Gordon v. Nationwide Mut. Ins. Co.

• Citation: 334 N.Y.S.2d 601,30 N.Y.2d 427,285 N.E.2d 849
• Parties: , 285 N.E.2d 849 Gerald GORDON, as Receiver of the Rights and Assets of Louis Porter, Respondent-Appellant, v. NATIONWIDE MUTUAL INSURANCE COMPANY, Appellant-Respondent.
• Decision Date: 01 June 1972
• Court: New York Court of Appeals

Page 601

334 N.Y.S.2d 601

30 N.Y.2d 427, 285 N.E.2d 849

Gerald GORDON, as Receiver of the Rights and Assets of Louis Porter, Respondent-Appellant, v. NATIONWIDE MUTUAL INSURANCE COMPANY, Appellant-Respondent.

Court of Appeals of New York.

June 1, 1972.

Benjamin H. Siff, and Thomas R. Newman, New York City, for appellant-respondent.

Joel Martin Aurnou, and Barry I. Fredericks, White Plains, for respondent-appellant.

BERGAN, Judge.

Recovery in this action on behalf of the insured Louis Porter by his receiver against the insurer Nationwide Mutual Insurance Company rests on a breach of good faith in the performance of its liability insurance contract by the company in managing the defense of liability claims against Porter.

The claimed breach of the implied obligation of the insurer to perform its contract of insurance in good faith rests on its refusal to settle negligence claims against Porter within the policy limits of $20,000.

The refusal, in turn, was based on the insurance company's assertion the policy had been canceled. Following on this assertion, the company withdrew from the defense of the negligence actions and refused to settle the claims within the policy limits. Porter ignored a notice of application by the plaintiffs in those actions to take inquests, served personally on him, and defaulted. The inquests, in turn, became the basis of Porter's receiver's present judgment against Nationwide. That judgment is for $259,058.87, over twelve-and-a-half times the policy limit.

Porter himself breached his contract to pay installments to Premier Credit Corporation which had financed on his behalf the premium for Nationwide's coverage, and it was this conceded breach of his premium financing contract, and the notice of nonpayment received by Nationwide from Premier as Porter's agent, which led Nationwide to assert that the policy had been canceled and coverage terminated.

A 'Notice of Cancellation', following Porter's failure to comply with his contract with Premier to pay for Nationwide's coverage, was sent by mail by Premier both to Nationwide and Porter. On locating this notice in its files Nationwide, which had undertaken the defense of the negligence actions, told attorneys for claimants against Porter that it regarded the policy as canceled and would not defend Porter or be responsible for resulting judgments.

It may be assumed for the purpose of this appeal that Nationwide was wrong as a matter of law in its assertion that Porter's uncontroverted default on his premium contract had effectively canceled the policy. But this does not make Nationwide liable for acting in bad faith.

More than an 'arguable case' of coverage responsibility must be shown before liability may be imposed for breach of an implied covenant to act in good faith in denying coverage (Sukup v. State of New York, 19 N.Y.2d 519, 281 N.Y.S.2d 28, 227 N.E.2d 842). The holding in that case embraced a determination that the carrier was wrong as a matter of law in denying coverage, i.e., that there was coverage.

It was observed (p. 522, 281 N.Y.S.2d p. 31, 227 N.E.2d p. 844): 'The record in this case shows that he carrier was wrong and the insured right as to coverage, as the Workmen's Compensation Board found. The record does not show any gross disregard for its policy obligation by the insurer in asserting noncoverage. The record shows merely an arguable case in which the carrier was held wrong. That is not enough to impose a liability beyond the terms of the contract.'

The notice of cancellation was mailed by the finance company to Porter November 10, 1961 with an effective date of cancellation stated to be November 23. This was not the 10 days' notice with 3 days added for mailing required by section 576 (subd. 1, par. (b)) of the Banking Law, governing cancellation by a 'premium finance agency'. Although it gave 13 days' notice, the day of mailing should have been excluded. The accident in which Porter was involved occurred November 28, 1961, well beyond 14 days after the mailing of the notice of cancellation to him on November 10.

The accuracy of the computation of days was debated between counsel at the trial of this present action, although appellant carrier does not argue on the merits in this court that the notice given to it and the insured by the finance agency technically met the time requirements of the Banking Law.

There is a large and very fundamental difference, however, on the effect of this one-day technicality in notice of cancellation flowing from Porter's breach of contract, between the legal effect of this purported cancellation of insurance and the asserted failure of Nationwide to act in good faith toward Porter when it refused to settle the case within the policy limits of $20,000.

If, as it now appears, Porter's finance company was a day short in the notice of cancellation it sent for Porter's breach of contract, the normal consequence would be that the policy remained in effect, uncanceled, and Nationwide continued liable for $20,000.

Indeed, Nationwide has been required in an earlier phase of this present action on behalf of judgment creditors in the negligence actions who were original coplaintiffs to pay its policy limits (Rotsettis v. Nationwide Mutual Ins. Co., 58 Misc.2d 667, 297 N.Y.S.2d 333, affd. 31 A.D.2d 722, 297 N.Y.S.2d 712) and that is not open in this appeal.

This was the holding in Cannon v. Merchants Mut. Ins. Co., 35 Misc.2d 625, 230 N.Y.S.2d 282, the effect of which was debated between counsel for Nationwide and counsel for the plaintiffs in the actions against Porter. But a good faith belief in the cancellation of the policy would not only depend on the view the insurer took of the legal question, but also its view of the facts of Porter's default in payment. In Johnson v. General Mut. Ins. Co., 24 N.Y.2d 42, 298 N.Y.S.2d 937, 246 N.E.2d 713, not only was the notice of cancellation no sufficient in time, but in fact the insured had not defaulted in payment (p. 47, 298 N.Y.S.2d, p. 939, 246 N.E.2d, p. 714).

Therefore, the question of breach by Nationwide of its good-faith obligation to perform its contract of coverage cannot be walled off from the actualities in the chain of events which Porter set in motion by failure to perform his contract with his finance company to pay the premium.

And Nationwide's bad faith must be shown to be so great as to require it, not only to pay the policy limits, but to pay the essentially punitive sum of $250,000.

No such remarkable showing of bad faith is made in this record to warrant submission of the case to a jury for imposition of liability vestly beyond the policy limits on any theory--either breach of contract or negligence.

Nationwide's counsel advised it that the policy had properly been cancelled for Porter's breach. Counsel testified on the trial, not only that this had been his professional opinion when advising the company, but that it continued to be his opinion at the trial of the present action.

Counsel for the plaintiffs in the negligence actions against Porter argued with the insurer's counsel that the law was the other way--i.e., the notice of default given by the finance company was a day short and cited Cannon v. Merchants Mut. Ins. Co., 35 Misc.2d 625, 230 N.Y.S.2d 282, Supra. He insurer's counsel replied he believed that case wrongly decided, and that the policy had properly been canceled well before the accident had occurred.

It would be an extraordinary result to hold a client guilty of breach of good faith, wih large punitive damages, because it acts on advice of counsel--even mistaken advice--about the precedential stature of a single case in the Miscellaneous Reports. It would be even more extraordinary if liability could be imposed on a client for breach of good faith in following counsel's advice because an adversary lawyer disagrees with the legal merits of the advice given. And the acerbity of the argument has itself no legal consequence.

When the actual documents governing the relations between Porter, his finance company Premier, and Nationwide, are examined, it is to be observed that Premier was vested by Porter with a very large measure of control over the continuance of Nationwide's policy. Porter assigned to Premier 'all rights' that he had under the policy, and in case of default in installment payments, Premier was appointed Porter's agent to 'request cancellation'. This was a normal and reasonable consequence since Premier was assuming financial arrangements for the premium.

The indorsement in the policy, binding on Porter, 'specifically directs' Nationwide to honor any request for cancellation made by Premier 'just as though such requests were in fact made' by Porter. The indorsement also provided that 'if the Company (Nationwide) cancels the policy it will be with advance notice to the Policyholder and the Lender'.

It seems obvious this kind of direct cancellation by the insurer itself requiring notice to both Porter and Premier is not the kind of cancellation requested by the finance company on Porter's behalf as Porter's agent for a failure to pay finance installments. This distinction is to be seen in the statute governing the right of a 'premium finance agency' to cancel an insurance contract by giving notice (Banking Law, § 576, subd. 1, pars. (a) & (b)).

The 'Notice of Cancellation' sent by Premier on November 10, 1961 was mailed both to Porter and Nationwide and, reciting that Porter was in default, it could scarcely be treated by the insurer as other than election by Porter's agent to request cancellation. All this has a bearing on the good faith of the carrier in accepting its counsel's view it was not on the risk when the accident of November 28, 1961 occurred.

Furthermore, and significant on the issue of good faith of Nationwide, it was Premier's error of one day in computing the time of the notice of cancellation for Porter's conceded default, and not...