Based upon its implied duty of good faith, insurers are obliged under their liability insurance contracts, to settle claims that have been brought forth by claimants against their insureds, when there is a legitimate basis for doing so. In every case, as a practical matter, an insurer should evaluate the risk that a judgment could be entered against its insured in excess of the policy limits. If there is no reasonable prospect of an excess judgment being entered against the insured, then there is no duty to settle.
Bad faith refusal to settle involves conduct of the insurer that constitutes disregard or indifference toward the interests of the insured. Bad faith on the part of the insurer is proven by facts that indicate "a willingness on the part of the insurer to gamble with the insured's money in an attempt to save its own money or any intentional disregard of the financial interests of the [insured] in the hope of escaping full liability imposed upon its own policy."
Impact of Recent Case Decision- Johnson v. Tennessee Farmers Mutual Insurance Company
Johnson v. Tennessee Farmers Mutual Insurance Company, 205 S.W.3d 365 (Tenn. 2006) was a landmark case in the area of bad faith law in Tennessee. In this case, the Supreme Court of Tennessee held that mere negligence is insufficient for imposing liability against an insurer for failure to settle, and that mistaken judgment by the insurer is not bad faith, if it was made honestly and followed an investigation performed with ordinary case and diligence. Further, the Supreme Court held that if a failure to negotiate a settlement is the result of a reasonable business judgment made after considering all of the pertinent factors, then there is no liability for bad faith, regardless of the outcome. Under Johnson, negligent conduct is insufficient by itself. In order to impose liability against an insurer for bad faith, there must be evidence of either a dishonest purpose (or agenda) and/or conscious indifference (or disregard) on the part of the insurer.