| CBLPath, Inc. v Lexington Ins. Co. |
| 2010 NY Slip Op 04128 [73 AD3d 829] |
| May 11, 2010 |
| Appellate Division, Second Department |
| CBLPath, Inc., Appellants, v Lexington InsuranceCompany, Respondent. |
—[*1] Fiedelman & McGaw, Jericho, N.Y. (Andrew Zajac of counsel), for respondent.
In an action to recover damages for breach of the covenant of good faith and fair dealingimplied in an insurance contract, the plaintiffs appeal from an order of the Supreme Court,Westchester County (Rudolph, J.), entered March 3, 2009, which granted the defendant's motionfor summary judgment dismissing the complaint and denied their cross motion to dismiss thedefendant's affirmative defenses.
Ordered that the order is affirmed, with costs.
Underlying the instant action is a claim against the plaintiffs, CBLPath, Inc., and CBLPathHoldings Corporation (hereinafter together CBL), by Darrie Eason, who alleged that, in March2006, CBL, a medical diagnostic laboratory, negligently switched her biopsy specimen with abiopsy specimen from another individual, which resulted in Eason being erroneously diagnosedwith breast cancer, and subsequently undergoing an unnecessary double mastectomy. At thetime, CBL was covered under a medical malpractice insurance policy issued by the defendantLexington Insurance Company (hereinafter Lexington), a subsidiary of American InternationalGroup, Inc. (hereinafter AIG). The policy provided CBL with coverage for medical malpracticeliability of up to the sum of $1,000,000 per medical incident. CBL timely reported the claim toLexington, which referred the matter for handling on its behalf to AIG Domestic Claims(hereinafter AIGDC), also an AIG subsidiary.
From February 2007 through September 2007, Eason's counsel made several attempts toopen settlement discussions, but AIGDC, which in February 2007 allegedly exercised its right asthe sole authority to handle the Eason claim, never made a substantive response to thoseinquiries. Eason commenced the underlying action in October 2007. Lexington contends (andCBL does not dispute) that Eason's counsel did not issue the first settlement demand untilDecember 2007, which was after the commencement of the underlying action, and demanded thesum of $5,000,000, which was five times more than the policy limit. The underlying action wassettled several months later for the sum of $2,500,000, with Lexington paying the policy limit inthe sum of $1,000,000 and CBL paying the balance. CBL thereafter commenced the instantaction against Lexington, asserting a single cause of action for breach of the covenant of goodfaith and fair dealing implied in the [*2]insurance contract. Thegravamen of CBL's complaint is that AIGDC, which had asserted sole control over the Easonclaim, acted in bad faith by refusing to enter into prelitigation settlement discussions withEason's counsel. CBL sought actual and consequential damages, including, inter alia, injury to itsbusiness reputation, lost sales, increased sale expenses, lost profits, and lost businessopportunities caused by the negative publicity that resulted from the commencement of theunderlying action. After joinder of issue, Lexington moved for summary judgment dismissingthe complaint, and CBL cross-moved to dismiss Lexington's affirmative defenses. The SupremeCourt granted Lexington's motion and denied CBL's cross motion. CBL appeals, and we affirm.
"For a breach of contract based only on a failure to make reasonable settlement of a claimwithin the policy limits, damages are measured by the policy limits. For a breach of impliedconditions of the contract to act in its performance in good faith in refusing to settle within thepolicy limits, the damages may exceed the policy limits" (Gordon v Nationwide Mut. Ins.Co., 30 NY2d 427, 436-437 [1972], cert denied 410 US 931 [1973]). Since an awardof damages exceeding the policy limits is punitive in nature, it "is not applied routinely forbreach of contract; and bad faith requires an extraordinary showing of a disingenuous ordishonest failure to carry out a contract" (id. at 437).
An insurer "may be held liable for the breach of its duty of 'good faith' in defending andsettling claims over which it exercises exclusive control on behalf of its insured" (Pavia vState Farm Mut. Auto. Ins. Co., 82 NY2d 445, 452 [1993]). The root of this doctrine is that,typically, an insurer exercises "complete control over the settlement and defense of claimsagainst their insureds, and, thus, under established agency principles may fairly be required toact in the insured's best interests" (id.). However, since courts are understandablyreluctant to expose insurers to liability exceeding the policy limits, the bad faith must be forconduct that is clearly more than ordinary negligence, i.e., more than merely poor judgment(id. at 453).
"Naturally, proof that a demand for settlement was made is a prerequisite to a bad-faithaction for failure to settle . . . [Additionally,] the plaintiff in a bad-faith action mustshow that the insured lost an actual opportunity to settle the . . . claim at a timewhen all serious doubts about the insured's liability were removed.
"Bad faith is established only where the liability is clear and the potential recovery farexceeds the insurance coverage" (id. at 454 [internal quotations marks and citationsomitted]; see also Smith v General Acc. Ins. Co., 91 NY2d 648, 653 [1998]; Soto vState Farm Ins. Co., 83 NY2d 718, 723 [1994]; Vecchione v Amica Mut. Ins. Co.,274 AD2d 576, 578 [2000]; cf. United States Fid. & Guar. Co. v Copfer, 48 NY2d 871,873 [1979]).
Here, Lexington met its prima facie burden of establishing its entitlement to judgment as amatter of law (see Alvarez v Prospect Hosp., 68 NY2d 320, 324 [1986]; Zuckermanv City of New York, 49 NY2d 557, 562 [1980]) by submitting, inter alia, an affirmation ofan AIGDC attorney who had handled the Eason claim. In that affirmation, the attorney statedthat Eason's counsel did not issue the first settlement demand until after commencement of theunderlying action, and that once such demand was made, negotiations ensued, and a settlementwas reached, with Lexington paying the policy limit in the sum of $1,000,000, and CBLresponsible for the balance in the sum of $1,500,000. Thus, Lexington established that CBL'sbad faith claim could not stand, as there was no pre-litigation settlement demand made within thepolicy limits (see Smith v General Acc. Ins. Co., 91 NY2d at 653; Soto v State FarmIns. Co., 83 NY2d at 723; Pavia v State Farm Mut. Auto. Ins. Co., 82 NY2d at 454).
In opposition, CBL failed to raise a triable issue of fact. CBL submitted, inter alia, anaffidavit of its vice president and corporate controller, who indicated that after AIGDC assertedexclusive control over the Eason claim in February 2007, it thereafter refused to contact Eason'scounsel to settle her claim and avoid negative publicity to CBL. Notably, however, CBL'sopposition did not raise a triable issue of fact as to whether Eason's counsel had made apre-litigation settlement demand within the policy limits. As such, while it may arguably besome evidence of bad faith that AIGDC failed to enter into pre-litigation settlement discussionswith Eason's counsel at [*3]a time when CBL's liability was notin doubt and the nature of Eason's injuries indicated that her recovery would exceed the policylimit, we are constrained to find that Lexington was entitled to summary judgment because CBLfailed to raise a triable issue of fact as to whether Eason made a pre-litigation settlement demandwithin the policy limit (see Pavia v State Farm Mut. Auto. Ins. Co., 82 NY2d at 453;see also Smith v General Acc. Ins. Co., 91 NY2d at 653; Soto v State Farm Ins.Co., 83 NY2d at 723; Vecchione v Amica Mut. Ins. Co., 274 AD2d at 578). Underthe circumstances, CBL cannot show that, because of AIGDC's conduct, it lost an actualopportunity to settle and, thus, any damages it asserts are based on mere speculation (seeUnited States Fid. & Guar. Co. v Copfer, 48 NY2d at 873).
In light of our determination, CBL's remaining contentions have been rendered academic.Fisher, J.P., Florio, Belen and Austin, JJ., concur.