New England Ins. v. Healthcare Underwriters Mut.

• Decision Date: 26 June 2001
• Docket Number: No. 98-CV-2234.,98-CV-2234.
• Citation: 146 F.Supp.2d 280
• Parties: NEW ENGLAND INSURANCE CO., Plaintiff, v. HEALTHCARE UNDERWRITERS MUTUAL INSURANCE, Defendant.
• Court: U.S. District Court — Eastern District of New York

146 F.Supp.2d 280

NEW ENGLAND INSURANCE CO., Plaintiff, v. HEALTHCARE UNDERWRITERS MUTUAL INSURANCE, Defendant.

No. 98-CV-2234.

United States District Court, E.D. New York.

June 26, 2001.

Rivkin, Radler & Kremer, LLP by David Richman and Lee S. Siegel, Uniondale, NY, for Plaintiff.

Mcaloon & Friedman, PC by Lawrence W. Mumm, Gillian Fisher and Timothy J. O'Shaughnessy, New York City, for Defendant.

MEMORANDUM OF DECISION AND ORDER

SPATT, District Judge.

In this case, a jury has found that a casualty carrier, insuring a hospital in a medical malpractice case, is liable for "bad faith" for refusing to settle a case in which the injuries in the underlying action were devastating, and would expose the carrier to substantial damages well in excess of its coverage, but where the liability against the hospital was sharply disputed. This case of original impression, presents the question of whether a bad faith claim in New York State requires the plaintiff to prove, as an element of the cause of action, that the insured's liability was clear — that is "all serious doubts about the insured's liability were removed" — at a time when an offer to settle within the policy limits was refused by the carrier. In addition, the Court also addresses the novel question of the proof required to show that an offer to settle within the policy limits was in fact made.

This case was tried before a jury from November 27, 2000 to December 20, 2000, at which time the jury returned a verdict in favor of the Plaintiff New England Insurance Co. ("New England"), for damages stipulated to be $1.1 million. Following the verdict, the Defendant, Healthcare Underwriters Mutual Insurance Co. ("Healthcare") moved for judgment as a matter of law under Fed.R.Civ.P. 50, contending that New England had failed to establish the required element of "clear liability." New England cross-moved for an award of prejudgment interest. Oral argument on these motions was held on May 4, 2001.

BACKGROUND

In 1985, David Weinstock was born in Huntington Hospital with catastrophic birth defects, in that he was severely brain damaged. Weinstock's parents commenced a malpractice action ("the Weinstock action") in Supreme Court, Suffolk County, against, among other parties, Dr. Lawrence Horn, the obstetrician involved, and Huntington Hospital ("the Hospital"). Healthcare was the primary liability insurer of the Hospital, covering the first $ 1 million in claims, while New England provided excess insurance in the additional sum of $ 3 million. The Healthcare policy required that the Hospital consent to any settlement.

On or about February 23, 1991, prior to the trial of the Supreme Court action, the Weinstocks settled with Dr. Horn for the sum of $1.2 million, leaving the Hospital as the only defendant. Although there were settlement discussions between Healthcare and the Weinstocks, as discussed in more detail below, the parties were unable to resolve the case, in that Healthcare made no offer. On September 1, 1992, the jury in the Weinstock action returned a verdict against the Hospital, and awarded damages of $ 9.6 million, 25% of which were attributable to the Hospital, resulting in the sum of $2.4 million being apportioned to the Hospital. In post-verdict settlement discussions, the Weinstocks accepted $ 2.1 million in satisfaction of the verdict against the Hospital. Healthcare paid its full $ 1 million under its policy, and New England paid the remaining $ 1.1 million as required by the excess policy. New England then commenced this action against Healthcare, alleging that Healthcare had an opportunity to settle the case within its policy limits prior to and during the underlying trial and refused to do so; and that such a refusal rendered Healthcare liable under the doctrine of "bad faith."

The primary evidence on the issues presently before the Court was provided by Steven Pegalis, the Weinstocks' trial counsel in the latter part of the Supreme Court trial. Pegalis testified that in January 1991, when the Weinstocks were negotiating a settlement with Dr. Horn, their demand to settle to the Hospital was $500,000. By February 1991, after the Weinstocks had reached a settlement with Dr. Horn, leaving the Hospital as the only remaining defendant, their demand to the Hospital had risen to $1 million, although Pegalis testified that he would have "seriously considered" recommending to his client an offer as low as $850,000.

Once the trial began, the Weinstocks' settlement demand to the Hospital rose to $2 million, and prior to the jury returning with a verdict, Pegalis increased the settlement figure to $4 million, representing the total coverage of both insurance policies. However, Pegalis testified that, at the conclusion of the plaintiff's case, he would have "recommended" a settlement of $ 1 million had it been offered. Healthcare never made any settlement offer at any time prior to the verdict. However, the evidence in the trial before this Court establishes that the Hospital had an arguably viable defense on the liability issue throughout the Weinstock trial — specifically, (i) that David Weinstock's injuries were suffered prior to the birth while in utero or during delivery, when Dr. Horn, the obstetrician, was on the scene and fully in charge, and (ii) that the Hospital had no vicarious responsibility for the actions of Dr. Horn, the attending physician.

For the purposes of this opinion, the Court assumes that a reasonable jury could find, as a fact, that prior to and during the Weinstock trial to the conclusion of the plaintiffs' case, Healthcare could have settled the claim against the Hospital for $1 million or less, with the consent of the Hospital.

Following the close of proof in this trial, this Court initially informed the attorneys for the parties that, in accordance with the seminal case of Pavia v. State Farm Mutual Automobile Ins. Co., 82 N.Y.2d 445, 454, 605 N.Y.S.2d 208, 212, 626 N.E.2d 24 (1993), it intended to charge the jury that New England had the burden of proving that (i) Healthcare had an opportunity to settle the case within its policy limits; (ii) that the Hospital would have consented to the settlement; and (iii) that the Hospital's liability was "clear" at that time. New England's counsel objected to the Court's proposed instruction, and stated that the Pavia case also set forth a multi-factor balancing test, which required the jury to consider, among other things, "the likelihood of success on the liability issue in the underlying action." Id., 82 N.Y.2d at 454-55, 605 N.Y.S.2d at 212, 626 N.E.2d 24. Upon further consideration, this Court reversed its earlier ruling, and instructed the jury to consider the probability of success on the merits, stating that "the third issue you must consider is whether the plaintiff New England proved that it was probable [...] that the jury would find a verdict in favor of the Weinstocks against the Huntington Hospital." The Court did not charge the jury that New England must prove that the liability against the Hospital in the underlying action had to be "clear" at the time that an offer was made by the Weinstocks to settle within the policy limits.

DISCUSSION

A court decides a motion for judgment as a matter of law under Fed. R.Civ.P. 50(a)(1) using the same standard that applies to motions for summary judgment. See Alfaro v. Wal-Mart Stores, Inc., 210 F.3d 111 (2d Cir.2000). As stated recently by the United States Supreme Court in Reeves v. Sanderson Plumbing Products, 530 U.S. 133, 120 S.Ct. 2097, 147 L.Ed.2d 105 (2000),

Rule 50 requires a court to render judgment as a matter of law when a party has been fully heard on an issue and there is no legally sufficient evidentiary basis for a reasonable jury to find for that party on that issue... The standard granting summary judgment "mirrors" the standard for judgement as a matter of law, such that "the inquiry under each is the same..." It therefore follows that, in entertaining a motion for judgment as a matter of law, the court should review all of the evidence in the record. In doing so, however,, the court must draw all reasonable inferences in favor of the nonmoving party, and it may not make credibility determinations or weigh the evidence. "Credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge." Thus, although the court should review the record as a whole, it must disregard all evidence favorable to the moving party that the jury is not required to believe. That is, the court should give credence to the evidence favoring the nonmovant as well as that "evidence supporting the moving party that is uncontradicted and unimpeached, at least to the extent that that evidence comes from disinterested witnesses."

530 U.S. at 149-151, 120 S.Ct. at 2109-10 (citations omitted). Stated differently,

[O]n a motion for a judgment as a matter of law after a jury verdict, or on appeal after trial, the question is always whether, after "drawing all reasonable inferences in favor of the nonmoving party and making all credibility assessments in his favor, there is sufficient evidence to permit a rational juror to find in his favor." Sir Speedy, Inc. v. L & P Graphics Inc., 957 F.2d 1033, 1039 (2d Cir.1992); see also Liberty Lobby, 477 U.S. at 252, 106 S.Ct. 2505, 91 L.Ed.2d 202 ("[T]he judge must ask ... whether a fair-minded jury could return a verdict for the plaintiff on the evidence presented [,] ... whether reasonable jurors could find by a preponderance of the evidence that the plaintiff is entitled to a verdict...."); Hollander v. American Cyanamid Co., 172 F.3d 192, 200 (2d Cir.1999) (standard to grant summary judgment is whether there is "sufficient evidence for a reasonable jury to conclude that [defendant] discriminated.")

McCarthy v. New York City Technical College, 202 F.3d 161 (2d Cir.2000).

Under New York law, a primary...