Nathan Brochstein and Manuel Brochstein, Doing Business as Church Avenue Poultry v. Nationwide Mutual Insurance Company , 448 F.2d 987 ( 1971 )

FEINBERG, Circuit Judge:

In the prior appeal in this case, Brockstein v. Nationwide Mutual Insurance Co., 417 F.2d 703 (2d Cir. 1969), with which familiarity will be assumed, we remanded to the district court to determine again whether the Brochsteins, plaintiffs-insureds, were entitled to recover damages from their insurer because of its failure to settle an action brought against plaintiffs by the admin-istratrix of John F. Kiely (Kiely). As a result of that mistake in judgment, Kiely recovered $95,000 against the Broeh-steins, $45,000 more than the amount of the policy provided by defendant. The Brochsteins’ excess liability to Kiely was ultimately settled for $25,000, for which they sued defendant-insurer. In our earlier decision, we held, among other things, that the bad faith of an insurer in refusing to settle a claim against the insured

may be evidenced by the failure of the insurer even to mention to the insured his opportunity to make a relatively small contribution to avoid a large exposure.

417 F.2d at 709. We sought further findings as to

(1) precisely what the Brocksteins were told or knew regarding the amount needed to settle the Kiely action, the amount the insurer was willing to contribute, and what their potential personal liability was, and (2) what they were then willing to contribute themselves. [Footnote omitted.]

and directed the trial court again to decide upon the entire record whether Nationwide acted in bad faith under the principles set forth herein.

On remand, Judge Dooling made extensive further findings of fact, including the key finding that:

The inference of constructive bad faith that might be drawn in some circumstances from the failure of the insurer to mention to the insured his opportunity to make a contribution to the settlement in order to avert the risk of a verdict in excess of the policy limit is insufficient on the facts of the present case to establish bad faith in fact.

The judge again found for defendant-insurer, and this appeal followed.

Appellants claim that the judge did not follow our directions and that defendant acted in bad faith as a matter of law. As to the former contention, Judge Dooling reopened the record, as our opinion authorized, heard testimony from five witnesses, including one of the plaintiffs and the lawyer who defended the Kiely action against them, and carefully reconsidered the question of the insurer’s bad faith in refusing to settle that action. There is no doubt at all in our minds that the judge attempted to and did comply with our directions in all respects.

Appellants’ alternative argument is that, in any event, the findings of the judge on remand required a conclusion as a matter of law that the insurer acted in bad faith. Appellants base their claim principally on the findings that plaintiffs had cash on hand sufficient to make a contribution to the settlement of even $10,000, but were not requested to do so and were not told that a relatively small contribution on their part would avoid a large exposure or that such a course was possible.

The judge did make the findings to which plaintiffs refer. But he also characterized as “necessarily hypothetical and not adequate as the basis for a finding” the testimony of one of the plaintiffs that he would have contributed from $5,000 to $12,500 to a settlement if defendant had advised him he could. The judge also found that O’Neill (trial counsel for the Broch-steins and the insurer) did advise the Broehsteins that the outcome was not predictable, that the verdict could be in excess of the policy limits, what the “posture of the settlement discussions [were] as they progressed during trial, from which the difference between offer and demand was evident,” and what amount the insurer was willing to offer. The judge also found that the Broeh-steins “understood that [if a verdict were rendered in excess of the policy limit] in such case the liability would be their firm’s.” Finally, the judge pointed out that if there had been a negotiation between the Broehsteins, the insurer and the Kiely interests, all sorts of eventualities might have occurred; e. g., Kiely could have increased the demand upon learning that further sums were available or the Broehsteins might not have been willing to make a substantial contribution unless the insurer made a similar increase.

As we pointed out in our earlier opinion, 417 F.2d at 705, the ultimate issue before the judge was whether the insurance company dealt fairly and adequately with its insured under New York law.¹ A finding of good faith or lack of bad faith is merely a shorthand way of resolving the series of issues embodied in that concept. When the trier of fact is convinced that under the applicable law the insurer on all the evidence did deal properly with its insured, we are not disposed to overrule that judgment. It is true that the insurer made no mention of the possibility that the Broehsteins might make a contribution; the insurer apparently thought that doing so would have been improper. As we noted in the first appeal, 417 F.2d at 708-709, its concern at that time is understandable. But now that we have spoken out on the subject, insurers are put on notice and should act accordingly in the future. This means that they must tread the narrow and difficult line between merely informing the insured in a proper case “of his chance to make a contribution in order to settle the case” and insisting “upon a contribution as the price of settlement.” 417 F.2d at 709. Insurers must be particularly careful not to do the latter or to use the possibility of contribution from the insured as a means of evading their own responsibilities.

We do not suggest that this is an open and shut case or that the problem it illumines can be dealt with easily. The contrary is the fact. As Judge Dooling pointed out:

[T]he limited coverage situation becomes flatly unsatisfactory in the final settlement stages if the insured has not retained counsel to represent him in his role as self-insurer on the excess risk.

We agree and point out as we did before, 417 F.2d at 709 n. 10, that the insurer’s lawyer at that stage is in a “delicate” situation.² For the future, we suggest that an insurer must be careful to give an insured full and accurate information as to settlement possibilities not only in the early, but also in the late, stages of negotiation, including the advice that to the extent that there is an uninsured interest, the insured has the option of being represented by separate counsel. But on this record and after the careful sifting .of the evidence by the district judge, we should reverse his finding of no bad faith only if the rule is that failure to notify an insured of his opportunity to contribute always requires a finding of bad faith. But this court did not go that far in our prior opinion or in the cases upon which we relied, e. g., Young v. American Casualty Co., 416 F.2d 906 (2d Cir. 1969); Brown v. United States Fidelity & Guaranty Co., 314 F.2d 675 (2d Cir. 1963). And we decline to adopt such a rule now.

At oral argument appellants called to our attention two recent decisions which cite our prior opinion. But both support the view that the decision here is essentially for the trier of fact. In Ging v. American Liberty Insurance Co., 423 F.2d 115 (5th Cir. 1970), summary judgment for the insurer was reversed so that a trial could be had on the issue of good faith. In Board of Education of Borough of Chatham v. Lumbermens Mutual Casualty Co., 419 F.2d 837 (3d Cir. 1969), the trier of fact found against the insurance company, and the appellate court affirmed.

Judgment affirmed.

1 . We note that some jurisdictions apparently impose a stricter standard of liability upon the insurer than New York does. See generally Note, Recent De-velojiments in the Excess Judgment Suit, 36 Bklyn.L.Rev. 464 (1970) ; 64 De Paul L.Rev. 604 (1970).

2 . Cf. Lysick v. Walcom, 258 Cal.App.2d 136, 65 Cal.Rptr. 406 (1968), discussed in Sevier, Beyond tlie “Bad Faith” Rule: New Excess Liability for Insurance Carriers and Their Attorneys, Proceedings, ABA Section of Insurance, Negligence, and Compensation Law 391, 396-99 (1969).