Knobloch v. Royal Globe Ins. Co., 38 N.Y.2d 471 (1976)

An insurance carrier may be liable for bad faith failure to settle a claim against its insured within policy limits if it does not consider the insured’s interests as well as its own when making settlement decisions.

Summary

The Knoblochs sued their insurance carrier, Royal Globe, alleging bad faith failure to settle a personal injury claim (Wickman) within their policy limits, leading to a judgment exceeding their coverage. Wickman was injured in a car accident while riding as a passenger in a vehicle driven by Fred Knobloch. Wickman initially offered to settle for $9,500, but the insurer failed to settle, eventually offering the full $10,000 policy limit on the eve of trial after years of negotiation. The jury awarded Wickman $75,383.50. The Knoblochs paid the excess and then sued Royal Globe. A jury found Royal Globe liable for $30,236.50. The Appellate Division reversed, but the New York Court of Appeals reinstated the jury verdict, finding sufficient evidence that the insurer acted in bad faith by not adequately considering the insureds’ interests during settlement negotiations.

Facts

Fred Knobloch was driving a car with John Wickman as a passenger when he lost control and Wickman was seriously injured. Wickman sued the Knoblochs. Royal Globe, the Knoblochs’ insurance carrier, defended the Knoblochs. Wickman’s attorney initially offered to settle for $9,500, below the $10,000 policy limit. Royal Globe did not accept, and settlement negotiations stalled. The Knoblochs’ independent counsel offered $2,500 towards settlement, in addition to Royal Globe’s contribution. On the eve of trial, Royal Globe offered the full $10,000 policy limit, but Wickman’s attorney, now aware of the Knoblochs’ independent contribution, withdrew the previous demand. At a settlement conference before trial, Wickman demanded $35,000.

Procedural History

Wickman obtained a judgment of $75,383.50 against the Knoblochs. The Knoblochs then sued Royal Globe, alleging bad faith failure to settle within policy limits. The trial court entered judgment on a jury verdict in favor of the Knoblochs. The Appellate Division reversed. The New York Court of Appeals reversed the Appellate Division and reinstated the trial court’s judgment.

Issue(s)

Whether there was sufficient evidence to support the jury’s finding that Royal Globe acted in bad faith by failing to settle the Wickman claim within the policy limits, thereby exposing the Knoblochs to excess liability.

Holding

Yes, because the jury was warranted in finding that the insurance carrier failed to consider the insureds’ interests as well as its own when making settlement decisions, thus supporting a finding of bad faith.

Court’s Reasoning

The Court of Appeals emphasized that the jury was instructed to determine whether Royal Globe acted in good faith, considering the Knoblochs’ interests along with its own when deciding on settlement. No exception was taken to this charge, making it the law of the case. The court found sufficient evidence for the jury to conclude that Royal Globe acted in bad faith. The court rejected the argument that the eventual tender of the full policy limits absolved Royal Globe of liability, stating that a belated offer does not automatically exonerate a carrier from pre-existing bad faith. The court noted the refusal of the carrier’s representative to disclose settlement negotiation progress to Knobloch, which, while not significant alone, was relevant. The court also considered the high likelihood of a jury finding negligence against the driver and the potential for damages to exceed $10,000, given Wickman’s serious injuries and special damages. Crucially, the court highlighted the absence of any evidence of Royal Globe’s evaluation of the case for settlement purposes or advice sought from counsel. The court concluded that, under the applicable standard, the jury was justified in finding Royal Globe liable for failing to settle the Wickman claim within policy limits because they did not adequately consider the Knoblochs’ interests during settlement negotiations. The court emphasized that “the carrier is obliged in most circumstances to respond accurately to requests from its insured with reference to the progress of any settlement negotiations.”