Reed Smith on The Insurance Company’s Settlement of Tort Claims: An Analysis of In Re East 51st St. Crane Collapse Litigation

   By John Berringer and Jennifer Katz, Reed Smith LLP

In In Re East 51st St. Crane Collapse Litigation, the New York Supreme Court permitted the primary insurance company to enter into a settlement which clearly was not “in the best interests of the insured.”  That decision set an extremely low bar for determining whether insurance company settlements of underlying tort claims are in “good faith.”  This commentary examines that decision and its implications for policyholders.

On March 15, 2008, a crane collapsed on east 51st Street in New York City at a construction site, resulting in death and personal injury claims, as well as property damage claims.  Lincoln General Insurance Company (“Lincoln”) was the primary insurer of Joy Contractors, Inc., the construction manager.  The owner and developer of the property under construction as well as the general contractor of the construction were additional named insureds under the Lincoln policy.   The insurance policy issued by Lincoln obligated it to defend its policyholders in the tort litigation involving the crane collapse until its $1 million policy limits were exhausted through the payment of “judgments or settlements.”   It also provided that Lincoln’s “right and duty to defend ends when we have used up the applicable limit of insurance in the payment of judgments or settlements ….”

The Court approved Lincoln’s third attempt to craft a settlement with less than all of the underlying plaintiffs, thereby exhausting its policy limits and terminating its duty to defend its policyholders in the remainder of the underlying litigation.  The Court concluded that the settlement was in “good faith.”  Lincoln’s third, successful proposal was to exhaust its policy limits by settling with a local Rite Aid store for $450,000 (which was less than half of the amount Lincoln originally proposed to pay that entity only days before) with the remainder of the policy limits (or $550,000) being paid to a plaintiff with indisputable injuries.

The decision to accept Lincoln’s third proposed settlement could potentially have far reaching implications for policyholders.  Arguably, the Court ignored whether the settlement was in the “best interests of the insured.”  Yet, even counsel defending insurance companies routinely concede that an insurance company may not exercise its contractual right under a liability insurance policy to settle an underlying tort claim where such a settlement is not in the “best interests” of the policyholder.  The ruling effectively invites insurance companies to settle with less than all of the plaintiffs in pending tort cases at the earliest possible moment, thereby limiting the insurance company’s own exposure for defense costs and denying a policyholder the full benefit of the “litigation insurance” it purchased.

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John Berringer is a litigator at Reed Smith who has represented clients in a broad variety of practice areas, including environmental, product liability and directors and officers insurance coverage litigation, contract, bankruptcy and employment litigation.  He has written articles and lectured extensively on insurance coverage issues. John has been recognized, for the third year in a row, by Chambers USA 2009: America’s Leading Lawyers for Business as a "'real team player' who is known for his extensive knowledge and experience in representing clients in insurance coverage and bankruptcy cases.” In addition, Chambers USA recognizes John by saying "Berringer is held to be one of the regions foremost authorities on insurance matters, with expertise across a wide range of issues."

Jennifer Katz joined Reed Smith in 2008 and is a member of the firm's Insurance Recovery Group. Jennifer represents policyholders exclusively in disputes with their insurance companies. She has experience handling both first-party and third-party insurance coverage matters including product liability, property valuation, and political risk insurance claims.

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