United States District Court, S.D. New York
February 19, 2004.
GAIL GREENIDGE and GEARY GREENIDGE, Plaintiffs, -against- ALLSTATE INSURANCE COMPANY, Defendant
The opinion of the court was delivered by: JAMES FRANCIS, Magistrate Judge
The question in this case is a novel one: does an insurer act in bad
faith when it rejects a demand that would make its contribution to a
settlement contingent upon the outcome of a subsequent declaratory
judgment action in which the limits of liability under the relevant
policy would be established? Although no case has decided this precise
issue under New York law, the convergence of several well-established
principles lead to the conclusion that an insurer can refuse such a
demand without violating its good faith obligation to the insured.
The plaintiffs in this action, Gail Greenidge and Geary Greenidge, own
a three family home at 1883 Billingsly Terrace in the Bronx. In 1995, Ray
Teachey brought an action on behalf of his daughter, Taniya Seay, against
the Greenidges in New York State Supreme Court, Bronx, County. Seay v.
Delano Village, Index No. 6012/95 (the Seay Action"). The Complaint
alleged that Taniya suffered lead poisoning from exposure to lead paint
while she resided with her mother and grandmother in the Greenidges'
from October 1992 to April 1994. (Seay Complaint, attached as Exh. 1 to
Notice of Motion by Plaintiff for Summary Judgment ("P1. Notice of
Motion"), ¶¶ 34, 41). The plaintiffs in the Seay Action also brought
claims against the owners and managing agents of the apartment where
Taniya's father lived, since she had often stayed with him during the
same period. (Seay Complaint ¶¶ 4-18, 24-25).
The Greenidges were insured pursuant to a homeowners' policy issued by
the Allstate Insurance Company ("Allstate"), the defendant in this
action. The insurance consisted of a Standard Form policy issued on
Allstate policy form AU2074. (Defendant's Statement of Uncontested Facts
Pursuant to Local Civil Rule 56.1 ("Def. Rule 56.1 Statement"), Exh. F
(the insurance Policy")). That policy had been in effect continuously
since 1988, and its effective date was February 13 of each year.
(Deposition of Gail Greenidge dated June 20, 2003 ("Greenidge Dep."),
attached as Exh. A to Def. Rule 56.1 Statement, at 26; Declaration Pages,
attached as Exh. E to Def. Rule 56.1 Statement). Since Taniya's exposure
to lead paint allegedly spanned two policy periods, it was arguable
that, for purposes of the policy limits, not one, but two, policies were
triggered. The Insurance Policy provided up to $300,000 in
indemnification for claims of bodily injury, defined as "physical harm to
the body, including sickness or disease, and resulting death. . . ."
(Insurance Policy at 3, 31; Declaration Pages. The relevant language of
the Insurance Policy stated:
Subject to the terms, limitations and conditions
of this policy, Allstate will pay damages which an
insured person becomes legally obligated to pay
because of bodily injury . . . arising from an
accident and covered by this part
of the policy.
* * *
We are not obligated to pay any claim or judgment
after we have exhausted our limit of liability.
(Insurance Policy at 21). In addition, the Insurance Policy contained an
Regardless of the number of insured persons, injured
persons, claims, claimants or policies involved, our
total liability under the Family Liability Protection
coverage for damages resulting from one accidental
loss will not exceed the limits shown on the
Declarations Page. All bodily injury and property
damage resulting from one accidental loss or from
continuous or repeated exposure to the same general
conditions is considered the result of one accidental
(Insurance Policy at 27).
When the Greenidges notified Allstate of the Seay Action, Allstate
responded by assigning the firm of Minetti and Benedict to defend them.
(Geary Dep. at 12-13). Allstate further advised that the plaintiffs in
the Seay Action were claiming damages beyond the policy limits, that the
Greenidges could be personally liable for the excess, and that the
Greenidges were entitled to retain separate counsel at their own
expense, in addition to counsel appointed by the insurer. (Letter dated
Feb. 22, 1995, attached as Exh. B to Def. Rule 56.1 Statement).
Beginning in 1998, Theresa Sturges, a senior claim representative for
Allstate, was responsible for handling the claim against the Greenidges.
(Deposition of Theresa Sturges dated June 30, 2003 ("Sturges Dep."),
attached as Exh. D to Def. Rule 56.1 Statement, at 4-5). In February
1998, counsel appointed by Allstate to defend the Greenidges advised Ms.
Sturges that the case
would soon be assigned for trial. (Sturges Dep. at 16). They further
reported that counsel for the plaintiffs in the Seay Action, Sanders,
Sanders, Block & Woycik, had made a settlement demand: $700,000, of
which $300,000 was to be paid by Allstate on behalf of the Greenidges,
and $400,000 was to come from the co-defendants. (Sturges Dep. at 13,
16-17). Apparently no further progress was made toward settlement at that
On August 20, 1999, Ms. Sturges learned that a trial date had been set
and that the plaintiffs' demand was still $700,000. (Sturges Dep. at 17,
19). On October 5, 1999, counsel conferred in New York State Supreme
Court, and the presiding justice sought a settlement offer from Allstate
on behalf of the Greenidges. (Sturges Dep. at 23). Ms. Sturges advised
counsel that they had authority to offer $300,000. (Sturges Dep. at 23).
This offer was conveyed to counsel for the plaintiffs, and further
negotiations were adjourned. (Sturges Dep. at 23).
On October 14, 1999, Ms. Sturges was advised that counsel for the
plaintiffs would not discuss settlement unless Allstate agreed that the
policy limit was $600,000: $300,000 for each of two policy periods.
(Sturges Dep. at 23-24). In the alternative, plaintiffs' counsel proposed
a settlement between $300,000 and $600,000, with $300,000 to be paid
immediately and the balance contingent upon the outcome of a declaratory
judgment action that Allstate would agree to litigate to resolve the
issue of whether the policy limits for one policy period or two applied.
(Sturges Dep. at 23-24). On behalf of Allstate, Ms. Sturges rejected this
demand. (Sturges Dep. at 24). At the same time, she referred the question
of the relationship between the policy limit and the anti-stacking
provision in the policy to three sets of outside counsel for their
review. (Sturges Dep. at 25).
Shortly thereafter, the co-defendants settled for $150,000. (Claim
Diary, attached as Exh. G to Def. Rule 56.1 Statement, at 33). In a
letter dated October 21, 1999, counsel for the plaintiffs stated that
unless Allstate tendered $600,000, there would be no settlement and a bad
faith action would be commenced by the plaintiffs against Allstate. (Def.
Rule 56.1 Statement, Exh. H). Ms. Sturges forwarded this letter to the
attorneys who were in the process of reviewing Allstate's interpretation
of the policy.
Over the following week, Allstate received opinions from outside
counsel. Dennis O'Connor of the firm of 0'Connor, McGuinness, Conte,
Doyle & Oleson submitted a letter on October 25, 1999, suggesting
that there was no proof that Taniya had been exposed to lead paint during
the first policy period and that, therefore, only the second policy had
been triggered. Mr. O'Connor did not, however, address the anti-stacking
provisions of the policies. (Def. Rule 56.1 Statement, Exh. I).
On October 29, 1999, Alan C. Eagle, a partner with the firm of Rivkin,
Radler & Kremer, submitted an opinion letter that explicitly dealt
with the anti-stacking language. Mr. Eagle acknowledged that "[o]ur
research has not revealed any cases applying the Allstate limits of
liability provision to a claim involving successive policy periods."
(Def. Rule 56.1 Statement,
Exh. J at 4). However, Mr. Eagle reviewed closely related caselaw
There is New York authority applying a
"non-cumulation" clause to restrict an insurer's
liability to one limit of liability under successive
policies. While the insureds could argue that the
"non-cumulation" clause more specifically addresses
the question of stacking policies from multiple policy
periods than the Allstate language and that Allstate
could have employed such a clause if it deemed
appropriate, Allstate could argue that the Allstate
provision has the same effect.
(Def. Rule 56.1 Statement, Exh. J at 5). He ultimately reached the
In the absence of decisions directly on point, we look
to analogous cases and resort to interpretation of the
plain language of the limits of liability provision
contained in the Allstate insurance policy. While we
must anticipate that plaintiff and/or the insureds may
raise a number of arguments that the limits of
liability clause does not prevent the "stacking" of
limits, thereby making any result less than certain,
we conclude that there may be a better than 50% chance
that a court would interpret the Allstate policy to
provide that only one limit is available for the claim
and the policy limits may not be "stacked."
(Def. Rule 56.1 Statement, Exh. J at 7).
In an opinion letter dated November 2, 1999, Gregory S. Katz of the
firm of Wilson, Elser, Moskowitz, Edelman & Dicker LLP also reviewed
the anti-stacking provisions. Mr. Katz analyzed the policies as follows:
In essence, we would read Allstate's policy provision
to limit a claimant who suffered bodily injury as the
result of a continuous exposure to lead paint to be
entitled to the proceeds of a single policy. The
policy states that "regardless of the number of . . .
policies involved" the "total liability . . . for
damages resulting from one accidental loss will not
exceed the [policy limits]." The policy then defines
injuries caused by continuous exposure, such as
exposure to lead paint, as "one accidental loss." By
extension, coverage for one accidental loss is limited
to a single policy,
notwithstanding that the lead poisoning injury
may continue into a second policy period.
(Def. Rule 56.1 Statement, Exh. K at 4). Mr. Katz also reviewed cases
that counsel for the plaintiffs had cited and found them distinguishable
because, although they held that successive policies might be triggered
by injury resulting from continuous exposure to a toxic agent, none of
those cases dealt with anti-stacking provisions. (Def. Rule 56.1
Statement, Exh. K at 5). Accordingly, Mr. Katz concluded that "[i]t is
our opinion that the policy provision clearly states that only one policy
will apply when a child is injured as a result from continuous or
repeated exposure to the same general conditions." (Def. Rule 56.1
Statement, Exh. K at 2).
Meanwhile, trial of the Seay Action had begun on October 25, 1999
before Justice Janice Bowman. At the end of the trial day on November 3,
Martin Block, counsel for the plaintiffs, placed on the record his intent
to initiate a bad faith proceeding if Allstate did not agree to settle on
the basis of the policy limits as would be determined in a subsequent
declaratory judgment action. (Def. Rule 56.1 Statement, Exh. M at
314-15). Counsel for the Greenidges noted that Allstate had offered
$300,000 and indicated that he would transmit the bad faith statement to
the insurer. (Def. Rule 56.1 Statement, Exh. M at 315-16). Justice Bowman
commented, "[m]y concern is suppose there's judgment for a million
dollars." (Def. Rule 56.1 Statement, Exh. M at 316). Mr. Block responded
that if Allstate agreed to the declaratory judgment action, the plaintiff
would not seek to recover anything over the $600,000 from the
Greenidges. (Def. Rule 56.1 Statement, Exh. M at 316).
The following day, Hugh Campbell appeared as personal counsel for the
Greenidges and urged Allstate to negotiate in good faith, while
recognizing that it was within the insurer's discretion to settle within
the policy limits. (Def. Rule 56.1 Statement, Exh. M at 385-87). That
night, Mr. Campbell sent a letter to Ms. Sturges repeating the
plaintiffs' offer to settle on a contingent basis and strongly urging
Allstate to consider that proposal. (Def. Rule 56.1 Statement, Exh. N).
The next day, Ms. Sturges responded:
The full limit of our policy coverage was offered
in settlement of this case, prior to the onset of
trial. It is the position of the plaintiff that a
second policy exists. This is where we disagree. A
full disclosure was made in a timely fashion of
all applicable policies, including a signed excess
affidavit by your client/our insured. It has been
and always will be a prerogative of the plaintiff
to pursue a declaratory judgment in this issue. No
agreement on our part is necessary.
(Def. Rule 56.1 Statement, Exh. O). She also sent a letter to plaintiffs'
counsel reiterating that Allstate's offer of $300,000 was still
available. (Def. Rule 56.1 Statement, Exh. P). No settlement was
On November 5, 1999, the jury returned a verdict in favor of Taniya
Seay in the amount of $2,000,000, and on July 7, 2000, judgment was
entered against the Greenidges for $1,643,000.00. The Greenidges
appealed, and the judgment was affirmed on March 5, 2002. Seay v.
Greenidge, 292 A.D.2d 173, 738 N.Y.S.2d 199 (1st Dep't 2002).
Thereafter, the Greenidges instituted the instant bad faith
action in New York State Supreme Court, Bronx County, and Allstate
removed it to this Court based on diversity jurisdiction. The parties
then consented to proceed before me for all purposes pursuant to
28 U.S.C. § 636(c). Following completion of discovery, Allstate moved
for summary judgment pursuant to Rule 56 of the Federal Rules of Civil
Procedure, and the Greenidges opposed Allstate's motion and cross-moved
for summary judgment in their favor.
A. Summary Judgment Standard
Pursuant to Rule 56 of the Federal Rules of Civil Procedure, summary
judgment is appropriate where "the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, if
any, show that 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 Andy Warhol Foundation for the Visual Arts,
Inc. v. Federal Insurance Co., 189 F.3d 208, 214 (2d Cir. 1999); Tomka v.
Seiler Corp., 66 F.3d 1295, 1304 (2d Cir. 1995). The moving party bears
the initial burden of demonstrating "the absence of a genuine issue of
material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Where
the moving party meets that burden, the opposing party must come forward
with "specific facts showing that there is a genuine issue for trial,"
Fed.R.Civ.P. 56(e), by "a showing sufficient to establish the existence
of [every] element essential to that party's case, and on which that
party will bear the burden of proof
at trial." Celotex, 477 U.S. at 322.
In assessing the record to determine whether there is a genuine issue
of material fact, the court must resolve all ambiguities and draw all
factual inferences in favor of the nonmoving party. Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 255 (1986); Vann v. City of New York,
72 F.3d 1040, 1048-49 (2d Cir. 1995). But the court must inquire whether
"there is sufficient evidence favoring the nonmoving party for a jury to
return a verdict for that party," Anderson, 477 U.S. at 249 (citation
omitted), and grant summary judgment where the nonmovant's evidence is
conclusory, speculative, or not significantly probative. Id. at 249-50.
"The litigant opposing summary judgment may not rest upon mere conclusory
allegations or denials, but must bring forward some affirmative
indication that his version of relevant events is not fanciful." Podell
v. Citicorp Diners Club, Inc., 112 F.3d 98, 101 (2d Cir. 1997) (internal
quotations and citations omitted); see also Matsushita Electric Industrial
Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986) (a nonmoving party
"must do more than simply show that there is some metaphysical doubt as
to the material facts"); Goenaga v. March of Dimes Birth Defects
Foundation, 51 F.3d 14, 18 (2d Cir. 1995) (nonmovant "may not rely simply
on conclusory statements or on contentions that the affidavits supporting
the motion are not credible"). In sum, if the court determines that "the
record taken as a whole could not lead a rational trier of fact to find
for the non-moving party, there is no `genuine issue for trial.'"
Matsushita, 475 U.S. at 587 (quoting First National Bank of Arizona v.
Cities Service Co., 391 U.S. 253, 288 (1968)).
The Greenidges have raised a threshold question: they contend that
Allstate is barred from arguing that only a single policy limit applies
because it failed to issue a timely disclaimer with respect to the second
policy. This argument is itself untimely, and, even if it were not, it is
Under the Federal Rules of Civil Procedure, the purpose of a complaint
is to provide the defendant with notice of the claims asserted against
it. "[A]t the very least, plaintiff must set forth facts that will allow
each party to tailor its discovery to prepare an appropriate defense."
Beckman v. United States Postal Service, 79 F. Supp.2d 394, 407
(S.D.N.Y. 2000). In this case, the Greenidges' Complaint grounds their
bad faith claim exclusively on Allstate's refusal to offer $600,000 in
settlement of the Seay Action, or at least to agree to pay that amount
contingent upon the outcome of a declaratory judgment action. Nowhere
does the Complaint suggest that their claim is in any way predicated on
Allstate's failure to disclaim. To be sure, counsel for the plaintiffs in
the Seay Action argued in his bad faith letter dated October 21, 1999,
that Allstate had not made a timely disclaimer. (Def. Rule 56.1
Statement, Exh. H at 4). But that aspect of the letter was never
referenced in the pleadings in this action.
A party cannot assert a cause of action for the first time in
response to a summary judgment motion. Because a claim so raised deprives
the adversary of the opportunity for discovery and presumptively creates
prejudice, it must be disregarded. See Khan v. Abercrombie & Fitch.
Inc., No. 01 Civ. 6163, 2003 WL 22149527, at *10 (S.D.N.Y. Sept. 17,
003); Porter v. New York University School of Law, No. 99 Civ. 4693, 2003
WL 22004841, at *12 (S.D.N.Y. Aug. 25, 2003); Beckman, 79 F. Supp.2d at
407-08; Bonnie & Co. Fashions. Inc. v. Bankers Trust Co., 170 F.R.D.
Ill, 119 (S.D.N.Y. 1997). Accordingly, the Greenidges may not now rely on
Allstate's failure to disclaim.
In any event, the contention that Allstate was obligated to disclaim
fails on the merits. The Greenidges' argument is derived from New York
Insurance Law § 3420(d) which provides:
If under a liability policy delivered or issued for
delivery in this state, an insurer shall disclaim
liability or deny coverage for death or bodily injury
arising out of a motor vehicle accident or any other
type of accident occurring within this state, it shall
give written notice as soon as is reasonably possible
of such disclaimer of liability or denial of coverage
to the insured and the injured person or any other
However, in the first instance, Allstate does not appear to be
"disclaiming" coverage at all. It acknowledges that Taniya Seay may have
been exposed over two policy periods and that each policy was triggered.
Allstate's position, at least at this point in time, is that even if the
injury is covered by multiple policies, only a single limitation of
liability applies pursuant to the anti-stacking
This distinguishes the instant case from Reliance Insurance Cos. v.
Daly, 67 Misc.2d 23, 322 N.Y.S.2d 881 (Sup.Ct. Nassau Co.1971), aff'd as
modified, 38 A.D.2d 715, 329 N.Y.S.2d 504 (2d Dep't 1972). In Reliance,
the automobile policy at issue provided liability insurance of up to
$300,000 for injury to one victim or $500,000 for multiple victims. 38
A.D.2d at 715-16, 329 N.Y.S.2d at 505. After the insured was involved in
an accident in which a passenger was killed, the insurer discovered that
the insured had fraudulently obtained the policy, and the insurer
therefore sought to reduce the policy limits to the legally mandated
minimums of $10,000 and $20,000. Id. at 716, 329 N.Y.S.2d at 505-06. The
trial court held that under these circumstances, the insurer was
effectively denying coverage and was obligated to issue a timely
disclaimer under the processor statute to Insurance Law § 3420(d) The
While "Coverage" as used in the policy refers to the
nature of the risk insured against and is distinct
from the "Limits of Liability," the extent of an
insurer's liability is a function of both. Since
plaintiff does not deny bodily injury liability, it
can properly argue that it has not denied coverage,
but in disclaiming any obligation to pay more than
$10,000 it is in a very real sense ($290,000 worth)
disclaiming liability. Put another way, the statute
does not require the disclaimer of All liability; an
insurer which disclaims any part of the liability for
which it contracted comes within the statute and must
give the required notice.
Reliance. 67 Misc.2d at 25, 311 N.Y.2d at 884 (citations omitted).
The instant case differs in the critical respect that Allstate never
sought to rescind or reform the policies at issue; it simply advanced its
interpretation of the limits of liability. Under those circumstances, it
was not required to disclaim.
Moreover, even if an insurer's narrow reading of its liability limits
could be considered a "disclaimer," Allstate had no obligation to
Disclaimer pursuant to section 3420(d) is unnecessary
when a claim falls outside the scope of the policy's
coverage portion. Under those circumstances, the
insurance policy does not contemplate coverage in the
first instance, and requiring payment of a claim upon
failure to timely disclaim would create coverage where
it never existed. By contrast, disclaimer pursuant to
section 3420(d) is necessary when denial of coverage
is based on a policy exclusion without which the claim
would be covered.
Worcester Insurance Co. v. Bettenhauser, 95 N.Y.2d 185
712 N.Y.S.2d 433
, 435 (2000). See also Crespo v. City of New York,
303 A.D.2d 166
, 167, 756 N.Y.S.2d 183
, 185 (1st Dep't 2003); Iafallo v.
Nationwide Mutual Fire Insurance Co., 299 A.D.2d 925
750 N.Y.S.2d 386
, 388 (4th Dep't 2002).
As the New York Court of Appeals has observed, "drawing the line
between a lack of coverage in the first instance (requiring no
disclaimer) and a lack of coverage based on an exclusion (requiring
timely disclaimer) has at times proved problematic." Bettenhauser, 95
N.Y.2d at 189, 712 N.Y.S.2d at 435. This case, however, clearly falls on
the side of the line where no disclaimer is required. That is because
[w]here . . . an insurer has paid the full monetary
limits set forth in the policy, its duties under the
contract of insurance cease. The defendant's tardiness
in issuing its denial of claim could not thereafter
create a new policy or additional coverage in excess
of the amount contracted for.
Presbyterian Hospital in the City of New York v. Liberty Mutual Insurance
Co., 216 A.D.2d 448, 448, 628 N.Y.S.2d 396, 397 (2d Dep't 1995)
(citations omitted); see also Presbyterian Hospital in the City of New
York v. General Accident Insurance Co. of America, 229 A.D.2d 479, 480,
645 N.Y.S.2d 516, 517 (2d Dep't 1996). As will be discussed below,
Allstate did, indeed, offer in settlement the full limits of its
policies. And, as demonstrated by Waskiewicz v. New York Central Mutual
Fire Insurance Co., 252 A.D.2d 944, 675 N.Y.S.2d 733 (4th Dep't 1998),
the fact that determining the applicable limits required looking beyond
the limitation of liability section is of no moment. In Waskiewicz the
court held that where a policy's limits were exhausted after application
of an offset provision, no disclaimer was required. Id., 675 N.Y.S.2d at
734. Similarly, in this case where Allstate's policy limits were
exhausted after application of the anti-stacking provision, no disclaimer
Therefore, Allstate's failure to issue a timely disclaimer, even if
properly raised at this point, does not preclude it from defending this
bad faith action.
C. Bad Faith
It is well settled under New York law that an insurer may be held
liable for the breach of its duty of good faith in defending and settling
claims against its insured. See New England Insurance
Co. v. Healthcare Underwriters Mutual Insurance Co., 295 F.3d 232, 240-41
(2d Cir. 2002); Pavia v. State Farm Mutual Automobile Insurance Co.,
82 N.Y.2d 445, 452, 605 N.Y.S.2d 208, 210 (1993.). "[W]herever an insurer
is presented with a settlement offer within policy limits a conflict
arises between, on the one hand, the insurer's interest in minimizing its
payments and on the other hand, the insured's interest in avoiding
liability beyond the policy limits." Pavia, 82 N.Y.2d at 452, 605
N.Y.S.2d at 211. Accordingly, "[b]y refusing to settle within the policy
limits, an insurer risks being charged with bad faith on the premise that
it has advanced its own interests by compromising those of its insured
[.]" Id., 605 N.Y.S.2d at 211 (internal quotation marks and citation
omitted). To prevail, then, an insured must show "more than ordinary
negligence and less than a showing of dishonest motives" on the part of
the insurer. Id. at 454, 605 N.Y.S.2d at 212. The insured "must establish
that the insurer's conduct constituted a `gross disregard' of the
insured's interests that is, a deliberate or reckless failure to place
on equal footing the interests of its insured with its own interests when
considering a settlement offer." Id. at 453, 605 N.Y.S.2d at 211.
Bad faith, however, is not a free-floating concept to be invoked
whenever the insurer fails to maximize the interests of the insured.
Rather, "[t]he duty of `good faith' settlement is an implied obligation
derived from the insurance contract." Id. at 452, 605 N.Y.S.2d at 211.
See also Gordon v. Nationwide Mutual Insurance Co., 30 N.Y.2d 427, 437,
344 N.Y.S.2d 601, 609 (1972)
("bad faith requires an extraordinary showing of a disingenuous or
dishonest failure to carry out a contract"). Thus, bad faith cannot be
imputed to an insurer who declines to perform an act that does not arise
from the policy itself. See Combustion Engineering, Inc. v. Imetal,
235 F. Supp.2d 265, 270 (S.D.N.Y. 2002); cf. Granite Partners. L.P. v.
Bear, Stearns & Co., 17 F. Supp.2d 275, 306 (S.D.N.Y. 1998) (general
contract principle that implied duty of good faith "cannot be used to
create independent obligations beyond those agreed upon and stated in the
express language of the contract"); Warner Theatre Associates L.P. v.
Metropolitan Life Insurance Co., No. 97 Civ. 4914, 1997 WL 685334, at *6
(S.D.N.Y. Nov. 4, 1997) (same).
In conducting settlement negotiations on behalf of an insured, an
insurer engages in two different analyses, each of which is subject to
the test of good faith. First, the insurer must evaluate the insured's
exposure as tortfeasor: the probability that the insured will be found
liable and the likely magnitude of a damage award. See Pavia, 82 N.Y.2d
at 454, 605 N.Y.S.2d at 212. Second, the insurer also has to evaluate
coverage issues, since the failure to offer to settle a claim based on a
wrongful disclaimer could constitute bad faith. Cf. Gordon, 30 N.Y.2d at
437, 334 N.Y.S.2d at 609 (insurer found not to have acted in bad faith
when it withdrew from defense of insured on erroneous but not
unreasonable belief that policy had been cancelled).
With respect to the first of these prongs, the principle that a finding
of bad faith must be related to the breach of contractual
obligations means that once an insurer has offered its policy limits, it
is immune from a claim of bad faith for not agreeing to settle for any
higher amount. See Nachbaur v. American Transit Insurance Co.,
300 A.D.2d 74, 74, 752 N.Y.S.2d 605, 606 (1st Dep't 2002). Thus, in a
case where a liability policy has limits of $100,000, and the plaintiff
in the underlying tort action demands $100,001, an insurer that offers
the full policy limit but refuses to pay a dollar more can not be held to
have acted in bad faith.
Similarly, in fulfilling its obligation to evaluate coverage, an
insurer is not required to engage in extra-contractual conduct. In this
case, the policy did not require Allstate to assent to a declaratory
judgment action to determine the policy limits, and it therefore breached
no good faith obligation by declining to do so. Even if the "contingent"
settlement proposed by the plaintiffs in the Seay Action were costless to
Allstate, it was not required to accede to the demand. And, the proposal
was not costless. Allstate would have been put to the expense of
litigating the declaratory judgment proceeding and, by "agreeing" to that
procedure, would have waived the opportunity to seek an award of costs and
attorneys' fees on the grounds that the position of the insureds in the
litigation was frivolous. To hold that a tort plaintiff's attorney can
assert bad faith merely because an insurer declines to offer policy
limits as determined by some future proceeding regardless of the
objective merit of the insurer's interpretation of the policy would
tilt the playing field and give the tort plaintiff unwarranted leverage
Nevertheless, the Greenidges could still have a viable claim here if
Allstate declined the settlement proposal based on unreasonable
construction of the policy. But that is not the case. First, even if
Allstate's interpretation were mistaken, it is far from unreasonable, as
demonstrated by the fact that Allstate obtained opinion letters from two
separate sets of outside counsel that confirmed its reading of the
policies. Second, the plain language of the anti-stacking provision admits
of only one construction. The policies provide that injury "from
continuous or repeated exposure to the same general conditions is
considered the result of one accidental loss." (Insurance Policy at 27).
Taniya Seay's exposure to lead paint while residing on the Greenidges's
property was thus one accidental loss. Furthermore, "total liability . .
. for damages resulting from one accidental loss will not exceed
[$300,000]," "[r]egardless of the number of . . . policies involved [.]"
(Insurance Policy at 27). Therefore, it is clear that even though two
policies may have been triggered, the policy limit remained $300,000.
Allstate's interpretation of the policies was not only reasonable, it was
correct; Allstate offered the policy limits in settlement; and,
consequently, it did not act in bad faith.
As discussed above, the Greenidges' claim of untimely disclaimer comes
too late, and, in any event, Allstate was not required to disclaim. The
Greenidges' claim of bad faith fails
because Allstate offered the policy limits and was not obligated to
accept a resolution of the Seay Action that would have been contingent on
the outcome of a subsequent declaratory judgment proceeding. Therefore,
Allstate's motion for summary judgment is granted, the Greenidges'
cross-motion is denied, and the Clerk of Court is directed to enter
judgment dismissing the Complaint.