For affirmance -- Chief Justice Weintraub, and Justices Francis, Proctor and Hall. For reversal -- Justices Burling and Jacobs. The opinion of the court was delivered by Francis, J. Jacobs, J., joined by Burling, J. (dissenting).
[31 NJ Page 300] A taxicab of the plaintiff Radio Taxi Service, Inc. was involved in a collision with an automobile owned and driven by Annette E. Myers. The cab was insured under an automobile liability policy issued by defendant Lincoln Mutual Insurance Company, which contracted to pay all sums up to $5,000 for which Radio became obligated by reason of the liability imposed by law for damages arising
out of its operation. Mrs. Myers sued Radio for damages on account of the injuries and consequential losses sustained in the accident. Defendant carrier undertook investigation of the mishap and the preparation for and defense of the action. The case went to trial and resulted in a jury verdict for the injured woman in the sum of $13,500. The insurer's contractual liability being limited to $5,000, Radio became responsible for the $8,500 balance of the judgment. Action was then brought on the policy to recover the amount of the excess. The complaint charged that defendant insurer failed to use due care in investigating the accident and in preparing the automobile case for trial, and was guilty of negligence and failure to act in good faith in refusing to accept an offer to settle the Myers claim within the $5,000 limit of the policy. After the plaintiff had submitted its proof on these issues at the trial, the Law Division of the Superior Court granted defendant's motion for a judgment of dismissal. An appeal was taken to the Appellate Division and we certified it prior to argument there.
As indicated by the complaint, the plaintiff's cause of action is predicated upon two claims of breach of duty by defendant, (1) failure to exercise due care in investigating the accident, and (2) breach of an obligation to settle the claim within the policy limit. As to the first, the contract of insurance obliges the insurer to defend any suit within the subject matter of the coverage, even if groundless, false or fraudulent. There is a further proviso that the company "shall have the right to make such investigation, negotiation and settlement of any claim or suit as may be deemed expedient" by it.
The parties are in agreement that the provisions with respect to investigation of claims, considered in relation to the whole of the undertaking, impose upon the carrier the duty of exercising reasonable care in doing so. We have examined the evidence adduced to support the assertion that the defendant failed to use such care in investigating the circumstances of the accident, in interviewing a certain
witness, and in preparing the case for trial. Assuming that the criticized action or inaction raised a jury question of negligence, the record is barren of any indication that such conduct was a proximate cause of the adverse jury verdict.
The claim with respect to negligence in investigation concerns the failure to interview a young boy who, the taxi driver said in his statement, ran across the street from the southwest to the northeast corner of the intersection where the accident took place as the cab approached the stop sign at the southwest corner. The driver asserted he stopped not only for the stop sign but also because of the presence of the boy. Nothing further appears in the record to indicate that the boy saw the taxicab (which would be approaching from the rear as he was running) or knew whether it stopped, or that he had any information which would throw light on the manner in which the mishap occurred. Moreover, in the present case where it is charged the carrier did not use due care to protect its insured because of the failure to visit this boy, attention is drawn inevitably to the fact that neither the plaintiff nor its driver nor experienced trial counsel produced him at the trial. He was known to them and if he knew anything which would have supported their suit, it is difficult to believe he would not have been brought in as a witness. If there are any inferences to be drawn at all, in the light of the nature of the criticism of the insurer, they must be adverse to the plaintiff. If it was negligence for the insurer not to interview the boy, by the same process of reasoning it was at least as negligent for counsel for plaintiff or his investigator to fail to seek him out and produce him at the trial of this policy suit. Such conclusion should follow because in order to support plaintiff's position it was essential to show that the boy had knowledge which would have thrown light on the issue of negligence at the trial of the accident case. But a finding that counsel's fault in that respect renders him responsible for the loss of the present case at the trial level without any proof that such failure was related in cause to the loss would rest in sheer
speculation or conjecture and could not be tolerated in the law. It is likewise intolerable as to the carrier. Obviously, therefore, the alleged negligence of the one could not be considered the proximate cause of the loss of the accident suit, nor the alleged negligence of the other be deemed the proximate cause of the loss of the present case. Accordingly, on the facts we find no jury question on this issue.
The second basis for the asserted liability of the carrier for payment of the excess of the judgment over the policy limit arises from the failure to settle the injury claim before or during the trial. It is undisputed that down to the beginning of the trial a compromise within the $5,000 maximum coverage was possible. The proof is silent as to whether the offer remained open throughout the trial.
The duty of an insurer to accept a proffered settlement which is within the available coverage has been expressed by courts throughout the country in two forms. One group espouses the rule that the carrier must act in good faith in considering offers to compromise. The other group has adopted the negligence test, that is, the carrier is liable for the excess judgment if it fails to settle when a reasonable man with unlimited exposure in the exercise of due care would have settled. Appleman, whose exhaustive work on insurance was published in 1942, says that the former was the old majority rule but that it is "tending to become the minority rule, being displaced by the rule of negligence." 8 Appleman, Insurance Law and Practice (1942), § 4712, pp. 76-77. On the other hand, a detailed annotation in the American Law Reports published in 1955 declares that the "great majority of the cases" have proclaimed the good faith doctrine. Annotation, 40 A.L.R. 2 d 168, 171, 178. The occasion for adoption of a definitive position has not arisen previously in New Jersey. Cf. McDonald v. Royal Indemnity Ins. Co., 109 N.J.L. 308 (E. & A. 1932).
These two tests of liability which have evolved from the cases are necessarily general, and at times the line of demarcation between them, as well as that between failure to exercise
due care in investigation and breach of the duty to settle, is difficult to discern. For example, a failure to exercise due care in the investigation of a claim might well make it impossible to fashion a good faith evaluation of a case for settlement purposes. See Keeton, "Liability Insurance and Responsibility for Settlement," 67 Harv. L. Rev. 1136, 1140-1141 (1954).
Search for the just rule must be engaged in with an understanding that the purpose of insurance of this type is to protect the insured from liability within the limits of the coverage. And in interpreting the policy, the courts cannot allow the insurer to frustrate that purpose by a selfish decision as to settlement which exposes the insured to and results in a judgment beyond the specific monetary protection which his premium has purchased. In this case, the record presented does not call for acceptance or application of one or the other of the two principles because, in our opinion, the facts adduced do not evidence a violation of either one, and we must conclude that the trial court was correct in ordering judgment for the defendant. But since our reports contain no definitive ruling on the basic issue involved, it seems advisable to announce the principle which gives fair and just recognition to the interests of both parties to the insurance contract. For that purpose, we hold that the obligation assumed by the insurer with respect to settlement is to exercise good faith in dealing with offers of compromise, having both its own and the insured's interests in mind. And it may be said also that a reasonably diligent effort must be made to ascertain the facts upon which a good faith judgment as to settlement can be formulated. Southern Fire & Casualty Co. v. Norris, 35 Tenn. App. 657, 250 S.W. 2 d 785 (Ct. App. 1951); 40 A.L.R. 2 d supra, at pp. 208-210. In the present instance, we find no proof to indicate that any omission in the matter of investigation of the facts in any wise affected the settlement negotiations.
In considering cases such as this, and even though the fact does not affect the insurer's duty, it is not amiss to
have in mind that the insured has purchased a specified amount of coverage for an agreed premium and that more substantial monetary limits were available for relatively smaller additional premiums. See Cosmopolitan Mut. Ins. Co. v. Continental Cas. Co., 28 N.J. 554, 564 (1959). The company, by the contract, reserved the right to control the settlement of claims. Such right is a necessary incident of the operation of its business. Because the insured is prohibited from interfering with this right, however, manifestly its exercise must be accompanied by considerations of good faith. A decision not to settle must be an honest one. It must result from a weighing of probabilities in a fair manner. To be a good faith decision, it must be an honest and intelligent one in the light of the company's expertise in the field. Where reasonable and probable cause appears for rejecting a settlement offer and for defending the damage action, the good faith of the insurer will be vindicated. Hall v. Preferred Acc. Ins. Co. of New York, 204 F.2d 844, 40 A.L.R. 2 d 162 (5 Cir. 1953); and compare the definition of good faith in the Uniform Sale of Goods Law. R.S. 46:30-1.
Concededly, the administration of the good faith test is not easy for either party to the insurance contract. Many elements, both objective and subjective, enter into the fashioning of an honest decision to proceed to trial. Considerations of experience, expertise and judgment are particularly important and significant. The problem of proof of bad faith is not an inconsequential one for the insured. But in these days of liberal pretrial discovery, the burden has been considerably lightened. On the other hand, from a practical standpoint if a mere mistake of honest judgment (based upon a post-verdict appraisal) were said to create a jury question, the obvious danger cannot be ignored that a jury in the policy suit in order to impose liability upon the carrier for the excess, would require little more ...