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.)
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 ...