| Federal Ins. Co. v North Am. Specialty Ins. Co. |
| 2011 NY Slip Op 02724 [83 AD3d 401] |
| April 5, 2011 |
| Appellate Division, First Department |
| Federal Insurance Company, Individually and as Subrogee ofGalaxy General Contracting Corp., Respondent, v North American Specialty InsuranceCompany et al., Appellants, et al., Defendants. |
—[*1] Quick and Bakalor, P.C., New York (Timothy J. Keane of counsel), for respondent.
Order, Supreme Court, New York County (Charles E. Ramos, J.), entered December 15,2008, which, to the extent appealed from as limited by the briefs, granted plaintiff's cross motionfor summary judgment on its cause of action for bad faith, unanimously reversed, on the law,without costs, and the cross motion denied.
Defendant-appellant Allied World Assurance Company (U.S.) Inc., formerly known asCommercial Underwriters Insurance Company (CUIC), insured Galaxy Contracting Corp.(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 coverageup to $10,000,000. In addition, pursuant to its contractual indemnity obligation, Galaxypurchased from CUIC, for the property owners' benefit, a separate owners and contractorsprotective liability policy (OCP) with a limit of $1,000,000.
The underlying Labor Law action was settled for $3,000,000. This was paid $1,000,000 byCUIC pursuant to the CGL policy and $2,000,000 by Federal pursuant to the excess policy,without prejudice to Federal's right to recover from CUIC. This action followed and, as isrelevant to this appeal, in the second cause of action, 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 appeal (47 AD3d 52,64 [2007]), we found that Federal sufficiently stated a cause of action for bad faith.
Under New York law, since an insurer has exclusive control over a claim against its insuredonce it assumes defense of the suit, it has a duty to act in "good faith" when deciding whether tosettle and may be held liable for breach of that duty (see Pavia v State Farm Mut. Auto. Ins.Co., 82 NY2d 445, 452 [1993]). This duty also applies where an excess insurer is exposed toliability (see Hartford Acc. & Indem. Co. v Michigan Mut. Ins. Co., 61 NY2d 569[1984]; Elm Ins. Co. v GEICODirect, 23 AD3d 219 [2005]), and requires a primary insurer to [*2]give as much consideration to the excess carrier's interests as it doesto its own (Pavia, 82 NY2d at 453; St. Paul Fire & Mar. Ins. Co. v United States Fid.& Guar. Co., 43 NY2d 977, 978-979 [1978]).
An insurer does not breach its duty of good faith when it makes a mistake in judgment orbehaves negligently. To establish bad faith, an excess insurer must show that the primaryinsurer's conduct constituted a "gross disregard" of the excess insurer's interests and that theinsurer's conduct involved a "deliberate or reckless failure to place on equal footing the interestsof its insured with its own interests when considering a settlement offer" (Pavia, 82NY2d at 453).
There is no formula to determine whether an insurer acted in good faith. The court mustassess, among other factors, the "plaintiff's likelihood of success on the issue of liability, thepotential 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 thedemand for settlement was made, and . . . any other relevant proof tending toestablish or negate the insurer's good faith in refusing to settle" (see Pinto v Allstate Ins.Co., 221 F3d 394, 399 [2d Cir 2000], citing Pavia, 82 NY2d at 454-455).
Given these stringent standards, there remains a material issue of fact as to whether CUICwas merely negligent or whether CUIC and/or its counsel were aware that the antisubrogationrule applied and deliberately failed to assert the defense in order to allow the owners to escapeliability, thereby removing the OCP policy from the layer of coverage that had to be exhaustedbefore triggering Federal's excess coverage. Although the memos and correspondence submittedby plaintiff could conceivably support a bad faith verdict after trial, it is for the finder of fact todetermine whether the documents establish a deliberate plan by CUIC or merely reflectdiscussions of the consequences of a valid indemnity claim by the owner against Galaxy.Concur—Andrias, J.P., Moskowitz, Freedman and RomÁn, JJ.
McGuire, J., dissents in a memorandum as follows: I disagree with the majority's conclusionthat plaintiff Federal Insurance Company (Federal) is not entitled to summary judgment as amatter of law on its second cause of action for bad faith. Accordingly, I would affirm SupremeCourt's decision granting Federal's cross motion for summary judgment on that cause of action.
This declaratory judgment action arises from a personal injury action commenced by anemployee of a subcontractor who was injured at a construction site. The employee sued thegeneral contractor, Galaxy General Contracting Corporation (Galaxy), and the owners andsponsors of a construction housing project (Owners). Galaxy had obtained two separate primaryinsurance policies from defendant Commercial Underwriters Insurance Company (CUIC): acommercial general liability (CGL) policy for itself and an owners and contractors protectiveliability (OCP) policy for the Owners. Each policy provided coverage up to the amount of$1,000,000. Galaxy also obtained a $10,000,000 excess insurance policy for itself from Federal.
At the inception of the action in 1999, CUIC retained one law firm to represent both Galaxyand the Owners. In June 2002, however, CUIC assigned separate defense counsel for Galaxy andthe Owners. As CUIC states, it concluded that a potential indemnification claim by the Ownerscreated a conflict of interest between its two insureds. Thereafter, the Owners [*3]amended their answer to assert cross claims against Galaxy forcontractual and common-law indemnification, and moved for summary judgment on the crossclaims. Galaxy opposed the motion but did not raise the antisubrogation rule, i.e., it did not arguethat the owners were not entitled to indemnification because they were insured by the sameinsurer and an insurer "has no right of subrogation against its own insured for a claim arisingfrom the very risk for which the insured was covered" (North Star Reins. Corp. v ContinentalIns. Co., 82 NY2d 281, 294 [1993]). In March 2003, Supreme Court conditionally grantedthe indemnification claims because no evidence had been presented that the Owners either werepresent at the work site or had any responsibility to control or supervise the work beingperformed. In a motion to renew or reargue, Galaxy belatedly raised the antisubrogation rule; themotion was denied on the ground that Galaxy had not provided a satisfactory explanation forfailing to raise the antisubrogation rule on the original motion. Thereafter, the case was settledfor $3,000,000; $1,000,000 was paid by CUIC pursuant to its CGL policy and $2,000,000 waspaid by Federal under the excess policy.
On or about November 4, 2005, Federal commenced this declaratory judgment action,individually and as a subrogee of Galaxy, against CUIC. Federal asserted five causes of action,including violation of the antisubrogation rule, bad faith in defending Galaxy against the Owners'indemnification claims, and legal malpractice. CUIC made a pre-answer motion to dismiss andSupreme Court granted the motion with respect to the causes of action for legal malpractice. ThisCourt affirmed the dismissal of those causes of action and also dismissed the causes of action forviolation of the antisubrogation rule (47 AD3d 52, 59-63 [2007]). With respect to the cause ofaction for bad faith, we held that "Federal's claim that CUIC manifested a 'conscious disregard'for Federal's rights by allowing one of its insureds, the owners, to escape liability in violation ofthe antisubrogation rule, thereby removing one of its policies (OCP) from the layer of coveragethat had to be exhausted before triggering Federal's excess coverage, sufficiently states a cause ofaction for bad faith" (id. at 64 [citation omitted]).
In support of its motion for summary judgment, Federal submitted, inter alia, a hand-writtenmemorandum by a CUIC claims manager that diagrams the parties, states that the Owners werenot actively negligent in connection with the underlying personal injury action and lays outCUIC'S reason for seeking indemnification: doing so "will save 1 of CUIC's limits." Asubsequent note to the Owners' counsel, authored by the same claims manager, states: "Our goalis to get Galaxy the G.C. through its primary coverage . . . and Galaxy's excesscarrier to resolve this claim thereby keep[ing] our $1 million for [the Owners] protected. Galaxy'sprimary and their [sic] excess is enough to settle this, the trick is to get Galaxy's excesscarrier to agree they're [illegible]." Additionally, in a letter to CUIC regarding a possiblesettlement, the Owners' counsel advises: "In summary, there is no settlement that makes sense for[the Owners] unless our contribution is substantially less than the $1 million policy limits andthere is no further litigation. If, for example, Federal requested that [the Owners] pay $500,000toward settlement and agreed not to challenge the indemnification finding, CUIC would be ableto end the litigation without risking the full exposure of both its policies in this case."[*4]
Federal maintains that these documents establish thatpursuant to a plan it developed, CUIC acted to shift the financial responsibility for the personalinjury claim to place a greater burden on Federal by triggering the excess coverage instead ofCUIC's OCP policy. CUIC maintains that the plan was to protect the Owners, that the documentsdemonstrate a lack of knowledge of the antisubrogation rule and that this lack of legal knowledgereflects mere negligence (which they blame on counsel retained to represent the Owners) ratherthan a violation in bad faith of their fiduciary duty to Federal as the excess carrier. CUIC alsomaintains that after the file was split, i.e., after it retained separate counsel and assigned separateclaims handlers to the claims against Galaxy and the Owners, "[t]heir duty ran only to theOwners, and not to Federal, which only insured Galaxy."
Under New York law, "the primary carrier owes to the excess insurer the same fiduciaryobligation which the primary insurer owes to its insured, namely, a duty to proceed in good faithand in the exercise of honest discretion" (Hartford Acc. & Indem. Co. v Michigan Mut.Ins. Co., 93 AD2d 337, 341 [1983], affd 61 NY2d 569 [1984]). A primary insurer isconsidered to act in good faith when it gives the same consideration to the excess insurer'sinterests that it gives to its own interests (see Pavia v State Farm Mut. Auto. Ins. Co., 82NY2d 445, 453 [1993]; New England Ins. Co. v Healthcare Underwriters Mut. Ins. Co.,295 F3d 232 [2d Cir 2002]). In the context of a bad-faith claim founded on a failure to settle, "theplaintiff must establish that the insurer's conduct constituted a 'gross disregard' of the insured'sinterests—that is, a deliberate or reckless failure to place on equal footing the interests ofits insured with its own interests when considering a settlement offer" (Pavia, 82 NY2d at453 [citation omitted]).
Here, summary judgment is warranted because CUIC knowingly and deliberately placed itsinterests ahead of those of the excess carrier to avoid exposure beyond the $1 million limit of theCGL policy it issued to Galaxy. Specifically, the record establishes that CUIC devised andexecuted a plan to avoid exposure of the Owners' primary policy, i.e., to save one of CUIC's twolimits of $1 million, with the knowledge and intent that a successful indemnification claimagainst its other insured would shift the financial burden to Federal (id.; see alsoHartford Acc., 93 AD2d at 341-342).
Nor can CUIC avoid liability on the ground that neither it nor the attorneys it retained torepresent the Owners knew that a doctrine called the antisubrogation rule barred theindemnification claim. This defense is predicated not on what CUIC did or did not do, but onwhat it did or did not know about the law. Even assuming neither CUIC nor the attorneys for theOwners knew of the rule, that lack of knowledge is not a defense for it does not alter the crucialfact that CUIC knowingly and deliberately placed its interest ahead of those of the excess carrierto which it owed the same fiduciary obligation it owed to its insureds. Obviously, to recognizesuch a defense—CUIC cites no authority recognizing it—would run afoul of theprecept that ignorance of the law is not an excuse. Moreover, it would have the unseemly effectof permitting an insurer ignorant of the rule, a rule premised in part on the need to avoid theconflicts of interest inherent in situations in which an insurer provides coverage to two insuredsfor the same risk (Pennsylvania Gen. Ins. Co. v Austin Powder Co., 68 NY2d 465, 472[1986]), to be in a superior position than an insurer knowledgeable about the rule. The formercan avoid a loss for which it provided coverage (here, a $1 million loss) while the latter must payit. In short, CUIC's liability should turn on the self-serving nature of the conduct it knowinglycommitted, not on whether it knew that a rule of law prohibited that conduct.
CUIC asserts that it acted in good faith because it was in the Owners' best interest not to[*5]trigger coverage under the Owners' OCP policy. Morespecifically, it maintains that "pressing and protecting the Owner's [sic] right ofindemnification . . . served, inter alia, to minimize the erosion of the Owners'primary policy, to protect the policy to be available to pay a judgment above any amountsavailable from Galaxy, and to safeguard the Owners' loss history." The same claims handler whotestified to these ostensible reasons for conserving the OCP policy wrote the contemporaneousnotes quoted above setting out a very different reason for seeking indemnification: doing so "willsave 1 of CUIC's limits" (emphasis added). And in the handwritten note quoted above,the claims handler expressly stated that "Galaxy's primary and their [sic] excess isenough to settle this." Moreover, when the indemnification motion was made, no other claimshad been made against the Owners that might trigger coverage under the OCP policy. In anyevent, even assuming that its plan to seek indemnification was motivated in part by a beneficentregard for the interests of the Owners, that does not negate the evidence establishing that CUICknowingly and deliberately placed its interests above those of Federal. Finally, as Federal notes,after it did become aware of the antisubrogation rule and learned that it had benefitted from therule's violation, CUIC was asked to contribute to the settlement but refused, essentially insistingon the advantage it had obtained from the successful realization of its plan.
Whether the plan was devised before or after the defense was split between law firms andclaims handlers is irrelevant. CUIC's duty to Federal did not evaporate simply because separatecounsel for each insured was obtained. Not surprisingly, CUIC cites nothing in support of itsargument that its duty ran only to the Owners, and not to Federal, after the split. An "insurer doesnot satisfy its duty to defend merely by designating independent counsel to defend the litigation"(Feliberty v Damon, 72 NY2d 112, 117 [1988]). Likewise, its fiduciary duty to act ingood faith toward both its insured and the excess carrier were not discharged upon theassignment of separate counsel. Finally, the mere fact that CUIC obtained separate counsel ishardly conclusive proof that it was acting selflessly. After all, the firm that initially representedboth insureds could not bring a cross claim against one of its clients on behalf of the other.
Accordingly, I would affirm the Supreme Court's decision granting Federal's cross motion forsummary judgment on its cause of action for bad faith. As there is no dispute that the appropriatemeasure of damages is $1 million, I assume, without deciding, that it is the amount to whichFederal is entitled. [Prior Case History: 2008 NY Slip Op 33349(U).]