Harris v. Standard Accident and Insurance Company

• Decision Date: 06 December 1961
• Docket Number: Docket 26892.,No. 38,38
• Citation: 297 F.2d 627
• Parties: Melville HARRIS, as Trustee in Bankruptcy of Leonard Massello and William Massello, Plaintiff-Appellee, v. STANDARD ACCIDENT AND INSURANCE COMPANY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Second Circuit

297 F.2d 627 (1961)

Melville HARRIS, as Trustee in Bankruptcy of Leonard Massello and William Massello, Plaintiff-Appellee, v. STANDARD ACCIDENT AND INSURANCE COMPANY, Defendant-Appellant.

No. 38, Docket 26892.

United States Court of Appeals Second Circuit.

Argued September 28, 1961.

Decided December 6, 1961.

Maurice Rosenberg, New York City (Reid A. Curtis, James B. Donovan, Patrick J. Hughes, and Watters & Donovan, New York City, on the brief), for defendant-appellant.

William A. Hyman, New York City (Harold W. Hayman, New York City, on the brief), for plaintiff-appellee.

Before LUMBARD, Chief Judge, and FRIENDLY and SMITH, Circuit Judges.

LUMBARD, Chief Judge.

Plaintiff, the trustee in bankruptcy of Leonard and William Massello, brought this action to recover damages for defendant's refusal, allegedly in bad faith, to settle a personal injury action brought against the Massellos, within the limit of a $10,000 automobile liability insurance policy issued by the defendant, Standard Accident and Insurance Company. The district court awarded $89,000 damages, and Standard appeals. Since there was no showing that the insured suffered any loss, we reverse the judgment of the district court. In view of this, it is unnecessary for us to determine whether New York law recognizes a cause of action for refusal to settle under the circumstances of this case.

Standard issued an automobile liability insurance policy to Leonard Massello with a limit of liability of $10,000 for any one person for any one accident.¹ On January 5, 1952 William Massello, while driving a panel truck owned by his brother Leonard, collided with a taxicab in Yonkers, New York. As a result of this collision, the taxicab ricocheted onto the sidewalk where it struck a pedestrian, Mrs. Elizabeth Pease Van Suetendael, inflicting serious injuries. Mrs. Van Suetendael sued the owners and drivers of both vehicles in the New York Supreme Court. Pursuant to the policy, Standard assumed the defense of the action on behalf of the Massellos. Although numerous settlement discussions were had both before and during the trial, at which Mrs. Van Suetendael was willing to settle for the policy limits or a little less, no settlement was reached and, after a trial in March 1957, the jury brought in a $105,000 verdict for Mrs. Van Suetendael upon which Judge Fanelli entered judgment. Standard paid Mrs. Van Suetendael the sum of $10,000, the limit of its policy; the Travelers Insurance Co. paid on behalf of the taxicab owner the sum of $5,000, the limit of its policy; and the taxicab owner personally paid an additional $1,000, receiving a release of the lien of the judgment against him. The sum of $89,000 remained uncollected upon the judgment,^1a and for this amount the trustee brought suit against Standard.

Even before entry of the Van Suetendael judgment, the Massellos were insolvent. In August 1956 they had lost their business to creditors. Subsequent to the entry of judgment, the Massellos filed petitions in bankruptcy in the United States District Court for the Southern District of New York and were adjudicated bankrupts. Although the Massellos were discharged in bankruptcy on November 17, 1958, the bankruptcy proceedings have remained open pending the outcome of this damage action against Standard.

The district judge tried the case without a jury. Judge Fanelli of the New York Supreme Court, who had presided at the personal injury trial, testified that when he told Standard's counsel, Reid Curtis, that he thought all the defendants would be held liable and that Standard could not win, Mr. Curtis replied that he knew it. Mrs. Van Suetendael's attorney, William Hyman, testified that Mr. Curtis told him that since Standard had nothing to lose, he would finish the trial. Although Mr. Curtis denied these statements, the district judge credited Judge Fanelli and Mr. Hyman. William Massello, the driver of the truck, at all times contended that he was not responsible for the accident and both Massellos admitted that since they were already insolvent, they could not pay any excess judgment.

The district court held that since the insurer had exclusive control of settlement, it had an obligation to consider, in good faith, the insured's interests as well as its own when making decisions as to settlement. In light of the severity of Mrs. Van Suetendael's injuries and the probability of a verdict in her favor, coupled with the statements made by Standard's trial attorney during the personal injury action, the judge concluded that the trustee in bankruptcy had a cause of action for Standard's bad faith in its conduct of the defense. The district court held that payment by the insured should not be a prerequisite to recovery as the insurer could then "easily avoid the duty of good faith owed to the insured." 191 F.Supp. at 544. He pointed out that New York had not yet adopted any rule on damages in such a case and cited Iowa, California and Tennessee authority to support his view that entry of judgment was sufficient.

The district court had jurisdiction under § 23, sub. b of the Bankruptcy Act, 11 U.S.C.A. § 46, sub. b, which gives federal courts jurisdiction of suits brought by the trustee provided the defendant consents.²

The courts have increasingly recognized a duty on the insurer to exercise some degree of care or good faith toward the insured in deciding whether to settle, although most contracts of insurance merely give the insurer the sole right to settle actions arising within the coverage of the policy but do not require it to do so. The interests of the insured and insurer often conflict. A settlement within the limits of the policy coverage is usually advantageous for the insured, for then he avoids all risk of personal liability for a judgment in excess of the policy limits. On the other hand, rather than consent to a settlement which would require the payment of substantially the entire amount of its coverage, the insurance company would generally prefer to proceed to trial and seek to avoid liability; should it lose, it may not be liable for much more than it would have had to pay in settlement. Consequently, the majority of jurisdictions which have ruled on the point do impose a duty upon the insurer in some situations where it has failed to give appropriate weight to the insured's interests.³

Standard's duties and liabilities in this case are governed by the law of New York,⁴ and this the parties do not dispute. But we do not pause to discuss whether the New York courts would hold Standard liable in this situation.⁵ The plaintiff has failed to prove any damage whatever under New York law. Therefore, we reverse the judgment of the district court and direct that the complaint be dismissed. In the discussion of damages to which we now turn, we assume arguendo that the plaintiff has otherwise made out a sufficient case for recovery.

New York's insurance statutes, relied upon by Judge SMITH in his dissenting opinion, have no persuasive effect as to what constitutes such damage to an insured as to render the insurer liable on an excess judgment. There are two types of insurance policies, those indemnifying the insured against liability and those indemnifying against loss.⁶ In order for the insured to recover against the insurer under the first type, the insured need prove only that a judgment has been entered against him. On the other hand, policies of the second type require proof that a loss has actually been suffered. To emphasize the nature of this type of policy, insurance companies often insert provisions that the insured shall not recover from them until he has actually paid a judgment against him. Because of an increasing feeling that automobile liability insurance should protect the injured person as well as the negligent driver,⁷ coupled with the idea that having received the premiums the insurance company should not avoid liability to a person injured within the scope of the policy merely because the insured was unable to pay, the legislatures of New York and many other states have prohibited this type of policy in certain situations.⁸ The New York statute, first enacted in 1917,⁹ prohibits the use of the insured's insolvency or bankruptcy as a defense to the insurance company and creates a cause of action by the injured person directly against the insurer if the former's judgment against the insured remains unsatisfied for 30 days. Standard's policy issued to Leonard Massello incorporates these provisions. Pursuant thereto, Standard paid Mrs. Van Suetendael's judgment against the Massellos to the extent of the limit of coverage of the policy, $10,000. It is to be noted, however, that this New York statute explicitly prohibits use of the insured's insolvency or bankruptcy as a defense only to the face amount of the policy; it does not forbid such defense as to the excess judgment.

The reasons for the enactment of the statute warrant its application to the coverage of the policy only and not to the excess liability. The argument that insurance should protect the injured person as well as the insured applies only to the extent that the insured has taken out insurance. The argument that having received premiums the insurance company should not be relieved of liability because of the insured's bankruptcy does not apply to the excess judgment since the insurer has received premiums only for the face amount of the policy, here $10,000. If, as our dissenting colleague suggests, we are to decide this case on "the spirit of New York's concern for the injured victim" we would be usurping the function of New York's legislature. Perhaps New York should require those in the trucking business to carry more adequate liability insurance. But so long as the state leaves in the hands of the potential wrongdoer the amount of insurance he shall carry, courts should not depart from well-settled principles of tort law and damages in order to impose a...