Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

NEW ENGLAND INS. v. HEALTHCARE UNDERWRITERS MUT.

June 26, 2001

NEW ENGLAND INSURANCE CO., PLAINTIFF,
V.
HEALTHCARE UNDERWRITERS MUTUAL INSURANCE, DEFENDANT.



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

MEMORANDUM OF DECISION AND ORDER

In this case, a jury has found that a casualty carrier, insuring a hospital in a medical malpractice case, is liable for "bad faith" for refusing to settle a case in which the injuries in the underlying action were devastating, and would expose the carrier to substantial damages well in excess of its coverage, but where the liability against the hospital was sharply disputed. This case of original impression, presents the question of whether a bad faith claim in New York State requires the plaintiff to prove, as an element of the cause of action, that the insured's liability was clear — that is "all serious doubts about the insured's liability were removed" — at a time when an offer to settle within the policy limits was refused by the carrier. In addition, the Court also addresses the novel question of the proof required to show that an offer to settle within the policy limits was in fact made.

This case was tried before a jury from November 27, 2000 to December 20, 2000, at which time the jury returned a verdict in favor of the Plaintiff New England Insurance Co. ("New England"), for damages stipulated to be $1.1 million. Following the verdict, the Defendant, Healthcare Underwriters Mutual Insurance Co. ("Healthcare") moved for judgment as a matter of law under Fed.R.Civ.P. 50, contending that New England had failed to establish the required element of "clear liability." New England cross-moved for an award of pre-judgment interest. Oral argument on these motions was held on May 4, 2001.

BACKGROUND

In 1985, David Weinstock was born in Huntington Hospital with catastrophic birth defects, in that he was severely brain damaged. Weinstock's parents commenced a malpractice action ("the Weinstock action") in Supreme Court, Suffolk County, against, among other parties, Dr. Lawrence Horn, the obstetrician involved, and Huntington Hospital ("the Hospital"). Healthcare was the primary liability insurer of the Hospital, covering the first $1 million in claims, while New England provided excess insurance in the additional sum of $3 million. The Healthcare policy required that the Hospital consent to any settlement.

On or about February 23, 1991, prior to the trial of the Supreme Court action, the Weinstocks settled with Dr. Horn for the sum of $1.2 million, leaving the Hospital as the only defendant. Although there were settlement discussions between Healthcare and the Weinstocks, as discussed in more detail below, the parties were unable to resolve the case, in that Healthcare made no offer. On September 1, 1992, the jury in the Weinstock action returned a verdict against the Hospital, and awarded damages of $9.6 million, 25% of which were attributable to the Hospital, resulting in the sum of $2.4 million being apportioned to the Hospital. In post-verdict settlement discussions, the Weinstocks accepted $2.1 million in satisfaction of the verdict against the Hospital. Healthcare paid its full $1 million under its policy, and New England paid the remaining $1.1 million as required by the excess policy. New England then commenced this action against Healthcare, alleging that Healthcare had an opportunity to settle the case within its policy limits prior to and during the underlying trial and refused to do so; and that such a refusal rendered Healthcare liable under the doctrine of "bad faith."

The primary evidence on the issues presently before the Court was provided by Steven Pegalis, the Weinstocks' trial counsel in the latter part of the Supreme Court trial. Pegalis testified that in January 1991, when the Weinstocks were negotiating a settlement with Dr. Horn, their demand to settle to the Hospital was $500,000. By February 1991, after the Weinstocks had reached a settlement with Dr. Horn, leaving the Hospital as the only remaining defendant, their demand to the Hospital had risen to $1 million, although Pegalis testified that he would have "seriously considered" recommending to his client an offer as low as $850,000.

For the purposes of this opinion, the Court assumes that a reasonable jury could find, as a fact, that prior to and during the Weinstock trial to the conclusion of the plaintiffs' case, Healthcare could have settled the claim against the Hospital for $1 million or less, with the consent of the Hospital.

Following the close of proof in this trial, this Court initially informed the attorneys for the parties that, in accordance with the seminal case of Pavia v. State Farm Mutual Automobile Ins. Co., 82 N.Y.2d 445, 454, 605 N.Y.S.2d 208, 212, 626 N.E.2d 24 (1993), it intended to charge the jury that New England had the burden of proving that (i) Healthcare had an opportunity to settle the case within its policy limits; (ii) that the Hospital would have consented to the settlement; and (iii) that the Hospital's liability was "clear" at that time. New England's counsel objected to the Court's proposed instruction, and stated that the Pavia case also set. forth a multi-factor balancing test, which required the jury to consider, among other things, "the likelihood of success on the liability issue in the underlying action." Id., 82 N.Y.2d at 454-55, 605 N.Y.S.2d at 212, 626 N.E.2d 24. Upon further consideration, this Court reversed its earlier ruling, and instructed the jury to consider the probability of success on the merits, stating that "the third issue you must consider is whether the plaintiff New England proved that it was probable [. . .] that the jury would find a verdict in favor of the Weinstocks against the Huntington Hospital." The Court did not charge the jury that New England must prove that the liability against the Hospital in the underlying action had to be "clear" at the time that an offer was made by the Weinstocks to settle within the policy limits.

DISCUSSION

A court decides a motion for judgment as a matter of law under Fed. R.Civ.P. 50(a)(1) using the same standard that applies to motions for summary judgment. See Alfaro v. Wal-Mart Stores, Inc., 210 F.3d 111 (2d Cir. 2000). As stated recently by the United States Supreme Court in Reeves v. Sanderson Plumbing Products, 530 U.S. 133, 120 S.Ct. 2097, 147 L.Ed.2d 105 (2000),

Rule 50 requires a court to render judgment as a matter of law when a party has been fully heard on an issue and there is no legally sufficient evidentiary basis for a reasonable jury to find for that party on that issue . . . The standard granting summary judgment "mirrors" the standard for judgement as a matter of law, such that "the inquiry under each is the same . . ." It therefore follows that, in entertaining a motion for judgment as a matter of law, the court should review all of the evidence in the record. In doing so, however,, the court must draw all reasonable inferences in favor of the nonmoving party, and it may not make credibility determinations or weigh the evidence. "Credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge." Thus, although the court should review the record as a whole, it must disregard all evidence favorable to the moving party that the jury is not required to believe. That is, the court should give credence to the evidence favoring the nonmovant as well as that "evidence supporting the moving party that is uncontradicted and unimpeached, at least to the extent that that evidence comes from disinterested witnesses."

530 U.S. at 149-151, 120 S.Ct. at 2109-10 (citations omitted). Stated differently,

[O]n a motion for a judgment as a matter of law after a jury verdict, or on appeal after trial, the question is always whether, after "drawing all reasonable inferences in favor of the nonmoving party and making all credibility assessments in his favor, there is sufficient evidence to permit a rational juror to find in his favor." Sir Speedy, Inc. v. L & P Graphics Inc., 957 F.2d 1033, 1039 (2d Cir. 1992); see also Liberty Lobby, 477 U.S. at 252, 106 S.Ct. 2505, 91 L.Ed.2d 202 ("[T]he judge must ask . . . whether a fair-minded jury could return a verdict for the plaintiff on the evidence presented [,] . . . whether reasonable jurors could find by a preponderance of the evidence that the plaintiff is entitled to a verdict. . . ."); Hollander v. American Cyanamid Co., 172 F.3d 192, 200 (2d Cir. 1999) (standard to grant summary judgment is whether there is "sufficient evidence for a reasonable jury to conclude that [defendant] discriminated.")

McCarthy v. New York City Technical College, 202 F.3d 161 (2d Cir. 2000).

Under New York law, a primary insurer owes an excess insurer the same duty of good faith that it owes to its insured. Pavia, 82 N.Y.2d at 452, 605 N.Y.S.2d at 211, quoting St. Paul Fire & Marine Ins. Co. v. United States Fid. & Guar. Co., 43 N.Y.2d 977, 404 N.Y.S.2d 552, 375 N.E.2d 733 (1978); Hartford Accident & Indem. Co. v. Michigan Mutual Ins. Co., 93 A.D.2d 337, 462 N.Y.S.2d 175 (1st Dept. 1983), aff'd, 61 N.Y.2d 569, 475 N.Y.S.2d 267, 463 N.E.2d 608 (1984).

A. As to the requirement of the Plaintiff to prove "clear liability"

Turning to Healthcare's motion for judgment as a matter of law, the first crucial issue before the Court is whether, referring to the underlying action, "clear liability" is an indispensable element in a bad faith insurance claim under New York State law, or whether the proper standard is a multi-factor test weighing, among other things, "probability of success." These two concepts, while sounding similar at first blush, are entirely different, as will be seen later in this opinion.

The Court's starting point is, naturally, the leading decision of the New York Court of Appeals in Pavia:

It is settled that an insurer "cannot be compelled to concede liability and settle a questionable claim" (St. Paul, supra, 43 N.Y.2d at 978, 404 N.Y.S.2d 552, 375 N.E.2d 733) simply "because an opportunity to do so is presented" (Knobloch v. Royal Globe Ins. Co., 38 N.Y.2d 471, 479, 381 N.Y.S.2d 433, 344 N.E.2d 364). Rather, the plaintiff in a bad-faith action must show that "the insured lost an actual opportunity to settle the * * * claim" (Copfer, supra, 48 N.Y.2d at 873, 424 N.Y.S.2d 356, 400 N.E.2d 298) at a time when all serious doubts about the insured's liability were removed (St. Paul, supra, 43 N.Y.2d at 978, 404 N.Y.S.2d 552, 375 N.E.2d 733; DiBlasi, supra, 147 A.D.2d at 98-99, 542 N.Y.S.2d 187).
Bad faith is established only "where the liability is clear and the potential recovery far exceeds the insurance coverage" (DiBlasi, supra, 147 A.D.2d at 98, 542 N.Y.S.2d 187). However, it does not follow that whenever an injury is severe and the policy limits are significantly lower than a potential recovery the insurer is obliged to accept a settlement offer. The bad-faith equation must include consideration of all of the facts and circumstances relating to whether the insurer's investigatory efforts prevented it from making an informed evaluation of the risks of refusing settlement. In making this determination, courts must assess the plaintiff's likelihood of success on the liability issue in the underlying action, the potential magnitude of damages and the financial burden each party may be exposed to as a result of a refusal to settle. Additional considerations include the insurer's failure to properly investigate the claim and any potential defenses thereto, the information available to the insurer at the time the demand for settlement is made, and any other evidence which tends to establish or negate the insurer's bad faith in refusing to settle. The insured's fault in delaying or ceasing settlement negotiations by misrepresenting the facts also factors into the analysis (see, Lozier v. Auto Owners Ins. Co., 951 F.2d 251, 254 [9th Cir. 1991], supra; see also, 14 Couch, Insurance 2d § 51:137 [rev ed]).

82 N.Y.2d at 454-455, 605 N.Y.S.2d at 212, 626 N.E.2d 24 (emphasis added).

This language appears to be somewhat inconsistent. On the one hand, Pavia states that "bad faith only exists where liability is clear," which is defined as being "at a time when all serious doubts about the insured's liability were removed." On the other hand, the Pavia decision sets forth several factors to be considered, including "the likelihood of success on the liability issue." It is difficult to harmonize these two statements, because if liability is "clear" all serious doubts as to liability have been removed and there would be no need to evaluate the "likelihood" of success; in that event, success on the issue of liability would be assured. The statement in Pavia that "bad faith is established only where the liability is clear" has been further complicated by the widely varying construction given the quoted language by later court decisions.

Subsequent cases citing Pavia appear to present this language as setting forth a multi-factor test for generally analyzing the existence of bad faith. See e.g. Pinto v. Allstate Insurance Co., 221 F.3d 394, 399 (2d Cir. 2000) ("No pat formula applies to the wide variety of fact patterns that occur, or readily resolves whether an insurer acted in good faith . . . [a] number of factors must be evaluated. Among them are plaintiff's likelihood of success on the issue of liability . . .") (citation omitted); Vecchione v. Amica Mutual Ins. Co., 274 A.D.2d 576, 578, 711 N.Y.S.2d 186, 188-89 (2d Dept. 2000) ("Factors that enter into the bad faith equation include the likelihood of success on the liability issue in the underlying action . . .").

In a decision rendered five years after Pavia, the New York Court of Appeals itself apparently embraced the notion that Pavia's multi-factor test generally applies to the bad-faith analysis. Smith v. General Accident Insurance Co., 91 N.Y.2d 648, 674 N.Y.S.2d 267, 697 N.E.2d 168 (1998). In Smith, the Court, citing Pavia, held that likelihood of success on the underlying liability issue was "a factor which the jury is entitled to consider in a bad faith claim," 91 N.Y.2d at 653-54, 674 N.Y.S.2d at 270, 697 N.E.2d 168, and that it was among the "eight factors which the trial court correctly instructed the jury that it should consider in assessing the insurer's bad faith." 91 N.Y.2d at 655, 674 N.Y.S.2d at 271, 697 N.E.2d 168.

Although, arguably, Smith could be read as rejecting the "clear liability" language from Pavia and embracing the multi-factor test as the only method of assessing bad faith, subsequent decisions in New York State courts have not abandoned the "clear liability" language. Again, "clear liability" is defined in Pavia as "a time when all serious doubts about the insured's liability were resolved." For example, the Second Circuit in Pinto cites the "clear liability" factor as a separate element to be established by the plaintiff. 221 F.3d at 401 ("The final prerequisite for Pinto's bad faith claim is that Allstate lost an actual opportunity to settle at a time when there remained no serious doubt about the insured's liability."). See also Vecchione, supra. ("It must be shown that a demand for settlement was made and that the policyholder lost an actual opportunity to settle the claim at a time when all serious doubts as to liability were removed"); Redcross v. Aetna Casualty & Surety Co., 260 A.D.2d 908, 911, 688 N.Y.S.2d 817, 820 (3d Dept. 1999) ("In establishing had faith, the courts will consider the facts and circumstances surrounding the case including whether liability is clear . . .").

It is interesting to note that some four years prior to the Pavia decision, the Appellate Division, Second Department, also enunciated the "clear liability" requirement. In DiBlasi v. Aetna Life and Caus. Ins. Co., 147 A.D.2d 93, 542 N.Y.S.2d 187, 191 (2d Dept. 1989), the court held "A bad faith case is established where the liability is clear and the potential recovery far exceeds the insurance coverage. The carrier cannot be held liable if its decision not to settle was the result of an error of judgment on its part or even by a failure to exercise reasonable care."

Indeed, the Plaintiff's counsel seem to recognize the "clear liability" requirement in that the complaint in this action alleges that Healthcare breached its duty to New England in "failing and refusing to settle the action within the limits of its policy before verdict when liability became clear."

The continued invocation of the "clear liability" requirement following the Court of Appeals' decision in Smith might reflect a belief that reliance on the multi-factor test alone can yield inappropriate results. At its core, the multi-factor analysis from Pavia and Smith is a two element test, balancing "the likelihood of success on the liability issue" on the one hand, and "the potential magnitude of damages" on the other. Pavia, 82 N.Y.2d at 455, 605 N.Y.S.2d at 212, 626 N.E.2d 24. In cases where the plaintiff is severely injured, the "potential magnitude of damages" could quickly escalate to such a level that it would easily outweigh situations in which the defendant's liability is disputed or even questionable. In short, abrogating the "clear liability" test would expose insurance carriers to bad-faith liability for taking high-exposure cases to trial, even though the case was "defensible," in that liability was highly disputed or even questionable. In this Court's view, such a scenario was what the Court of Appeals in Pavia sought to avoid when it expressly rejected the notion that "whenever an injury is severe and the policy limits are significantly lower than a potential recovery[,] the insurer is obliged to accept a settlement offer." 82 N.Y.2d at 454, 605 N.Y.S.2d at 212, 626 N.E.2d 24.

Instead, the Second Circuit's approach in Pinto best harmonizes the two competing provisions into a workable and practical framework. The Pinto decision requires the factfinder to first determine whether the carrier acted in bad faith by weighing the numerous factors cited in Pavia, and reasserted in Smith. For example, the court in Pinto found that on the one hand, the carrier had conducted a thorough investigation and made an informed evaluation of the plaintiff's settlement demand. 221 F.3d at 400. On the other hand, it also found that the carrier had conceded liability, had received warnings from its attorney that a damage award would likely exceed the policy limits, and had an indication during jury deliberations that the jury was prepared to issue a large award. Id. Under these circumstances, the Second Circuit found that the jury appropriately resolved the multifactor bad faith test against the carrier. Id. at 400-01.

However, the court in Pinto went on to state that the "final prerequisite for Pinto's bad faith claim is that Allstate lost an actual opportunity to settle at a time when there remained no serious doubt about the insured's liability." Id. at 401. This incorporates the element of "clear liability" at the point in which settlement within the policy limits is actually possible. It is important to note that in Pinto. there was conceded liability. While the multi-factor bad faith analysis examines the totality of the carrier's acts in light of the likelihood of success and possible damage exposure. the "clear liability" element examines only the question of whether settlement was possible at the point in time when all of the carrier's good-faith defenses to liability were exhausted. See e.g. Pavia, 82 N.Y.2d at 454, 605 N.Y.S.2d at 212, 626 N.E.2d 24 ("insurance carriers are not compelled to concede liability and settle a questionable claim"); Federal Ins. Co. v. Liberty Mut. Ins. Co., 2001 WL 333009 (S.D.N.Y. 2001) ("the potential for a large plaintiff's verdict does not render an insurer's settlement posture unreasonable so long as the insurer's course was informed by a defensible rationale.")

Imposing the burden of establishing "clear liability" on a plaintiff alleging bad-faith is not only supported by the language of the Pavia case and its progeny, but also by the lack of any reported cases in which courts have upheld bad-faith verdicts in favor of the insured in cases with less than clear liability. Since the Pavia decision, only the Pinto and Smith cases appear to have resulted in affirmances of jury verdicts for an insured, and both of these cases involved pre-established clear or perfect liability on the part of the insured. By contrast, virtually all of the other reported bad-faith cases involve judgments as a matter of law in favor of the carrier. See e.g. Vecchione v. Amica Mut. Ins. Co., 274 A.D.2d 576, 577, 711 N.Y.S.2d 186, 187 (2d Dept. 2000) (reversing jury verdict in favor of insured); Daus v. Lumbermen's Mut. Cas. Co., 241 A.D.2d 665, 659 N.Y.S.2d 584, 585 (3d Dept. 1997) (granting summary judgment to carrier); Federal Ins. Co. v. Liberty Mut. Ins. Co., 2001 WL 333009 (S.D.N.Y. 2001) (summary judgment granted to carrier); Redcross v. Aetna Casualty & Surety Co., 260 A.D.2d 908, 913, 688 N.Y.S.2d 817, 821 (3d Dept. 1999) (granting summary judgment to carrier on bad-faith refusal to ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.