Rova Farms operated a recreational resort with a lake. Its liability insurer, Investors, issued a policy with a $50,000 limit, assumed control of the defense of covered suits, and prohibited Rova from settling claims on its own except at its own expense. A resort guest, Lawrence McLaughlin, suffered permanent, catastrophic paralysis after diving from a platform into shallow, murky water. He and his wife sued Rova.
Investors defended the action. Although McLaughlin's injuries plainly supported damages far above the policy limit and the case was expected to reach a jury on liability, Investors offered only $12,500 throughout trial. The trial judge urged a policy-limits offer, and defense counsel recommended offering $50,000 if it would settle the case. Evidence showed the McLaughlins would have accepted $75,000, and Rova had authorized its personal counsel to contribute $25,000 if Investors first offered its full limit. Investors never increased its offer. The jury returned a $225,000 verdict. After appellate proceedings, the Supreme Court reinstated that verdict; Investors paid its $50,000 limit, and Rova paid the $175,000 excess plus interest.
Rova then sued Investors for bad-faith failure to settle. Following a bench trial, the trial court awarded Rova $197,150.68—the excess judgment and interest Rova had paid—and later awarded counsel fees, but denied prejudgment interest on that recovery. The Appellate Division affirmed. Investors appealed the bad-faith judgment, and Rova cross-appealed the denial of prejudgment interest.
Issue #1
Whether an appellate court should disturb the trial judge's factual finding, after a bench trial, that Investors acted in bad faith by failing to settle the McLaughlin claim.
Holding
No. The finding of bad faith was supported by adequate, substantial, and credible evidence and therefore had to be sustained.
Reasoning
Appellate review of a bench-trial judgment is limited. A trial judge's factual findings, particularly those involving credibility, are binding when supported by competent and substantial evidence; an appellate court should overturn them only when they are so unsupported or inconsistent with the record that they offend the interests of justice.
The evidence strongly supported the finding that Investors failed to make an honest, intelligent, and objective settlement evaluation. McLaughlin was a 27-year-old man visibly and permanently devastated by the accident, the prospective damages unmistakably dwarfed the $50,000 policy limit, and Investors' own counsel reported that the negligence claim would go to the jury and could yield a verdict above the limit.
Despite those warnings, the trial judge's suggestion that Investors offer its policy limit, and its own lawyer's recommendation to offer $50,000 if that would settle the case, Investors never moved beyond its initial $12,500 offer. The evidence showed that a $75,000 settlement was attainable, with Rova prepared to supply $25,000 if Investors paid its full limit.
An insurer may consider its assessment of liability, but good faith requires a realistic appraisal of the whole case: the likely verdict range, the strengths and weaknesses of the evidence, the local jury climate, and the likely appeal of the parties and witnesses. The relevant question was not whether Investors personally believed Rova was free from liability, but what a jury could reasonably find from the available evidence.
Because Investors controlled the defense and settlement process while Rova faced the entire risk above $50,000, its decision had to be made as though it bore full responsibility for any verdict. Its persistent refusal to make a meaningful effort to settle, even after the verdict and counsel's warnings of a potential $500,000 exposure on retrial, amply supported bad-faith liability.
Issue #2
Whether an insurer can avoid bad-faith liability for an excess judgment because the claimant never made a formal, authorized demand within the policy limits.
Holding
No. A formal within-limits demand is not a prerequisite to bad-faith liability; an insurer controlling settlement has an affirmative fiduciary duty to explore and pursue realistic settlement opportunities.
Reasoning
The insurer's contractual control over defense and settlement, coupled with the insured's inability to settle independently, creates an inherent conflict once a serious claim presents a substantial danger of an excess verdict. That control makes the insurer an agent of the insured for settlement purposes and imposes a duty of good faith and fair dealing.
When an adverse verdict is likely to exceed the coverage, good faith requires the insurer to treat the claim as if it alone would pay the entire judgment. An insurer cannot wait passively for a claimant to make a perfectly formal offer when the surrounding facts show a realistic prospect of settlement.
The absence of a formal settlement demand is at most one circumstance bearing on good faith. Here, it did not excuse Investors because the trial judge, plaintiffs' counsel, Rova's counsel, and Investors' own trial counsel all conveyed that a settlement was feasible, and the evidence established that the McLaughlins would have accepted $75,000.
Rova's counsel did not bar recovery by saying that Rova lacked money while declining to volunteer its ability to contribute. Investors was improperly asking Rova to contribute while Investors itself offered only one-quarter of its policy limit. If Investors had offered its full limit, it could have clarified whether Rova would contribute any additional amount; doubts about settlement feasibility and the insured's willingness to contribute had to be resolved in Rova's favor absent affirmative proof to the contrary.
Issue #3
Whether the Court should adopt a broader rule automatically requiring an insurer to bear an excess judgment whenever it declines to offer its policy limits in a case presenting a settlement opportunity.
Holding
No definitive rule was adopted. The Court identified serious concerns with the existing good-faith standard but found it unnecessary to extend the rule because Investors' bad faith was established under current law.
Reasoning
The Court recognized a structural problem in the traditional good-faith framework: even an insurer that acts reasonably may choose trial to protect its own financial interest, while the insured alone bears the loss if that judgment proves wrong. Separate counsel offers limited protection because the insurer still controls the defense and cannot be compelled to accept a settlement.
The Court suggested that, in a future appropriate case, an insurer that elects not to offer available policy limits might properly be required to bear the resulting excess loss. Such a rule would align the insurer's ability to benefit from declining settlement with responsibility for the risk of that choice.
That prospective discussion was not necessary to decide Rova's case. The existing standard already supported liability because Investors' conduct was not merely a reasonable but unsuccessful evaluation; it was affirmatively unsupported by the evidence and inconsistent with its duty of good faith.
Issue #4
Whether Rova was entitled to prejudgment interest on the excess judgment and interest it paid to the McLaughlins, running from the date of Rova's payment.
Holding
Yes. The case was remanded for an award of prejudgment interest from August 7, 1970, the date Rova paid $197,150.68 to satisfy the McLaughlin judgment.
Reasoning
A wrongful failure to settle involves both contract and tort principles because it breaches the fiduciary obligation arising from the insurance relationship. The availability of prejudgment interest should turn on the injury and remedy, not on an exclusive label for the action.
Once Rova paid the excess judgment, it was deprived of the use of a definite sum while Investors retained the use of money it should have paid. Prejudgment interest compensates for that lost use of money during the period before judgment.
Rova did not need to prove that it borrowed the funds at interest or withdrew them from an interest-bearing account. For a liquidated amount, the loss of use is presumed. Investors could not avoid interest merely because some money may have been supplied by Rova's affiliated members; the insurer had the benefit of the funds, while Rova and its contributors did not.