The opinion of the court was delivered by: EUGENE H. NICKERSON
NICKERSON, District Judge:
This case concerns a dispute between Hartford Insurance Company ("Hartford"), a Connecticut corporation, and its insured, Methodist Hospital (the "Hospital"), with its principal place of business in New York, regarding payment in a malpractice action of a settlement exceeding the Hospital's insurance coverage. Hartford seeks a declaratory judgment that it is not liable for the excess and now moves for summary judgment. This court has jurisdiction because of diversity of citizenship. 28 U.S.C. § 1332.
On June 4, 1985 Maria D'Alessio, an infant, and her mother brought suit in the Supreme Court of the State of New York, Kings County, against the Hospital for negligently treating Maria and causing her severe neurological damage.
Shortly thereafter, the Hospital notified Hartford of the D'Alessio lawsuit. The Hospital had purchased from Hartford liability insurance policies providing coverage of up to $ 2,250,000 for any particular claim. Hartford assigned defense counsel to the lawsuit.
At a pre-trial conference, the D'Alessios' counsel made a settlement demand of $ 3.25 million, $ 1 million in excess of the coverage. Hartford did not respond to this demand.
The D'Alessio trial began on November 8, 1990. By the close of the D'Alessios' proof at trial, Hartford still had made no response to the settlement demand. The D'Alessios' attorney stated on the record that he thought Hartford's failure to offer the policy limits was in bad faith, but he did not say how his clients would respond to such an offer.
On November 27, the final day on which evidence was presented to the jury, Hartford made a settlement offer of $ 450,000. The D'Alessios rejected that offer. On November 29 Hartford increased its offer to $ 900,000. The D'Alessios made a counter "high-low offer" in which the D'Alessios would accept $ 2.25 million in the event of a verdict for the Hospital and a cap of $ 4.5 million in the event of a verdict for the D'Alessios.
On November 30 Hartford made its own "high-low offer" with a low of $ 500,000 and a high of $ 2.25 million. The D'Alessios rejected the offer and made a counter-offer with a low of $ 1.8 million and a high of $ 4 million. Hartford rejected the offer, its counsel explaining that Hartford could not "enter into any kind of an agreement which deals in money in excess of their policy limits."
Hartford never made an offer of the policy limits and the D'Alessios' attorney never stated that his clients would accept an offer within those limits.
Later that day the jury requested that the court reporter read back the testimony regarding future costs of custodial care, therapy and rehabilitation of the infant. The parties apparently inferred from this request that the jury had already decided that the Hospital was liable and was considering the issue of damages.
Hartford then offered the D'Alessios the limits of the insurance policies. They ...