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Farmers Insurance Exchange v. George V. Henderson and Helen W. Henderson

Supreme Court of Arizona
82 Ariz. 335, 313 P.2d 404 (1957)
ELI5:

Rule of Law:

An insurer's duty of good faith requires it to give equal consideration to the interests of the insured as it does to its own interests when deciding whether to accept a settlement offer within policy limits. A failure to do so, by exposing the insured to an unreasonable risk of a judgment in excess of policy limits, constitutes bad faith.


Facts:

  • Farmers Insurance Exchange issued a public liability insurance policy to George Henderson with a bodily injury limit of $5,000 per person.
  • Henderson's employee, Whitehead, was operating Henderson's car when it collided with a vehicle operated by Charles Breesman.
  • Breesman sustained serious injuries, including being unconscious for six days, and incurred special damages exceeding $2,400.
  • The insurer's own attorneys concluded that Breesman had a strong case for negligence and that Henderson's key witnesses were weak and unpredictable.
  • Prior to trial, Breesman offered to settle his personal injury claim for $4,000, which was within Henderson's $5,000 policy limit.
  • Henderson's personal attorneys urged Farmers Insurance to accept any offer of $4,000 or less, warning that they would hold the company liable for any excess judgment if it refused.
  • Farmers Insurance rejected the $4,000 settlement offer and made a counteroffer of only $2,500.

Procedural Posture:

  • Charles Breesman sued George Henderson in the superior court (trial court) for damages from the auto collision.
  • A jury returned a verdict for Breesman in the amount of $18,284, which was in excess of Henderson's policy limits.
  • While an appeal was pending, Henderson's business property was levied upon and sold under execution to partially satisfy the judgment.
  • The Arizona Supreme Court, in a separate action, reversed the judgment for Breesman and remanded for a new trial.
  • Following the remand, Farmers Insurance settled the claim with Breesman for $6,200.
  • Henderson then sued Farmers Insurance Exchange in superior court (trial court) for damages resulting from the company's bad faith failure to settle the claim.
  • A jury found in favor of Henderson and awarded him a judgment of $45,000.
  • Farmers Insurance Exchange appealed the $45,000 judgment to the Arizona Supreme Court.

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Issue:

Does an insurer act in bad faith by refusing a settlement offer within policy limits when there is a strong probability of an adverse judgment exceeding those limits, thereby failing to give equal consideration to the insured's interests?


Opinions:

Majority - Windes, Justice

Yes, an insurer acts in bad faith by refusing a settlement offer within policy limits when it fails to give equal consideration to the insured's interests as it does to its own. When an insurer has sole control over litigation and settlement, it must not be moved by partiality to itself. In this case, by refusing the $4,000 settlement, the company risked only an additional $1,000 of its own money, while exposing Henderson to the much greater hazard of a large excess judgment. The jury could reasonably conclude that the company was guided principally by its own risk and did not give equal consideration to the risk it compelled Henderson to incur, which constitutes a breach of its duty of good faith. While the jury's finding of bad faith was supported by the evidence, the judgment is reversed and a new trial is ordered due to erroneous jury instructions regarding damages and the insurer's duty to pay the policy limits pending an appeal.



Analysis:

This case establishes the 'equal consideration' standard in Arizona for determining an insurer's bad faith in refusing to settle a claim. It rejects standards that would allow an insurer to prioritize its own interests over those of its insured. The decision provides a clearer framework for holding insurers accountable when their settlement decisions expose policyholders to unreasonable financial risks. This precedent significantly strengthens the position of insureds in disputes over an insurer's failure to settle, making it easier to bring a cause of action for the full amount of an excess judgment resulting from such a failure.

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