Pinto v. Allstate Ins. Co., Docket No. 98-9356

Decision Date01 August 1998
Docket NumberDocket No. 98-9356
Citation221 F.3d 394
Parties(2nd Cir. 2000) CARMELLA M. PINTO, Plaintiff-Appellant, v. ALLSTATE INSURANCE COMPANY, Defendant-Appellee
CourtU.S. Court of Appeals — Second Circuit

PHILIP RUSSOTTI, New York, New York (William P. Hepner, Wingate, Russotti & Shapiro, New York, New York, of counsel), for Plaintiff-Appellant.

EVAN H. KRINICK, Uniondale, New York (Cheryl F. Korman, Rivkin, Radler & Kremer, Uniondale, New York; Howard J. Newman, Saretsky Katz Dranoff & Glass, L.L.P., New York, New York, of counsel), for Defendant-Appellee.

Before: CARDAMONE, JACOBS, and STRAUB, Circuit Judges.

Judge JACOBS dissents in a separate opinion.

CARDAMONE, Circuit Judge:

We confront on this appeal whether an insurance company acted in good faith when it refused to settle a negligence claim against its insured. Because of the company's refusal, judgment was entered against the insured for the amount by which the plaintiff's award exceeded the policy limits. Although an insurance company has a contractual obligation to defend its insured, it also has a contractually defined limit of exposure to plaintiff's suit. An insurer has an economic incentive not to settle, hoping a jury will bring in a verdict for less than the policy limits. But when such hope goes awry, as it did here, the insured is the loser, being personally responsible for the excess. These conflicting interests between the insurer and the insured cause them to rub against each other like unmoored rowboats on a placid pond.

To resolve the conflict, New York implies a duty of good faith in insurance policies requiring the company - when it decides whether to settle a claim - to give the same consideration to its insured's interests as it does its own. Good faith as defined in New York law is an intangible quality, but certainly includes the absence of a design to seek an unconscionable advantage. Generally speaking, good faith imposes a duty on the company to act in accordance with standards of honesty, and in a manner faithful to its obligations.

BACKGROUND

Plaintiff Carmella M. Pinto, then a 29-year old employee of Shearson, Lehman & Hutton in Manhattan, was seriously injured in an automobile accident in the early afternoon of November 5, 1988 when her vehicle was struck head-on by another vehicle driven by Reginald Bell, an insured of defendant Allstate Insurance Company (Allstate). Because Bell was driving the wrong way down a one-way street, Allstate conceded liability in the negligence action plaintiff brought against Bell in New York State Supreme Court, Richmond County.

Bell's policy insured him for up to $100,000 for bodily injury he negligently caused. Pinto claimed damages in the sum of $1 million. Under the terms of Bell's policy, Allstate was obligated to assume his defense. Because liability was conceded only the issue of damages was contested. Pinto offered to settle her claim for Bell's policy limit of $100,000, but Allstate would only make a pretrial settlement offer of $30,000.

A. State Court Damages Trial

The damages issue went to trial in state court in November, 1991. Pinto presented proof that she suffered a bulging disk that impinged on a nerve in her neck. She testified that she wore a cervical collar for six months after the accident and underwent physical therapy to relieve the pain in her neck and arm and tingling in her fingers.

Pinto had been an avid athlete. In high school she captained the girls' varsity basketball team, and she continued to play basketball after high school. She bowled and participated in organized softball, and was a star player on a championship softball team in 1981. In the summer of 1988 she played on another championship softball team and took up golf as well. Pinto told the jury these activities occupied all of her time outside work. Her trial testimony included an extensive description of her pre-accident athletic pursuits and her declaration that as a result of her injuries she could no longer engage in any sports. This came about, as she explained, because she still experienced pain and tingling, as well as difficulty moving her neck, at the time of the trial three years after the accident.

Although Allstate had independent doctors review the plaintiff's medical records and test results, it did not depose Pinto prior to trial. Dennis Hannafey, Esq., the defense counsel who represented Bell on behalf of Allstate, later expressed surprise at the extent of Pinto's athletic achievements revealed by her testimony. Three physicians testified on Pinto's behalf. Their testimony described the disc bulge and apparent nerve damage Pinto had suffered, as well as her extensive physical therapy since the accident.

Allstate called a single witness, a doctor who had examined Pinto once in preparation for litigation. Allstate's doctor testified that he found Pinto's neurological symptoms normal. On cross-examination, this doctor did not dispute Pinto's test results nor that plaintiff could have suffered nerve damage that he did not detect.

B. Settlement Negotiations During the State Trial

During the course of the trial Pinto's attorney made several settlement offers to Allstate for various amounts within the policy range, usually for the full policy amount of $100,000. Allstate rejected each offer and stubbornly stuck to its $30,000 offer to settle Pinto's claim. Yet as the trial progressed it became apparent that a large verdict was in the offing. After the three physicians had testified for Pinto, defense counsel told Allstate claims manager Diana Scheid that in his opinion the policy would be lost. But defense counsel did not then or at any later time in the proceedings advise Allstate whether it should or should not settle. After Allstate's doctor testified, Pinto again indicated her willingness to settle for the policy limit. At that time, defense counsel told Allstate senior claims manager Steven Bove that he expected a verdict in excess of the policy. But Allstate did not increase its settlement offer at this point either.

The trial court charged the jury that to sustain a damages award it needed to find either that Pinto had suffered the permanent loss of a body organ, member, function, or system, or alternatively that she had incurred a significant limitation of the use of an organ, member, function, or system. The court instructed the jury that it must have a 5-1 vote in order to return a verdict. During deliberations, the jury asked if it could adjust the amount demanded by the plaintiff. Defense counsel advised Allstate that this question should be viewed as "extremely negative" and that Allstate should be prepared for a "very large verdict." Allstate still made no move to settle.

The jury then returned its first verdict. It found that Pinto had suffered a "significant limitation," one of the alternative findings required to support a damages award, and awarded her $210,000 for this serious injury. The verdict also found that Pinto did not suffer a "permanent loss." But when the court polled the jurors on the latter question, it discovered that the jury had voted 4-2 for a finding that Pinto had sustained a "permanent loss." The jury explained that it found against Pinto on this question because it did not reach the 5-1 majority required for a verdict in her favor. The judge explained that a 5-1 vote was required on any answer to have a verdict, and sent the jury back for further deliberations. Defense counsel reported to Allstate that he felt Pinto was going to "pierce the threshold" and that he expected the judgment would be in "excess of the policy limits." Allstate claims manager Bove later stated that he was sure Pinto would have accepted the $100,000 policy limit at this point. Again, Allstate made no offer to settle.

The jury then returned a second verdict. It found that Pinto had suffered both a "permanent loss" and a "significant limitation" and awarded her damages of $350,000. A poll of the jury revealed a 5-1 majority on both questions. As noted, of the $350,000 awarded only $100,000 was covered by Bell's insurance policy with Allstate. The court denied defendant's motion to set the verdict aside as excessive. The next day, Allstate offered $100,000 to settle, which Pinto rejected. On appeal the damages award was reduced to $331,200. Allstate paid Pinto the $100,000 limit of Bell's policy, leaving Bell liable to Pinto for the excess.

C. Plaintiff Sues Allstate in Federal Court for Bad Faith

On March 17, 1995 Bell and Pinto executed an agreement by which Bell, in consideration of a general release from Pinto discharging Bell's liability to her, assigned to Pinto his right to proceed against Allstate for the excess damages due to its alleged bad faith in the settlement negotiations. Pinto then sued Allstate in a diversity suit in the United States District Court for the Eastern District of New York (Glasser, J.) for violating its implied covenant of good faith by recklessly rejecting her settlement demands. The district court determined that although there was evidence of poor judgment on Allstate's part, there was insufficient evidence to allow a reasonable finder of fact to find that Allstate's conduct amounted to bad faith under the standards set out in Pavia v. State Farm Mutual Automobile Insurance Co., 82 NY2d 445, 452-55 (1993). See Pinto v. Allstate Ins. Co., No. 95-CV-2807, 1998 WL 760269, at *2-*5 (E.D.N.Y. Sept. 10, 1998). Because the trial court further found no material issues of fact regarding Allstate's good faith, it granted Allstate's motion for summary judgment. Pinto appeals. We reverse.

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