Quincy Mutual Fire Ins. Co. v. New York Central Mutual Fire Ins. Co., No 3:12-CV-1041-DEP (N.D.N.Y. March 31, 2014)

The Northern District of New York held that a primary carrier that declined to settle an underlying lawsuit for policy limits multiple times, even in the face of evidence that damages were likely to exceed the combined limits of the primary and excess policies at issue, was liable to excess insurer for bad faith.

On November 21, 2000, Randolph Warden was in an automobile accident in upstate New York in which he failed to stop at a stop sign and struck the vehicle driven by Peggy Horton, causing her serious injuries.  At the time of the accident, Warden had a Personal Automobile Liability Insurance Policy issued by New York Central Mutual Fire Insurance Company (“NYC”) that provided primary coverage of $500,000.  Warden also had a homeowner’s policy with Quincy Mutual Fire Insurance Company (“Quincy”) that provided excess liability insurance in the amount of $1 million per occurrence.  Under the terms of the Quincy policy, Quincy had no obligation to indemnify or defend Warden until the limits of the underlying primary policy were exhausted or tendered.

Timely notice of the accident was provided to both NYC and Quincy, and both carriers accepted coverage.  When Horton filed suit against Warden in October 2001, NYC took up Warden’s defense, retaining counsel on his behalf.  In December 2001, in response to a query from Quincy, a representative of NYC informed Quincy that NYC believed that its policy limits were sufficient to cover Horton’s damages.  Horton, however, underwent six surgeries to her back and abdomen between 2001 and 2008 that left her with permanent scars.  She also suffered mental impairments from the accident, eventually being diagnosed with both Post-Traumatic Stress Disorder and depression.  She was unable to return to her job as a nurse and eventually qualified for Social Security disability benefits. 

In November 2004, Horton filed for partial summary judgment on the issues of liability and serious injury, and the New York Supreme Court granted her motion in May 2005.  NYC directed Warden’s attorney to appeal.  It was not until December 2005 that NYC authorized Warden’s attorney to make its first settlement offer, for $75,000, which Horton rejected.  At the time, Horton’s demand was $500,000, the limit of the NYC policy. 

The appellate court affirmed the trial court’s ruling in August 2006.  At that point, only the issue of damages remained for trial.  In January 2007, Horton increased her demand to $3.5 million.  Soon after, Warden retained a personal attorney to monitor the case.  Still, NYC kept its settlement offer at only $75,000, even after being apprised of the reports from Warden’s own experts that Horton was seriously disabled.  NYC also held firm in June 2007, when Horton indicated she would accept a settlement of $1.5 million, the combined limits of the NYC and Quincy policies.  At that point, Horton’s counsel sent a bad faith letter to NYC.  Horton lowered her demand again in July to $750,000, and Quincy indicated it would pay $250,000 toward that amount if NYC tendered its limits, but NYC still refused to raise its offer.  Requests from Warden’s personal attorney to settle also did not change NYC’s position, and NYC ignored Warden’s request to be sent copies of any case evaluations.

Because of Horton’s surgeries, the trial of the matter was delayed until October 2009.  NYC had by this point hired new counsel for Warden and intended to try the case.  In September 2009, Horton informed NYC that, in light of its failure to raise its offer above $75,000, she was withdrawing her offer to settle within Warden’s policy limits.  In response, NYC raised its offer to $200,000.  In late September, NYC heard a verdict- potential evaluation from the lawyer it had hired to defend Warden, the first such evaluation performed by or on behalf of NYC concerning the matter in the almost nine years since the accident.  At that point, NYC tendered its entire policy limit of $500,000.

Quincy, which by now also faced assertions of bad faith from Horton and Warden, then took over the settlement negotiations.  The case finally settled a few weeks later for a total of $1.5 million, with both NYC and Quincy paying their full policy limits.

In June 2012, Quincy filed a bad faith action against NYC in the U.S. District Court for the Northern District of New York, alleging that NYC breached its duty as a primary carrier to an excess carrier to consider the interests of the excess carrier in deciding whether to settle.  As the court recognized, this required Quincy to prove that, “had [NYC] acted in good faith throughout the negotiation process, a settlement would have been realized, and that settlement would have required Quincy Mutual to pay less than the full extent of its excess policy.”

The court found that NYC acted in bad faith by losing two opportunities to settle with Horton.  Citing testimony from Horton’s attorney that she would have been willing to settle the case for NYC’s policy limits in December 2005, the court found there was an opportunity to settle that NYC ignored.  Further, it held Quincy proved that all serious doubts concerning Warden’s liability had been removed by that point based on the entry of summary judgment on liability and the findings of several of Warden’s own experts.  Moreover, despite NYC’s failure to perform its own damages evaluation of the case, the court said that NYC should have known by late 2005 based on various developments that Horton’s damages would exceed $500,000.  Similarly, there was also sufficient evidence to conclude that Horton would have settled in July 2007 for $750,000.  By this point, NYC should have been aware that the damages had significant potential to exceed the $1.5 million available under both policies. 

NYC argued that Quincy bore some blame for the failure to settle.  The court rejected this argument, noting that Quincy’s defense and indemnity obligations did not engage until the primary insurer, NYC, either exhausted or tendered its policy limits.  The court noted that Quincy, as an excess carrier, did not have a duty to supervise the primary insurer.

As a result of NYC’s bad faith, the court ruled that Quincy was entitled to recover its entire $1 million policy limit from NYC.