Doherty v. Merchants Mut. Ins. Co.
(4th Dept., decided 6/11/2010)
New York's third-party bad faith failure to settle within policy limits standard is:
Merchants' insured, Fitzpatrick, rear-ended Doherty, allegedly injuring her. Doherty sued Fitzpatrick, who had a $300,000 personal auto policy with Merchants, for her injuries and, according to the three-justice majority's and two-justice dissent's memorandum opinions:"To prevail in . . . an action [seeking damages for an insurer's bad faith refusal to settle an underlying action], a plaintiff must establish that the insured lost an actual opportunity to settle the . . . [action] . . . at a time when all serious doubts about [his or her] liability were removed . . ., and that defendant insurer [acted with gross disregard for the insured's interests, i.e., it] engaged in a pattern of behavior evincing a conscious or knowing indifference to the probability that [the] insured would be held personally accountable for a large judgment if a settlement offer within the policy limits were not accepted." Kumar v American Tr. Ins. Co., 57 AD3d 1449, 1450 [internal quotation marks omitted]; see Pavia v State Farm Mut. Auto. Ins. Co., 82 NY2d 445, 453-454, rearg denied 83 NY2d 779).
- Doherty and her husband presented medical testimony and opinion that she had sustained a significant shoulder injury in addition to permanent injuries at multiple levels of her cervical spine and a disc injury in her lumbar spine at the L5-S1 level;
- Merchants investigated Doherty's claim and arranged for a physical examination of her to determine the extent of her alleged injuries and whether they constituted a "serious injury";
- although the expert retained by Merchants and plaintiff's treating physician had differing views of the extent of plaintiff's injuries, Merchants' expert determined that Doherty sustained cervical, thoracic and lumbar strains that resulted in a "moderate, partial, temporary disability for recreational activities and activities of daily living in the home";
- Merchants did not attempt to obtain an IME related to Doherty's shoulder and, in fact, relied upon the limited examination of a neurologist who admitted that she was not qualified to offer an opinion regarding Doherty's shoulder and that accident biomechanics was "a weak point in her expertise";
- prior to the trial of Doherty's personal injury action, attorneys for both Doherty and Fitzpatrick requested that Merchants settle for the policy limit of $300,000;
- prior to trial, Merchants' settlement offer was $10,000;
- the record was silent as to whether Merchants had evaluated and actually assigned a potential jury verdict value, as compared to a settlement value, to Doherty's personal injury claim;
- Merchants' claim representative admitted that she never assigned a value or even a value range to the claim and could not recall how she arrived at Merchants' $10,000 pre-trial settlement offer;
- 20 months before trial, Merchants determined that Fitzpatrick's proportionate share of fault for liability in this rear-end accident was "100%";
- 16 months before trial, Merchants concluded that Fitzpatrick had "no legal defenses" to Doherty's negligence claim;
- 10 months before trial, Merchants' claim representative advised Fitzpatrick's defense counsel that a motion for summary judgment on the serious injury threshold was not authorized because Merchants' own "IME indicate[d] [Doherty] is disabled" and that such a motion would not be granted since defendant's "IME was completed on 11/4/03 (1 year and 2 mos after the [date of loss]) indicating [Doherty] is still disabled";
- one month before trial, Supreme Court denied a motion for summary judgment by Fitzpatrick on the issue of the serious injury threshold;
- on the first day of trial, Fitzpatrick's defense counsel advised that he needed to revise his exposure opinion and that, if the jury believed that Doherty needed surgery, the potential exposure was above $250,000, in response to which Merchants increased its settlement offer to $25,000;
- Merchants' investigation included videotaped surveillance of Doherty engaged in activities without apparent difficulty, despite her alleged injuries;
- Merchants participated in settlement negotiations prior to and during the trial and the trial judge (Erie Supreme Court Justice John Curran) was actively engaged in the settlement negotiation process;
- prior to trial, Doherty and her husband reduced their settlement demand to $250,000 and, four days into trial, they further reduced their demand to $240,000;
- in response to plaintiffs' reduced settlement demand, Merchants increased its settlement offer from $25,000 to $55,000, but plaintiffs' counsel declined to negotiate further;
- after the trial commenced, Merchants made a "high-low" settlement offer that was "not well received" and was rejected;
- the videotape surveillance showed Doherty, stay-at-home mother of two children ages 5 and 7, engaging in "activities without apparent difficulty," including carrying her children; the jury included four women who, according to the dissent, "might understand and sympathize with Doherty's lack of choice in engaging in those activities while Doherty's husband worked at two jobs";
- Merchants was never prepared to offer the policy limits in that the claim manager's settlement authority was limited to $150,000, Merchants' claim manager testified that he never spoke with his supervisor concerning authorization to offer a greater amount; and
- the jury returned a verdict against Fitzpatrick for $740,000, $500,000 of which was for future pain and suffering; of the $300,000 limit of Fitzpatrick's insurance policy with Merchants, the sum of $289,489 was available after other claims had been paid.
In AFFIRMING the order appealed from, the three-justice majority held:
The two-justice dissent disagreed, believing that there was sufficient evidence of Merchants' alleged bad faith to submit that issue to a jury for determination:We conclude that defendant established that Fitzpatrick did not lose an actual opportunity to settle the claim at a time when all serious doubts about his liability were removed and it was clear that the potential recovery far exceeded the insurance coverage (see id.), and thus that it did not act with gross disregard for Fitzpatrick's interests (see id. at 453). We therefore conclude that defendant established its entitlement to summary judgment dismissing the complaint, and that plaintiffs failed to raise a triable issue of fact in opposition (see generally Zuckerman v City of New York, 49 NY2d 557, 562).
Necessarily inherent in an insurer's duty to its insured is a well-reasoned and thorough analysis leading to the establishment of a predicted jury verdict value in the event of a verdict in favor of the injured claimant (see PJI 4:67). The record is devoid of any assertion by defendant that it had evaluated and actually assigned a potential jury verdict value, as compared to a settlement value, to Doherty's personal injury claim. Indeed, defendant's claim representative admitted that she never assigned a value or even a value range to the claim and could not recall how she arrived at the $10,000 settlement offer that remained in place until the first day of trial, when it was increased to $25,000. The record does not contain evidence of any analysis by defendant of the potential for high-end jury verdicts in the trial venue or any examination of jury verdict reports in cases with similar injuries in similar venues. Thus, in our view, on this record, defendant utterly failed to satisfy one of the most fundamental factors essential to a finding of good faith.
Although the majority concludes that defendant "investigated the claim in the underlying action," we submit that the quality and thoroughness of that investigation should be the subject of careful review. It is for the jury to decide if "[a] reasonable investigation of the facts . . . would indicate that the chances of successfully defending the [underlying] action were very remote" (State of New York v Merchant's Ins. Co. of N.H., 109 AD2d 935, 936).
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We disagree with the majority's conclusion that defendant's participation in settlement negotiations is indicative of its good faith. Even the ultimate tender of full policy limits on the eve of trial cannot insulate an insurer from liability for bad faith failure to settle within policy limits (see Knobloch v Royal Globe Ins. Co., 38 NY2d 471, 478). Here, on the first day of trial, defendant's counsel advised that he needed to revise his exposure opinion and that, if the jury believed that Doherty needed surgery, the potential exposure was above $250,000. Although defendant had no expert to rebut Doherty's need for shoulder surgery, its settlement offer remained at $25,000. Four days into trial, defendant's settlement offer was increased to $55,000. The settlement demand of Doherty and her husband was $240,000—well within the policy limits and below the potential exposure indicated by defendant's counsel. Their counsel thereafter declined to continue negotiations and an opportunity to settle within the policy limits had been lost. To the extent that defendant contends that Doherty and her husband cut off settlement discussion or denied defendant an opportunity to settle, the jury could reasonably conclude that their decision to do so "was the direct result of defendant's own conduct" because "[d]efendant never indicated that it would make a fair and reasonable offer and, by failing to do so, defendant suppressed negotiations" (State of New York v Merchants Ins. Co. of N.H., 109 AD2d 935, 937).
We also recognize that opportunities to settle the claim within the policy limits can be lost at various points in the evolving continuum of the litigation and claim management process. In our view, an opportunity to settle the claim may be lost early in the process and may not be recovered or the bad faith cured by subsequent conduct. In other words, we do not believe that an insurer's bad faith is measured at the moment before the jury returns a verdict. Instead, conduct by the insurer weeks or months before the jury verdict may have entrenched the parties or foreclosed the opportunity for settlement long before a jury is empaneled. Thus, in our view, the fact that defendant made a "high-low" offer four days after the trial commenced is not dispositive. Even assuming, arguendo, that the "high-low" offer was meaningful, which, in our view, it was not, such "a belated tender [does not] operate without more to exonerate a carrier from a pre-existing liability for bad-faith failure to settle within policy limits" (Knobloch, 38 NY2d at 478 [emphasis added]). Our own precedent establishes that the delayed unconditional making of a settlement offer of the full policy limits does not automatically relieve the carrier of liability (see Reifenstein v Allstate Ins. Co., 92 AD2d 715, 716). It is not the mere fact that a "high-low" offer was made, but also the timing of that offer that must be evaluated in light of all the circumstances. Therefore, we cannot agree with the majority that defendant's "high-low" offer conclusively demonstrates that defendant met its good faith obligation. Instead, it is "but a factor for the jury to consider on the question of bad faith" (id. at 716).
Lastly, in our view, the contention of defendant that its reliance upon the trial court's discussions during settlement conferences provides some form of absolution from a bad faith claim is misplaced. We conclude that, had the trial court recommended a settlement figure more favorable to Doherty, such as $700,000, defendant would have summarily rejected the trial court's view. In any event, we are well aware that, during settlement conferences, a trial court is not provided full access to the files and investigative materials of the parties. In our view, defendant's good faith is measured by what it knew and had in its files—not by a trial court's view of the case based upon limited information provided during a settlement conference.
Therefore, we conclude that there are issues of fact whether defendant "engaged in a pattern of behavior evincing a conscious or knowing indifference to the probability that [its] insured would be held personally accountable for a large judgment if a settlement offer within the policy limits were not accepted" (Pavia, 82 NY2d at 453-454; see Kumar v American Tr. Ins. Co., 57 AD3d 1449).