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March 30, 2001


The opinion of the court was delivered by: Pauley, District Judge.



The following facts are not disputed. In 1988, two-year-old Joel Garcia fell six floors from an apartment window when the spring-tension window guard gave way. (Def.'s 56.1 Stmt. ¶ 4.) As a consequence of the fall, he suffered a fractured skull. (Def.'s 56. 1 Stmt. ¶ 11.) On January 8, 1990, he and his mother Mercedes Garcia (collectively, the "Garcias") filed a negligence action in New York State Supreme Court against their landlord Thayer Realty Company and its principals Florence and Michael Edelstein (collectively "Thayer") for $1,500,000 in damages.*fn1 (Def.'s 56.1 Stmt. ¶¶ 2-3, 5.)

Thayer held a $1 million primary insurance policy with Liberty and $5 million excess coverage with Federal. (Def.'s 56.1 Stmt. ¶¶ 9, 10.) After reviewing the claim, Liberty authorized settlement during the pendency of the litigation on an incremental schedule as follows:

(Aff. of Arthur McNamee, dated Apr. 27, 2000, ("McNamee Aff.") ¶ 19.) The parties conducted discovery for more than two years before broaching settlement. (See (Affidavit of Marshall Potashner ("Potashner Aff.") Ex. D ("Claim File"): Remark 50.) On April 10, 1992, the Garcias' counsel made a settlement demand exceeding $1 million. (Claim File: Remark 59.) Deeming that demand "outrageous," Liberty deferred making a counteroffer until it reviewed Garcia's physical examination report. (McNamee Aff. ¶ 28; Claim File: Remark No. 62.) More than four months later, on August 25, 1992, Liberty received that report. (McNamee Aff. ¶ 29.)

The physical examination report concluded that Joel Garcia had sustained significant cerebral trauma. While he had not exhibited any developmental problems before the accident, the report revealed that he now lagged behind other first graders in cognitive development, struggled with basic reading and writing, and could not calculate simple arithmetic "such as 2 2." (Claim File: Remark No. 65.) More than one year later, Liberty attempted to initiate settlement discussions with the Garcias' attorney but those overtures were rejected. (McNamee Aff. ¶ 32; Claim File: Remark Nos. 83-87, 96). On December 3, 1993, the Garcias' attorney filed a note of issue placing the action on the state court's trial calendar. In May 1994, the Garcias' attorney again declined to discuss settlement and instead advised Liberty that he preferred to let the case develop. (Claim File: Remark 96.)

Despite the filing of a note of issue, discovery apparently continued, and the prospect of avoiding liability became bleaker for Liberty. On October 20, 1997, Liberty was advised by its counsel that New York City Board of Health Code Regulation 131.15 ("Regulation 131.15") imposed on Thayer a duty to install screw-in window guards in any apartment where the landlord had ascertained that children under ten years of age resided. (See Affirmation of Thomas E. Mehrtens ("Mehrtens Aff.") Ex. 3: Palermo Letter at 2.) Thayer's building superintendent testified at deposition that he knew the window guard in the Garcias' apartment did not meet Regulation 131.15's standards. That concession undermined Thayer's affirmative defense that the landlord had acted reasonably. (Mehrtens Aff. Ex. 3: Palermo Letter at 1.)

On January 19, 1998, Liberty made its first counteroffer to the Garcias in an amount worth $175,000.*fn2 (Def.'s Rule 56.1 Stmt. ¶ 34.) Two days later the Garcias responded with a new settlement proposal of $1.2 million. (Def.'s 56.1 Stmt. ¶¶ 3536.) In February 1998, Charles Stark ("Stark"), Liberty's in-house counsel, recommended that Liberty offer a settlement in the range of $250,000. (Def.'s Rule 56.1 Stmt. ¶¶ 39-40.) On March 2, 1998, Liberty contacted Federal to advise that the Garcias' $1.2 million demand stated a $200,000 excess claim. (Def.'s Rule 56.1 Stmt, ¶ 40.)

By memorandum dated March 13, 1998, Arthur McNamee, a Liberty insurance claims specialist, valued the Garcias' case at $1,024,500 and concluded that a jury would likely attribute fifty percent of the liability to Mercedes Garcia.*fn3 Consequently, McNamee recommended a settlement offer of $512,250. (Potashner Aff. Ex. G: Pricing Memo.) On April 23, 1998, Liberty increased its settlement offer to the Garcias' counsel to $199,358. (Potashner Aff. Ex. H: Structured Settlement dated Dec. 15, 1998.) However, the Garcias did not budge from their $1.2 million demand. (McNamee Aff. ¶ 52.) On May 19, 1998, Liberty forwarded a copy of its claim file to Federal. (Def.'s Rule 56.1 Stmt. ¶ 54-55.) On August 5, 1998, Stark concluded that Liberty faced "virtual strict liability" given Thayer's admitted awareness of Joel Garcia. (Mehrtens Aff. Ex. 4: Stark Letter at 1.) Stark acknowledged that in Liberty's worst case scenario, it faced a potential seven-figure damages award. (Mehrtens's Aff. Ex. 5: Stark Deposition at 16, 21.)

Jury selection began on November 2, 1998. By that time, Liberty had authorized a settlement cap of $750,000. (Def.'s Rule 56.1 Stmt. ¶ 65.) On November 4, 1998, Liberty tendered a $300,000 settlement offer to Garcias' counsel who responded by reiterating plaintiffs' $1.2 million demand. (Def.'s Rule 56.1 Stmt. ¶ 67.) On November 18, the second day of trial, Liberty increased its offer to $400,000, only to be rebuffed again by the Garcias' counsel. (Def.'s Rule 56.1 Stmt. ¶ 73.) At an impromptu November 25, 1998 settlement conference, the trial judge suggested that Liberty offer $700,000; however, the Garcias' counsel refused to lower plaintiffs' $1.2 million demand. (Def.'s Rule 56.1 Stmt. ¶¶ 76-77.) While the jury was deliberating, Liberty increased its settlement offer to $600,000. (Def.'s Rule 56.1 Stmt. ¶¶ 73, 75.) Before the Garcias responded, the jury returned a plaintiffs' verdict in the amount of $2,548,350. (Def.'s Rule 56.1 Stmt. ¶¶ 76, 86.) After trial, Federal and the Garcias agreed to settle for $2.3 million. Liberty paid $1 million plus $37,500 in interest, and Federal paid the remaining $1,262,500. This action followed.


I. Summary Judgment Standard

Rule 56(c) of the Federal Rules of Civil Procedure provides that summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 2509-10, 91 L.Ed.2d 202 (1986). The burden of demonstrating the absence of any genuine dispute as to a material fact rests with the moving party. See, e.g., Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 1608, 26 L.Ed.2d 142 (1970); Grady v. Affiliated Cent., Inc., 130 F.3d 553, 559 (2d Cir. 1997). In evaluating the record to determine whether there is a genuine issue as to any material fact, "[t]he evidence of the nonmovant is to be believed, and all justifiable inferences are to be drawn in his favor." Liberty Lobby, 477 U.S. at 255, 106 S.Ct. at 2513. If the moving party meets its initial burden, the non-moving party must then come forward ...

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