85 F.3d 1088 (3rd Cir. 1996), 95-1484, Greater New York Mut. Ins. Co. v. North River Ins. Co.

Docket Nº:95-1484.
Citation:85 F.3d 1088
Party Name:GREATER NEW YORK MUTUAL INSURANCE COMPANY, v. THE NORTH RIVER INSURANCE COMPANY; Crum and Forster Holdings, Inc.; Rodin Management Incorporated; Crown Park Investors (D.C. Civil No. 94-cv-05223). NORTH RIVER INSURANCE COMPANY, v. GREATER NEW YORK MUTUAL INSURANCE COMPANY (D.C. Civil No. 94-cv-05554), Greater New York Mutual Insurance Company, Appel
Case Date:June 10, 1996
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit
 
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Page 1088

85 F.3d 1088 (3rd Cir. 1996)

GREATER NEW YORK MUTUAL INSURANCE COMPANY,

v.

THE NORTH RIVER INSURANCE COMPANY; Crum and Forster

Holdings, Inc.; Rodin Management Incorporated;

Crown Park Investors (D.C. Civil No.

94-cv-05223).

NORTH RIVER INSURANCE COMPANY,

v.

GREATER NEW YORK MUTUAL INSURANCE COMPANY (D.C. Civil No. 94-cv-05554),

Greater New York Mutual Insurance Company, Appellant.

No. 95-1484.

United States Court of Appeals, Third Circuit

June 10, 1996

Argued March 11, 1996

Page 1089

James D. Crawford (argued), Schnader, Harrison, Segal & Lewis, Philadelphia, Pennsylvania, for Appellant.

Francis J. Deasey (argued), Timothy Costello, Deasey, Mahoney & Bender, Philadelphia, Pennsylvania, for Appellees.

Page 1090

Before: STAPLETON, SCIRICA and COWEN, Circuit Judges

OPINION OF THE COURT

SCIRICA, Circuit Judge.

In Trustees of the Univ. of Pennsylvania v. Lexington Ins. Co., 815 F.2d 890 (3d Cir.1987), we predicted Pennsylvania law would allow a two-tiered or conditional settlement between a plaintiff and an insured when the insurer refused to defend against plaintiff's suit. 1 In this case we predict Pennsylvania law would also permit a two-tiered settlement between a plaintiff, an insured and the insured's excess insurer, when the primary insurer refused to settle plaintiff's claim.

I.

A.

In January 1987, Sandra McIlhenny slipped and bruised herself on the steps of the Crown Park Apartments in Lansdale, Pennsylvania. Three months later she was diagnosed with multiple sclerosis. Shortly thereafter, McIlhenny brought suit in the Court of Common Pleas for Philadelphia County against the owner and manager of the building, Rodin Management, Inc., alleging the fall had precipitated or aggravated a previously dormant condition.

Rodin purchased primary liability insurance from the Greater New York Mutual Insurance Company with a one million dollar limit per occurrence. Rodin also purchased excess general liability insurance from the North River Insurance Company, with coverage from one million to ten million dollars.

Greater New York retained counsel to defend Rodin in McIlhenny's personal injury action, as it was obligated to do under its policy. McIlhenny initially made a demand of $770,000, but later increased the amount to $1 million. Defense counsel recommended settlement between $500,000 and $750,000, but Greater New York made no offer. The case went to trial and after the jury began deliberating, Greater New York offered $350,000. Plaintiff's counsel considered this amount to be a non-offer because "no reasonable person who had sat in that courtroom could make this offer." The jury awarded McIlhenny $4 million. The trial judge molded the verdict resulting in a total award of $5,796,000. Greater New York appealed to the Pennsylvania Superior Court.

The appeal was withdrawn, however, because North River on behalf of itself and Rodin, negotiated a settlement directly with McIlhenny for $5.25 million. 2 Under the settlement agreement, North River paid McIlhenny $l,949,629 and provided her with a lifetime annuity. In return, McIlhenny released North River and Rodin from all further liability. Because the $5.25 million settlement was greater than the amount McIlhenny received from North River and Greater New York, North River agreed to "exercise its best efforts to recover the full settlement amount from Greater New York through litigation or other proceedings." If North River prevailed, it would retain the first million and 60% of the overage; McIlhenny would receive the remaining 40%. To fund the litigation, McIlhenny channeled North River $400,000 of the one million she received from Greater New York.

B.

Before North River could bring an action against Greater New York, as it had agreed to do, Greater New York brought this suit in federal district court, alleging the settlement was invalid as a matter of law, and that North River and Rodin breached its duty of good faith. Greater New York also sought

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the return of the one million dollars it had paid McIlhenny.

North River then filed suit in the Court of Common Pleas for Philadelphia County against Greater New York for bad faith on behalf of itself and as the assignee and equitable subrogee of Rodin. North River sought $4,250,000, representing the full value of the settlement less $1,000,000 already paid by Greater New York. Greater New York removed the claim to federal court, and the two cases were consolidated for discovery and trial.

In a pretrial order, the district court upheld the two-tiered settlement and dismissed all of Greater New York's claims against North River. Greater New York Mut. Ins. Co. v. North River Ins. Co., 872 F.Supp. 1403 (E.D.Pa.1995). Holding two-tiered settlements are permitted under Pennsylvania law, it also determined an excess insurer owes no direct duty of good faith to a primary insurer when negotiating a settlement agreement. Greater New York appeals these orders.

At trial, a jury found Greater New York breached its duty of good faith to Rodin by failing to settle McIlhenny's lawsuit in a timely and satisfactory manner. The jury also found Rodin did not breach its duty of good faith to Greater New York by entering into the two-tiered settlement agreement. It gave North River a verdict for $4,432,324 ($5.25 million minus one million already paid by Greater New York plus other costs). Greater New York contends it was entitled to a directed verdict that it did not breach its duty of good faith. It also appeals certain evidentiary rulings.

II.

A.

The district court had jurisdiction based on diversity of citizenship. 28 U.S.C. § 1332. We have jurisdiction under 28 U.S.C. § 1291. In diversity cases we must apply the substantive law of the state whose law governs the action. Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 822, 82 L.Ed. 1188 (1938). The parties agree Pennsylvania law governs. Our review of the district court's interpretations and predictions of state law is plenary. Salve Regina College v. Russell, 499 U.S. 225, 231, 111 S.Ct. 1217, 1220-21, 113 L.Ed.2d 190 (1991); Wiley v. State Farm Fire & Casualty Co., 995 F.2d 457, 459 (3d Cir.1993).

B.

The principal issue on appeal is whether the two-tiered conditional settlement assented to by McIlhenny, Rodin, and North River is permitted under Pennsylvania law. Because no Pennsylvania case has directly addressed the enforceability of two-tiered settlement agreements we must predict how the Pennsylvania Supreme Court would decide the issues before us. U.S. Underwriters Ins. Co. v. Liberty Mut. Ins. Co., 80 F.3d 90, 93 (3d Cir.1996). But this is not the first time we have examined a two-tiered settlement. In a similar case, after an exhaustive review of Pennsylvania case law and a thorough analysis of the relevant policies, we predicted the Pennsylvania Supreme Court would enforce a two-tiered settlement. Lexington, 815 F.2d 890.

Lexington involved a settlement by the Hospital of the University of Pennsylvania with a personal injury plaintiff. Under the settlement's terms, HUP agreed to pay $2.2 million itself and an additional $4.8 million if it won a suit against its insurer, Lexington, which had refused coverage. 3 Applying Pennsylvania law, we upheld the validity of the two-tiered settlement, subject to the requirements of good faith and reasonableness. Lexington, 815 F.2d at 902. "Prohibiting two-tiered settlements," we noted, may "force insureds to turn down advantageous

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settlement offers." 4 Id. at 901-02.

We see nothing in the facts of this case that would lead us to a different outcome. Lexington 's central rationale that a prohibition on two-tiered settlements would prevent some insureds from accepting advantageous settlements also applies where an excess insurer, an insured and a victim/plaintiff collectively forge a settlement. The mere addition of an excess insurer into the settlement equation does not alter our sense of how the Pennsylvania courts would assess the legality of two-tiered settlements.

Greater New York contends Lexington is inapposite because it involved a bad faith failure to defend while this case involves a failure to settle. Greater New York points out that in failure-to-settle cases the victim/plaintiff, its counsel, and the excess insurer have an incentive to color their testimony about settlement negotiations in the underlying lawsuit in order to recover as much as possible from the primary insurer. In contrast, failure-to-defend-cases brought by an insured against an insurer revolve around contractual duties and typically will not require the testimony of the victim/plaintiff or its counsel.

As Lexington makes clear, there are dangers associated with two-tier settlements, including the prospect of self-dealing and self-serving testimony. See Lexington, 815 F.2d at 902. Arguably this danger is heightened in excess insurer versus primary insurer failure-to-settle cases. But many kinds of cases provide inducements to color testimony, and we routinely leave it to juries to assess the forthrightness and honesty of witnesses. Witness credibility and the reasonableness of settlement agreements are questions of fact. Nothing in Pennsylvania law indicates we should prohibit two-tiered settlements in order to guard against jury imperfection. 5 In this case...

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