Smoral v. Hanover Insurance ( 1971 )

Steuer, J.

The individual plaintiff (Smoral) was driving an automobile owned by Syracuse Jerome Motors when the car was in an accident in which Whittaker, a passenger in the car, was severely injured. The car was insured by defendant Hanover, which upon merger assumed the obligation of a policy issued by Massachusetts Bonding and Insurance Company. Whittaker instituted suit against Smoral, as driver, and Syracuse Jerome Motors and its president, Jerome Goldberg, as owners. Some question existed at the time as to whether Smoral had in fact purchased the car prior to the accident, and Hanover disclaimed liability as to him. Smoral had a policy with Glens Falls Insurance Company and he notified that company of Hanover’s disclaimer. Glens Falls brought an action against Hanover in which it was determined that Smoral had not bought the car and that he was an insured under the Hanover policy. Hanover then undertook to represent Smoral in the Whittaker action.

The Hanover policy had a limit of $50,000. Hanover, seeing no defense to the action and believing that Whittaker’s damages exceeded the policy limit, agreed with Whittaker to pay the entire $50,000 in return for a release to Syracuse and Goldberg. The release specifically reserved all rights against Smoral. Smoral was given no notice of these negotiations and gave no consent to Hanover’s actions. Hanover continued to represent Smoral. When the case appeared for trial the Trial Judge, on learning of the settlement, found that Hanover had an adverse interest to Smoral and directed Hanover’s attorneys to withdraw, which they did. Glens Falls then assumed the defense of the Whittaker action and settled it for $32,500 in behalf of Smoral. Thereupon Smoral and Glens Falls, as subrogee, brought this action to recover all or part of the $32,500 paid on the settlement and for the reasonable value of the legal services rendered in that action.

Trial Term dismissed the complaint. This was upon the theory that Glens Falls was the sole party in interest. As Glens Falls was in the position of an excess insurer and as such was not entitled to any notice from the primary insurer as to the progress of the action against its insured, Trial Term held that no duty was violated. The rights of Smoral are entirely different. While Hanover owed no duty to Smoral’s insurer, it was itself Smoral’s insurer and it owed a duty of good faith to him (Best Bldg. Co. v. Employers’ Liab. Assur. Corp., 247 N. Y. 451; Cappano v. Phoenix Assur. Co. of N. Y., 28 A D 2d 639). Good faith in this connection means more than an absence of intent to harm. It means an adequate protection of the interests of the assured (Cappano v. Phoenix Assur. Co. of N. Y., supra, p. 640). While this duty has most frequently been considered where the interests of the company have been preferred to the detriment of the insured (Brown v. United States Fid. & Guar. Co., 314 F. 2d 675), the same considerations would apply with equal force where the company preferred one of its insureds over another. It is absolutely no answer for the company to say that it paid the full amount of its policy if in so doing it fully protected one of its insureds and left the other completely exposed. While it is easy to see why Hanover acted as it did— the insured it protected was a policyholder, the one whose rights it ignored was an insured it was by law required to defend— there is no legal justification for its preferring one over the other.

While the breach by the defendant of its duty to Smoral is clear, the damage caused by the breach does present difficult questions. At least, Smoral would have been entitled to legal representation, and defendant’s voluntary conduct in putting itself in an equivocal position amounting to a conflict of interest effectually denied that benefit to him. The reasonable value of such services would seem an incontestable item of damage. As the complaint was dismissed we are not faced with questions as to whether any particular item or theory of damage is tenable. Such questions will be resolved when met. Suffice it to say we are not impressed by the contention advanced that a greater value was put on the "Whittaker claim and hence a greater amount was apportionable to Smoral’s liability by the settlement. This highly theoretical proposition is incapable of resolution with a reasonable degree of certainty. Bather we would incline to the view as to what proportion of the settlement fund should have been, in good faith, allotted to relieving or reducing Smoral’s liability.

The judgment entered March 1,1968, should be reversed on the law and a new trial ordered, with costs and disbursements to abide the event.