Young v. American Casualty Company of Reading, Pa.

• Decision Date: 15 September 1969
• Docket Number: Docket 33197.,No. 540,540
• Citation: 416 F.2d 906
• Parties: Harold YOUNG, as Trustee in Bankruptcy of Robert S. Quigley, Bankrupt, and William S. Brown, as Trustee in Bankruptcy of Billy B. Walker, Bankrupt, and Robert S. Quigley and Billy B. Walker, Co-Partners, formerly doing business under the firm name and trade style of York Laundromat, Plaintiffs-Appellees, v. AMERICAN CASUALTY COMPANY OF READING, PENNSYLVANIA, Defendant-Appellant.
• Court: U.S. Court of Appeals — Second Circuit

416 F.2d 906 (1969)

Harold YOUNG, as Trustee in Bankruptcy of Robert S. Quigley, Bankrupt, and William S. Brown, as Trustee in Bankruptcy of Billy B. Walker, Bankrupt, and Robert S. Quigley and Billy B. Walker, Co-Partners, formerly doing business under the firm name and trade style of York Laundromat, Plaintiffs-Appellees, v. AMERICAN CASUALTY COMPANY OF READING, PENNSYLVANIA, Defendant-Appellant.

No. 540, Docket 33197.

United States Court of Appeals Second Circuit.

Argued April 22, 1969.

Decided September 15, 1969.

Certiorari Dismissed January 12, 1970.

COPYRIGHT MATERIAL OMITTED

Herman Cahn, New York City (Cahn & Ryp, New York City, on the brief), for plaintiffs-appellees.

Robert E. Curran, New York City (Kevin D. Moloney, New York City, on the brief), for defendant-appellant.

Before LUMBARD, Chief Judge and ANDERSON, Circuit Judge and WYATT, District Judge.^*

Certiorari Dismissed January 12, 1970. See 90 S.Ct. 580.

LUMBARD, Chief Judge:

Plaintiffs, Trustees in Bankruptcy of Robert S. Quigley and Billy B. Walker, brought this diversity action to recover damages for defendant's refusal, allegedly in bad faith, to settle within the limits of a $20,000 liability insurance policy issued by defendant, American Casualty Company, a personal injury action brought against Quigley and Walker in their capacity as owners of the York Laundromat. After trial before a jury American was found liable and damages of $70,330.25 were awarded.¹ American appeals on the grounds that it could not be found to have refused in bad faith to settle within the limits of the policy and that, assuming liability, plaintiffs' damages could not have exceeded $7,278.61, the total amount which was paid by the plaintiffs to the personal injury claimant prior to their discharge in bankruptcy.

There was substantial evidence from which the jury could have concluded that American acted in bad faith in failing to settle within the policy limits by not entering into settlement negotiations, and by not informing the insureds of the possibility of settlement. Since the insureds were not insolvent before the excess judgment was rendered and since they paid a part thereof from the proceeds of the sale of their laundromat prior to their filing voluntary bankruptcy petitions, the fact that they have been personally discharged from future liability on this judgment does not inure to the benefit of American.

In 1960 American issued a liability insurance policy to the York Laundromat providing coverage of $20,000 for each person injured, and a maximum of $40,000 for each accident. The policy contained the standard provision that American would defend any suit against the insured seeking damages for bodily injury. On September 30, 1960, Margaret Flynn, while a customer in the laundromat, located at 1505 York Avenue in Manhattan, slipped and fell on a wet floor, sustaining severe injuries. Miss Flynn commenced an action against the laundromat and its owners in the New York Supreme Court, alleging negligence arising out of the slippery condition of the laundromat floor. On September 24, 1962, a judgment of $90,330.25 was entered in favor of Miss Flynn. American paid $20,000, the amount of the coverage and an excess judgment of $70,330.25 was entered against Quigley and Walker.²

Prior to the entry of the Flynn judgment both Quigley and Walker were solvent. In addition to income from their absentee ownership of the York Laundromat each engaged in full time outside employment. Subsequent to entry of judgment against them Quigley and Walker liquidated their holdings in the York Laundromat and applied the proceeds, approximately $7,200, to the Flynn judgment. Since a combined indebtedness of over $63,000 remained, and their assets were substantially less than that amount, Quigley and Walker, on May 12, 1967, filed voluntary petitions in bankruptcy in the Southern and Eastern Districts of New York, respectively. Only one debt was scheduled in each of the petitions, and that was the amount owed to Miss Flynn on account of the excess judgment. Although both were discharged the bankruptcy proceedings apparently remain open pending the outcome of this damage action against American.

In October, 1968, the instant action was tried before Judge MacMahon and a jury. Plaintiffs' proof was that after notifying American of the Flynn accident Quigley and Walker received a notice from American advising them that they had the right to have their own attorney sit in on the case with Mr. Ahmuty, American's attorney, since the amount claimed exceeded the policy coverage. Walker testified that he spoke to Ahmuty about this letter and that Ahmuty referred to it as a form letter. Walker allegedly was told that it was not absolutely necessary for him and Quigley to retain independent counsel and that, if they did, counsel's role would be that of an observer. Both Quigley and Walker testified that they were never interviewed by anyone on behalf of American prior to the Flynn trial, that employees of the laundromat who might have been witnesses to the accident were not sought out by American, and that the laundromat's business and repair records were not reviewed. The subject of settlement was never mentioned by American to Quigley and Walker, nor were they asked if they would be willing to contribute to a possible settlement.³ A memorandum written by Mr. Ahmuty to an individual in American's claims department stated that Miss Flynn's counsel had made a demand of $40,000 but that Ahmuty had made no offer in response thereto. Through the expert testimony of an attorney plaintiffs sought to establish that, in the factual context presented by the Flynn action, an insurance company would make a serious effort to settle this case by responding to a demand of $40,000 through disclosure of the lesser amount of coverage and the substantial questions surrounding their alleged liability.

Mr. Ahmuty testified for American concerning the serious doubts he entertained prior to trial on the potential liability to Miss Flynn.⁴ Ahmuty denied Walker's contention that he had represented to Walker that it was not necessary to get independent counsel. In answer to questions by the court, Ahmuty testified that in response to the $40,000 demand of Flynn's counsel he made no counter offer.⁵

Judge MacMahon charged the jury that in determining whether American had acted in bad faith in failing to settle the case it should consider:

"Did they try to settle within the policy limits? Did they make any effort at all to do so? If they did not, why didn\'t they? They are under an obligation to act here as though they were fully liable for whatever judgment might be rendered against the plaintiff or against Quigley and Walker. In other words, they have to act as though only their own money was on the line here, that they were the only ones at risk of financial loss. It is that kind of a judgment that they must make, an honest judgment as though all the loss were going to come out of their own pocket."

I. Liability

Under New York law, which concededly governs here in this diversity action, it is well settled that the insurance company is under a duty to negotiate a settlement in good faith and that the interests of the insured must be given "at least equal consideration in evaluation the propriety of a settlement." Brown v. United States Fidelity & Guaranty Co., 314 F.2d 675, at 678 (2 Cir. 1963). Where, because of the likelihood that an excess verdict will be returned, the greater financial risk of the litigation rests on the insured, a finding of bad faith on the part of the insurer may be based on such factors as these:

(1) The failure of the insurer to investigate properly the circumstances of the accident.

(2) The refusal of the insurer to accept a settlement within the limits of the policy.

(3) The failure of the insurer to inform the insured of a compromise offer.

(4) The failure of the insurer to attempt to induce contribution by the insured.⁶

In this instance there existed a likelihood that an excess verdict would be returned, and thus insureds were subjected to the greater financial risk of litigation. The jury could have concluded that American failed to investigate the accident properly, failed to inform the insureds of Flynn's demand, and failed to attempt to induce the insureds to contribute to any proposed settlement. The evidence also supported the view that had American responded to Flynn's demand for $40,000 a settlement within the $20,000 limit of the policy might have been reached, or, that had the insureds been fully advised a settlement could have been made with some small contribution from them.

We recognize that, in the usual case, to establish bad faith by the insurer an insured should demonstrate that the claim could have been settled within the policy limits, or, if only a settlement in excess of the coverage could have been achieved, that the insured was willing and able to provide the excess amount. But we believe that under New York law, where an insured reasonably relies upon its insurer to conduct settlement negotiations, and such insurer neither attempts to secure a modification of the initial settlement demand nor communicates that demand to its insured, the jury may find that the insurer did not act in good faith.

Where an insurer receives an offer of settlement in excess of the coverage of its policy it acts in bad faith if it fails to make any attempt to engage the injured plaintiff's counsel in discussions seeking a reduction in the initial settlement demand and if it fails to inform its insured of the opportunity to settle. The initial demand of plaintiff's counsel often will be as far removed from the actual figure acceptable in settlement as the ad damnum in the complaint is removed from the initial settlement demand, especially in a personal injury action. It is a matter of common knowledge that it is a rare case where exploration of the possibilities of...