Henegan v. Merchants Mut. Ins. Co.

• Decision Date: 07 November 1968
• Citation: 294 N.Y.S.2d 547,31 A.D.2d 12
• Parties: John HENEGAN, Tolly Johnson and Viola Johnson, Plaintiffs-Appellants, v. MERCHANTS MUTUAL INSURANCE COMPANY, Defendant-Respondent.
• Court: New York Supreme Court — Appellate Division

Page 547

294 N.Y.S.2d 547

31 A.D.2d 12

John HENEGAN, Tolly Johnson and Viola Johnson, Plaintiffs-Appellants, v. MERCHANTS MUTUAL INSURANCE COMPANY, Defendant-Respondent.

Supreme Court, Appellate Division, First Department.

Nov. 7, 1968.

Herbert Nason, New York City, of counsel, Nason & Cohen, New York City, for appellants.

Robert Hill Nix, New York City (Paul A. Crouch, New York City, with him on the brief), for respondent.

Before BOTEIN, P.J., and STEVENS, EAGER, TILZER and McGIVERN, JJ.

TILZER, Justice.

The issue posed by the present appeal is whether an action may be maintained against an insurance company for its bad faith and/or fraud in failing to settle a negligence case in the absence of a showing that the plaintiff insured has paid the excess judgment recovered against him. The court below answered this question in the negative and accordingly dismissed the complaint at the close of plaintiffs' case on the sole ground of a failure of proof of loss.

This question has not been passed on by the courts of this State, although some forty years ago the Court of Appeals ruled that an insurance company 'in the handling of the litigation or in failing to settle is liable for its fraud or bad faith * * *' (Best Building Co. v. Employers' L. Assur. Corp., 247 N.Y. 451, 453, 160 N.E. 911, 912, 71 A.L.R. 1464). Our review is thus limited to the issue of damages, to whether plaintiffs made out a prima facie case in this regard, and we do not consider whether in the handling of the litigation or in failing to settle the insurance company was guilty of graud or bad faith.

We join with the majority of jurisdictions in this country in concluding that an insured is damaged, that he has suffered a loss or injury, upon entry of the excess final judgment in the damage suit case. Reason as well as economic fact dictate that the mere existence of an excess final judgment causes harm to the judgment debtor. The judgment increases his debts, it damages his credit, it subjects his property to the lien of the ubiquitous judgment. An insurer which has been guilty of bad faith, one which has deliberately shackled its insured with the crippling jeopardy of a large excess judgment, may not insist that the insured must sacrifice his assets and pay the judgment before suit. The very nature of the risk insured against prohibits the imposition of such prerequisite. (Alabama Farm Bureau Mut. Cas. Ins. Co. v. Dalrymple, 270 Ala. 119, 116 So.2d 924 (1959); Farmers Insurance Exchange v. Henderson, 82 Ariz. 335, 313 P.2d 404 (1957); Southern Farm Bureau Casualty Insurance Co. v. Mitchell, 312 F.2d 485 (8 Cir. 1963); Brown v. Guarantee Insurance Company, 155 Cal.App.2d 679, 319 P.2d 69, 66 A.L.R.2d 1202 (1957); Burton v. State Farm Mutual Automobile Insurance Co., 335 F.2d 317 (5 Cir. 1964); Smoot v. State Farm Mutual Automobile Insurance Co., 299 F.2d 525 (5 Cir. 1962); Henke v. Iowa Home Mutual Casualty Company, 250 Iowa 1123, 97 N.W.2d 168 (1959); Sweeten v. National Mutual Insurance Co. of D.C., 233 Md. 52, 194 A.2d 817 (1963); Wessing v. American Indemnity Co. of Galveston, Tex., 127 F.Supp. 775 (W.D.Mo.1955); Jessen v. O'Daniel, 210 F.Supp. 317 (D.Mont.1962); Gray v. Nationwide Mutual Insurance Company, 422 Pa. 500, 223 A.2d 8 (1966); Southern Fire & Casualty Co. v. Norris, 35 Tenn.App. 657, 250 S.W.2d 785 (1952); Seguros Tepeyac, S.A., Compania Mexicana de Seguros Generales v. Bostrom, 347 F.2d 168 (5 Cir. 1965); Murray v. Mossman, 56 Wash.2d 909, 355 P.2d 985 (1960); Schwartz v. Norwich Union Indemnity Co., 212 Wis. 593, 250 N.W. 446 (1933)). The Supreme Court of Pennsylvania in Gray v. Nationwide Mutual Insurance Company, supra, (p. 506, 223 A.2d p. 10) noting that there was no Pennsylvania decision directly in point, concluded that 'Three very sound reasons' justified the adoption of the view that payment of the excess judgment was not a prerequisite to a cause of action against the insurer:

'(1) such view prevents an insurer from benefiting from the impecuniousness of an insured who has a meritorious claim but cannot first pay the judgment imposed upon him; (2) such view negates the possibility that the insurer would be '* * * less responsive to its trust duties where the insured (is impecunious than where the insured) is able to pay the excess judgment. Were (pre)payment the rule, an insurer with an insolvent insured could unreasonably refuse to settle, for, at worst, it would only be liable for the amount specified by the policy. To permit this would be to impair the usefulness of insurance for the poor man.' Note, 27 U.Pitt.L.Rev. 726, 728 (1966); (3) such view recognizes that the fact of entry of the judgment itself against the insured constitutes a real damage to him because of the potential...