Harris v. Standard Accident and Insurance Company

• Decision Date: 10 February 1961
• Citation: 191 F. Supp. 538
• Parties: Melville HARRIS, as Trustee in Bankruptcy of Leonard Massello and William Massello, Plaintiff, v. STANDARD ACCIDENT AND INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — Southern District of New York

191 F. Supp. 538

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

United States District Court S. D. New York.

February 10, 1961.

Robert Liederman, New York City, for plaintiff, by John J. Tullman, New York City, of counsel.

Reid A. Curtis, Merrick, N. Y., for defendant, by James B. McLaughlin, New York City, of counsel.

IRVING R. KAUFMAN, District Judge.

Plaintiff, the trustee in bankruptcy of Leonard and William Massello, brings 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 limits of a liability insurance policy issued by the defendant to Leonard Massello.

I.

This action stems from an automobile accident which occurred on January 5, 1952, when a panel truck owned by Leonard Massello and driven by William Massello collided with a taxicab at the intersection of Palisade Avenue and Shonnard Place in Yonkers. As a result of the collision, the taxicab was forced onto the sidewalk, where it struck a passing pedestrian, Mrs. Elizabeth Pease Van Suetendael, causing her serious injuries. Mrs. Van Suetendael then instituted suit in the New York Supreme Court, Westchester County, against the owners and drivers of both vehicles, to recover damages for these injuries.¹

Pursuant to the terms of the automobile liability insurance policy issued by the defendant to Leonard Massello, Standard Accident and Insurance Company assumed the defense of the action on behalf of the Massellos. The coverage under this policy was limited to $10,000 for any one person injured in any one accident.

Settlement discussions were had in the State court action prior to the trial in pre-trial conferences, and during the course of the actual trial. However, no agreement could be reached, and after a trial in the month of March, 1957, before Justice George Fanelli of the Supreme Court and a jury, a verdict awarding $105,000 damages for the plaintiff, individually and as executrix, against all defendants, was returned, and judgment was entered thereon. Subsequently, Standard paid Mrs. Van Suetendael the sum of $10,000, the limit of its policy, and Travelers Insurance Company paid, on behalf of the taxicab owner, the sum of $5,000, the limit of its policy. The taxicab owner personally paid an additional $1,000, and received a release of the lien of the judgment against him. Thus, the sum of $89,000 remains due upon the judgment.

Meanwhile, subsequent to the judgment in the personal injury action, the Massellos filed petitions in bankruptcy in the United States District Court for this district, and were adjudicated bankrupts. On September 13, 1957, plaintiff was appointed trustee in bankruptcy. The bankruptcy proceedings have remained open, pending the outcome of this action.

II.

Plaintiff's case is premised on the contention that defendant's refusal to settle was in bad faith, a theory of liability that is recognized in New York, Best Building Co. v. Employers' Liability Assurance Corp., 1928, 247 N.Y. 451, 160 N.E. 911, 71 A.L.R. 1464, as well as in most other jurisdictions. See, e. g., Tennessee Farmers Mutual Ins. Co. v. Wood, 6 Cir., 1960, 277 F.2d 21; Henke v. Iowa Home Mutual Casualty Co., 1959, 250 Iowa 1123, 97 N.W.2d 168; Comunale v. Traders & General Insurance Co., 1958, 50 Cal.2d 654, 328 P.2d 198, 68 A.L.R.2d 883. See generally Keeton, Liability Insurance and Responsibility for Settlement, 67 Harv.L.Rev. 1136 (1954).²

The necessity for a principle of liability in this area stems from the fact that under the terms of the ordinary liability insurance policy, the insurer has the duty of defending actions brought against the insured within the scope of the policy. This duty confers upon the company the exclusive control over all decisions concerning settlement. In making these decisions, the company, since it is, in actuality, representing both itself and its insured, is faced at times with the reconciliation of inevitably conflicting interests. For example, a settlement within the limits of the policy coverage would generally be advantageous to the insured, since he would then not be subject to any excess personal liability. On the other hand, it would often be desirable for the company to proceed to trial, and seek to avoid liability, particularly where its risks are limited by the policy coverage to a relatively small sum. This, however, would often expose the insured to the possibility of a substantial personal liability.

Since the company, therefore, has power, through the control of settlement, to adversely affect the insured's interests, it must necessarily bear a legal responsibility for the proper exercise of that power. Thus, the law imposes upon the insurer the obligation of good faith— basically, the duty to consider, in good faith, the insured's interests as well as its own when making decisions as to settlement.

Bad faith—the failure to comply with this obligation—is generally proven by evidence largely circumstantial in nature. It is most readily inferable when the severity of the plaintiff's injuries is such that any verdict against the insured is likely to be greatly in excess of the policy limits, and further when the facts in the case indicate that a defendant's verdict on the issue of liability is doubtful. See, e. g., Tennessee Farmers Mutual Ins. Co. v. Wood, 6 Cir., 1960, 277 F.2d 21; Henke v. Iowa Home Mutual Casualty Co., 1959, 250 Iowa 1123, 97 N.W.2d 168. When these two factors coincide, and the company still refuses to settle, the inference of bad faith is strong.

In the instant case, the defendant contends that it exercised good faith throughout; that it determined to proceed to trial because of a bona-fide belief that liability could be avoided. The company further seeks to excuse its failure to settle on the theory that, since it knew the Massellos were insolvent, it was not exposing them to any substantial risk in proceeding to trial.

An examination of the evidence introduced at the instant trial indicates conclusively, however, that the defendant company, and its attorney, failed to give adequate consideration to the interests of the Massellos. Not only did the objective criteria—the severity of the injuries and the probability of a plaintiff's verdict—coincide, but statements made by defendant's trial attorney during the course of the personal-injury action clearly illustrate the bad-faith approach by the company to the defense of that action.

III.

Several witnesses were called by the trustee in the trial before this court to substantiate his version of the facts. Justice Fanelli, one of these witnesses, testified that a settlement conference was held before him at the time of the selection of the jury and that at least one more such conference was held during the course of the trial. He testified:

that at the first conference, Mr. William A. Hyman, representing Mrs. Van Suetendael, outlined the essentials of his case to the judge and to the attorneys for the defendants; that Hyman emphasized, through the bill of particulars, the severity of the plaintiff's injuries;

that Hyman further noted the inconsistencies in testimony given by William Massello in his examination before trial and in a Motor Vehicle Bureau hearing;³ that Hyman indicated that he had available a disinterested eyewitness who would give testimony which would be very damaging to the Massellos;

that he (Justice Fanelli) during this pretrial conference indicated his belief that both defendants would be held liable, and that the defendants could not win the case;

that he, therefore, recommended a settlement to all parties;

that Mr. James O. Denniston, the attorney representing the Travelers Insurance Company, agreed that all defendants were liable, and offered to contribute the full amount of Travelers' policy coverage, $5,000, towards a settlement;

that he (Justice Fanelli) inquired of Standard's counsel as to his position;

that Standard's counsel replied that he would only match the Travelers' contribution;

that he (Justice Fanelli) again expressed his opinion that the defendants could not win the case;

and that Standard's counsel replied that he knew he couldn't win, but that he had no authority to contribute any more than Travelers.⁴

(See Record, pp. 5-12).

Justice Fanelli further testified:

that at the second settlement conference held before him, he again told Standard's counsel that he did not believe the defendants could win the case;

that he further indicated that Mr. Hyman was now willing to settle for a sum below the combined policy limits, and thus that Standard would be able to save a small amount on its policy coverage;

that Standard's position, however, remained unaltered;

and that its attorney repeated that he had no authority to contribute any more than was contributed by the Travelers Insurance Company — $5,000. (Record, pp. 12-14).

The testimony of Justice Fanelli with respect to these incidents was fully corroborated by testimony given by Mr. Denniston and Mr. Hyman. (Record, pp. 48-59, 97-99, 101-04).⁵

The attorney for Standard maintained his position throughout the course of the trial of the negligence action, and reiterated it several times in discussions with Mr. Denniston and Mr. Hyman. Even after the "disinterested" witness mentioned by Mr. Hyman testified, giving testimony strongly indicating that the Massellos were liable, Standard refused to alter its position with regard to settlement.

This attitude of intransigence and the failure to understand its responsibility to the insured, was evident even before the trial. Thus, Mr. Hyman testified to a meeting with Mr. George Wadkinson, the supervisor of defendant's Liability Claim Department, approximately one year before the trial. At this time, according to Mr. Hyman's testimony, Mr. Wadkinson told Mr. Hyman that, with...