Bad Faith Generally
Maryland law recognizes a tort cause of action by an insured party where an insurer refuses in bad faith to settle a third-party's claim against the insured. Mesmer v. Md Auto. Ins. Fund, 353 Md. 241, 725 A.2d 1053, 1061-62 (Md. 1999).The basis for the insurer's tort duty to the insured arises from the insurer's "exclusive control" of "settlement and defense of any claim or suit against the insured," such that "there is a potential, if not actual, conflict of interest giving rise to a fiduciary duty." Id. at 1063(quoting Sweeten v. Nat'l Mut. Ins. Co. of D.C., 233 Md. 52, 194 A.2d 817, 818(Md. 1963)). In determining liability for the failure to settle a claim within the applicable policy limits, Maryland has adopted a good faith standard.
In applying the 'good faith' theory the courts have found that the presence of one or more of the following acts or circumstances may affect the 'good faith' posture of the insurer: the severity of the plaintiff's injuries giving rise to the likelihood of a verdict greatly in excess of the policy limits; lack of proper and adequate investigation of the circumstances surrounding the accident; lack of skillful evaluation of plaintiff's disability; failure of the insurer to inform the insured of a compromise offer within or near the policy limits; pressure by the insurer on the insured to make a contribution towards a compromise settlement within the policy limits, as an inducement to settlement by the insurer; and actions which demonstrate a greater concern for the insurer's monetary interests than the financial risk attendant to the insured's predicament.
State Farm Mut. Auto. Ins. Co. v. White, 248 Md. 324, 333, 236 A.2d 269 (1967).
[F]oran insurer to measure up to the good faith test, its action in refusing to settle must consist of an informed judgment based on honesty and diligence. Id. A liability insurer's duty to attempt to settle claims within its insureds' policy limits arises because standard insurance policies give the insurer the exclusive control of the investigation, settlement, and defense of claims against its insureds. Fireman's Fund v. Continental Ins. Co., 308 Md. 315, 318,519 A.2d 202, 204 (1987).
The measure of damages recoverable in a tort action based upon a bad faith failure to settle within policy limits is ordinarily the amount by which the judgment in the underlying action exceeds the amount of insurance coverage. Medical Mutual v. Evans, 330 Md. 1, 25-28, 622 A.2d 103, 114-116 (1993). Since a claim for failure to settle within the policy limits is a tort action, no breach of contract damages are available for violation of any duty to settle a claim within policy limits.
Standing to Sue
If the insurer does not provide coverage such as defense and indemnification, the insurer no longer has exclusive control over the defense and settlement of an action, and no tort claim for failure to settle can arise. While this may give rise to a breach of contract action, the insured will not succeed on a claim for bad faith failure to settle if coverage is denied.
An injured third party does not have standing to bring a cause of action against an insurer for failure to settle within in the policy limits; however, these claims can be assigned. Med. Mut. Liab. Ins. Soc. of Maryland v. Evans, 622 A.2d 103, 117(Md. 1993).
Chartwell Law represents the interests of insurers and employers, as such, we continue to continue to monitor the legal landscape. If you have any questions about issues associated with right of action for bad faith claims, our attorneys are available to help. Please contact your Chartwell Law attorney.