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April 2014 New York Federal Court Awards Excess Insurer Full Policy Limits in Bad Faith Claim Against Primary Insurer

Photo---Kevin-merrimanBy Kevin T. Merriman and William R. Leinen

In a March 31, 2014 decision, the Northern District of New York found a primary insurer liable to an excess insurer for bad faith settlement practices in the defense of its insured in an underlying motor vehicle lawsuit. After a bench trial in Quincy Mutual Fire Insurance Co. v. New York Central Mutual Fire Insurance Co., Civil Action No. 3:12-CV-1041, the Court found that New York Central, as the primary insurer, acted in bad faith and grossly disregarded the interests of Quincy, the excess carrier, by: (1) refusing to increase its settlement offer for almost four years; (2) refusing to tender its policy limits until three weeks before trial where the damages were indisputably in excess of the primary limits several years earlier; and (3) failing to conduct or obtain an analysis and valuation of the underlying litigation’s potential jury verdict value until mere weeks before the scheduled damages-only trial. The Court found that New York Central’s conduct caused it to lose two opportunities to settle the case at times in which liability against its insured was clear and Quincy’s excess exposure would have been none or significantly less than the full amount of its policy limits. Importantly, the Court recognized that Quincy, as the excess insurer, had no duty to undertake a defense in the underlying litigation, and therefore rejected New York Central’s argument that Quincy’s conduct in monitoring the litigation contributed to its damages. As a result, the Court awarded Quincy the full amount of its policy limits in damages, plus prejudgment interest.

Quincy’s bad faith claim against New York Central was based on New York Central’s defense of its insured in an underlying motor vehicle accident case. In November 2000, New York Central’s insured failed to yield the right of way at a stop sign and caused an accident with the underlying plaintiff. At the time of the accident, New York Central provided $500,000 of primary insurance and Quincy provided $1M excess through a homeowner’s policy. When the insured was sued by the underlying plaintiff in October 2001, New York Central accepted coverage and assumed control of the defense. After protracted litigation, both New York Central and Quincy tendered the limits of their policies in September and October 2009, respectively.

Quincy brought suit against New York Central in June 2012, alleging that New York Central’s handling of the underlying litigation was in gross disregard of Quincy’s interests. In particular, Quincy argued New York Central’s conduct amounted to bad faith because New York Central refused to engage in realistic settlement negotiations, even though liability against the insured was established early in the underlying litigation and the plaintiff’s damages far exceeded New York Central’s limits at that time. Quincy argued New York Central squandered several opportunities to settle the underlying litigation for significantly less than the combined policy limits, and by failing to do so, exposed Quincy to additional indemnity.

The Northern District of New York found that New York Central’s conduct amounted to bad faith and grossly disregarded Quincy’s interests. The Court found, based upon the testimony of the underlying plaintiff’s attorney and the insured’s personal attorney, that New York Central’s actions caused it to lose an opportunity to settle the underlying litigation on two distinct occasions in 2005 and 2007. Had New York Central availed itself of these opportunities to settle, reasoned the Court, Quincy would not have been exposed to any indemnity, or would have contributed only $250,000, significantly less than the $1M it ultimately tendered.

The Court next found that when New York Central lost these opportunities to settle the litigation, liability had been firmly established against its insured. The evidence adduced at trial proved that New York Central knew, as early as March 2001 (approximately seven months prior to the commencement of the underlying litigation), that its insured was negligent for failing to yield the right of way at a stop sign. Liability was established as a matter of law in May 2005, when the trial court granted the underlying plaintiff’s motion for summary judgment on liability and serious injury. Although New York Central was advised that an appeal of the decision had little chance of success, it proceeded with an appeal and in August 2006, the appeal was denied. The appellate court found the primary argument on appeal “meritless.”

The Court also found that when New York Central lost its opportunities to settle the underlying litigation, it had knowledge that the plaintiff’s likely damages far exceeded the limits of its policy. In particular, the Court noted that by 2005, when the first opportunity to settle was lost, New York Central was aware that the underlying plaintiff had undergone four surgeries, had not returned to work, was presenting a large lost wage claim and was experiencing PTSD and depression, all as a consequence of the subject accident. Additionally, New York Central was aware that interest, at nine percent per year, had begun to accrue upon the entry of the summary judgment order in May 2005. Moreover, the plaintiff’s expert disclosures, served in January 2007, estimated life care costs in the range of $2.4M - $4.4M. The underlying plaintiff would go on to have two additional surgeries in 2007 and 2008 related to the subject accident, and did not return to work in any capacity during the pendency of the underlying litigation. Thus, according to the Court, in 2005 and 2007, when the underlying litigation could have been settled, New York Central should have known that plaintiff’s damages far exceeded the limits of New York Central’s policy.

The Court also found that in spite of the established liability and high amount of damages, New York Central maintained a settlement offer of only $75,000 from December 2005 through September 2009. This offer, however, was not premised on any valuation or potential jury verdict analysis conducted by New York Central. Instead, the Court found that New York Central did not conduct any such analysis until September 2009. New York Central argued that Quincy’s actions or inactions during New York Central’s control of the defense contributed to Quincy’s damages. In particular,

New York Central argued that Quincy should have settled any potential excess exposure prior to the time New York Central tendered its policy limits. The Court rejected this argument, holding that it was without any legal basis. Although the Court noted that Quincy’s conduct may have had some relevance, it also noted that there is “no legal obligation on an excess carrier in Quincy Mutual’s position to negotiate a claim unless and until primary coverage is exhausted.” Imposing such an obligation, the Court noted, would place an excess insurer in a de facto primary insurer role.

Finally, the Court held that New York Central’s bad faith was further evidenced by the fact that despite tendering its $500,000 policy limit in the underlying litigation, it actually paid only $132,479 after receiving payments from its reinsurance carrier. Thus, the Court noted that during New York Central’s steadfast refusal to offer more than $75,000, New York Central was exposed to an additional $57,479 above that offer, while Quincy was exposed to the full $1M of its excess policy. This, according to the Court, “epitomize[d] bad faith negotiations, suggesting gross disregard for the interests of Quincy Mutual . . . and placing those of New York Central above them.”