Pavia v. State Farm Mutual Automobile Insurance Co.

Supreme Court of New York, Appellate Division, Second Department · Torts

TortsInsurance bad faithFailure to settle within policy limitsDamagesbad faithinsurancesettlement demandpolicy limits

Facts

State Farm insured the Rosatos under a $100,000 liability policy after an accident in which passenger Frank Pavia suffered catastrophic, permanent brain injuries. Before June 1987, State Farm had information indicating very serious injuries and substantial insured fault, including medical reports, independent medical examinations, witness statements, an internal assessment of 100% liability, and defense counsel's warning that liability was 'extremely unfavorable' and that $100,000 should be reserved to avoid a bad-faith claim. On June 26, 1987, Pavia's attorney sent a letter offering to settle for the full policy amount if accepted within 30 days, but State Farm did not respond, did not inform defense counsel or the insureds of the offer, and did not authorize a policy-limits offer until months later, after the offer had expired. The underlying case went to trial, producing a judgment vastly in excess of policy limits, after which the insureds assigned their claims against State Farm to Pavia.

Issue

Whether the evidence was sufficient to permit the jury to find that State Farm acted in bad faith by failing to respond within a reasonable time to Pavia's time-limited policy-limits settlement offer. Also, whether the proper measure of damages in such a bad-faith action is the excess judgment even when the insureds allegedly lacked the means to pay it.

Rule

Bad faith in this context is not established by mere negligence, carelessness, or error in judgment. It requires proof that the insurer acted intentionally and in gross disregard of the insured's interests, meaning a deliberate or reckless decision to disregard those interests rather than fairly considering them alongside the insurer's own; such proof is often circumstantial. A bad-faith case is established where liability is clear and the potential recovery far exceeds the insurance coverage, and a belated policy-limits offer does not automatically bar liability. The measure of damages is the amount by which the underlying judgment exceeds the policy limits.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Columbus, Ohio, Larkfield Mutual insured Devin Cole for $50,000 in auto liability coverage. After a crash, the company mishandled the file, overlooked a medical report, and miscalculated likely damages, causing it to reject a within-limits settlement demand, but the evidence shows only sloppiness and poor judgment rather than any conscious choice to ignore Devin's exposure.

If Devin later faces an excess judgment and sues Larkfield Mutual for bad-faith failure to settle, which is the strongest argument for the insurer?

Explanation. The majority held that bad faith in this setting requires more than negligence, carelessness, or an error in judgment. The insured must prove the insurer acted intentionally and in gross disregard of the insured's interests, meaning a deliberate or reckless decision not to fairly consider those interests alongside the insurer's own. The court also rejected any requirement of sinister or deceitful motive, and a missed deadline alone is not automatically bad faith. (Derived from Pavia v. State Farm Mutual Automobile Insurance Co. (n.d.).)