New York Law Review

Tag: Settlement Negotiations

  • 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.

  • 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.”