Soto v. State Farm Ins. Co.
| Decision Date | 10 May 1994 |
| Parties | , 635 N.E.2d 1222 Ilde A. SOTO, Individually and as Administratrix of the Estate of Nelson Rivera, Deceased, et al., Appellants, v. STATE FARM INSURANCE COMPANY, Respondent. |
| Court | New York Court of Appeals Court of Appeals |
John Lloyd Egan & Associates, Buffalo (John Lloyd Egan, Jr., of counsel), for appellants.
Maghran, McCarthy & Flynn, Buffalo (W. Donn McCarthy and Kevin E. Ketchum, of counsel), for respondent.
Charles Platto, New York City, James Kimble, of the District of Columbia Bar, admitted pro hac vice, and Keith Hopkinson, Warrenville, IL, of the Illinois Bar, admitted pro hac vice, for American Ins. Ass'n and another, amici curiae.
Anderson Kill Olick & Oshinsky, P.C. (Eugene R. Anderson, Robert M. Horkovich and Michael J. Keane, of counsel), Robert P. Walton, New York City, and Martha Churchill, Chicago, IL, of the Illinois Bar, admitted pro hac vice, for New York University and another, amici curiae.
Defendant's insureds were adjudged liable to pay a total of $420,000 in compensatory damages and $450,000 in punitive damages in connection with a fatal automobile accident. The insureds' assignees, the actual injured parties, then commenced the present action against the defendant insurer, alleging that it should be held liable for the full amount of the judgment, which far exceeded the policy limits, because it acted in bad faith in refusing a pretrial settlement offer that was within the policy limits. The issue in this appeal is whether the insureds' assignees may recover the portion of the judgment that represents an award of punitive damages. We conclude that they cannot.
On May 21, 1988, Nelson Rivera and Angel Luis Echevarria were hit by a car and fatally injured while they were standing and conversing with some individuals who were sitting in another car. The vehicle that hit Rivera and Echevarria had been operated by Elisio Montanez, but was registered and insured in the name of Mary Casey, Montanez's live-in girlfriend.
The victims' administrators brought wrongful death and survival actions against Casey and Montanez. Although the administrators' counsel had allegedly expressed a willingness to settle the case before trial for the $50,000 per death insurance policy limit, defendant, Casey's insurer, never offered that sum in settlement. Instead, it decided to litigate the case on the theory that its insured had never consented to Montanez's use of the car. The result was a judgment far in excess of the limits of Casey's policy and an award against Montanez that included $450,000 in punitive damages.
In awarding damages to the plaintiffs, the jury apparently found that Montanez had been operating the vehicle with Casey's permission at the time the accident occurred. It also evidently credited the substantial proof that Montanez, who had no driver's license, was legally blind when not wearing eyeglasses and had been intoxicated at the time of the accident.
The plaintiffs were paid the full amount of the compensatory damage award. Defendant insurer, however, declined to pay any portion of the judgment that represented punitive damages.
Unable to collect the full amount of their judgment, the decedents' administrators subsequently took an assignment of Montanez's and Casey's rights against defendant insurer. They then commenced the present action against defendant, alleging that it had been guilty of bad faith in refusing to settle the Rivera-Echevarria action within the policy limits before trial despite the opportunity to do so. In support of their claim, plaintiffs alleged that defendant had recklessly disregarded the interests of its insureds and that its conduct had been particularly egregious in light of the overwhelming evidence against Montanez and the clear likelihood of a jury award in excess of the policy limits.
Defendant insurer responded by moving to dismiss plaintiffs' complaint for failure to state a claim for which relief could be granted. Inasmuch as the full amount of the compensatory damage award in the Rivera-Echevarria action had already been paid, the only remaining basis for monetary relief was the punitive damages award. Relying on the well-established New York policy against indemnification for punitive damages (see, Home Ins. Co. v. American Home Prods. Corp., 75 N.Y.2d 196, 551 N.Y.S.2d 481, 550 N.E.2d 930), defendant contended that plaintiffs' claim for reimbursement for the punitive damages award could not be maintained.
Both courts below adopted defendant's argument and dismissed the complaint. In ruling in defendant's favor, both courts stressed that since punitive damages are not insurable in this State, they could not have been within the contemplation of the parties when they made their insurance contract and therefore were not properly recoverable as a consequential damage for defendant's alleged breach of its obligation of good faith. Following the Appellate Division's affirmance of the order dismissing the complaint, this Court granted plaintiffs leave to take a further appeal. We now affirm.
It is well established that an insurer who refuses a settlement offer in bad faith may be held liable in damages to its insured (e.g., Gordon v. Nationwide Mut. Ins. Co., 30 N.Y.2d 427, 334 N.Y.S.2d 601, 285 N.E.2d 849; Best Bldg. Co. v. Employers' Liab. Assur. Corp., 247 N.Y. 451, 453, 160 N.E. 911). Indeed, we recently observed that an insurer which acts in " 'gross disregard' of [its] insured's interests * * * when considering a settlement offer" may be required to pay damages, provided the plaintiff can show that " 'the insured lost an actual opportunity to settle the * * * claim' * * * at a time when all serious doubts about the insured's liability were removed" (Pavia v. State Farm Mut. Auto. Ins. Co., 82 N.Y.2d 445, 453, 454, 605 N.Y.S.2d 208, 626 N.E.2d 24 [quoting United States Fid. & Guar. Co. v. Copfer, 48 N.Y.2d 871, 873, 424 N.Y.S.2d 356, 400 N.E.2d 298].
The damages recoverable in an action based on an insurer's bad-faith refusal to settle are generally measured by "the amount for which the insured becomes charged in excess of his policy coverage" (7C Appleman, Insurance Law and Practice § 4711, at 414 [Berdal ed.]; see, Gordon v. Nationwide Mut. Ins. Co., supra, 30 N.Y.2d at 436-437, 334 N.Y.S.2d 601, 285 N.E.2d 849; see generally, 14 Couch, Insurance 2d § 51:143 [rev ed]. An excess judgment is a class of harm that naturally and foreseeably flows from an insurer's failure to accept a pretrial settlement offer within the policy limits. Accordingly, when the harm has been caused by the insurer's breach of its obligation to perform in good faith, the insurer should be required to remedy that harm by paying the excess judgment (Gordon v. Nationwide Mut. Ins. Co., supra, 30 N.Y.2d...
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