The Hawaii Supreme Court determined there was a genuine issue of fact on whether the insurer acted in bad faith in failing to consent to the insured's settlement with a third party tortfeasor.  See Guajardo v. AIG Hawaii Ins. Co., No. 27893 (Haw. Sup. Ct. July 8, 2008).

     The insured had an auto policy with AIG which included $100,000 in UIM coverage.  The policy promised to pay UIM coverage once the under insured tortfeasor's bodily injury limits were exhausted "by payment of judgments or settlements." 

     The insured was injured in an auto accident. The torfeasor, Senaga, was insured for $100,000 in liability coverage through Progressive Insurance.  Progressive agreed to tender its policy limits.  The insured's counsel wrote to AIG, asking for its consent to the settlement.  AIG refused based on its belief that Senaga, who was a deputy attorney general and lived with his parents, had the capacity to earn sufficient future income to pay any excess judgment against him.  Moreover, AIG claimed the policy required the insured to obtain a judgment against Senaga before UIM benefits were paid. Thereafter, the insured continued to apprise AIG of settlement negotiations and to seek consent for the settlement, but AIG maintained its position.

     The insured eventually executed a release of claims against Senaga in exchange for the $100,000 policy limit.  Thereafter, the insured sued AIG for: (1) a declaratory judgment that AIG had an obligation to provide UIM benefits under the policy; (2) tortious breach of the implied covenant of good faith and fair dealing; and (3) punitive damages.  The Circuit Court granted both parties' motions for partial summary judgment.  The court held AIG must pay UIM benefits.  The court also determined AIG had not acted in bad faith.  The Intermediate Court of Appeals affirmed.

     The Supreme Court accepted certiorari and reversed.  AIG had unequivocally withheld its consent to settle.  The policy did not allow AIG to refuse its consent to settle on the basis that the tortfeasor had sufficient assets to allow AIG to recoup the UIM benefits owed to the insured.  Therefore, a genuine issue of material fact existed as to whether AIG's interpretation of its policy was unreasonable because AIG had insisted the insured must obtain a judgment against Senaga.  There was also an issue of fact as to whether AIG's reliance upon an unreasonable interpretation of its policy subsequently caused an unreasonable delay in payment of benefits that warranted recovery of compensatory damages.