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Brockstein v. Nationwide Mutual Ins. Co.

decided: October 20, 1969.


Appeal from judgment for defendant insurer. The United States District Court for the Eastern District of New York, John F. Dooling, Jr., J., found that defendant was not guilty of bad faith in refusing to settle action within policy limit. Remanded to trial court for further findings on whether defendant breached its duty to keep plaintiffs adequately informed of settlement negotiations, risk in going to trial, and opportunity to contribute to settlement.

Lumbard, Chief Judge, Smith and Feinberg, Circuit Judges.

Author: Feinberg

FEINBERG, Circuit Judge:

The sense of repose afforded by the knowledge that one is insured is sometimes shattered by the rude news that a policy does not fully cover a claim. What happens after that is a fertile source of litigation by insured against insurer. This is such a case, in which plaintiffs Nathan and Manuel Brockstein, doing business as Church Avenue Poultry, appeal from a judgment in favor of their insurer, defendant Nationwide Mutual Insurance Company, after a non-jury trial before John F. Dooling, Jr., J. in the United States District Court for the Eastern District of New York. Plaintiffs sued to recover $25,000, the amount they paid in excess of the policy limit to settle a judgment against them in a death action. For reasons given below, we remand the case to the district court.


The action arises out of an accident that occurred in March 1960, when Irving Bloom, an employee driving a truck owned by plaintiffs, fatally injured John F. Kiely in backing up. At that time, plaintiffs were insured by defendant Nationwide against liability for personal injuries or death resulting from use of the truck by plaintiffs or their employees. Maximum coverage for any one person was $50,000. According to the findings of the court below, Mr. Kiely died in the hospital eight days after the accident. Kiely was then 59, had an indicated life expectancy of 16.4 years, and was earning $7,000 per year. Shortly thereafter, the decedent's administratrix sued the Brocksteins and Bloom. The complaint had two causes of action: one, based on wrongful death, sought damages of $50,000 for the widow; the other, based on the deceased's pain and suffering, claimed $500,000.*fn1 Counsel for the administratrix was Harry H. Lipsig, an experienced and well-known trial lawyer. Settlement attempts, of which more later, were abortive; the case was tried in January 1963. The jury returned a verdict of $65,000 on the wrongful death claim and $30,000 on the pain and suffering action. Judgment, as finally entered, was for $106,413.33. This liability was discharged by payment to the administratrix of $83,847.81, of which defendant Nationwide paid $58,847.81 ($50,000 plus interest and costs) and the Brocksteins paid $25,000. Thereafter, in the action now before us, the Brocksteins sued Nationwide for the $25,000.

The theory of plaintiffs' action is that under New York law, which concededly governs, Nationwide did not properly represent their interest in its efforts to settle the case. The insurance policy provided that with respect to the relevant coverage, the insurer shall:

defend any suit against the Insured alleging such injury . . . and seeking damages on account thereof, even if such suit is groundless, false or fraudulent; but the Company may make such investigation, negotiation and settlement of any claim or suit as it deems expedient.

While this broad statement appears to give the insurer unlimited settlement discretion, such is not the case -- and for good reason. The policy confers upon the insurer the exclusive right to decide whether to settle or defend, but that decision may affect not only its own interest but also that of the insured. Since the insurer has that exclusive right, it must take responsibility for its exercise. While the insurer has an interest in paying out as little as possible on claims covered by its policies, the insured has an interest in not being exposed to a judgment beyond the policy limit. When these two interests conflict, the company has the unenviable duty of dealing fairly with them both. See Harris v. Standard Accident & Insurance 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, 7 L. Ed. 2d 847, 82 S. Ct. 875 (1962). Therefore, the insurer's power not to settle is actually more limited than the language of the policy indicates.

We have recently reviewed the applicable cases dealing with the insurer's obligation in settlement situations. In Brown v. United States Fidelity & Guaranty Co., 314 F.2d 675 (2d Cir. 1963), we concluded that a New York court would require at the very least that the insurer's decision whether to defend or settle must be made in good faith and that "in evaluating the propriety of a settlement" when the interest of the company and the insured may differ, the interest of the latter "must be given at least equal consideration." We there stated, 314 F.2d at 678, that the rule may be phrased 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." Keeton, Liability Insurance and Responsibility for Settlement, 67 Harv. L. Rev. 1136. "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).

Moreover, we quoted, 314 F.2d at 679, from the district court opinion in Harris, supra, to emphasize that an insurer's bad faith

is most readily inferable when the severity of the plaintiffs' injuries is such that any verdict against the insured is likely to be greatly in excess of the policy limits, and further when the facts in the case indicate that a defendant's verdict on the issue of liability is doubtful.

New York law was again assessed in Young v. American Casualty Co., 416 F.2d 906 (2d Cir. 1969), which was issued after Judge Dooling's decision in this case. Chief ...

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