## Facts

- A 16-year-old driver, Carmine Rosato, drove his mother’s insured vehicle and crashed, catastrophically injuring passenger Frank Pavia.
- The vehicle was insured by State Farm with $100,000 liability limits.
- Pavia sued the Rosatos; State Farm initially assessed the Rosatos as fully liable and had medical documentation of the severe injuries.
- After receiving a different account from the driver, State Farm investigated potential defenses and comparative-fault theories.
- Pavia’s counsel made a policy-limits settlement demand with a 30-day deadline.
- State Farm did not accept or respond within the deadline and continued investigating; it later abandoned the defense investigation as uncorroborated.
- After the deadline passed, State Farm authorized an offer of the full policy limits; Pavia rejected it as untimely.
- The tort action proceeded to trial, producing a multi-million-dollar judgment substantially exceeding policy limits.
- The Rosatos assigned any claims against State Farm to Pavia in exchange for an agreement not to execute on the excess judgment, and they sued State Farm for bad-faith failure to settle.

## Issues

1. What standard governs an insurer’s liability for failure to settle a third-party claim within policy limits in New York.
2. Whether an insurer’s nonacceptance or nonresponse to a time-limited policy-limits demand during an ongoing liability/defense investigation can constitute bad faith.
3. Whether the evidence showed conduct meeting the governing standard sufficient to submit bad faith to the jury and impose excess-judgment liability.

## Decision

- The Court of Appeals reversed the order sustaining the verdict against State Farm and dismissed the complaint.
- The court reaffirmed that bad-faith failure-to-settle liability requires proof of “gross disregard” of the insured’s interests.
- The evidence was legally insufficient to establish a prima facie case because the delay occurred while State Farm pursued a nonfrivolous investigation of potential defenses and liability theories.
- A missed time-limited demand deadline, without proof of deliberate or reckless indifference to the insured’s exposure to an excess judgment, did not justify imposing excess liability.

## Legal Principles

- An insurer is liable for an excess judgment for failure to settle only upon proof of “gross disregard” of the insured’s interests.
- “Gross disregard” means a deliberate or reckless failure to place the insured’s interests on equal footing with the insurer’s when evaluating settlement.
- Bad faith requires more than negligence, delay, or mistaken judgment; it requires conduct showing conscious or knowing indifference to the probability of an excess judgment against the insured.
- A plaintiff’s time-limited policy-limits demand does not, by itself, compel acceptance; an insurer may reasonably investigate liability and defenses without automatically incurring bad-faith exposure.

## Conclusion

New York’s highest court held that bad-faith failure-to-settle claims demand proof that the insurer deliberately or recklessly subordinated the insured’s interests, and it ruled that State Farm’s delayed acceptance during a reasonable investigation did not meet that standard, requiring dismissal of the excess-liability claim.


Pavia v. State Farm Mut. Auto. Ins. Co., 82 N.Y.2d 445, 626 N.E.2d 24 (N.Y. 1993)