Before LUMBARD, Chief Judge, and KAUFMAN and HAYS, Circuit Judges.
Plaintiffs in the court below appeal from an order dismissing their complaint at the close of the entire case.
One of the plaintiffs, Mrs. Marion J. Brown, is holder of an automobile liability policy issued by the defendant, United States Fidelity and Guaranty Company. The co-plaintiff, her son, was driving the insured's car when it collided with a taxicab, causing serious injuries to four individuals - the driver of the taxicab, two of his passengers, and a companion of young Brown who was seated next to him in Mrs. Brown's automobile.
The coverage of the insurance policy was $10,000 for each person injured and $20,000 total for each accident. The policy contained the usual terms providing that the company has the duty to defend personal injury actions against the assured and that the investigation, negotiation and settlement of any claim or suit is to be under the exclusive control of the company. The defendant settled the claim of David Borowiak, Brown's car companion, for $6,000, and the claim of Morris Ruby, the driver of the taxicab, for $8,000. With only $6,000 remaining unexpended under the insurance policy, the two passengers in the taxicab, Miss Joan O'Dwyer and Anthony E. Sacco, commenced an action in the New York state courts against the plaintiffs herein and secured judgments of $25,000 and $20,000 respectively. The instant action was commenced against the insurance company seeking recovery in the amount of $39,000, the difference between the plaintiffs' personal liability resulting from the O'Dwyer-Sacco suit and the remaining coverage under the policy. It is alleged as a basis for the claim that the company conducted settlement negotiations in bad faith, abandoning the interests of the assured, and that such bad faith resulted in liability in excess of the limits provided in the policy.
In order that the facts leading up to this action may be viewed in the proper perspective, it is necessary to summarize the legal principles which govern suits resting upon the purported misconduct of an insurance company in the settlement and defense of claims against its policy holders.
Correlative to the company's duty to defend and its control over settlement negotiations, pursuant to its policy of insurance, is an obligation to the assured. The scope of that obligation has rarely been defined with precision. Some states have adopted an objective standard, under which the insurance company must accept a settlement offer or conduct the assured's defense in a manner befitting an "ordinarily prudent insurer" with experience in such matters. Other states have adopted a more lenient standard of obligation to the assured, a subjective standard, under which the company may not be held liable for an honest mistake in judgment, even if unreasonable; it is liable only for an intentional disregard of the assured's financial interests. Much ink has been spilled in an effort to define and to distinguish the rule of negligence from the rule of bad faith. For some of the more helpful discussions, see 7A Appleman, Insurance Law and Practice §§ 4711-13 (1962); Keeton, "Liability Insurance and Responsibility for Settlement." 67 Harv.L.Rev. 1136 (1954); Note, 43 Iowa L.Rev. 588 (1958); Note, 62 Harv.L.Rev. 104 (1948); Note, 34 Colum.L.Rev. 511 (1934); Annot., 40 A.L.R.2d 168 (1955). Perhaps the one conclusion upon which almost all authorities agree is that the distinction between negligence and bad faith in these insurance-settlement cases is more difficult to trace than most legal distinctions.*fn1
But there is sufficient difference between the two standards of obligation so that the more recent and better reasoned cases have opted rather clearly for the "settlement in good faith" standard. See, e.g., Bell v. Commercial Ins. Co., 280 F.2d 514 (3d Cir., 1960); Tennessee Farmers Mut. Ins. Co. v. Wood, 277 F.2d 21 (6th Cir., 1960); Comunale v. Traders & Gen. Ins. Co., 50 Cal.2d 654, 328 P.2d 198, 68 A.L.R.2d 883 (1958); Brown v. Guarantee Ins. Co., 155 Cal. App.2d 679, 319 P.2d 69, 66 A.L.R.2d 1202 (Dist.Ct.App.1957); Henke v. Iowa Home Mut. Cas. Co., 250 Iowa 1123, 97 N.W.2d 168 (1959); Radcliffe v. Franklin Nat'l Ins. Co., 208 Or. 1, 298 P.2d 1002 (1956). The New York law, which governs here, is indefinite in many respects. Many of the early cases contained language strongly indicating that the company's power over settlement amounted to a discretion well-nigh unlimited, and that the assured was without remedy for even reckless refusals (short of positive fraud) to settle leading ultimately to personal liability well beyond the limits of the insurance policy.*fn2 From other New York cases, one could draw the conclusion that the goodfaith settlement standard prevailed,*fn3 and the New York Court of Appeals spoke out clearly on behalf of that standard in 1928, in Best Bldg. Co. v. Employers' Liability Assur. Corp., 247 N.Y. 451, 160 N.E. 911, 71 A.L.R. 1464, expressly distinguishing it from the negligence standard.*fn4
Despite the absence of a clear, recent pronouncement on the subject, we are convinced that the good-faith settlement standard controls in New York in cases of an assured's personal liability resulting from the insurer's failure to settle within policy limits. The opinion of the highest state tribunal in the Best Bldg. Co. case comports with the modern trend of the law, and has been cited with approval in several subsequent decisions which have adopted the goodfaith standard.*fn5 The source and nature of the standard has been succinctly stated in a recent case:
"Since the company * * * has the power, through the control of settlement, to adversely affect the insured's interests, it must necessarily bear a legal responsibili y for the proper exercise of that power. Thus, the law imposes upon the insurer the obligation of good faith - basically, the duty to consider, in good faith, the insured's interests as well as its own when making decisions as to settlement."
Harris v. Standard Acc. & Ins. Co., 191 F.Supp. 538, 540 (S.D.N.Y.), rev'd on other grounds, 297 F.2d 627 (2d Cir., 1961), cert. denied, 369 U.S. 843, 82 S. Ct. 875, 7 L. Ed. 2d 847 (1962). See Hilker v. Western Auto. Ins. Co., 204 Wis. 1, 235 N.W. 413 (1931).
How much consideration should be given to the assured when the company is confronted with a conflict between its interests and those of the assured has been the subject of some contention. The sharpest conflict is between cases which hold that the insurance company must sacrifice its interest to that of the assured, and those which hold merely that the company need only give equal consideration to its financial interest and that of the assured. See Keeton, 67 Harv.L.Rev. at 1144-45. It is unrealistic to assume, however, that the New York courts today would adhere to the position apparently espoused in the early cases, that the company is not bound to consult the interests of the insured at all in the event of a conflict. It is most likely that those courts, in implementing the good-faith settlement standard, would conclude that the interests of the assured must be given at least equal consideration in evaluating the propriety of a settlement. Professor Keeton has paraphrased the rule as follows: "With respect to the decision whether to settle or try the case, the insurance company must in good faith view the situation as it would if there were no policy limit applicable to the claim." 67 Harv.L.Rev. at 1148. "[The] fairest method of balancing the interests is for the insurer to treat the claim as if it were alone liable for the entire amount." Bell v. Commercial Ins. Co., 280 F.2d 514, 515 (3d Cir., 1960).*fn6
Thus, for purposes of illustration, we might assume that an insurance company issues a liability policy with a limit of $20,000, that an action is brought against the assured for $45,000, and that the claimant has offered to compromise its claim for $15,000. We might further assume that the assured's responsibility for the collision is hardly in doubt, and that the claimant's injuries are very serious. Had the policy limit been $50,000, that is, had the damages claimed in the action as well as the compromise offer both fallen within the policy limits, making the company fully responsible, then it might be reasonable to find that the company acted recklessly if it failed to accept the compromise offer. The degree of recklessness might be even greater if, for example, the company failed to investigate the precise nature of the collision and the relative degree of fault of the parties involved. Recklessness in such circumstances is tantamount to bad faith when we assume that the policy limit is only $20,000 and that the assured is personally responsible for any excess liability. In such a case, the risk to the company in going to trial is $5,000; the risk to the assured is $25,000. For the company to take the risk under the facts as posited may well be viewed as "the intentional disregard ...