The opinion of the court was delivered by: WORTENDYKE
By reason of the conceded diversity of citizenship between the parties this cause was removed to this Court from the Superior Court of New Jersey in which it was originally instituted. A motion to remand to the State Court was denied by this Court's Order of December 1, 1965. The involvement of the jurisdictional minimum is uncontradicted. The case was tried in this Court without a jury, demand for which was waived after trial commenced. This Opinion is being filed in lieu of findings of fact and conclusions of law required by F.R.Civ.P. 52. Plaintiff is a municipal corporate body organized under Chapter 7 of Title 18 of the Revised Statutes of the State of New Jersey, and defendant is a casualty insurance corporation of the State of Illinois, duly authorized to transact business in the State of New Jersey.
On or about July 1, 1961 defendant, hereinafter Lumbermens, issued to plaintiff, Board, a policy of liability insurance by the terms of which Lumbermens agreed to pay in behalf of the Board all sums of money, not exceeding $200,000, which the Board might become legally obligated to pay as damages because of bodily injuries sustained accidentally during the period prescribed in the policy by any persons, and to defend any suit against the Board alleging such injuries and seeking damages therefor. By the terms of the policy Lumbermens reserved the right to make such investigation, conduct such negotiations and conclude such settlement of any claim or law suit against the Board as it deemed expedient. On January 15, 1962, while the policy was in full force and effect, Stanley Miller, a 9th grade student at Chatham Borough Junior High School operated by the Board, sustained bodily injuries resulting from an accident of the character contemplated by the terms of the policy. Thereafter Stanley and his parents made claim against the Board for damages on account of said injuries and their consequences, and instituted an action against the Board for the recovery thereof. Pursuant to the terms of the policy Lumbermens undertook an investigation of the claims alleged in the action against the Board and, through attorneys selected by Lumbermens, it conducted a defense of the 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."
At page 516, the Court further stated:
"And, where there is little or * * * no likelihood of a verdict or even a settlement within the limits of the policy's coverage, the separate interests of the parties are in effect substantially hostile. In such circumstances, it becomes all the more apparent that the insurer must act with the utmost good faith toward the insured in disposing of claims against the latter. " Cowden v. Aetna Casualty and Surety Co., 389 Pa. 459, 470, 134 A. 2d 223 (1957).
A recent decision of Judge Coolahan of this Court in Kaudern v. Allstate Insurance Company, 277 F. Supp. 83, sheds further illumination upon the settlement obligation of a liability insurer with respect to a claim against its insured. In that case the Court, citing Brown v. Guarantee Ins. Co., 155 Cal. App. 2d 679, 319 P.2d 69 (1957) enumerated the following factors as relevant to the question whether an insurer had exercised the requisite degree of good faith in its negotiations for settlement of a claim against its insured. These factors are stated as follows:
1. The strength of the injured claimant's case on the issues of liability and damages;
2. Attempts by the insurer to induce the insured to contribute to the settlement;
3. Failure of the insurer to properly investigate the circumstances involved in the accident, which would result in its inability to effectively weigh the evidence against the insured;
4. The insurer's rejection of advice of its own attorney or agent;
5. Failure of the insurer to inform the insured of the compromise offer;
6. The amount of financial risk to which each party is exposed in the event of a refusal to settle; and
7. The fault of the insured in inducing the insurer's rejection of the compromise offer by misleading it as to the facts.
In Radio Taxi Service, supra, 31 N.J. at page 312, Mr. Justice Francis, writing for the majority of the Court, stated:
"The ultimate question is not whether a verdict in excess of the policy limits should have been anticipated but whether the insurer lacked good faith in deciding not to meet the settlement demand. Mere failure to settle within the policy limit when there was an opportunity to do so before or during trial is not evidence of bad faith. * * * The fact that the policy limit was exceeded by the verdict, in the light of hindsight may indicate a mistake of judgment. But such a mistake when resulting from a decision made with good faith regard for its own and the insured's interests does not confer a cause of action on the insured for the excess."
Against the background of case law to be found in the foregoing cited cases we proceed to review the evidence in the case at bar.
In January 1962 when Lumbermens received the report of the accident sustained by Stanley Miller, the insurer assigned its staff investigator, Edward T. Ponek, to investigate the Miller claim. He thereupon interviewed Mr. Cloidt, the physical education instructor at the Chatham School. In order to secure authorization to examine the hospital records and doctors' reports relating to Stanley's injuries and treatment, Ponek communicated with Mr. Perretti, the attorney who had been retained to represent the Miller family. He also conferred with Mr. Frahn who had recently become counsel to the Board of Education. Initially a reserve of $250 was placed upon the claim file by Lumbermens, but this was gradually increased to $15,000 just prior to Ponek's departure from Lumbermens' employment. Ponek never had occasion to recommend a settlement figure to his employer. Based upon his investigation, Ponek was of the opinion that the Board was statutorily immune from liability and that the physical education instructor, Cloidt, was probably free of negligence. Carl Frahn, Esq. became attorney for the Board in April 1963, and he thereupon wrote to Lumbermens and its attorney, Mr. Gleeson, that he had become attorney for the Board and requested that he be kept informed of developments in the Miller case. Frahn never received a formal settlement demand from counsel for the Millers. He, however, learned from Ponek that the Miller boy was very seriously and permanently injured, was receiving treatment at the Kessler Institute for Rehabilitation, and that medical and hospital expenses had already exceeded $7,400. Frahn inquired of Ponek respecting the amount of reserve being carried on the case by the insurer and was informed that it was $20,000. Respecting liability, Ponek expressed his opinion to Frahn that the insurer's reserve on the case should be raised because the case was dangerous. On July 23, 1963 Frahn was told by Lecay, an associate in Gleeson's office, that there had been no discussion of settlement of the Miller case, but that the Board would be protected by statutory immunity.
Frahn testified that his first knowledge that the amount of the settlement demand for the Miller case exceeded the policy limits was on the date of the commencement of the trial, when the demand was $350,000; but he did not discuss this figure with anyone at the time. That demand was subsequently reduced by counsel for the Miller family to $200,000, which was the policy limit. On the following day, June 12, 1964, Frahn wrote to Lumbermens advising that counsel for the Millers would accept the policy limit of $200,000 in full settlement of all claims, and stated:
"I hereby require that subject to court approval on behalf of the minor you offer the plaintiffs the said sum of two hundred thousand dollars in settlement of their claims. Should you fail to do so and subsequently any judgment is entered herein in favor of the plaintiffs for a total sum in excess of two hundred thousand dollars, you are hereby notified that the defendants will hold your company liable to pay all of such excess or overage in addition to the two hundred thousand dollars required under my client's policy.
In addition, if you should decline to make such offer at this time, on behalf of the Board of Education, I further demand that you keep me advised of the progress of all further settlement negotiations in ...