Ansonia Associates Ltd. Partnership v. Public Service Mut. Ins. Co.

• Citation: 692 N.Y.S.2d 5,257 A.D.2d 84
• Parties: , ANSONIA ASSOCIATES LIMITED PARTNERSHIP, etc., Plaintiff-Respondent, v. PUBLIC SERVICE MUTUAL INSURANCE COMPANY, et al., Defendants-Appellants.
• Decision Date: 25 May 1999
• Court: New York Supreme Court Appellate Division

Page 5

692 N.Y.S.2d 5

257 A.D.2d 84, ANSONIA ASSOCIATES LIMITED PARTNERSHIP, etc., Plaintiff-Respondent, v. PUBLIC SERVICE MUTUAL INSURANCE COMPANY, et al., Defendants-Appellants.

Supreme Court, Appellate Division, First Department, New York.

May 25, 1999.

Dean G. Yuzek, of counsel (Leigh A. Roveda, on the brief, Hutton Ingram Yuzek Gainen Carroll & Bertolotti, L.L.P., attorneys) for plaintiff-respondent.

Kathleen E. Schaaf, of counsel (Andrew J. Harakas and Steven H. Weisman, on the brief, Rosenman & Colin, L.L.P. and Stuart M. Herz, attorneys) for defendant-appellant Public Service Mutual Insurance Company.

Judith F. Goodman, of counsel (Lester Chanin, on the brief, Goodman & Jacobs, attorneys) for defendant-appellant Federal Insurance Company.

ERNST H. ROSENBERGER, J.P., RICHARD W. WALLACH, ISRAEL RUBIN and RICHARD T. ANDRIAS, JJ.

RUBIN, J.

This case raises questions of public policy, as defendant insurance companies contend. But the prohibition against reimbursement for punitive damages, upon which they rely, is not one of the policy considerations implicated (Home Ins. Co. v. American Home Prods. Corp., 75 N.Y.2d 196, 200, 551 N.Y.S.2d 481, 550 N.E.2d 930).

Defendant Public Service Mutual Insurance Company issued a general commercial liability insurance policy in the amount of $1 million to plaintiff Ansonia Associates. Defendant Federal Insurance Company, the excess liability carrier, issued coverage in the amount of $20 million. The issue presented by this appeal is whether defendants (collectively, the insurer) refused in bad faith to compromise a claim within the limits of the available coverage so as to require that restitution be made in the amount the insured paid to settle the claim against it. As no exemplary damages have been awarded, plaintiff cannot and does not seek reimbursement for any sum that represents punitive damages, and the public policy bar of Home Ins. Co. v. American Home Prods. Corp. (supra ) is simply inapplicable (see, Soto v. State Farm Ins. Co., 83 N.Y.2d 718, 613 N.Y.S.2d 352, 635 N.E.2d 1222).

Defendants employ backwards logic in the attempt to avoid liability for breach of the insurer's duty to exercise good faith in defending the insured. The reasoning advanced by defendant Public Service Mutual Insurance Company, in which defendant Federal Insurance Company concurs, would enable the insurer " 'to pass the incidence of the loss * * * from itself to its own insured and thus avoid the coverage which its insured purchased' " (Pennsylvania Gen. Ins. Co. v. Austin Powder Co., 68 N.Y.2d 465, 471, 510 N.Y.S.2d 67, 502 N.E.2d 982, quoting, Home Ins. Co. v. Pinski Bros., 160 Mont. 219, 226, 500 P.2d 945, 949). The gravamen of the insurer's position is that because the amount representing an award of punitive damages cannot be recovered from the insurer on public policy grounds, the insurer cannot be guilty of bad faith by exposing the insured to punitive damages, even though the potential exemplary award might far exceed any potential liability for compensatory damages.

I am aware of no policy of this State that would require or even support such a conclusion. To the contrary, there is a well-established proscription against permitting an insurer to place its own financial interests above those of its insured (e.g., Pennsylvania Gen. Ins. Co. v Austin Powder Co., supra, at 472, 510 N.Y.S.2d 67, 502 N.E.2d 982 [subrogation claim against own insured]; Jones Lang Wootton U.S.A. v. LeBoeuf, Lamb, Greene & MacRae, 243 A.D.2d 168, 674 N.Y.S.2d 280, lv. dismissed 92 N.Y.2d 962, 683 N.Y.S.2d 172, 705 N.E.2d 1213 [direct action against own insured] ).

The insurer's obligation to provide its insured with a defense is broader than its duty to indemnify the insured for loss (Goldberg v. Lumber Mut. Cas. Ins. Co., 297 N.Y. 148, 154, 77 N.E.2d 131). "The New York rule is that where an insurer 'unjustifiably refuses to defend a suit, the insured may make a reasonable settlement or compromise of the injured party's claim, and is then entitled to reimbursement from the insurer, even though the policy purports to avoid liability for settlements made without the insurer's consent' " (Isadore Rosen & Sons v. Security Mut. Ins. Co., 31 N.Y.2d 342, 347, 339 N.Y.S.2d 97, 291 N.E.2d 380, quoting Matter of Empire State Sur. Co., 214 N.Y. 553, 563, 108 N.E. 825). Rosen (supra, at 347, 339 N.Y.S.2d 97, 291 N.E.2d 380) emphasizes that

the insurer's obligation to act in good faith for the insured's interest may be breached in other ways than by refusing or neglecting to defend a suit. It may be breached by neglect and failure to act protectively when the insured is compelled to make settlement at his peril; and unreasonable delay by the insurer, in dealing with a claim, may be one form of refusal to perform which could justify settlement by the insured.

In Public Serv. Ins. Co. v. Goldfarb, 53 N.Y.2d 392, 442 N.Y.S.2d 422, 425 N.E.2d 810, the Court of Appeals merely held (at 400-401, 442 N.Y.S.2d 422, 425 N.E.2d 810) that the insured could not compel his insurance carrier to indemnify him "for any liability for punitive damages", and went on to stress (at 401, 442 N.Y.S.2d 422, 425 N.E.2d 810) that "it must, nonetheless, defend him * * * because a claim within the stated coverage has been made." The Court also alluded to the conflict of interest that arises where the insurer is "liable on only some of the grounds for recovery asserted and not upon others" (id.).

This matter likewise involves the insurer in a conflict of interest. In the absence of liability for punitive damages, defendant insurance companies face no augmented financial risk by foregoing settlement and proceeding to trial. The insured, in marked contrast, is forced to elect between exposure to potentially ruinous punitive damages by proceeding to trial and the loss of coverage for compensatory damages by entering into a compromise without the insurer's consent. In this situation, the insurer's use of the threat of punitive damages, which may exceed compensatory damages by a substantial margin (see, BMW of N. Am. v. Gore, 517 U.S. 559, 581, 116 S.Ct. 1589, 134 L.Ed.2d 809 [suggesting 10 to 1 as an outside ratio] ), amounts to the application of economic duress (see, 805 Third Ave. Co. v. M.W. Realty Assocs. 58 N.Y.2d 447, 451, 461 N.Y.S.2d 778, 448 N.E.2d 445; Austin Instrument v. Loral Corp., 29 N.Y.2d 124, 130, 324 N.Y.S.2d 22, 272 N.E.2d 533; 989 Sixth Ave. Assocs. v. Stolow, 176 A.D.2d 556, 575 N.Y.S.2d 24).

The operative question to be decided on this appeal is whether the complaint states a prima facie case of bad faith refusal to settle an action on the part of the insurer. Plaintiff's cause of action arises out of "the principle that in every contract there is an implied covenant that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract, which means that in every contract there exists an implied covenant of good faith and fair dealing" (Kirke La Shelle Co. v. Armstrong Co., 263 N.Y. 79, 87, 188 N.E. 163; see also, Brassil v. Maryland Cas. Co., 210 N.Y. 235, 104 N.E. 622). The Court of Appeals has noted that "whenever an insurer is presented with a settlement offer within policy limits a conflict arises between, on the one hand, the insurer's interest in minimizing its payments and on the other hand, the insured's interest in avoiding liability beyond the policy limits" (Pavia v. State Farm Mut. Auto. Ins. Co., 82 N.Y.2d 445, 452, 605 N.Y.S.2d 208, 626 N.E.2d 24, citing Brown v. United States Fid. & Guar. Co., 314 F.2d 675, 678 [2d Cir] ). Pavia states that, where settlement is rejected, the essence of a charge of bad faith against the insurer is having " 'advanced its own interests by compromising those of its insured' " (id., quoting Gordon v. Nationwide Mut. Ins. Co., 30 N.Y.2d 427, 446, 334 N.Y.S.2d 601, 285 N.E.2d 849 [Breitel, J., dissenting] ). As the Pavia Court explained, "At the root of the 'bad faith' doctrine is the fact that insurers typically exercise complete control over the settlement and defense of claims against their insureds, and, thus, under established agency principles may fairly be required to act in the insured's best interests" (id., at 452-453, 605 N.Y.S.2d 208, 626 N.E.2d 24, citing 7C Appleman, Insurance Law and Practice § 4711 [Berdal ed.] ). The Court went on to hold (at 453, 605 N.Y.S.2d 208, 626 N.E.2d 24) that:

in order to establish a prima facie case of bad faith, the plaintiff must establish that the insurer's conduct constituted a 'gross disregard' of the insured's best interests--that is, a deliberate or reckless failure to place on equal footing the interests of its insured with its own interest when considering a settlement offer (see, Lozier v. Auto Owners Ins. Co., 951 F.2d 251 [9th Cir] ). In other words, a bad-faith plaintiff must establish that the defendant insurer engaged in a pattern of behavior evincing a conscious or knowing indifference to the probability that an insured would be held personally accountable for a large judgment if a settlement offer within the policy limits were not accepted.

That the "large judgment" for which the "insured would be held personally accountable" might consist of an award of punitive damages does not detract from the insurer's complicity in exposing the insured to significant financial loss. Defendant does not pretend that Goldfarb has been overruled so as to relieve an insurer of the duty to fairly represent an insured's interests simply because the insured is potentially liable for punitive damages (Magnum Foods v. Continental Cas. Co., 36 F.3d 1491, 1506 [10th Cir.] ), and this Court will not endorse such a proposition. The interest of the judicial system in promoting the settlement of disputes (Salesian Socy. v. Village of Ellenville, 41 N.Y.2d 521, 525-526, 393 N.Y.S.2d 972, 362 N.E.2d 604) is not advanced by permitting an...