Knobloch v. Royal Globe Insurance

Shapiro, J.

Plaintiff Rena Knobloch owned an automobile which was covered under a $10,000 to $20,000 policy of liability insurance issued by the defendant, Royal Globe Insurance Company (Royal Globe). On June 2, 1962 her son, Fred Knobloch, the other plaintiff, was driving the insured automobile when it was involved in a one-car accident in which a passenger, John A. Wickman, was injured. As a result of the accident Wickman sued the Knoblochs and the East Hudson Parkway Authority to recover damages for the injuries sustained by him.¹ He recovered a judgment against the Knoblochs and the Authority for $75,383.50, which on appeal was affirmed by this court (Wick-man v. Knobloch, 34 A D 2d 617)., The judgment was satisfied by the Authority and the Knoblochs — each paying one half — with Royal Globe, as the Knoblochs ’ insurer, paying $10,000 (plus interest and costs) —its policy limit — toward the payment made by their insureds. The Knoblochs, contending that their insurer, defendant Royal Globe, in bad faith failed to settle the claim against them, within their policy limits, when it could have done so, have recovered a judgment for $30,236.50, representing the amount above $10,000 they were, compelled to pay (plus additional amounts for interest, the expenses incurred by them on the appeal in the Wickman case, and the costs and disbursements in this case). We reverse the Knoblochs' judgment and dismiss their complaint. By reason of that determination we must also reverse an order which had granted a motion by the Knoblochs to add interest to the $30,236.50 recovery, and must dismiss the motion as academic.

THE QUESTION ON THIS APPEAL.

The major issue raised by this appeal is a novel one — whether a settlement offer of the maximum coverage of the policy made by an insurer a few days before the beginning of the trial, with notice of that offer being given to the insureds at that time, can sustain a finding of lack of good faith in protecting the insureds’ interest sufficient to make the insurer liable for the excess which its insureds had to pay under the judgment against them. We answer that question in the negative.

THE FACTS.

After the accident described hereinabove in the preliminary statement, Royal Globe’s representatives were in touch with one Browne, the attorney for Wickman. In 1962 there were two such communications, in one of which Browne was informed of the $10,000 policy coverage. In December, 1962 Royal Globe notified the Knoblochs of their possible personal liability over and above the policy coverage and of their right to have their own attorney co-operate in the defense of the action. On January 7, 1963 Royal Globe arranged with Browne for an examination of the injured claimant by its doctor. On May 19, 1964 Browne offered to settle the case against the Knoblochs for $9,500. He was asked to provide the insurer with data on special damages. On December 15, 1965 Royal Globe’s representative, when told by Browne that he wanted all or nearly all of the $10,000 coverage, said he might recommend such an amount but needed an authorization to obtain Wickman’s hospital records and proof of his lost earnings and hospital bills. On March 11, 1966 Royal Globe’s representative told Browne he had the hospital authorization but not the hospital and medical bills. On September 20,1966 Browne was told by Royal Globe’s representative that it had not yet received some of the bills and earnings data. On February 27,1967 Browne was informed by Royal Globe that the claim would be taken up by its committee and that he would be given its best figure. On March 10, 1967 Royal Globe offered Browne $6,500. He rejected the offer, reiterating his demand for $9,500. In February, 1968 Browne again spoke to Royal Globe’s representative and repeated his willingness to take $9,500. He was given a firm offer of $8,500 and was asked if he would take $9,000. Browne refused, standing on his $9,500 demand. On March 21, 1969, when the case appeared on the day calendar, Royal Globe’s trial attorney requested an adjournment because Fred Knobloch was on a business trip outside of the country. An adjournment to April, 1969 was granted. At the time of this adjournment Royal Globe’s counsel told Browne that Knobloch had retained private counsel, one Bernard R. Selkowe. On April 3, 1969 Royal Globe’s representative offered Browne $9,000. He refused to accept that sum saying, “ At this stage of the game I am going to let the case ride. ’ ’ On April 9, 1969, and shortly before the trial was to begin, Royal Globe’s trial counsel told Browne that the Royal Globe representative who had been handling the negotiations with him “ had foolishly been trying to save some money, a few dollars in this case, and he told * * * [the representative] to throw in the whole policy. ’ ’ He then offered Browne the total policy coverage of $10,000. Browne rejected the offer.

On April 12, 1969, two days before the trial of the Wickman suit commenced, plaintiff Fred Knobloch authorized his attorney, Selkowe, to offer up to $10,000, plus costs, on his behalf as a contribution to a possible settlement of the claim against him and his mother. On April 14, 1969, the first day of the trial of the Wickman case, Royal Globe’s trial counsel again offered the full policy coverage of $10,000 plus costs and Selkowe offered an additional $2,500. This offer was rejected by Browne, who indicated that he wanted $60,000 from both sets of defendants (the Knoblochs and the Authority). The Attorney-General, who was representing the Authority, refused to contribute anything to a possible settlement. Selkowe made no offer to contribute more than $2,500 above Royal Globe’s offer of its policy limit of $10,000, even though admittedly he had been authorized by the Knoblochs to go as high as $10,000, if necessary. Selkowe testified that he “ indicated ” that he would go higher and “ called upon the Royal Globe to offer above its ten; and the Royal Globe wouldn’t offer a cent above its ten. So, therefore, there was no point in my going above the $2500 ”.² The trial then proceeded, resulting in a judgment .in favor of Wickman against the Knoblochs and the Authority, as above stated, for $75,383,50.

THE LAW.

Under present New York case law the obligation of an insurer to its insureds in connection with its determination of whether to settle claims against the insureds for- risks covered by the policy, or to defend them if they go to litigation, is solely one of good faith conduct and there is.no liability for mere negligence in failing to settle a claim.

In Auerbach v. Maryland Cas. Co. (236 N. Y. 247) the plaintiffs were the insureds under a $5,000 policy of liability insurance issued by the defendant. While the policy was in force their car was involved in an accident resulting in personal injuries to a married woman named Mrs. O’Neill. Mrs. O’Neill thereafter brought an action against the insureds to recover damages in the sum of $40,000 for her injuries and her husband sought to recover $10,000 for loss of her services. During the pendency of the action, which was defended by the insurer pursuant to the terms of its policy, the insurer had an opportunity to settle the action for $6,500, which it declined to do unless the insureds contributed $3,000 toward the settlement. The case thereafter proceeded to trial and resulted in a verdict of $20,000 in favor of Mrs. O’Neill and $5,000 in favor of her husband.

Under those facts the Court of Appeals held that the insurer was not in default of any contractual obligation assumed by it to its insured when it refused to contribute more than $3,500 of its policy limit of $5,000 toward the settlement of the O’Neill action, saying (Auerbach v. Maryland Cas. Co., supra, pp. 252-253):

“ There are no allegations in the complaint to the effect that the insurance company was negligent either in investigating the facts connected with the accident, or in the defense of the action, not a suggestion that it was guilty of fraud or misrepresentation in any way. A contract of insurance, like other contracts, is to be construed according to the sense and meaning of the terms which the parties have used; and if such terms are clear and unambiguous, they are to be understood in their plain, ordinary and popular sense. (Imperial Fire Ins. Co. v. Coos County, 151 U. S. 452; Drilling v. New York Life Ins. Co., 234 N. Y. 234.) The terms here used are clear and unambiguous.. The intent of the parties, if the language used be given a reasonable construction, cannot be misunderstood. There is nothing in the policy by which the insurance company obligated itself to settle, if an opportunity presented itself. It was given the option to settle, if it saw fit to do so, or to try the action, as it preferred. It, however, was under no legal obligation, either express or implied to compromise or settle the claims prior to the trial. The plaintiffs when they accepted the policy, did so with full knowledge of the fact, if an action were brought, that they surrendered to the insurance company absolute, full and complete control of it, including the settlement or trial. (Rum-ford Falls Paper Co. v. Fidelity & Casualty Co., 92 Me. 574; Schmidt v. Travelers Ins. Co., 244 Penn. St. 286.) They also knew there was no provision in the policy which obligated the insurance company to pay any amount whatever prior to the rendition of a judgment. The policy was one indemnifying them ‘ against loss or liability imposed by law. ’ The loss or liability here provided for contemplated the liquidation of a claim, if one were made, by the rendition of a judgment unless the insurance company saw fit to exercise the option which it had to settle and compromise without a trial.

“ It is true the insurance company realized, prior to the trial, that the terms under which a settlement could be had were favorable ones and that the same ought to be accepted. It so advised the plaintiffs in writing. The advice thus given imposed upon it no legal obligation to make the settlement. It. knew that its liability was limited to $5,000, and while it offered to pay $3,500 towards a settlement, that did not impose upon it the obligation to pay the full amount of the policy prior to the trial. The probability that judgments much larger than $6,500 would be recovered was as well known to the plaintiffs as to the insurance company. Each of the parties had full knowledge of all the facts. It is not suggested that the plaintiffs were misled by reason of the suppression of any of the facts by the insurance company or any fraud practiced upon them by it.

‘‘ The case in principle cannot be distinguished from McAleenan v. Massachusetts Bonding & Insurance Co. (173 App. Div. 100; affd. 219 N. Y. 563); Levin v. New England Casualty Co. (101 Misc. Rep. 402; affd. 187 App. Div. 935, which, in turn, was affirmed by this court, 233 N. Y. 631).

“ The insurance company, in refusing to settle the actions, did what it had the legal right to do under the terms of the policy ” (emphasis supplied).

If under Auerbach the insurance company could not be held liable for the excess recovery even though it realized, “ prior to the trial, that the terms under which a settlement could be had were favorable ones and that the same ought to be accepted ”, how can the insurer here be cast in liability, when not only did it not refuse to settle for less than its policy limit but in fact offered to pay every penny that it was obligated to under its policy of insurance?

In Best Bldg. Co. v. Employers’ Liab. Assur. Corp. (247 N. Y. 451, 456), the court said:

“ Although this court wrote no opinion in the case of Schenche Piano Company v. Philadelphia Casualty Company (216 N. Y. 662), it apparently decided that there was no liability for negligence in failing to settle a claim under an accident policy. In that case a judgment in the accident case was recovered for $10,143.93. The case could have been settled for $2,500. The company refused to settle because the insured would not pay part of the amount. Thereafter, the insured sued the company for the amount which it was obliged to pay over $5,000, the face of the policy. The complaint alleged negligence in these words: ' That the defendant herein refused and neglected to settle said action, and for its own benefit and against the wishes of the plaintiff herein arbitrarily and unreasonably refused to settle said claim and suit within the policy limit stated in said policy. ’

“ Our note in the memorandum recital of our decision calls attention to this complaint as alleging negligence and lack of due diligence. As a verdict was directed against the plaintiffs’ contention of negligence, this court must have decided the point.”

Judge Crane, speaking for a unanimous court, also wrote (pp. 455-456): “ We may ask what would constitute negligence in the failure to settle a case, as distinguished from bad faith. Even when there was little likelihood of recovery, many reasonable persons would think it wise to settle rather than to take any chance with a jury. In most of the accident cases, disputed questions of fact arise. Is the insurance company to determine at its peril whether reasonable-minded men would believe the plaintiff’s witnesses in preference to its own? Again, even on conceded facts, as frequently happens, a serious question of law arises as to the nature or extent of liability, if any. Is a jury to say that the insurance company was guilty of negligence in choosing to try out such a question in the courts rather than to settle? ”

In Best Bldg., as in Schenche Piano, relied on by the court in Best Bldg., the insurer had refused to settle with the insured’s injured employee for a stated amount. In Best Bldg, the amount was $8,500 and the policy provided for a liability of $10,000; the insurer had offered only $6,500, even though the insured had indicated a willingness to contribute $2,000 toward the settlement ; the trial resulted in a judgment of $16,000 against the insured, who then sued the insurer for the excess of the judgment over the policy, i.e., $6,000, less the $2,000 the plaintiff alleged it had 'been willing to contribute; and the complaint charged the insurer with negligence in handling the case and failing to notify the plaintiff of the offers made by both sides. In affirming the action of the trial court which set aside the verdict for the plaintiff and dismissed the complaint, Judge Grane said, “ The contract of the parties must measure the liability in the absence of fraud or bad faith ” (p. 455).

The standard laid down in Best Bldg, (supra), which limits the liability of an insurer to its insured, in handling settlement negotiations and in determining whether to settle or go to trial, to acting in good faith finds support in subsequent decisions on the subject (Brochstein v. Nationwide Mut. Ins. Co., 417 F. 2d 703, 706, 708; Gordon v. Nationwide Mut. Ins. Co., 30 N Y 2d 427; Peterson v. Allcity Ins. Co., 472 F. 2d 71; Parisi v. Maryland Cas. Co., 27 N Y 2d 505, affg. 32 A D 2d 1030 [2d Dept. 1969], affg. N. Y. L. J., Nov. 26, 1968, p. 18, col. 7).

Chief Judge Lumbard in Young v. American Cas. Co. of Reading, Pa. (416 F. 2d. 906), assessing New York law on the question of what constitutes bad faith by an insurer, listed some of the factors to he considered, as follows (p. 910): “ Under New York Law * * * it is well settled that the insurance company is under a duty to negotiate a settlement in good faith and that the interests of the insured must be given ' at least equal consideration in evaluating the propriety of a settlement.’ * * * Where, because of the likelihood that an excess verdict will be returned, the greater financial risk of the litigation rests on the insured, a finding of bad faith on the part of the insurer may be based on such factors as these:

(1) The failure of the insurer to investigate properly the circumstances of the accident.

(2) The refusal of the insurer to accept a settlement within the limits of the policy.

(3) The failure of the insurer to inform the insured of a compromise offer.

(4) Tho failure of the insurer to attempt to induce contribution by the insured.”

The last word on the subject, and one which to me seems conclusive on the question here at issue, is the statement of the court in Gordon v. Nationwide Mut, Ins. Co. (30 N Y 2d 427, 439) where Judge Bergan, speaking for the majority of the court, said: “ Where there is a breach of the terms of a contract of insurance, not found to have been made in bad faith, the damage for refusal to settle is limited, both in New York and elsewhere, by the policy coverage or, additionally, to that and the cost of defense where there is also a refusal to defend (Grand Union Co. v. General Acc., Fire & Life Assur. Corp., 279 N. Y. 638; Best Bldg. Co. v. Employers’ Liab. Assur. Corp., 247 N. Y. 451; Seward v. State Farm Mut. Auto, Ins. Co., 392 F. 2d 723 [5th Cir.]; Hendry v. Grange Mut. Cas. Co., 372 F. 2d 222 [5th Cir.]; Myers v. Farm Bur. Mut. Ins. Co., 14 Mich. App. 277).”

Applying the foregoing tests to the facts in this case, we find that the plaintiffs make no complaint as to the nature of the insurer’s investigation. While Royal Globe did refuse to settle with Wickman for $9,500 for a substantial period of time, the undisputed facts are (1) that a few days prior to the opening of the trial of the personal injury suit it did offer “ to throw in the whole policy ” and (2) that on the opening day of the trial, in a pretrial conference, it again offered its policy limit of $10,000, plus costs. At that time the plaintiffs’ own attorney, then aware of the negotiations and having been empowered by his clients, the plaintiffs here, to offer up to $10,000 as their contribution to a settlement, actually offered no more than $2,500 and instead, ‘ ‘ called upon the Boyal Globe to offer above its ten,” deciding, when “ Boyal Globe wouldn’t offer a cent above its ten,” that there “ was no point ” in his going above $2,500. Such conduct would appear to raise a serious question as to the plaintiffs ’ good faith in seeking a settlement that would cut their potential losses. Certainly such conduct by them, when called upon to contribute, after the insurer had offered its full coverage in an effort to obtain a settlement, should, regardless of the other factors in the case, estop them from claiming bad faith on the part of their insurer. What they did was to hazard a trial and verdict rather than offer what they had themselves decided should be their contribution toward a settlement. Their conduct is a clear indication that their considered judgment as to the likelihood of a verdict against them far in excess of the policy limit was not so great as to cause them to offer more than $2,500 above the insurer’s coverage. In the face of their own conduct, to permit a recovery here would be allowing them , to second-guess the insurer.

Here there is no claim of failure by the insurer to inform their insureds of the demands made by the personal-injury claimant. Clearly the Knoblochs were informed of the possibility of a judgment against them in excess of the policy coverage in December, 1962, which gave them ample time to take any steps they felt necessary to protect themselves. Yet they did not elect to obtain their own lawyer until more than six years had elapsed and then only when the case reached the day calendar.

The record in this case is barren of any evidence of bad faith on the part of the insurer, unless the continued refusal until shortly before the trial to meet the claimant’s demand of $9,500 is such evidence. We submit that it is not. Nothing done by the insurer during the prolonged course of the ‘ ‘ byzantine bargaining ” (Brockstein v. Nationwide Mut. Ins. Co., 417 F. 2d 703, 706, supra) with respect to a settlement in behalf of the plaintiffs here shows any failure by the insurer to carry out its duty to act in good faith to protect its insureds’ interests. It was merely doing what it had a right to do under its contract of insurance. To repeat what Judge Bergan said in Gordon (supra, p. 439): “ Where there is a breach of the terms of a contract of insurance, not found to have been mad¿ in bad faith, the damage for refusal to settle is limited, both in New: York and elsewhere, by the policy coverage ”. To sustain the plaintiffs’ recovery here would be tantamount to laying down a rule of law that an insurer which had collected a premium based on its maximum liability could bargain with a claimant only ,at its peril and, if a judgment were rendered in excess of its policy limit, it would then be “ stuck ” for the difference. To so hold, when the insurer has “ thrown in the whole policy ” in an effort to obtain a settlement, would be a rewriting of the express and explicit provisions of the policy and would, in pragmatic effect, remove the need for those buying liability insurance to consider how much coverage they should buy to obtain the “ sense of repose ” which one purchasing a liability policy seeks (Brockstein v. Nationwide Mut. Ins. Co., 417 F. 2d 703, 704, supra).

My learned brothers, Presiding Justice Gulotta and Justice Hopkins, in their respective dissenting opinions indicate their belief that Auerbach and Best Bldg, (supra) no longer represent the' law of this State.³ However that may be, it certainly would be an unwarranted extension of any New York case to hold that an insurer may be cast in damages where before trial it has offered to pay its entire liability under its policy of insurance merely because a jury might decide that it should have' made that offer at some earlier stage of the litigation.

We therefore reverse the judgment, on the law and the facts, and dismiss the complaint,⁴ and we reverse the order which granted the motion to- add interest, and dismiss the motion, all without costs.

1 . The Authority was sued on the theory that a rough section of the Taconic Parkway where the accident happened contributed to the occurrence.

2 . It should be noted that Browne, on behalf of Wickman, had indicated his willingness to accept $35,000 to release the Knoblochs and it is therefore quite possible that if the Knoblochs’ attorney had offered to put in the $10,000 above Royal Globe’s $10,000, as he was authorized to do, the action might have been settled as to the Knoblochs.

3 . See the comprehensive opinion on the relationship between an insured and his insurer in Rova Farms Resort v. Investors Ins. Co. of Amer. (65 N. J. 474, 500-501 [Aug. 7, 1974]) in which Chief Judge Hughes, writing for .the New Jersey Supreme Court, said: “ One day, in an appropriate issue, it may be necessary to separate these conflicting interests. The insured has the right to expect that the amount of protection he has purchased will be offered in compromise where necessary to effect an end to the litigation. On the other hand, the insurer may pursue its own interests and decline to settle a case, for whatever reason (so long as not in bad faith or similarly wrongful). These elements apart, it is contractually free to offer a fraction of its insured’s policy limit or nothing at all. However, where the carrier chooses not to offer the limits of coverage, one wonders whether it should not bear the unhappy financial result of that unilateral decision, since it alone profits from the opposite result of the gamble. This resolution would enable the insurer to pursue its own interests in great measure without sacrificing those of its insured so long as it was clear by whom the burden of mistake should be borne. The kind of rule we project, which would settle the nagging conflicts of interest under present law, has already been regarded favorably by some. See Crisci V. Security Ins. Co., 66 Cal. 2d 425, 58 Cal. Rptr. 13, 17, 426 P. 2d 173, 177 (1967); Comment, 47 Neb. L. Rev. 705 (1968); Note, An Insrance Company’s Duty to Settle, 41 S. Cal. L. Rev. 120, 138-142 (1968); Note, Excess Liability: Reconsideration of California’s Bad Faith Negligence Rule, 18 Stam. L. Rev. 475, 482-485 (1966); Note, Insurer’s Refusal to Settle—A Proposal for Imposition of Liability Above Policy Limits, 60 Yale L. J. 1037, 1041-1042 (1951); Comment, 48 Mich. L. Rev. 95, 102 (1949); Note, 13 U. Chi. L. Rev. 105, 109 (1945).’’

4 . Cognizant of the fact that insurance companies sometimes refuse to engage in good faith settlement negotiations the- Legislature has. authorized the imposition of penalties on an insurer who engages in unfair claim settlement practices (Insurance Law, § 40-d, subd. 1, par. d). Thus a penalty may be imposed upon a carrier for d. not attempting in good faith to effectuate prompt, fair and equitable settlements of claims submitted in which liability has become reasonably clear ” (added by L. 1970, ch. 296, § 1, eff. Sept. 1,1970).