In New York, an insurer may be held liable for the breach of its duty of “good faith” in defending and settling claims over which it exercises exclusive control on behalf of its insured. In order 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–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.
In General Motors Acceptance Corp. v. New York Central Mut. Fire Ins. Co., the insured and its excess insurer commenced a bad faith action against the insured’s primary insurance carrier. The plaintiffs asserted that the defendant’s conduct, in failing to settle the case within the policy limit, was in “gross disregard of plaintiffs’ interests.”
In the underlying action, the plaintiff suffered a brain injury, causing a loss of smell, as well as other symptoms. The medical records also showed that the plaintiff suffered from pre-existing injuries. In its motion for summary judgment, the defendant asserted that its failure to make a settlement offer of the policy limit was not a breach of its duty of good faith because this was simply a mistake in judgment, and at the worst, negligence.
Although summary judgment was denied by the lower court, the First Department reversed, holding that the assessment of the insured’s exposure and the failure to make a settlement offer of the policy limit was no more than a mistake in judgment, which is insufficient to demonstrate bad faith.
Thanks to Gabe Darwick for his contribution.