In New York State, courts are required to consider a number of factors when determining if an insurer has satisfied its good-faith obligations in settling a liability claim, including, among other things, the likelihood of an adverse judgment against the insured, the potential magnitude of the damages, and the financial burden that will be borne by both the insurer and the insured should an adverse judgment be rendered. See Pavia v. State Farm Mut. Auto. Ins. Co., 82 N.Y.2d 445 (1993). Exactly when the insurer concludes that an adverse judgment against the insured is likely to occur is also an important factor to consider. A recent decision from the Appellate Division, Third Department shows that the insurer's conduct over just a few hours during the liability trial can determine whether the insurer has acted in good faith.
In Healthcare Professional Insurance Co. v. Parentis, 165 A.D.3d 1558 (3d Dep't 2018), the underlying liability claim involved a medical malpractice action where the jury rendered a $8.6 million verdict against the defendant/insured. The insured had a total of $2.3 million in insurance coverage, consisting of a $1.3 million primary policy and a $1 million excess policy. After judgment was taken against the insured, the excess insurer commenced a declaratory judgment action seeking a declaration that it acted in good faith during settlement negotiations of the underlying claim and, thus, its obligation to indemnify the insured was limited to the $1 million excess policy limit. The insured counterclaimed against the excess insurer and also cross-claimed against the primary insurer in the declaratory judgment, claiming that both insurers acted in bad faith during settlement negotiations. The trial court granted the insurers' motions for summary judgment and dismissed the bad-faith claims, which was appealed by the insured.
The Appellate Division, Third Department reversed the trial court and reinstated the bad-faith claims against both insurers. After reciting the well-settled law that an insurer must place the insured's interests on equal footing with its own interests when considering a settlement offer, the court focused on the timing element of the events that took place while the jury was deliberating the underlying action. In particular, the court noted that, although there was no dispute that the potential damages against the insured were significant (the injured plaintiff was 36 years old at the time of the accident and eventually underwent an above-the-knee amputation), liability against the insured was still uncertain when the jury began their deliberations as there was "a prototypical battle of the experts."
The pivotal moment came about an hour after the jury began their deliberations when they sent out a note requesting a breakdown of the life-care expenses, which strongly suggested the jury had already concluded the insured was going to be found liable. At that point, defense counsel for the insured confirmed with plaintiffs' counsel that plaintiffs would accept the available policy limits of $2.3 million to settle the claims against the insured, which was communicated to the primary insurer who had a representative present in the courtroom. However, what transpired among the primary and excess insurers after that point was in conflict. The primary insurer claimed that it agreed to tender its policy limit, but the excess insurer decided to wait for further deliberations. The excess insurer claimed it was never informed that the primary insurer had tendered its policy limit. The jury returned a verdict shortly thereafter, less than an hour after resuming their deliberations.
The court concluded that there were questions of fact warranting denial of the insurers' motions to dismiss the bad-faith claims. Among other things, the court found that the insurers failed to sufficiently communicate plaintiffs' settlement demand and their settlement strategy with the insured before trial. With respect to the events that transpired during jury deliberations, the court noted that "[t]his was crunch time" and that the insurers had a duty to stay informed and needed to be prepared to respond quickly when it appeared that liability against the insured was likely. The insured's potential liability was the key disputed issue for the defense, and once it appeared that liability against the insured was likely given the jury's question about damages, the insurers' good-faith obligations required that they be ready to act quickly to protect the insured's interests. The disputed questions of fact concerning the communications between the primary and excess insurers during jury deliberations precluded dismissal of the bad-faith claims.
This decision is significant because it reaffirms that the insurers have a continuing obligation to keep the insured well informed of all liability and damage issues, especially prior to and during trial, when the insured and insurers may need to act quickly based on developments at trial. In some cases, there may only be a small window of time to act (here, there was just over one hour where the case could have been settled before the jury returned their verdict), so the insured and insurers need to be positioned to act quickly in order to avoid exposure in excess of the policy limits.
If you have any questions regarding the content of this alert, please contact Mark Whitford, Partner, at mwhitford@barclaydamon.com or another member of the firm's Insurance Coverage & Regulation Practice Area.