SNR Denton on Doherty v. Merchants Mutual Insurance Co.: When Is Bad Faith Failure To Settle a Jury Question in New York?

SNR Denton on Doherty v. Merchants Mutual Insurance Co.: When Is Bad Faith Failure To Settle a Jury Question in New York?

William Barker and Justin Kattan   By William T. Barker & Justin N. Kattan

In Doherty v. Merchants Mutual Insurance Co., [1] a sharply divided Appellate Division affirmed summary judgment for an insurer on bad faith failure to settle.  If followed, this would arguably raise the already high threshold for failure to settle claims in New York.  An appeal to the New York Court of Appeals is pending. [2] This commentary examines the case.

It quickly became clear that the insured, Fitzpatrick, bore 100% of the fault for the accident.  But New York allows no right to recover noneconomic loss for an auto accident unless there has been a “serious injury,” defined to include “permanent consequential limitation of use of a body organ or member.”  Existence of a serious injury (and, if so, the amount of damages) was the issue to be tried.  The policy limit was $300,000 and pretrial negotiations had ended with a demand of $250,000 and an offer of $25,000.  The doctors were deposed on the eve of trial, and the defense expert was far less positive than expected.  During trial, the offer was raised to $55,000 and the demand lowered to $240,000, but no settlement resulted.  The jury awarded $740,000.  Merchants Mutual paid the policy limit, Fitzpatrick assigned the bad faith claim and the Dohertys sued.  The trial court rendered summary judgment for Merchants Mutual and a divided appellate division affirmed, holding that Merchants Mutual had not acted in gross disregard of Fitzpatrick’s interests.

 New York Courthouse

As the commentary notes:

The dissent disagreed, pointing out that the trial court, in denying Fitzpatrick summary judgment on the “serious injury” issue had found that “Doherty and her husband presented ‘objective evidence’ of a serious injury which was supported by the ‘qualitative assessment’ of Doherty's orthopedic surgeon.” [3] Moreover, Doherty had a life expectancy of 54.4 years, during which he would suffer from disability and pain (and the jury ultimately awarded $500,000 for future pain and suffering). [4]  In the dissent’s view:

Necessarily inherent in an insurer's duty to its insured is a well-reasoned and thorough analysis leading to the establishment of a predicted jury verdict value in the event of a verdict in favor of the injured claimant. The record is devoid of any assertion by defendant that it had evaluated and actually assigned a potential jury verdict value, as compared to a settlement value, to Doherty's personal injury claim. Indeed, defendant's claim representative admitted that she never assigned a value or even a value range to the claim and could not recall how she arrived at the $ 10,000 settlement offer that remained in place until the first day of trial, when it was increased to $ 25,000. The record does not contain evidence of any analysis by defendant of the potential for high-end jury verdicts in the trial venue or any examination of jury verdict reports in cases with similar injuries in similar venues. Thus, in our view, on this record, defendant utterly failed to satisfy one of the most fundamental factors essential to a finding of good faith.

The commentary analyzes the leading New York bad faith case of Pavia v. State Farm Mutual Automobile Insurance Co., in which the New York Court of Appeals laid down the following standard for bad faith failure to settle cases:

[T]o establish a prima facie case of bad faith, the plaintiff must establish that the insurer’s conduct constituted a “gross disregard” of the insured’s interests--that is, a deliberate or reckless failure to place on an equal footing the interests of its insured ….  In other words, a bad-faith plaintiff must establish that the defendant insurer engaged in a pattern of behavior evincing a conscious or knowing indifference to the probability that an insured would be held personally accountable for a large judgment if a settlement offer within the policy limits were not accepted.

The commentary analyzes the facts in Doherty and concludes that “[t]he bad faith claim in Doherty must stand or fall depending on whether Merchants Mutual was obliged to accept the $240,000 demand during trial.”  It analyzes various perspectives on how the Pavia standard might apply to the facts and concludes that

Doherty will call upon the New York Court of Appeals to clarify the standard for the duty to settle.  In light of the recent expansion of liability for first-party bad faith, it is unclear what direction the court will chart for bad faith law in the third-party context.

[1] Doherty v. Merchants Mut. Ins. Co., 74 A.D.3d 1870 (4th Dept. 2010).

[2] Doherty v. Merchants Mut. Ins. Co., 2010 N.Y. LEXIS 2964 (Oct. 19, 2010) (denying motion to dismiss appeal).

[3] 74 A.D.3d at 1873 (dissenting opinion).

[4] 74 A.D.3d at 1873 (dissenting opinion).

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William T. Barker is a partner in the Chicago office of SNR Denton, L.L.P., with a nationwide practice representing insurers in complex litigation, including matters relating to coverage, claims handling, sales practices, risk classification and selection, agent relationships, and regulatory matters. He is a member of the Editorial Board of the New Appleman on Insurance Law Library Edition and a Consulting Author of the New Appleman Insurance Law Practice Guide. He has published over 100 articles and speaks frequently on insurance and litigation subjects. He was a Contributing Editor and then Editor of Bad Faith Law Report until that publication merged with Insurance Litigation Reporter, where he is currently Senior Contributing Editor and Editorial Board Director. He has been described as the leading lawyer commentator on the connections between procedure and insurance. See Charles Silver & Kent Syverud, The Professional Responsibilities of Insurance Defense Lawyers, 45 Duke L.J. 255, 257 n.4 (1995). Mr. Barker is a member of the American Law Institute.

Justin N. Kattan is a partner in SNR Denton's Litigation practice. Mr. Kattan is experienced in many areas of litigation, including insurance coverage disputes, intellectual property, real estate, tax and complex contractual disputes. Over the past several years, Mr. Kattan has worked extensively on cases involving distressed assets, including an ongoing suit to adjudicate the obligations of a financial institution managing a reference pool of assets underlying a series of credit swap transactions. Mr. Kattan also currently represents a group of European lenders in a suit in New York Federal Court against the guarantors of a failed $200 million construction project in Florida.

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