement and should by reason of such "unclean hands" be estopped from recovery. The frivolous nature of these latter points of appeal can best be demonstrated in the context of our discussion of the main issue, the trial court's basic finding of bad faith on the part of Investors.
Rova's cross-appeal challenges that part of the judgment below (undisturbed by the Appellate Division) which denied it interest on the excess amount it says it wrongfully was caused to pay on August 7, 1970, between that date and the date of the entry of judgment here under review, May 12, 1972.
Considering first the scope of our appellate review of judgment entered in a non-jury case, as here, we note that our courts have held that the findings on which it is based should not be disturbed unless "* * * they are so wholly insupportable
We turn to the examination of the record below with such standards in mind, as bearing on the validity of the trial judge's determination that Investors failed to use good faith with regard to its contractual liability to Rova and that Rova for such cause was entitled to judgment. That such contractual obligation embodies an implied covenant of good faith and fair dealing is not in issue here, nor indeed do we think it is presently open to substantial question. See Radio Taxi Service, Inc v. Lincoln Mutual Ins. Co., 31 N.J. 299 (1960); Bowers v. Camden Fire Ins. Assoc., 51 N.J. 62 (1968).
We note that substantial evidence before the court revealed a multitude of circumstances which should have impelled Investors to energize a clearly attainable settlement of the McLaughlin claim. Settlement at trial could have been arranged for $75,000, an amount which plaintiffs' attorney was authorized by his clients to accept, as was made known to the McLaughlin trial judge, to Liebowitz, to Roth and, through Liebowitz, to Investors. During those somewhat hectic trial days there were raised many storm signals of potential financial disaster in the face of which Investors maintained a singular imperturbability, never increasing its firstday offer of $12,500. The mere appearance at the trial of a 27 year old man, visibly and unquestionably shattered for life, was a factor which might have been expected to inspire concern to a seasoned trial attorney (as no doubt it did) and to his client, an experienced insurance company.
During the customary "settlement" conferences the trial judge, aware of the grave physical aspect of the case and the unpredictability of jury results, suggested that Investors might be well advised to pay its policy limit and this was promptly reported by Liebowitz to Investors. Liebowitz added his own recommendation to Investors that it pay $50,000 "if that would settle the case." Investors remained unmoved. The McLaughlins' attorney stated he would recommend acceptance of $50,000 to his clients, if it were offered, and asserted that although he would not try to coerce them to accept it, he had "fairly good control" of them (a way of saying that they respected his advice). Rova had instructed Roth previously that, if Investors put up its $50,000, he was authorized to add $25,000, which Rova somehow would raise and pay. Roth never disclosed this to Liebowitz because he feared, in view of the adamant stance of Investors, unmoved by the exhortations not only of the court but of its own attorney, that he would be exposing his client to share in the payment of an amount contractually the obligation of
And Roth's fears were not unfounded, for in response to his pleas to Liebowitz to offer Investors' policy limit Liebowitz kept exhorting Roth to announce his client's willingness to contribute something, and this (in view of the apparent "stonewall" nature of Investors' $12,500 offer), was in itself suggestive of bad faith.
This sciential grasp of its legal duty, however, did not interrupt the even tenor of Investors' policy of containment at the level of $12,500 although it never had any illusion, nor had its attorney, that its insured could escape the risk of jury confrontation on the issue of fault vis-a-vis the grave injury involved. Mr. Liebowitz not only realized, but reported to the insurance company that a potential verdict could exceed $50,000, that the McLaughlins could produce a prima facie case of negligence, that he, Liebowitz, "* * * could not see getting out of this case on a motion," and that he "* * * could never have seen Judge Rosenberg or any other judge not permitting this case to go to the jury." Hence, from the time of first view of this unfortunate plaintiff in the courtroom, Investors had ample opportunity to understand that its fate (and that of its exposed insured) would rest in the hands of a jury and it would not be rescued by control of the issue by the court as a legal matter.
Even after the chastening effect of the $225,000 verdict (as ameliorated by appellate reversal and direction of a new trial) and Liebowitz' advice to Investors that it should
The reluctance of Roth to volunteer a contribution by Rova supported by his protestations of its cash poverty, was an element of the "fencing" which was a part of the settlement discussions during trial. We think the relevant culpability of Roth's participation in this technique diminishes to the vanishing point under the twin factors of Investors' unconscionable appeal that Rova contribute to a settlement underpinned by its offer of 25% of its policy obligation and the astute observation expressed by Judge Wiley below:
I think the insurance company has almost a fiduciary duty to protect their insured and, if there is any fencing to be done, the last person that is going to do it is the insurance company. They have to act in good faith to protect the interest of their client.
Investors and its counsel seemed quite sanguine as to the prospect of convincing a jury of McLaughlin's contributory negligence. That hope survived the abandonment (by way of inability to offer proof thereof) of two bases on which it, among other things, originally rested, i.e., intoxication and foreknowledge of the depth of the lake water on the part of McLaughlin. The reasonableness of its prejudice against settlement, based on this hope, is not persuasive of good faith, considering the haunting possibility of financial disaster. In fact, Investors' belief in its eventual vindication seems to have been somewhat aberrational in nature, since even at trial of the instant case (long after our Supreme Court had confirmed a finding of liability to the extent of
Although Investors knew after the McLaughlin judgment that Rova could not even produce an appeal bond, and Rova was subjected to supplementary proceedings, execution and levy on its property, Investors was unmoved by concern for its insured to re-explore the possibility of settlement. And when this Court granted certification of the McLaughlin case, a new dimension was added to the existing prospect of retrial, in that this Court might (as it eventually did) reinstate the $225,000 judgment. Even this did not cause Investors to quail. Nor did the insurance company hesitate on occasion to reject its lawyer's advice. When Liebowitz during trial advised his client to consider offering $50,000 if that "would settle the case," here was the response as testified below by Claims Manager Scheer, who had been kept advised by Liebowitz of these settlement discussions:
Q. Did you accept his advice?
A. We couldn't, the demand was never made.
When Liebowitz, after retrial had been ordered by the Appellate Division, advised Investors of the prospect of an adverse verdict of $500,000 and recommended the offering of $50,000 at an appropriate time, here was Mr. Scheer's response as he recalled it at trial below:
Q. Did you make an offer?
Q. Did you follow Mr. Liebowitz's advice?
Apropos Investors' submission that it regarded the McLaughlin case one of questionable liability, and conceding that prescience is not expected of a carrier, we recall that we noted in Bowers, supra, that "[a] decision not to settle must be a thoroughly honest, intelligent and objective one.
It is not necessary to speculate whether the basis of Investors' odd attitude toward the McLaughlin case was based on an inbred or institutional cynicism about swimming or diving accidents, nor to seek its further motives, nor to further particularize the testimony below. That evidence forged a ponderous chain of circumstance which not only amply supported the finding of bad faith on the part of Investors, but would suggest wonder as to how the Court could have reached any other conclusion. This is particularly so when one considers the development of the law with respect to the fiduciary responsibilty of an insurance carrier toward its assured, in instances of judgmental choices such as existed here.
The appellant insurer would argue that, as a matter of law, it had no obligation to offer its policy limit in settlement without a firm, authorized and explict demand within that figure on the part of McLaughlins' attorney. It points out that in each of the four major New Jersey cases
This seems to us an unduly constricted view of the law. Although the cases cited involved claimant offers either during trial or pending appeal, their delineation of the carrier's obligation of good faith would clearly embrace the situation vis-a-vis settlement disclosed in the instant case. When Investors suggests that no conflict of interest can exist, in law, under any circumstances until there has been a formalized offer within policy limits by plaintiffs, it may be thinking of older concepts, before the emergence and development of those principles of equity, fair dealing and good faith (such as in the very cases Investors cites) which breathed new lifegiving honesty into the bare contractual relationship sometimes mentioned as existing between insured and insurer. Cf. McDonald v. Royal Indemnity Ins. Co., 109 N.J.L. 308 (E. & A. 1932) ; Auerbach v. Maryland Cas. Co., 236 N.Y. 247; 140 N.E. 577 (Ct. App. 1923).
We must here reiterate our observation in Bowers, supra, that "[g]ood faith is a broad concept." And that where under the policy the insurer reserves full control of the settlement of claims against the insured, prohibiting him from effecting any compromise except at his own expense, that reservation — viewed in the light of the carrier's obligation to pay on behalf of the insured all sums up to the policy limit which he shall become obligated to pay — imposes upon the insurer the duty to exercise good faith in settling claims. We pointed out, as we had before (Radio Taxi, supra), that the purpose of this type of insurance is to protect the insured from liability within the limits of the contract, and that, therefore, the courts cannot allow the insurer to frustrate that purpose by a selfish decision as to settlement which exposes the insured to a judgment beyond the specific monetary protection which his premium has purchased.
By virtue of the terms of such a policy, proscribing the insured from settling in his own behalf, the carrier has made itself the agent of the insured in this respect. Fidelity & Cas. Co. v. Robb, 267 F.2d 473, 476 (5th Cir.1959). Thus the relationship of the company to its insured regarding settlement is one of inherent fiduciary obligation. Bowers, supra; Radio Taxi, supra, 31 N.J. at 313 (Jacobs, J. dissenting); Gruenberg v. Aetna Ins. Co., 9 Cal.3d 566,
Despite the fact that the holdings in Bowers and the other main New Jersey cases cited involved firm claimant offers, it would be unrealistic to believe that such an offer is a prerequisite for finding the insurer to have acted other than in good faith. See Keeton, Insurance Law, § 7.8(c) (1971). The better view is that the insurer has an affirmative duty to explore settlement possibilities. 7A Appleman, Insurance Law and Practice, § 4711, p. 405 (1974 Supp.); Self v. Allstate Ins. Co., 345 F.Supp. 191, 197 (M.D. Fla. 1972). At most, the absence of a formal request to settle within the policy is merely one factor to be considered in light of the surrounding circumstances, on the issue of good faith. Cernocky v. Indemnity Ins. Co. of No. Amer., 69 Ill.App.2d 196, 216 N.E.2d 198, 205 (1966).
Even those cases in other jurisdictions which have found in favor of the insurance company on the basis that no settlement demand was made by the injured party, generally suggest that the evidence did not indicate that such a settlement
At no time did [the claimant] make any offer to settle, nor did he or his counsel or his compensation insurance carrier ever advance any suggestion that settlement could be profitably discussed. [110 Cal. Rptr. at 524].
* * * *
No suggestion that settlement was feasible was ever made prior to judgment by anyone connected with the suit. [Id. at 525].
Similarly the court noted in LaRocca that the claimants' attorney "was not asked and did not testify that he would have settled or recommended settlement if the $50,000 policy limits were offered * * *." 329 F. Supp. at 171 [emphasis supplied]. Contra, (almost precisely) in the McLaughlin case, in which, as we have seen, the opportunities for settlement were so viable that it took a special genius at intransigence to kill them.
Nor were Roth's protestations of his client's poverty an excuse for Investors. It had a clear way out for the sealing of the issue of good faith (had it been willing to expend its policy limits); for as Professor Keeton has observed:
The company may protect itself against excess liability, where the settlement value of the claim is recognized as being in excess of the policy limits by making an offer to settle for the maximum sum within the policy limits, or by advising insured of continued willingness to pay such sum at any time that the claim can be settled for that sum or for that sum plus whatever the insured is willing to add. [Keeton, Liability Insurance and Responsibility for Settlement, 67 Harv. L. Rev. 1136, 1148 (1954)].
Despite the testimony of counsel below that he thought an explicit demand from the McLaughlins was a prerequisite to
The proposition that an insurer cannot be found liable for an excess judgment except where a firm and binding offer has been made and refused, was rejected by a federal court in Fidelity & Cas. Co. v. Robb, 267 F.2d 473, 475-476 (5th Cir.1959). See also Young v. American Cas. Co., 416 F.2d 906, 910-911 (2d Cir.1969). Similarly, in Bell v. Commercial Ins. Co. of Newark, N.J., 280 F.2d 514 (3rd Cir.1960) the insurer had believed that because claimant's demand of $25,000 was beyond the policy limit, the company was not obligated to seek a settlement within the coverage, and it had therefore not attempted further negotiations. Upon reversing a directed verdict for the carrier, the Court of Appeals observed:
Although the trial judge insisted that Bell [the insured] only showed that the claimants in the personal injury action had offered to settle for $25,000, there was testimony from Bell which if believed, would support the conclusion that during the course of the trial a suggestion had been made by counsel for claimants which, if at least explored, could well have led to settlement within the policy limits, and that he had reported this to the insured's counsel. [280 F.2d at 516].
The Supreme Court of Tennessee has explicitly held that an insurance company may be held liable for bad faith for a judgment in excess of its policy limits although it never received a settlement demand for or within the face amount of coverage. State Auto Ins. Co. v. Rowland, 221 Tenn. 421, 427 S.W.2d 30, 32-34 (1968). There the carrier took the position that "until the injured party has offered to settle the case for an amount within the policy limits, the company is under no legal duty to attempt to effectuate a settlement."
We are asked to hold as a matter of law that an insurance company cannot be held liable for bad faith for failing to settle a case when there is no demand for settlement for an amount of money which is within the limits of coverage afforded by the policy of insurance. We are of the opinion that such is not the law nor should it be so. [427 S.W.2d at 34].
We, too, hold that an 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 willingnuess 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. Young, supra, 416 F.2d at 911. From what has been said it is clear that an opposite pattern of fact existed here.
We rest our decision here on the plenitude of evidence below to support the findings to which we have adverted. Yet we view with some unease the effect that our present rules might have, in a more constricted future case where a more plausible decision against settlement might nevertheless expose an insured to excess loss, an opportunity to settle having been rejected. Under our present rule 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
Thus, by force of law, the situation of an insured (who comes among that class of "consumers" for whose general protection there has been increasing concern in recent years), threatened by a possible excess verdict, is not an enviable one.
The assured is not in a position to exercise effective control over the lawsuit or to further his own interests by independent action, even when those interests appear in serious jeopardy. The assured may face the possibility of substantial loss which can be forestalled only by action of the carrier. Thus the assured may find himself and his goods in the position of a passenger on a voyage to an unknown destination on a vessel under the exclusive management of the crew. [Merritt v. Reserve Ins. Co., 34 Cal.App.3d 858, 110 Cal.Rptr. 511, 519 (1973)].
Although the insured has contracted with the company for a specific amount of coverage, he is powerless to make the carrier use that coverage in a settlement for his protection.
The normal legal remedy for conflicts in interest is separate representation for the conflicting interests. This remedy, however, possesses only a limited usefulness in the present situation, for while the assured can be advised, as he usually is, that he may employ separate counsel to look after his interests, separate representation usually amounts to nothing more than independent legal advice to the assured, since control of the litigation remains in the hands of the carrier. Control of the defense of the lawsuit cannot be split, and independent legal advice to the assured cannot force the carrier to accept a settlement offer it does not wish to accept. In this instance the normal legal remedy of separate representation is an inadequate solution to the conflict in interest. [Merritt, supra, at 519].
The conflict problem arises out of the current interpretation of "good faith" in this and most other jurisdictions. Good faith has been construed to require the insurer to consider the interests of the insured as well as its own in deciding whether or not to settle the case within the limits of the policy. The company must weigh the conflicting interests by making its decision to settle or go to trial as if it had full coverage for whatever verdict may be recovered,
Yet however much the carrier considers the interests of its insured in pondering the decision as to settlement, the moment it decides not to settle, it in effect, however reasonably, sacrifices the interests of the insured in order to promote its own. It is always to the benefit of the insured to settle and thereby avoid the danger of an excess verdict. Since an insurer serves only its own interests by declining to compromise within the insurance coverage, a decision not to settle is perforce a selfish one. In attempting to save some of its own money on the policy, the company necessarily and automatically exposes the insured to the risk of an excess judgment. See Note, Excess Liability: Reconsideration of California's Bad Faith Negligence Rule, 18 Stan. L. Rev. 475, 483 (1966). This is particularly significant when any settlement opportunity approximates the policy limit. If the insurer, having chosen to go to trial wins the litigation it pays nothing except expenses; should it be unsuccessful it loses no more than it would have had to pay in settlement, since any excess is placed upon the shoulders of the only true loser, the insured.
Moreover the rule which permits a carrier to escape liability for excess unless its decision to go to trial is marred by dishonesty, bad faith or negligence creates an anomalous situation for insureds. Where a settlement opportunity exists, the more faultless the client seems to have been the more feasibly he may be subjected by the company to a trial of the case and all the dangers it entails. In the case of an obviously blameworthy client, the carrier would normally take advantage of a settlement opportunity within policy limits since any other disposition would be unduly optimistic. The least blameworthy insured, however, may more readily
Additionally, even the rule requiring the carrier to form its judgment as though it alone were liable for the entire risk may be polluted by institutional considerations which ignore the interests of the specific insured involved. See Note, supra, 41 S. Cal. L. Rev. at 128. These considerations may extend to a purpose to keep future settlement costs down, to numb the public's claim-consciousness, to create a conservative image for the discouragement of future claimants or to establish favorable precedents, none of which purposes has anything to do with the protection of the particular insured at hand. Such efforts, it might be hoped, would result in overall savings to the company by discouraging the pressing of marginal claims or by creating a body of low-verdict cases which could be used as a bargaining tool in settling subsequent claims. See Note, supra, 18 Stan L. Rev. at 482-483. Institutional interests of this nature might be pursued by carriers whether or not they were liable for the entire amount of a specific adverse verdict; yet it is generally the insured in the particular case who has had to bear the burden of any excess loss stemming from such an "institutional" decision not to settle.
But much more importantly we recall that we have indicated that a carrier bears a fiduciary relationship to its insured; yet the good faith norm, as presently construed, permits the insurer to be less responsive to the fiducial obligation than is any other type of fiduciary. One appellate court, though applying the norm, pointed out its unique effect in this regard.
The duty of good faith thus imposed upon the carrier is one peculiar to this situation. In most legal relationships determination of the merits of conflicting interests by one of the parties to the conflict
One day, in an appropriate issue, it may be necessary to separate these conflicting interests. The insured has the right to expect that the amount of protection he has purchased will be offered in compromise where necessary to effect an end to the litigation. On the other hand, the insurer may pursue its own interests and decline to settle a case, for whatever reason (so long as not in bad faith or similarly wrongful). These elements apart, it is contractually free to offer a fraction of its insured's policy limit or nothing at all. However, where the carrier chooses not to offer the limits of coverage, one wonders whether it should not bear the unhappy financial result of that unilateral decision, since it alone profits from the opposite result of the gamble. This resolution would enable the insurer to pursue its own interests in great measure without sacrificing those of its insured so long as it was clear by whom the burden of mistake should be borne.
Obviously, it will always be in the insured's interest to settle within the policy limits when there is any danger, however slight, of a judgment in excess of those limits. Accordingly the rejection of a settlement within the limits where there is any danger of a judgment in excess of the limits
The proposed rule is a simple one to apply and avoids the burdens of a determination whether a settlement offer within the policy limits was reasonable. The proposed rule would also eliminate the danger that an insurer, faced with a settlement offer at or near the policy limits, will reject it and gamble with the insured's money to further its own interests. * * *
Finally, and most importantly, there is more than a small amount of elementary justice in a rule that would require that, in this situation where the insurer's and insured's interests necessarily conflict, the insurer, which may reap the benefits of its determination not to settle, should also suffer the detriments of its decision. [58 Cal. Rptr. at 17, 426 P.2d at 177].
As indicated, it is unnecessary in the instant case to embrace such an extended rule. But since this Court as all other courts, seeks to prevent the law from inflicting unjust results, it is not discordant with its obligation, to foresee the probability or the possibility thereof.
Lastly, we turn to Rova's cross-appeal challenge of the trial court's refusal to award it prejudgment interest on the $197,150.68 sum that the insured was required to pay the McLaughlins. Whether or not prejudgment interest should be ordered in a successful action for the overage arising out of a carrier's failure to settle a claim has not frequently been considered by the various jurisdictions of the nation. Some have held that such an action sounds in tort rather than contract and therefore interest should run only from the date of the insured's judgment against the insurance company. See, e.g., Southern Farm Bureau Cas. Ins. Co. v. Hardin, 233 Ark. 1011, 351 S.W.2d 153, 156 (1961). This same reasoning — that the litigation is not a suit on the insurance contract but one in tort — has also been used as the basis for precluding an award of attorney's fees arising out of the action. See Crabb v. National Indemn. Co., supra, 205 N.W.2d at 639.
We note that in New Jersey even the labelling of excess liability suits as purely tortious in nature would not preclude the award of interest to insureds, since here prejudgment interest is required in actions in tort by virtue of Court Rule 4:42-11(b). See also Busik v. Levine, 63 N.J. 351 (1973).
However, it is unnecessary to resolve the issue since we do not think that compensation should be dependent on what label we place upon an action, but rather on the nature of the injury inflicted upon the plaintiff and the remedies requested by him. A wrongful failure to settle, wherein the insurer has breached the fiduciary obligation imposed by virtue of its policy, sounds in both tort and contract. See Crisci, supra, 58 Cal. Rptr. at 18, 426 P.2d at 178. Investors' disinclination to effect a settlement resulted in the excess verdict in question; and the carrier's failure to pay the overage required Rova Farms to do so. As a result, from August 7, 1970, when Rova paid $197,150.68 in satisfaction of the McLaughlin judgment, the insured was deprived of these monies, whereas the carrier, having refused to pay the excess itself, thereby had the use of the sum. Thus, despite the company's desire at trial to characterize the present action as simply one in tort, we feel that an appropriate award of prejudgment interest should run from the date that the
In the present case, the trial judge did not refuse to impose prejudgment interest because he agreed with Investors' view that the action before him sounded merely in tort. The fact that he awarded attorney's fees on the basis of R. 4:42-9 (a) (6) — "In an action upon a liability or indemnity policy of insurance" — indicates that he regarded the nature of the case in part as a suit upon an insurance contract. Rather, the judge decided that Rova was not entitled to interest because it had not proved that it gave interest on the monies acquired to pay the McLaughlins and therefore did not show that it had suffered a specific loss of interest by dint of the payment. The judge decided that at least some of the monies paid may have been supplied to Rova by affiliated members and consequently may never have actually come from corporate assets of the resort. In short, it was thought that because there was insufficient proof that Rova paid interest on the sum with which it satisfied the judgment or that it took the money from a bank account or asset of its own, losing interest thereby, no interest might be imposed on Investors by the court.
While an equity court has discretion in awarding interest (see Busik, supra, 63 N.J. at 395 (Mountain, J. dissenting)), a proper exercise of that discretion requires that the judge be aware of the alternatives open to him for consideration. Here, the judge appears to have believed that he did not have the power to impose prejudgment interest in the case at hand because plaintiff did not prove it literally gave or lost interest on the money paid. We reverse on this issue, since we feel that such a view is a mistaken one.
In the case before us, the trial court found that Investors ought to have settled the McLaughlin action or satisfied the entire judgment which resulted from its culpable failure to do so. In short, it determined that Rova was entitled to reimbursement for the amount it paid out on August 7, 1970. Thus, from that date Investors has had the use of a sum of which Rova was deprived and has been able to invest for gain
The judgment below is affirmed in full as to all points except the interest issue. The decision as to interest is remanded to the trial court for disposition according to the considerations discussed in Part IV of this opinion.
CLIFFORD, J. (concurring).
While I do not join in all of the Court's reasoning, nevertheless I reach the same result as the majority because of a singular feature in this case. The fact that defendants in the original action, Rova and its general manager, were charged with both negligence and willful and wanton misconduct looms large in my determination of whether the insurance company discharged its obligation to the insured. It brings an additional and significant dimension to the question of good faith and fair dealing in the face of over-the-limits exposure.
The Company's vice-president and attorney of record, who acted as claims manager, testified in this cause that the amendment allowing the additional issue of willful and wanton misconduct was significant in its potential for exposing the insured personally to liability "without regard to the policy."
While it is not at all clear to me that under the language of this policy and particularly in the absence of any exclusion (see n. 1 ante) the Company would not have covered, to the extent of compensatory damages within the policy limits, an accident occasioned by willful and wanton misconduct, see Hanover Insurance Group v. Cameron, 122 N.J.Super. 51, 60 (Ch. Div. 1973); Prosser, Torts, (4th Ed. 1971), § 34 at 184, nevertheless that was the asserted position of Investors and the position from which it established and conducted its relations with its insured.
Had it sought resolution of that obvious conflict, as it should have done, the declaratory judgment technique was available to answer the critical question: were plaintiff Lawrence McLaughlin's injuries due to negligence or to willful and wanton misconduct on the part of defendants? Well before this Court's decision in Burd v. Sussex Mutual Insurance Company, 56 N.J. 383 (1970), decided after the trial of the McLaughlin claim,
[S]ince there exists a genuine issue of whether the injury was intentionally or unintentionally inflicted, then until this issue is decided between the insured and the insurer, the company should not be required to defend the state tort action. Indeed it could not do so with propriety or satisfaction or fairness either to itself or the assured. The obvious conflict of interest * * * makes it impossible for the insurance company conscientiously to fulfill the role of defender. [307 F.2d at 523; emphasis supplied]
But Investors, confronted with that conflict, did nothing beyond notifying the insured that it would not furnish coverage for the one phase of the McLaughlin claim. Having made the choice not to seek resolution of the conflict and having retained control of the case, the Company, by perpetuating the prohibited conflict, exposed itself to — and by its conduct incurred — liability for any verdict in excess of its policy limits. It should, at the very least, have gone forward with a vigorous settlement effort marked by particular sensitivity to its insured's exposure. Instead it chose to treat its insured's personal attorney as an adversary and failed to initiate a cooperative and bipartisan approach to settlement. Whatever negotiations looking to possible settlement took place here appear to have originated with the trial judge — an undertaking which, although here necessitated by inexcusable foot-dragging by the attorneys, I for one have always thought better and more appropriately left to lawyers, with rare exceptions. But to the extent that Investors' attorney became involved in that ritual fire dance which all too frequently precedes (and sometimes precludes) settlement, the steps choreographed for him by the insurer were designed inevitably to dance his partner, the insured, into the flames.
Under these circumstances there is ample authority to sustain an affirmance of the Appellate Division on the basis of absence of good faith and fair dealing without resort to
Justice MOUNTAIN authorizes me to express his concurrence with the views set forth herein.
MOUNTAIN and CLIFFORD, JJ., concur in result.
For affirmance and remandment in part — Chief Justice HUGHES and Justices JACOBS, MOUNTAIN, SULLIVAN, PASHMAN and CLIFFORD — 6.
For reversal — None.
Furthermore, any conceivable effect on costs which such a rule could exert might be more than offset by other factors. For example, savings might be realized from the company's not having to maneuver for position on the issue of bad faith during the original trial, or from not having to litigate excess liability suits brought by its clients. The history of the McLaughlin case is one in which such cost-inflating factors stand out prominently, for Investors' trifling with its good faith fiduciary obligations visited upon it the substantial financial loss adjudged below.
In any event, the possibility that a broadened standard may increase insurance rates should not alone defeat its adoption. An insurer's decision not to settle is justified on the basis of that decision's contribution, in keeping costs down, to the benefit of all insureds. Since policyholders as a class, rather than the particular individual involved in a case, thus profit from the company's refusal to settle within the coverage afforded, then surely insureds as a whole should share the expense when the refusal results in an excess judgment. See Note, An Insurance Company's Duty to Settle, 41 S. Cal. L. Rev. 120, 139 (1968). Cost, reasonably distributed, should never be an impediment to the doing of justice.
We stated in Busik that this rule extends to cases which came to trial after its effective date, January 31, 1972, although the tort involved may have occurred prior to the rule's adoption. 63 N.J. at 355, 360-361. The trial between Rova Farms and Investors began on April 24, 1972.