Pavia v. State Farm Mutual Automobile Insurance Co.

Brief Fact Summary.

Pavia was a passenger injured in a car accident. Pavia rejected a settlement offer from State Farm (insurer of the vehicle) given two and a half years after the accident as “too late” after State Farm finished weighing possible defenses in its assessment of the accident. The jury found for Pavia, at which time Pavia and the individual insured under the State Farm policy jointly sued State Farm for bad faith in failing to accept the settlement offer within a reasonable time despite the clear liability and obvious damages exceeding the policy limits.

Synopsis of Rule of Law.

To establish a prima facie case of bad faith, the plaintiff must establish that the insurer’s conduct constituted a “gross disregard” of the insured’s interests, where “gross disregard” is defined as a deliberate or reckless failure to place on equal footing the interests of its insured with its own interests when considering a settlement offer.

Facts.

Sixteen-year-old Rosato drove Pavia and another youth in a car belonging to his mother that was insured by State Farm with a $100,000 liability limit. Rosato’s permit did not authorize her to drive at night. Rosato took a corner too fast and collided into a car driven by Amerosa while trying to avoid a double parked car on the corner. Pavia was seriously injured.

Investigations conducted by State Farm concluded that the Rosatos were likely to be held liable for the accident but that the record supported possible defenses, such as emergency (because the double parked car may have been backing up) and assumption of risk (because drugs were involved).

Two and a half years later, State Farm offered the fully policy limit of $100,000. Pavia rejected the offer as “too late.”

The jury returned a plaintiff’s verdict for $6,322,000, attributing 85% of the fault to the Rosatos and the remaining 15% to Amerosa. The Supreme Court reduced the verdict upon State Farm’s motion to $5,000,000. The Appellate Division modified the judgment by further reducing the verdict to $3,880,000.

The Rosatos subsequently assigned all causes of action they might have against State Farm to Pavia and commenced a joint bad faith action against State Farm, alleging that State Farm acted in bad faith by failing to accept Pavia’s policy limits settlement offer within a reasonable time despite the clear liability and obvious damages exceeding the policy limits.

Issue.

Did State Farm act in bad faith when it failed to accept a settlement offer for the Rosatos while investigating liability?

Held.

Reversed.

No, State Farm act in bad faith when it failed to accept a settlement offer for the Rosatos while investigating liability.

Discussion.

Whenever an insurer is presented with a settlement option, a conflict arises between the insurer and the insured. The insurer has an incentive to minimize payments, while the insured has an interest in avoiding liability beyond the policy limits. An insurer who refuses to settle within the policy limits risks being charged with bad faith for advancing its own interests over those of the insured.

A “gross disregard” standard is intermediate between the ordinary negligence and sinister motive standards that would either make it too easy or impossible for insured individuals to seek claims against their insurers.

Evidence that a settlement offer was made and not accepted is not dispositive of an insurer’s bad faith. Rather, the plaintiff must show that the insured lost an actual opportunity to settle the claim at a time when all serious doubts about the insured’s liability were removed. To evaluate this probability, courts should assess the likelihood of the plaintiff’s success on the liability issue in the underlying action, the potential magnitude of damages, and the financial burden each party may be exposed to as a result of a refusal to settle. Other considerations include the insurer’s failure to properly investigate the claim and any potential defenses, information available to the insurer at the time the demand for settlement is made, and any other evidence which tends to establish or negate the insurer’s bad faith in refusing to settle.

Here, Pavia’s bad faith claim stems primarily from State Farm’s failure to abide by a settlement deadline that was unilaterally established by Pavia’s counsel. The settlement offer came at an early point of the litigation when possible defenses were still be considered. State Farm conducted an investigation to evaluate the feasibility of the settlement and offered the policy limits before trial upon completing the assessment of the unlikelihood of success.