Rova Farms Resort, Inc. v. Investors Ins. Co. of America

• Court: United States State Supreme Court (New Jersey)
• Writing for the Court: HUGHES; The appellant insurer would argue that, as a matter of law, it had no obligation to offer its policy limit in settlement without a firm; CLIFFORD; MOUNTAIN
• Citation: 65 N.J. 474,323 A.2d 495
• Parties: ROVA FARMS RESORT, INC., Plaintiff-Respondent and Cross-Appellant, v. INVESTORS INSURANCE COMPANY OF AMERICA, a New Jersey Corporation, Defendant-Appellant and Cross-Respondent.
• Decision Date: 07 August 1974

Page 474

65 N.J. 474 323 A.2d 495 ROVA FARMS RESORT, INC., Plaintiff-Respondent and Cross-Appellant,
v.
INVESTORS INSURANCE COMPANY OF AMERICA, a New Jersey
Corporation, Defendant-Appellant and Cross-Respondent. Supreme Court of New Jersey. Argued Jan. 21, 1974.
Decided Aug. 7, 1974.

Page 478

[323 A.2d 497] Robert F. Novins, Toms River, for plaintiff-respondent and cross-appellant (Novins, Novins, Farley & Grossman, Toms River, attorneys; Edward F. Liston, Jr., Toms River, on the brief; Robert F. Novins, of counsel).

Elmer J. Bennett, Newark, for defendant-appellant and cross-respondent-petitioner (Carpenter, Bennett & Morrissey, Newark, attorneys; Michael S. Waters and Heather M. Mullett, Newark, on the brief; Thomas L. Morrissey, Newark, of counsel).

The opinion of the Court was delivered by

HUGHES, C.J.

We consider here cross appeals from the Appellate Division affirmance (Rova v. Investors, 124 N.J.Super. 248, 306 A.2d 77 (1973)) of a judgment entered by a trial court, sitting without a jury, generally in favor of a plaintiff against the defendant, its insurer. The claim rested on alleged bad faith by the insurer in exposing its insured to payment of substantial sums in excess of policy limits, for which sums recovery was sought and awarded below. [323 A.2d 498] Plaintiff, responding here in defense of its judgment, is Rova Farms Resort, Inc., a New Jersey corporation, which we shall call variously 'Rova' or 'the insured.' Appealing from the judgment against it is Investors Insurance Company of

Page 479

America, also a New Jersey corporation, hereafter referred to as 'Investors,' 'the insurer,' or 'the insurance company.'

The sequence of relevant events began with an accident entailing severe personal injuries, which occurred on the premises of Rova, on which it operated a recreational resort in Jackson Township, New Jersey, including a lake used by commercial guest patrons for diving and bathing. Investors had issued to Rova its policy of comprehensive general liability insurance which was in full force and effect on the date of accident. In the usual form, it bound Investors to pay on behalf of Rova '* * * all sums which the insured shall become legally obligated to pay as damages because of bodily injury, * * * sustained by any person and caused by accident,' with a limitation of $50,000. The policy also obligated Investors to defend any suit against the insured alleging such injury and seeking damages on account thereof. The contract further entitled Investors to make such investigations, negotiations and settlement of any claim or suit as it might deem expedient and, while binding the insured to cooperation with Investors, forbade the insured, except at its own cost, to make or pay any settlement.

Such was the contractual relationship between Investors and Rova on July 25, 1965, when Rova's commercial invitee, Lawrence McLaughlin, dove from a 'diving platform' into 3 or 4 feet of murky water under circumstances described in the carefully detailed opinion of Justice Francis, writing for this Court, in McLaughlin v. Rova Farms, Inc., 56 N.J. 288, 266 A.2d 284 (1970). And no gesture was made in the instant litigation or otherwise to question or palliate the significance of the terrible physical injury sustained when McLaughlin's head struck the unseen bottom of the lake. ¹

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Suit was instituted by McLaughlin, joined in by his wife for consequential loss, against Rova and its general manager. Investors, as its contract obligated it to do, assumed the defense of the action, assigning an experienced trial attorney, Mr. Milton D. Liebowitz, to conduct it. There was extensive pretrial discovery, including depositions of McLaughlin and others and, in the usual course Investors fully investigated the circumstances, interviewing and taking statements from relevant witnesses, preparing photographs and the like.

At one stage before trial, plaintiffs were successful over objection in adding to their original allegation of negligence against Rova an additional charge of willful and wanton misconduct on its part in the operation and maintenance of the facility. The investigations and pretrial discovery were chiefly oriented toward the main issue in the case, I.e., the conduct of Rova, whether negligent or willfully and wantonly tortious, and the alleged contributory negligence of McLaughlin. Naturally, this pretrial preparation did not bear importantly on the damage issue inasmuch as McLaughlin's injuries were so severe as to be quite beyond question.

The injection of the additional issue of willful and wanton negligence caused Investors to warn its insured of its denial of coverage of any such wrongful conduct, as distinguished from ordinary negligence, and to invite Rova's attention to the advisability of its retaining independent counsel for its own protection. Heeding such admonition, Rova did retain counsel, Mr. Nathaniel[323 A.2d 499] H. Roth, to act in its interest. Thereafter, although he was not permitted to participate in the actual trial because of Investors' preemption of the defense (as was its contractual right), ² Mr. Roth did participate in

Page 481

settlement discussions during trial, pointedly and repeatedly suggesting the vulnerability of Rova to excess liability loss in view of the grave injuries involved. He constantly inquired as to Investors' willingness to offer its policy limit and urged it to do so, and in fact at one point was permitted in an open court discussion (in the absence of the jury) to denounce that he considered the cavalier conduct of both counsel for plaintiffs and Investors in failing to reach the attitudinal de tente essential to settlement.

The McLaughlin case came to trial on June 10, 1969, before Judge Rosenberg and a jury in Passaic County. McLaughlin was present the first trial day, strapped in a wheelchair, and was presumably seen by judge and jury, but that night became so ill that he was not released from the hospital to return on subsequent days and his testimony entered the case by way of reading his deposition (R. 4:16--1(c)). On that first trial day Investors offered $12,500 in settlement of the case, that figure approximating the 'special' damages of Mr. McLaughlin at some earlier stage during discovery. At no time thereafter did Investors increase that offer, albeit its policy limit was $50,000 and any verdict beyond that would have to be paid by its insured.

Not surprisingly, in view of the grave injury involved and its lifetime consequences, the jury returned a verdict for the plaintiffs in a total amount of $225,000, $15,000 thereof being allocated to the wife for consequential losses. An appeal was directed by Investors to the Appellate Division. Even the magnitude of the verdict returned did not impel Investors to increase its offer nor to explore otherwise the possibility of settlement. The Appellate Division reversed in an unreported opinion, holding that the insured's negligence as

Page 482

proved was not so gross as to justify a finding of willful, wanton conduct, and therefore the judge had erred in failing to withhold this issue from the jury. Because the jurors may have found willful and wanton negligence by Rova Farms and have consequently disregarded any ordinary contributory negligence by McLaughlin, the case was remanded for retrial. Mr. Liebowitz reminded Investors in an opinion letter (which it had solicited) that the issue of bad faith in dealing with settlement should be of concern to it since, in the event of an adverse verdict '(t)he potential exposure in this case involving severe personal injuries could be up to $500,000.00.' Still Investors, through its Claims Committee, comprised in major part of experienced lawyers, did not flinch at this dismal prospect, perhaps because its eventuation could harm Investors only to the extent of 10% Of such projected verdict. As it happened, there was no retrial, for this Court reversed the Appellate Division and reinstated the verdict. McLaughlin v. Rova, Supra. Investors thereafter paid its $50,000 and Rova, with much difficulty, including a nationwide fund appeal to its members (Rova has a relationship to a church-social membership group not relevant here), a mass meeting at Rova Farms to raise money, and finally the obtaining of the bulk of the funds from a mortgage loan on its property, paid the excess judgment of $175,000 plus accrued interest thereon, completing such payment on August 7, 1970.

[323 A.2d 500] Having thus suffered from what it deemed the bad faith of Investors in not settling or attempting in good faith to settle the case against it, Rova sued Investors in the instant action for such losses plus counsel fees, and for interest on the total excess loss paid by it from the time such sums were paid until the time of entry of judgment in the present case. (Interest thereafter on the judgment here reviewed runs from the date of entry of judgment under R. 4:42--1(a) and that question is not issuable here.)

Page 483

After full hearing on the merits, the trial judge on May 12, 1972, entered judgment for Rova against Investors for the amount of the excess judgment which Rova had paid, $175,000, plus the interest which it had had to pay thereon, making a total judgment of $197,150.68. Later the court amended such judgment to allow counsel fee to Rova's attorney under R. 4:42--9(a)(6) (the counsel fee is not involved in this appeal), but denied plaintiff's application for assessment of additional interest for the interval above mentioned.

The Appellate Division having affirmed the trial court's judgment, this Court granted certification (63 N.J. 580, 311 A.2d 3 (1973)). Investors challenges the judgment against it on the principal ground that it had not, on the whole case, validly been adjudged to have exercised bad faith in the premises. Collaterally, it suggests (1) the relevance of a specific offer to settle within policy limits (which latter it...