Smith v. General Acc. Ins. Co.

• Decision Date: 11 June 1998
• Citation: 697 N.E.2d 168,674 N.Y.S.2d 267,91 N.Y.2d 648
• Parties: , 697 N.E.2d 168, 1998 N.Y. Slip Op. 5923 David SMITH et al., Appellants, v. GENERAL ACCIDENT INSURANCE COMPANY, Respondent.
• Court: New York Court of Appeals Court of Appeals

Page 267

674 N.Y.S.2d 267

91 N.Y.2d 648, 697 N.E.2d 168, 1998

N.Y. Slip Op. 5923

David SMITH et al., Appellants, v. GENERAL ACCIDENT INSURANCE COMPANY, Respondent.

Court of Appeals of New York.

June 11, 1998.

Schapiro & Reich, Lindenhurst (Perry S. Reich, of counsel), for appellants.

Lieber & Lieber, New York City (Eugene H. Lieber, of counsel), for respondent.

OPINION OF THE COURT

WESLEY, Justice.

New York Pattern Jury Instruction 4:67 provides that, in determining whether an insurer has acted in bad faith in refusing to settle a claim on behalf of its insured, the jury may consider a number of factors, including "whether [the insurer] had informed [the insured] of the amount for which [the opposing party] was prepared to settle his claim and of course the negotiations with [the opposing party]." This case requires us to examine the propriety of this aspect of the PJI charge. We hold that, on the facts of this case, the trial court's charge was appropriate. We therefore reverse the order appealed from and reinstate the judgment in plaintiff's favor.

I.

David Smith was 14 years old when he was injured while attempting to cross a street outside a bagel shop near his Staten Island home. Smith's view of oncoming traffic was blocked by a delivery truck that was parked in front of the store. As Smith stepped into the street, he was struck by an oncoming automobile driven by Frank Primiani. Smith spent the next eight days in a coma, and suffered serious and permanent physical injuries. Smith sued both Primiani and Jay Brody, the driver of the delivery truck. Smith alleged that Brody was negligent in parking the truck with the rear of the vehicle extending into the street thereby blocking his view of oncoming traffic. The trial was bifurcated, and the jury returned a verdict in the liability phase finding Smith and Brody each 50% at fault. Defendant General Accident was Brody's insurer, with coverage of $500,000. At that stage, General Accident did not reach a settlement with Smith. On the damages phase of the trial, the jury returned a verdict of $1.1 million. Brody thereafter assigned any cause of action which he might have against General Accident to Smith, and plaintiffs commenced this action against the insurer for bad faith refusal to settle.

The gravamen of the bad faith claim is that, once the jury had returned its verdict finding Brody 50% liable, Smith's injuries were so extensive that it was highly likely that a jury would return a verdict in the damages phase of the trial in excess of the policy limits. After the jury returned its verdict in the liability phase of the trial, the most that the carrier ever offered to settle the claim was $300,000, although defendant's own senior claim representatives indicated in an internal memorandum that a jury could realistically return a verdict of $450,000. Plaintiffs produced evidence at the bad faith trial tending to show that the carrier had not undertaken diligent efforts to ascertain the extent of Smith's injuries, which included fractures of the nose, skull, rib and pelvis; a collapsed lung; injuries to the eye requiring later surgery; and a brain injury which caused an eight-day coma and permanent cognitive impairment. Brody also testified that the carrier did not keep him informed of its settlement negotiations with Smith, including an offer by Smith to settle for the policy limits, despite the fact that defendant's own claims manual instructed its representatives to keep an insured informed of settlement negotiations in cases where liability may exceed the policy limits.

The trial court instructed the jury that, in assessing the insurer's bad faith, it could consider a number of factors, including: the probability that the jury in the underlying action would find for Smith; the probability that a verdict in the underlying action would exceed the monetary limit of the insurance policy; whether General Accident had properly investigated the claim; the extent of General Accident's attempts to settle the claim; settlement recommendations made by General Accident's attorney; the relative financial risk of General Accident and Brody; and "whether [General Accident] had informed Jay Brody of the amount for which David Smith was prepared to settle his claim and of course the negotiations with David Smith."

The insurer objected to the last portion of the charge, arguing that it was inappropriate for the jury to consider whether General Accident had kept its insured informed of the settlement negotiations, because an insurer has no legal duty to do so. The trial court rejected this argument. The jury returned a verdict in favor of plaintiffs finding that General Accident had acted in bad faith. Defendant's motion to set aside the verdict was denied by the trial court.

The Appellate Division reversed the judgment and ordered a new trial, holding that "the charge incorrectly instructed the jury that the appellant had an obligation to advise its insured as to the progress of settlement negotiations" (244 A.D.2d ----, 664 N.Y.S.2d 605, citing Knobloch v. Royal Globe Ins. Co., 38 N.Y.2d 471, 479, 381 N.Y.S.2d 433, 344 N.E.2d 364). Plaintiffs have appealed to this Court as of right pursuant to CPLR 5601(c) upon stipulating to judgment absolute should the Appellate Division order be affirmed. We now reverse and reinstate the Supreme Court judgment in plaintiff's favor.

II.

It is well settled that an insurer may be held liable for damages to its insured for the bad faith refusal of a settlement offer (Soto v. State Farm Ins. Co., 83 N.Y.2d 718, 613 N.Y.S.2d 352, 635 N.E.2d 1222; Pavia v. State Farm Mut. Auto. Ins. Co., 82 N.Y.2d 445, 605 N.Y.S.2d 208, 626 N.E.2d 24). This stems from the general principle that a covenant of good faith and fair dealing is implied in all contracts, including insurance policies, as well as a recognition of the control an insurer maintains over claims against an insured (Pavia v. State Farm Mut. Auto. Ins. Co., supra; Gordon v. Nationwide Mut. Ins. Co., 30 N.Y.2d 427, 334 N.Y.S.2d 601, 285 N.E.2d 849). When confronted with a settlement offer within the policy limits, an inherent conflict arises between the insurer's desire to settle the claim for as little as possible, and the insured's desire to avoid personal...