Is It Bad Faith to Exercise a Contractual Right?

A recent malpractice case highlighted this issue.  In Johnson v. Proselect Insurance, the doctor/insured contended that the insurer acted in bad faith by settling a claim after trial without the doctor’s consent.  The doctor contended that the case should have been appealed, which would have reversed the adverse trial verdict.  However, the insurer’s policy stated specifically that the insurer could settle claims after trial without the doctor’s consent.  The doctor claimed, however, that the settlement caused her to suffer professional embarrassment and damaged her reputation.

The Massachusetts appeals court upheld a summary judgment in the insurer’s favor.  The court noted that the settlement was explicitly permitted by the terms of the policy, and argued that the doctor’s right to consent to settle had been bargained away when the policy issued.  Because the settlement was within the limits of the policy, and the doctor therefore had no exposure post-settlement, the court ruled that the carrier was entitled to exercise its contracted for right to settle without consent.

The Johnson case highlights an important line of defense for an insurer accused of bad faith—was the insurer’s conduct authorized by the terms of the policy or not?  If the policy explicitly grants a right to the carrier, and the carrier exercises that right, the carrier will have a powerful shield to a claim that the carrier acted wrongfully.