action for the enforcement of the claims. Upon the trial of the action a jury awarded damages to Stanley Miller and his parents in the aggregate sum of $1,215,140, of which $1,180,000 was awarded to Stanley and $35,140 to his parents. After the return of the verdicts the award to the infant plaintiff was reduced by the Trial Court to the sum of $300,000, but the verdict for his parents remained unmodified. The Board has paid to the plaintiffs Miller the sum of $135,140.
In its complaint in the present action the Board alleges that it was compelled to pay to and for the account of the plaintiffs Miller, in the State Court action against the Board, the sum of $135,140 by reason of Lumbermens' negligent conduct of the Miller case and its bad faith in refusing to settle the Miller claims when it had the opportunity to do so within the policy limits. Accordingly, the Board seeks to recover from Lumbermens in this action the foregoing amount of $135,140 together with interest thereon, costs of suit, counsel fees and expenses necessarily incurred in the instant litigation.
In its answer Lumbermens denies that it was guilty of any negligence or bad faith in the investigation, defense and settlement negotiations involving the Miller claims against the Board and affirmatively charges the Board with contributory negligence.
The evidence in this case fails to support a reasonable inference that the payment of which the Board complains was caused or induced by any negligence chargeable to Lumbermens. Thus the sole issue with which this Court is confronted is whether Lumbermens' failure to settle the Miller claims before verdict resulted from the insurer's lack of good faith in reaching its determination not to settle.
Since jurisdiction in this case arises by reason of the diversity of citizenship of the parties, this Court sits as if it were a Court of the State of New Jersey and must therefore apply the law in the light of its interpretation of the policy of that State. A brief review of the decisions of the New Jersey Courts, as well as those of this Court, discloses recognition of the rule that an insurer which has reserved control over settlement of claims against its insured must act in good faith when refusing to settle and its decision not to settle must be thoroughly honest, intelligent, objective and realistic when tested by the necessarily assumed expertise of the insurer. The insurer's decision not to settle must result from weighing in a fair manner the probabilities of a favorable or unfavorable verdict against the insured. Accordingly, an insurer will not be allowed to frustrate the purpose of protecting the insured by making a selfish settlement decision which exposes the insured to and results in a judgment against the insured beyond the limits of the policy. Where the insurer recognizes the probability that an adverse verdict against the insured at trial will exceed the limits of the policy, the boundaries of good faith in refusing to settle become more compressed in favor of the insured than would otherwise be the case. Where, as in the case at bar, Lumbermens reserved control over the settlement of claims against the Board and had received an offer to settle within the policy limits in the face of the probability of an adverse verdict in excess of those limits, the insurer's refusal to settle can be found to have been determined upon in good faith only by treating the settlement demand as if the Board had full coverage for whatever verdict might be recovered against it regardless of the policy limits. Bowers v. Camden Fire Insurance Ass'n, 51 N.J. 62, 237 A.2d 857 (1968), 237 A. 2d 857. The purpose of liability insurance is to protect the insured from liability within the limits of the policy coverage. The insurer will not be permitted to frustrate that purpose by a selfish decision not to settle a claim against the insured where the insured is exposed to and suffers a judgment beyond the specific monetary protection which his premium has purchased. "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. [A] reasonably diligent effort must be made to ascertain the facts upon which a good faith judgment as to settlement can be formulated." Radio Taxi Service, Inc. v. Lincoln Mutual Insurance Co., 31 N.J. 299, 304, 157 A.2d 319 (1960); citing Southern Fire & Casualty Co. v. Norris, 35 Tenn. App. 657, 250 S.W.2d 785; 40 A.L.R. 2d 208.
While a liability insurer may, in determining whether to accept or reject an offer of compromise of a claim against its insured properly give consideration to its own interest, it must give in good faith at least equal consideration to the interest of its insured. An insurer who assumes control over an action against its insured is bound to exercise diligence, intelligence, good faith, and honest and conscientious fidelity to the common interest of itself and its insured. When a conflict of interest arises between the insurer as agent and its insured as principal, the insurer's conduct will be subject to closer scrutiny than that of the ordinary agent because of its adverse interest. "'The insurer must act honestly to effectively indemnify and save the insured harmless as it has contracted to do -- to the extent, if necessary, that it must make whatever payment and settlement as honest judgment and discretion dictate, within the limits of the policy, * * *. '" Tennessee Farmers Mutual Insurance Co. v. Wood, 277 F.2d 21 (6 Cir. 1960); quoting from Traders & General Ins. Co. v. Rudco Oil & Gas Co., 129 F.2d 621, 627 (10 Cir. 1942), 142 A.L.R. 799. In implementing the good faith settlement standard the interests of the insured must be given at least equal consideration with those of the insurer in evaluating a settlement. In approaching its decision whether to settle or try a case against its insured, the insurer must in good faith view the situation confronting both of them as the insurer would view it if there were no policy limits applicable to the claim against the insured. Therefore the fairest method of balancing the respective interests of insurer and insured is for the insurer to treat the claim as if it alone were liable for the entire amount. Brown v. United States Fidelity and Guaranty Company, 314 F.2d 675 (3 Cir. 1963) citing Bell v. Commercial Insurance Co. of Newark, 280 F.2d 514 (3 Cir. 1960).
Bad faith in refusing to settle is provable by circumstantial evidence. Brown v. United States Fidelity & Guaranty Company, supra; Tennessee Farmers Mutual Insurance Company v. Wood, supra. Bad faith in that regard "is most readily inferrable when the severity of the injuries [for which damages are claimed from the insured] is such that any verdict against the insured is likely to be greatly in excess of the policy limits and further when the facts in the case indicate that a [verdict for the defendant] on the issue of liability is doubtful. * * * When these two factors coincide, and the [insurer's] company still refuses to settle, the inference of bad faith is strong." Brown v. United States Fidelity & Guaranty Company, supra, at page 679. In Bell, supra, the Third Circuit Court of Appeals, applying the law of Pennsylvania, held, at page 515 that:
"* * * the insurer must accord the interest of its insured the same faithful consideration it gives its own interest: since the interest of one or the other may be imperiled at the instant of decision, the fairest method of balancing the interests is for the insurer to treat the claim as if it were alone liable for the entire amount. The insurer is not bound to submerge its own interest, but the decision to expose the insured to personal pecuniary loss must be based upon a bona fide belief by the insurer, predicated upon all of the circumstances of the case, that it has a good possibility of winning the lawsuit. The insurer does not have an absolute right to risk the insured's financial well-being; the insurer's obligation of good faith requires that the chance of finding non-liability be real and substantial and that the decision to litigate be honestly made."