## Facts

- Farmers Insurance Exchange issued George V. Henderson an automobile liability policy promising defense and reserving the right to investigate and settle claims “as it deems expedient.”
- Policy limits were $5,000 per person and $10,000 per accident for bodily injury, and $5,000 for property damage.
- Henderson’s employee, Whitehead, while driving Henderson’s car, collided with a vehicle driven by Charles Breesman, leading to multiple related personal-injury actions.
- In Breesman’s suit against Henderson and Whitehead, Farmers controlled the defense and settlement decisions.
- The Breesman case went to trial and resulted in a judgment against Henderson exceeding the policy limits.
- Henderson sued Farmers alleging it had an opportunity to settle within policy limits but, acting in bad faith, refused and exposed him to excess liability and related business loss.
- A jury found Farmers did not act in good faith and awarded Henderson $45,000; the trial court instructed the jury it could include items such as humiliation, pain, and suffering tied to loss of business.

## Issues

1. What standard governs an insurer’s settlement decisions when it has exclusive settlement control, and was there sufficient evidence that Farmers acted in bad faith by refusing a within-limits settlement in the face of substantial excess-judgment risk?
2. If bad faith is proven, what damages are recoverable—specifically, whether the insurer may be liable for the full excess judgment and whether the insured may recover noneconomic damages (humiliation, mental suffering) attributed to resulting business loss?
3. Whether the insurer had a duty to protect the insured from execution pending appeal by paying policy limits or furnishing a supersedeas bond, and whether failure to do so constituted bad faith.

## Decision

- The court affirmed the jury’s finding that Farmers acted in bad faith in refusing to settle within policy limits.
- The court held that, upon bad faith, the insurer may be liable for the entire judgment against the insured, including the portion exceeding policy limits.
- The court reversed the damages award and remanded for a new trial on damages because the jury instructions improperly permitted recovery for subjective noneconomic items such as humiliation, pain, and suffering.
- The court held the insurer had no contractual duty to pay policy limits during appeal or furnish a supersedeas bond, and failure to do so was not itself bad faith.

## Legal Principles

- When an insurer retains exclusive control over investigation and settlement, it must give at least equal consideration to the insured’s interests in deciding whether to accept a reasonable within-limits settlement.
- Bad-faith refusal to settle may be found where a substantial likelihood of an excess verdict exists and the insurer rejects a reasonable within-limits opportunity in a manner favoring its limited exposure over the insured’s greater risk.
- If bad faith causes an excess judgment, the insurer may be liable for the full amount of that judgment, including amounts above policy limits.
- The insured’s cause of action accrues upon entry of the excess judgment; payment of the judgment is not a prerequisite to suit.
- Damages in this setting are limited to legally cognizable, objective pecuniary losses causally tied to the bad faith; instructions permitting recovery for humiliation or mental suffering are erroneous.
- Absent a contractual provision, an insurer has no duty to provide a supersedeas bond or advance policy limits to protect the insured from execution during appeal.

## Conclusion

The court held that an insurer controlling settlement must treat the insured’s financial exposure with equal regard and may be responsible for an excess judgment caused by bad-faith refusal to settle, but it limited recovery to pecuniary loss and ordered a new trial on damages due to improper inclusion of noneconomic harms.


Farmers Ins. Exch. v. Henderson, 313 P.2d 404 (Ariz. 1957)