New York Law Review

Tag: insurance bad faith

  • Smith v. General Accident Ins. Co., 91 N.Y.2d 648 (1998): Insurer’s Duty to Inform Insured of Settlement Offers

    91 N.Y.2d 648 (1998)

    An insurer’s failure to inform its insured of settlement negotiations is a factor a jury can consider when determining if the insurer acted in bad faith by failing to settle a claim within policy limits.

    Summary

    This case concerns an insurer’s potential bad faith in refusing to settle a claim. A 14-year-old, David Smith, was severely injured after being hit by a car. Smith sued both the driver and Jay Brody, whose truck obstructed Smith’s view. The jury found Smith and Brody equally liable. General Accident, Brody’s insurer, with a $500,000 policy limit, did not settle. A subsequent jury awarded Smith $1.1 million. Smith, as Brody’s assignee, then sued General Accident for bad faith. The court instructed the jury to consider if General Accident informed Brody of settlement offers. The jury found bad faith, but the Appellate Division reversed. The New York Court of Appeals reversed the Appellate Division, holding that the jury could consider whether the insurer kept its insured informed during settlement negotiations as evidence of bad faith.

    Facts

    David Smith was severely injured when struck by a car after his view was obstructed by Brody’s delivery truck. Smith sued both the driver of the car and Brody. General Accident insured Brody with a $500,000 policy. The jury found Smith and Brody each 50% at fault for the accident. Despite Smith’s significant injuries, General Accident’s highest settlement offer was $300,000. Smith’s injuries included fractures, a collapsed lung, eye injuries, and brain damage resulting in an eight-day coma and permanent cognitive impairment. Brody testified that General Accident did not keep him informed of settlement negotiations, including Smith’s offer to settle for the policy limits. The insurer’s own claims manual instructed representatives to keep insureds informed of settlement negotiations when liability might exceed policy limits.

    Procedural History

    Smith sued Brody and the car driver, securing a verdict of $1.1 million against Brody. Brody assigned his rights against General Accident to Smith. Smith then sued General Accident for bad faith refusal to settle. The trial court found for Smith. General Accident appealed. The Appellate Division reversed, holding that the jury charge incorrectly stated that General Accident had a duty to advise Brody on settlement negotiations. Smith appealed to the New York Court of Appeals.

    Issue(s)

    Whether a jury, in determining an insurer’s bad faith refusal to settle a claim, can consider the insurer’s failure to inform its insured of settlement negotiations and offers.

    Holding

    Yes, because evidence of an insurance company not informing its insured of settlement negotiations is a factor the jury is entitled to consider in a bad faith claim.

    Court’s Reasoning

    The Court of Appeals reasoned that an insurer can be liable for bad faith refusal to settle. This stems from the implied covenant of good faith in all contracts, including insurance policies. A conflict arises when settlement offers approach policy limits; the insurer wants to minimize costs, while the insured wants to avoid excess liability. To prove bad faith, the insured must show the insurer acted with “’gross disregard’ of the insured’s interests”. The court noted that most jurisdictions allow juries to consider whether the insurer kept the insured informed of negotiations. While the court acknowledged that prior cases suggested an insurer has no unqualified duty to inform its insured of settlement offers, the court distinguished those cases. The court stated, “If an insurer acting in good faith would ordinarily keep its insured informed of settlement negotiations then the failure of an insurer to do so could raise the inference that the insurer is acting in bad faith by failing to provide its insured with settlement information, regardless of the insurer’s legal obligations.” Here, Smith presented evidence that the insurance industry standard, and General Accident’s own policies, required keeping the insured informed when liability might exceed coverage. The court emphasized that this factor was only one of many the jury considered in assessing bad faith, concluding that it was appropriate evidence for the jury to consider. The court reversed the Appellate Division and reinstated the trial court’s judgment.

  • Soto v. State Farm Insurance Company, 83 N.Y.2d 718 (1994): Insurer Bad Faith and Punitive Damages

    83 N.Y.2d 718 (1994)

    An insurer cannot be held liable for the punitive damages portion of a judgment exceeding policy limits, even if the insurer acted in bad faith by refusing a settlement offer within those limits.

    Summary

    This case addresses whether an insurer, acting in bad faith by refusing a settlement offer within policy limits, can be liable for the punitive damages portion of a judgment exceeding those limits. The New York Court of Appeals held that public policy precludes such liability. While an insurer may be liable for the excess judgment when refusing to settle in bad faith, this does not extend to punitive damages because these are meant to punish the wrongdoer (the insured), and allowing the insurer to pay would undermine this purpose. The insured’s own conduct is the reason punitive damages were awarded.

    Facts

    Elisio Montanez, driving Mary Casey’s car (his girlfriend), caused a fatal accident, killing Nelson Rivera and Angel Luis Echevarria. Montanez was legally blind without glasses and intoxicated. The victims’ administrators sued Casey and Montanez. The insurance policy limit was $50,000 per death. The insurer, State Farm, refused to settle within the policy limits, arguing Casey had not consented to Montanez driving the car. The jury found Montanez had permission and awarded significant compensatory and punitive damages exceeding the policy limits. State Farm paid the compensatory damages but refused to pay the punitive damages.

    Procedural History

    The victims’ administrators, as assignees of Montanez’s and Casey’s rights, sued State Farm, alleging bad faith refusal to settle. The trial court dismissed the complaint. The Appellate Division affirmed. The New York Court of Appeals granted leave to appeal and affirmed the dismissal.

    Issue(s)

    Whether an insurer who acts in bad faith by refusing to settle a claim within the policy limits can be held liable for the portion of a judgment that represents punitive damages assessed against the insured.

    Holding

    No, because New York’s public policy prohibits indemnification for punitive damages, even when the insurer acted in bad faith. The court reasoned that allowing recovery for punitive damages would undermine their purpose of punishing the wrongdoer.

    Court’s Reasoning

    The court acknowledged that an insurer refusing a reasonable settlement offer in bad faith is generally liable for the excess judgment. However, punitive damages are different. The court emphasized New York’s long-standing policy against indemnification for punitive damages, stating it is a “fundamental principle that no one shall be permitted to take advantage of his own wrong”. The court reasoned that punitive damages are designed to punish and deter the wrongdoer, not to compensate the plaintiff. Allowing the insurer to pay these damages would defeat this purpose, even if the insurer acted wrongfully in refusing to settle. The court stated that the insurer’s bad faith only put the insured at risk of a jury finding them morally culpable, warranting punitive damages. “Regardless of how egregious the insurer’s conduct has been, the fact remains that any award of punitive damages that might ensue is still directly attributable to the insured’s immoral and blameworthy behavior.” The court distinguished this situation from one where the insured seeks punitive damages from the insurer for the insurer’s own misconduct.

  • Knobloch v. Royal Globe Ins. Co., 38 N.Y.2d 471 (1976): Insurer’s Bad Faith Failure to Settle Within Policy Limits

    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.”

  • Knobloch v. Royal Globe Insurance Company, 38 N.Y.2d 471 (1976): Insurer’s Reliance on Counsel’s Advice and Bad Faith Refusal to Settle

    Knobloch v. Royal Globe Insurance Company, 38 N.Y.2d 471 (1976)

    An insurer’s reliance on advice of counsel is not a per se defense to a claim of bad faith refusal to settle a claim within policy limits; the question of bad faith remains a factual issue for trial.

    Summary

    In this case, the New York Court of Appeals addressed whether an insurer’s reliance on advice of counsel could automatically negate a claim of bad faith refusal to settle a liability claim within policy limits. The court held that it does not. Knobloch, the insured, sued Royal Globe, his insurer, alleging bad faith failure to settle a claim against him. Royal Globe argued that it relied on its counsel’s advice that a declaratory judgment providing coverage would be overturned on appeal. The Court of Appeals reversed the Appellate Division’s decision, finding that a factual issue remained as to whether the insurer acted in bad faith, even with the advice of counsel. The case emphasizes that reliance on counsel’s advice is a factor to consider, but it does not automatically absolve the insurer of potential bad faith.

    Facts

    The underlying case involved an accident where Knobloch was potentially liable.
    A declaratory judgment was issued, stating that Royal Globe’s policy covered Knobloch for the accident.
    Despite the declaratory judgment, Royal Globe’s counsel advised the insurer that the judgment was incorrect and would be reversed on appeal.
    Knobloch offered to settle the claim against him within the policy limits.
    Royal Globe refused to settle, allegedly relying on its counsel’s advice.

    Procedural History

    Knobloch sued Royal Globe, alleging bad faith refusal to settle.
    The Supreme Court initially denied Royal Globe’s motion for summary judgment.
    The Appellate Division reversed, granting summary judgment to Royal Globe.
    The New York Court of Appeals modified the Appellate Division’s order, reinstating the Supreme Court’s denial of summary judgment, remanding the case for trial.

    Issue(s)

    Whether an insurer’s reliance on advice of counsel automatically negates a claim of bad faith refusal to settle a claim within policy limits.

    Holding

    No, because reliance on advice of counsel is a factor to be considered but does not, as a matter of law, negate a charge of bad faith refusal to settle. The issue of bad faith is a question of fact to be determined at trial.

    Court’s Reasoning

    The Court of Appeals relied on the standard set out in Gordon v. Nationwide Mut. Ins. Co., emphasizing that an insurer can be liable for amounts exceeding policy limits if they acted in bad faith when refusing to settle a claim within those limits.
    The court acknowledged Royal Globe’s argument that reliance on counsel’s advice should negate a bad faith claim. However, the court reasoned that, under the circumstances, it could not be said as a matter of law that such reliance negates a charge of bad faith.
    The court stated, “Although the insurer here makes cogent argument to the contrary, we conclude that it cannot be said on this motion for summary judgment that an allegation of reliance on advice of counsel in such a circumstance as a matter of law negates a charge of bad faith refusal, even bad faith of the dimension demanded by Gordon.”
    The court highlighted factual issues that needed to be resolved at trial, including the extent to which the insured suffered damages due to the insurer’s alleged failure to fulfill its policy obligations. The court explicitly pointed to the incomplete record as a reason to send the case to trial.
    The court remanded the case for a full trial to determine whether Royal Globe’s conduct constituted bad faith, considering the totality of the circumstances, including the advice of counsel.