In New Jersey, a “Rova Farms” claim arises from the Supreme Court case of Rova Farms Resort, Inc. v. Investors Ins. Co. of America, 65 N.J. 474 (1974). There, the New Jersey Supreme Court held that an insurer’s bad-faith failure to settle a claim within the policy limits could ultimately leave the insurer on the hook for the entire judgment, even if it exceeds the policy limits.
The facts of Rova Farms are straightforward. Lawrence McLaughlin was a patron of Rova Farms Recreational Resort. Id. at 479. While at Rova Farms, he dove from a ‘diving platform’ into 3 or 4 feet of murky water and sustained severe physical injury when his head struck the bottom of the lake. Ibid. None of the parties to the litigation questioned the severity of his injuries. Ibid. However, the liability insurer, refused to tender its policy limits of $50,000 (approximately $327,370 when adjusting for inflation). Id. at 481. Instead, the insurer offered a mere $12,500 (approx. $81,842) in settlement. Ibid. The case proceeded to trial and the jury returned a verdict against the insured for $225,000 (approx. $1,479,165). Ibid.
Following the verdict, Investors paid its $50,000 policy limits and Rova Farms, with much difficulty, paid the excess judgment of $175,000, plus the accrued interest. Id. at 482. In fact, Rova Farms faced such difficulty in raising the money that it was forced to make a nationwide fund appeal to its members, hold several fundraisers, and ultimately obtain a mortgage loan on its property in order to complete the payment. Ibid. As a result, Rova Farms sued Investors Insurance Company, asserting bad faith and seeking reimbursement of the funds it paid as the excess judgment, along with counsel fees and interest.Ibid.
The trial court held a full hearing on the merits and entered judgment for Rova Farms, against Investors, in the amount of the excess judgment plus interest, resulting in a total judgment of $197,150.68. Id. at 483. The Appellate Division affirmed and Investors appealed to the Supreme Court, which granted certification. Ibid.
Before beginning its analysis, the Court first noted that there existed substantial evidence before the Court that Investors could have effectuated a settlement of the McLaughlin claim, but instead Investors refused to budge from its initial offer of $12,500. Id. at 485. The Court then admonished the conduct displayed by Investors and reiterated the general rule it first outlined in Bowers v. Camden Fire Ins. Assoc.
When it is probable that an adverse verdict will exceed the policy limit, the propriety of an insurer's refusal to accept a settlement offer which is within the coverage requires a resolution of conflicting interests. In our judgment, in view of the duty of the insurer to act in good faith, the resolution can lead to but one fair result: Both interests can be served justly only if the insurer treats any settlement offer as if it had full coverage for whatever verdict might be recovered, regardless of policy limits, and makes its decision to settle or go to trial on that basis. [Rova, supra 323 N.J. at 487 n.4]
The Court additionally concluded that the insurer had an inherent fiduciary obligation to its insured and therefore imposed the following responsibilities upon carriers:
- The duty to exercise good faith in settling claims;
- The affirmative duty to explore settlement possibilities (whether or not a formal settlement demand has been made by the plaintiff); and
- The fiduciary duty to the insured to attempt to negotiate a settlement within the policy limits.
[Id. at 493-96]
Thus, having re-affirmed the long-standing duty to exercise good faith in settling claims, the court concluded that it was only just that a carrier, which exhibited bad faith in settling a claim, should also suffer the detriments of its decisions. Id.
at 502. Accordingly, the Court affirmed the lower decisions and Investors was ordered to reimburse Rova Farms.
As a result, of the decision, attorneys in New Jersey often send a “Rova Farms letter” to the carrier when a plaintiff offers to settle a case within policy limits. The letter puts the carrier on notice that, if it does not settle within the policy limits, the carrier may be ultimately left to cover the entire judgment, even if it exceeds the policy limits. Of course, the obligation to send a “Rova Farms letter” only arises where the carrier has exhibited bad faith.
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