By Kevin R. Van Duser, Esq.
An insurance company’s duty under New York Law is to act in good faith. Pavia v. State Farm, 82 NY2d 445,452. Good faith has been defined as an adequate protection of the interests of the insured. Smoral v. Hanover Ins. Co., 37 AD2d 23. But, what then is “bad faith”? And when is it bad faith to refuse to defend an insured? Or to refuse to settle a case? This article provides a basic overview of the law on bad faith in New York.
An insurance carrier that refuses to defend based upon noncoverage does not act in “bad faith” unless in asserting noncoverage the carrier acts in gross disregard of its policy obligations. Gordon, supra; Sukup v State, 19 NY2d 519. An insured must demonstrate that the carrier engaged in a pattern of behavior evincing a conscious or knowing indifference to the insured’s interests. Bennion v Allstate Insurance Co., 284 AD2d 924. A finding of bad faith based upon an insurance carrier’s refusal to defend requires a showing that no reasonable carrier would have asserted noncoverage under the circumstances of the particular case. Sukup, supra.
In order to demonstrate bad faith by an insurance carrier for refusing to settle, it must be demonstrated that the insurer's conduct constituted a gross disregard of the insured’s interests, defined as "a deliberate or reckless failure to place on an equal footing the interests of its insured with its own interests when considering a settlement offer." Pavia, supra at 453. For bad faith, it must be shown that a settlement demand was made within the policy limits. CBLPath, Inc. v. Lexington Insurance Co., 73 AD3d 829. However, there may be an inference of bad faith that arises even where the plaintiff’s settlement demand equals or exceeds the policy limits if an insured is not advised of the right to contribute to a settlement offer in excess of the limits. Redcross v. Aetna Casualty & Surety, 260 AD2d 908.
Other factors, derived from New York’s Pattern Jury Instructions, that may be considered in determining if an insurer acted in bad faith in declining to settle are:
• The probability of a verdict in favor of the plaintiff;
• The probability that a verdict would exceed the policy limits;
• The extent to which the carrier investigated the case;
• What attempts the carrier made to settle;
• At what point were those attempts to settle the claim made;
• Was the plaintiff’s attorney advised of the policy limits;
• What, if any, recommendations regarding settlement were made to the carrier by defense counsel;
• Was the defendant/insured kept informed of the settlement demands and negotiations;
• Did the carrier inform the defendant/insured of the advisability of obtaining separate counsel to advise him/her on the possibility of an excess verdict and settlement negotiations;
• Whether the carrier offered the defendant/insured the opportunity to contribute to a settlement that the plaintiff was willing to accept;
• If so, what was the defendant/insured's response to this suggestion;
• The financial risk for the defendant/insured if the settlement was not made, as compared with the risk in relation to the policy limits.
• "any other evidence which tends to establish or negate the insurer's bad faith in refusing to settle." Vecchione v. Amica Mutual, 274 AD2d 576, 577-578.
The above list is not exhaustive, but should be considered in evaluating the issue of “bad faith”.