Consideration of the Insured’s Interests
An insurer breaches its duty under the covenant if it settles with a claimant but fails to protect any rights the insured had against the third-party claimant. For example, where a settlement and the documentation utilized by the insurer have the legal effect of barring the insured’s later claim against the claimant for damages arising out of same incident, the insured has acted in bad faith. An insurer does not have an affirmative duty under the covenant to investigate claims its insured may have against third parties or to preserve evidence absent a request from the insured.101 If, however, the insurer knows the insured has an independent right against a third party, it may not deprive the insured of the ability to enforce that right. A settlement with the third party that destroys the insured’s right of action against a third party can breach the covenant of good faith.