Pavia v. State Farm Mut. Auto. Ins. Co.

• Decision Date: 18 November 1993
• Parties: , 626 N.E.2d 24 Frank PAVIA, Respondent, et al., Plaintiffs, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Appellant.
• Court: New York Court of Appeals Court of Appeals

Page 208

605 N.Y.S.2d 208

82 N.Y.2d 445, 626 N.E.2d 24

Frank PAVIA, Respondent, et al., Plaintiffs, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Appellant.

Court of Appeals of New York.

Nov. 18, 1993.

[82 N.Y.2d 446] [626 N.E.2d 25] Rivkin, Radler & Kremer, Uniondale (Evan H. Krinick, John M. Denby and Evan S. Schwartz of counsel), for appellant.

[82 N.Y.2d 447] Schapiro & Reich, Lindenhurst (Steven M. Schapiro of counsel), and Richard J. Sgarlato, P.C., Staten Island, for respondent and plaintiffs.

[82 N.Y.2d 448] Maloney & Porcelli, New York City (Joseph E. Porcelli of counsel), for Nat. Ass'n of Independent Insurers, amicus curiae.

[82 N.Y.2d 449] Meyer, Suozzi, English & Klein, P.C., Mineola (Joseph A. Suozzi and Michael A. Ciaffa of counsel), for New York State Ins. Ass'n, amicus curiae.

OPINION OF THE COURT

TITONE, Judge.

In this action premised on the defendant insurer's alleged bad-faith failure to accept a settlement offer made by plaintiff's counsel in a personal injury action, the principal issue is whether the evidence adduced at trial was sufficient to establish "bad faith." We conclude that the insurer's failure to respond to plaintiff's time-restricted demand for settlement within the full policy limits, at a time when the insured's liability remained under investigation, was insufficient to establish a prima facie case of insurance bad faith. Moreover, there was nothing more in the conduct or inaction of the insurer that would qualify as bad faith under the circumstances of this case. Accordingly, we reverse and dismiss the complaint. 183 A.D.2d 189, 589 N.Y.S.2d 510.

I.

At approximately 10:15 P.M. on the evening of April 19, 1985, then 16-year-old Carmine Rosato picked up 19-year-old plaintiff Frank Pavia and a second youth and began driving around the Bensonhurst section of Brooklyn in a vehicle owned by Rosato's mother and insured by defendant State Farm Mutual Automobile Insurance Company with a $100,000 policy limit. Rosato, whose learner's permit did not authorize nighttime driving, apparently attempted to negotiate a corner at an excessive speed, lost control of the vehicle when he encountered a double-parked car, and ultimately collided with a car owned and operated by Joseph Amerosa. The injuries sustained by plaintiff Pavia in the accident rendered him a hemiplegic.

In October 1985, Pavia commenced a personal injury action against the Rosatos and Mr. Amerosa. The record reveals that as early as March 1986 a line unit representative at State Farm responsible for a preliminary investigation of plaintiff's claim concluded that the Rosatos were 100% liable for the accident. By August 1986, a State Farm claims representative responsible for handling the case on a daily basis was in receipt of medical reports attesting to the severity of plaintiff's injuries. A physical examination of plaintiff conducted by State Farm's physicians on April 27, 1987 confirmed those findings.

New developments in the case against the Rosatos surfaced on June 9, 1987--the date that Carmine Rosato was deposed. Through Rosato's testimony, State Farm was led to believe that the double-parked car may have been backing up, suggesting that Rosato's quick maneuvering may have been justified under an "emergency defense"; that witnesses not previously identified could support this version of the incident; that Pavia failed to wear a seat belt; and that drugs were being used in the car that night, possibly supporting an assumption of the risk defense. By letter dated June 10, 1987, counsel retained for the Rosatos by State Farm acknowledged that the liability forecast was "extremely unfavorable," but recommended that a further inquiry be conducted in light of these new leads.

On June 26, 1987, admittedly without having read Rosato's deposition, plaintiff's counsel wrote to State Farm demanding the full $100,000 policy limit in settlement of the personal injury action and requiring acceptance of the offer within 30 days. The offer expired without response from State Farm. By this time, however, State Farm had embarked on a thorough investigation of the potential defenses illuminated by Rosato's deposition. In fact, State Farm had hired an investigator to locate the supposed witnesses who would corroborate Rosato's version of how the events leading to the accident unfolded. By November 1987, State Farm's efforts to locate those witnesses were abandoned because the search had proved fruitless. On December 1, 1987, State Farm's Claims Committee, whose members had the authority to offer payments in excess of $50,000, convened for the first time to discuss the reports generated by the claim representative assigned to the case. On December 16, 1987, the Committee authorized its counsel to offer plaintiff the full policy limits. This offer was conveyed to plaintiff's attorney by counsel retained by State Farm on the Rosatos' behalf on January 7, 1988 during a "settle or select" conference, but was rejected as "too late."

The trial of the underlying personal injury action commenced in March 1988. The jury returned a plaintiff's verdict in the amount of $6,322,000, attributing 85% of the fault to Carmine Rosato and 15% to codefendant Amerosa. Supreme Court reduced the verdict upon State Farm's motion to $5,000,000 and the Appellate Division modified that judgment by further reducing the verdict to $3,880,000 upon plaintiff's stipulation (154 A.D.2d 519, 546 N.Y.S.2d 140).

The Rosatos subsequently assigned all causes of action they might have against State Farm to plaintiff by executing an assignment agreement, which included a covenant by plaintiff that he would not execute the excess portion of the judgment against the Rosatos. The Rosatos and plaintiff then commenced this action, alleging essentially that State Farm acted in bad faith by "fail[ing] to accept [plaintiff's] policy limits settlement offer within a reasonable time despite the clear liability and obvious damages exceeding the policy limits."

At the ensuing trial on the bad-faith action, the jury was presented solely with the following question: "Did the defendant, 'State Farm', act in gross disregard of the interests of Carmine Rosato and Joanne Rosato, their insured, in that there was a deliberate or reckless decision to disregard the interest of their insured?" The jury answered affirmatively, and Supreme Court entered an "excess" judgment against State Farm in the amount of $4,688,030--the amount of the jury verdict in the underlying personal injury action as modified by the Appellate Division, less $110,000 already paid by State Farm and Amerosa's insurer, plus interest and costs.

The Appellate Division affirmed, holding that the trial court properly charged the jury that, in order to find bad faith, State Farm must have acted in "gross disregard" of the Rosatos' interests, and properly rejected the standard urged by State Farm--that bad faith required "an extraordinary showing of a disingenuous or dishonest failure" to carry out the insurance contract (see, Gordon v. Nationwide Mut. Ins. Co., 30 N.Y.2d 427, 437, 334 N.Y.S.2d 601, 285 N.E.2d 849, cert. denied 410 U.S. 931, 93 S.Ct. 1374, 35 L.Ed.2d 593). The Court also rejected State Farm's contention that the evidence adduced at trial was insufficient as a matter of law to present a jury question on the "bad faith" issue, noting that State Farm "possessed the information necessary to accurately assess both the magnitude of Frank Pavia's injuries and the Rosatos' potential exposure well before the June 26, 1987 settlement offer was received" (Pavia v. State Farm Mut. Auto. Ins. Co., 183 A.D.2d 189, 199, 589 N.Y.S.2d 510). Despite our conclusion that the courts below properly applied the "gross disregard" standard, as a matter of law the finding of bad faith is not supported by this record.

II.

The notion that an insurer may be held liable for the breach of its duty of "good faith" in defending and settling claims over which it exercises exclusive control on behalf of its insured is an enduring principle, well settled in this State's jurisprudence (see, Gordon v. Nationwide Mut. Ins. Co., 30 N.Y.2d 427, 334 N.Y.S.2d 601, supra; Best Bldg. Co. v. Employers' Liab. Assur. Corp., 247 N.Y. 451, 453, 160 N.E. 911; Brassil v Maryland Cas. Co., 210 N.Y. 235, 241, 104 N.E. 622). The duty of "good faith" settlement is an implied obligation derived from the insurance contract (Gordon, supra, 30 N.Y.2d at 436-437, 334 N.Y.S.2d 601, 285 N.E.2d 849). Naturally, whenever an insurer is presented with a settlement offer within policy limits a conflict arises between, on the one hand, the insurer's interest in minimizing its payments and on the other hand, the insured's interest in avoiding liability beyond the policy limits (Brown v. United States Fid. & Guar. Co., 314 F.2d 675, 678 [2d Cir] [construing New York law]. By refusing to settle within the policy limits, an insurer risks being charged with bad faith on the premise that it has "advanced its own interests by compromising those of its insured" (Gordon, supra, 30 N.Y.2d at 446, 334 N.Y.S.2d 601 [Breitel, J., dissenting], or even those of an excess insurance carrier who "alone [may be] placed at further risk due to the defendant's intractable opposition to any settlement of the claim" (St. Paul Fire & Mar. Ins. Co. v. United States Fid. & Guar. Co., 43 N.Y.2d 977, 978, 404 N.Y.S.2d 552, 375 N.E.2d 733).

At the root of the "bad faith" doctrine is the fact that insurers typically exercise complete control over the settlement and defense of claims against their insureds, and, thus, under established agency principles may fairly be required to act in the insured's best interests (see generally, 7C Appleman, Insurance Law and Practice § 4711 [Berdal ed]. On the other hand, a countervailing policy consideration exists in the courts' understandable reluctance to expose insurance carriers to liability far beyond the bargained-for policy limits...