Why it matters

An excess insurer may be able to recover its contribution to an insured’s settlement where the primary insurer engaged in bad faith by failing to offer the policy limits, a New York federal judge has ruled. The court found the facts of the case demonstrated “substantial evidence” of the primary insurer’s bad faith efforts to settle an underlying negligence suit. The judge sent the case to trial for a jury determination of whether or not the primary insurer’s settlement efforts were made in bad faith. This decision provides policyholders and their insurers with knowledge regarding the manner in which a court will review an insurer’s claims handling and emphasizes the need for prompt and proactive claims handling.

Detailed discussion

After contracting to perform construction work in Queens, N.Y., Cole Partners purchased a $1 million policy from Indian Harbor Insurance Company and a $10 million excess policy from Scottsdale Insurance Company. An employee on the site fell 18 feet from a wall while conducting demolition work, fracturing his right leg and requiring multiple surgeries.

When the employee filed a negligence suit, Cole turned to Indian Harbor and Scottsdale for coverage. Early on in the claims process, Indian Harbor determined that the case did not pose reasonable potential for exposure beyond the policy limit and that liability was not reasonably in dispute. The preliminary assessment of Cole’s exposure was in the $350,000 to $500,000 range.

After the court granted summary judgment on the liability issue to the employee, he made a settlement demand of $2 million. However, Indian Harbor made no attempt to engage in negotiations for nine months. A mediation between the parties was unsuccessful, with Indian Harbor making no higher offer than $200,000. Plaintiff’s counsel later testified that he told the insurer he was willing to accept $1 million to settle the case.

Although Indian Harbor approved settlement authority up to $950,000, it never increased its offer despite being aware that the employee might need back surgery, potentially increasing his damages. When the employee ultimately underwent back surgery, he increased his settlement demand to $4 million.

Indian Harbor eventually tendered its policy and Scottsdale took over settlement negotiations, agreeing to pay an additional $1.5 million to settle with the employee.

Scottsdale then filed suit against Indian Harbor, alleging that it had the opportunity to settle the underlying litigation within the primary policy limit of $1 million and the failure to do so constituted bad faith under New York law.

The district court applied a two-part standard: whether Indian Harbor exhibited “gross disregard” for the interests of Scottsdale and whether the gross disregard caused the loss of an actual opportunity to settle the case within the primary policy limit.

Using a multifactor test, the court found “substantial evidence to support Scottsdale’s handling of [the employee’s] case met the standard for gross disregard and bad faith.”

The potential magnitude of the damages rose significantly after the employee’s back surgery, the court noted, a potentiality that Indian Harbor was aware of. “Considering the fact that, by all accounts, [the employee’s] back surgery dramatically increased the potential settlement value . . . it would have been reckless for Indian Harbor to ignore the possibility that failing to settle the case promptly could, were [he] to require surgery, expose Scottsdale to significant liability,” the court wrote.

A review of the case chronology also supported the judge’s determination, offering a jury substantial evidence to find that Indian Harbor approached the settlement of the case with gross disregard for Scottsdale’s interests.

Although a dispute existed about whether the employee’s lawyer said he would accept $1 million or $1.2 million to settle, the parties were “either $50,000 or $250,000 apart on what it would take to settle the case,” Judge Engelmayer said. “Yet Indian Harbor let the case languish for four-and-a-half months, never offering [the employee] more than $200,000. Under the circumstances, a reasonable jury could regard the $200,000 offer as a non-starter. Such a jury could therefore view this evidence as signifying that Indian Harbor deliberately placed greater importance on its own $50,000—i.e., the difference between the $950,000 at which its outside counsel recommended settling and Indian Harbor’s $1 million primary policy limit—than on the risk that a jury would ultimately return a verdict that could expose Scottsdale to substantial liability.”

Other evidence: an eight-month period where literally nothing happened in the case file, “implausible” denials from Indian Harbor’s claims handler that she never received any of the settlement letters sent by the employee’s lawyer (even though the letters were received by the insurer’s mailroom, with date and time stamps), and the failure to ever increase the settlement offer from $200,000.

Despite the evidence in support of Scottsdale’s bad faith claim, the court denied summary judgment to the excess insurer because of controverted testimony about the amount the plaintiff would have accepted to settle the case.

Given these factual disputes, the court said a jury should decide the issue, scheduling trial for later this year.

To read the decision in Scottsdale Insurance Company v. Indian Harbor Insurance Co., click here.