Typically, when I think of a bad faith claim against an insurance company, I think of a lawsuit filed by a policyholder. Bad faith, however, can also be asserted against an insurance company by someone other than a policyholder, in certain circumstances. The Appellate Division of the Supreme Court of New York recently evaluated such a circumstance in the unreported decision in Federal Ins. Co., etc. v. North American Specialty Ins. Co., et al., 2011 NY Slip Op 02724, 2011 WL 1236131 (N.Y.A.D. 1 Dept. April 5, 2011).
The Defendant/Appellant, Allied World Assurance Company (U.S.) Inc. (formerly known as Commercial Underwriters Insurance Company (CUIC)), insured Galaxy Contracting Corporation (Galaxy) under a commercial general liability (CGL) policy with a limit of $1,000,000. Plaintiff/Respondent Federal Insurance Company (Federal) provided Galaxy with excess coverage up to $10,000,000. In addition, pursuant to its contractual indemnity obligation, Galaxy purchased from CUIC, for the property owners’ benefit, a separate owners and contractors protective liability policy (OCP) with a limit of $1,000,000.
The underlying lawsuit involved labor matters and was settled for $3,000,000. CUIC paid $1,000,000 pursuant to the CGL policy. Federal paid $2,000,000 pursuant to the excess policy without prejudice to Federal’s right to recover from CUIC. In the action at issue, Federal alleged that it paid an extra $1,000,000 as a result of CUIC’s bad faith in failing to defend Galaxy against the owners’ indemnification claims on the basis of the antisubrogation rule. In a prior appellate decision (47 A.D.3d 52, 64, 847 N.Y.S.2d 7 ), the Court determined that Federal sufficiently stated a cause of action for bad faith.
At issue, was the duty that CUIC had to Federal as an excess insurer.
Under New York law, since an insurer has exclusive control over a claim against its insured once it assumes defense of the suit, it has a duty to act in “good faith” when deciding whether to settle and may be held liable for breach of that duty [citation omitted]. This duty also applies where an excess insurer is exposed to liability [citations omitted], and requires a primary insurer to give as much consideration to the excess carrier’s interests as it does to its own [citations omitted].
The Court explained that an insurer does not breach its duty of good faith when it makes a mistake in judgment or behaves negligently.
To establish bad faith, an excess insurer must show that the primary insurer’s conduct constituted a “gross disregard” of the excess insurer’s interests and that the insurer’s conduct involved a “deliberate or reckless failure to place on equal footing the interests of its insured with its own interests when considering a settlement offer” [citation omitted]. There is no formula to determine whether an insurer acted in good faith. The court must assess, among other factors, the “plaintiff’s likelihood of success on the issue of liability, the potential damages award, the financial burden on each party if the insurer refuses to settle, whether the claim was properly investigated, the information available to the insurer when the demand for settlement was made, and … any other relevant proof tending to establish or negate the insurer’s good faith in refusing to settle” [citations omitted].
Based on the foregoing, the Court determined that a material issue of fact remained as to whether CUIC was merely negligent or whether CUIC and/or its counsel were aware that the antisubrogation rule applied and deliberately failed to assert the defense in order to allow the owners to escape liability, thereby removing the OCP policy from the layer of coverage that had to be exhausted before triggering Federal’s excess coverage. Although the memos and correspondence submitted by the plaintiff could conceivably support a bad faith verdict after trial, the Court held that the finder of fact should determine whether the documents establish a deliberate plan by CUIC or merely reflect discussions of the consequences of a valid indemnity claim by the owner against Galaxy. For this reason, the Court determined that summary judgment should not have been entered.
Please consider that the above decision is unreported and is specific to New York law. Decisions in other jurisdictions may have different results.