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