In Ansonia, the insured had obtained a policy with Public Service Mutual Insurance Company which provided for commercial general coverage in the amount of $1 million. After Ansonia was sued (along with at least ten other co-defendants) PSMIC provided a defense attorney as required under the policy. Prior to the trial of the action, the plaintiff made a demand that Ansonia settle out for $375,000, a number well within the limits of the PSMIC policy. The court noted that Ansonia's attorney (provided by PSMIC)urged PSMIC to accept the offer, stating, “It is my recommendation that at this juncture active efforts on our part to resolve this matter be undertaken to minimize the exposure to runaway verdicts, punitive damages, or a disproportionate liability split in which Public Service Mutual's contribution towards the settlement would be greater than [this amount]”.
As insurance carriers often do, PSMIC did not accept the recommendation. Therefter, the ten codefendants settled for the total sum of $152,702. Ansonia's attorney again urged settlement, stating his “opinion that resolutions [sic ] of these actions, and the extinguishment of any liability of the insured including the possible effect of punitive damages is preferred to the prospect [of] subjecting the insured to a trial on the issue of liability and damages where the exposure appears greater than the benefits of resolution.” The insurer again ignored the suggestion.
Since the Plaintiff could not settle with Ansonia, the matter proceeded to trial where the jury found Ansonia to be 80% liable for the injury and to be answerable in punitive damages for “gross negligence and/or willful misconduct”. Ansonia offered its own funds in the attempt to settle the matter for $500,000 above the amount of the $1 million policy issued by PSMIC, but the plaintiffs demanded $2.5 million. Ultimately, the case settled for $1.5 million with the entire amount being provided by Ansonia as PSMIC refused to make any contribution towards the settlement.
As PSMIC had abdicated its responsibility under the policy, Ansonia sued it under a theory that its actions constituted a bad faith refusal to settle the underlying claim. As noted by the First Department in its decision:
At the root of the ‘bad faith’ doctrine is the fact that insurers typically exercise complete control over the settlement and defense of claims against their insureds, and, thus, under established agency principles may fairly be required to act in the insured's best interests ... in order to 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 best interests-that is, a deliberate or reckless failure to place on equal footing the interests of its insured with its own interest when considering a settlement offer. 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.
In arguing that Ansonia's suit should be dismissed, PSMIC asserted that since the insurance policy did not cover punitive damages and an award against Ansonia would have included punitive damages, it was never required to pay the claim. The court rejected this argument, stating:
Stated simply, two wrongs do not make a right. What defendants misapprehend is that, for the purposes of this appeal, there is only one wrong and it is entirely attributable to misconduct by the insurer. Having succeeded in maneuvering its insured into unilaterally entering into a settlement to avoid the potential of an award of punitive damages, the insurer has exhibited bad faith by using economic duress to deprive the insured of the very insurance coverage for which plaintiff contracted. The insurer cannot justify its misconduct by speculating that, had the parties proceeded to trial, an award of exemplary damages would have been rendered that would necessarily have been upheld by this Court. In the absence of any award representing exemplary damages, this Court is not concerned with “preserving the condemnatory and retributive character” of such awards and avoiding a result that “would allow the insured wrongdoer to divert the economic punishment to an insurer”. What is involved here is merely that aspect of our civil justice system that “allow[s] a wrongdoer to escape the punitive consequences of his own malfeasance in order that the injured party may enjoy the advantages of a swift and certain pretrial settlement”. It is “no more than a necessary incident of the process” and not an event that operates to absolve the insurer of the consequences of its failure to fairly represent its insured's interests in the litigation, looking instead to its own financial benefit. Thus, the defect in defendants' case is the lack of “an entirely separate and analytically distinct wrong on the part of the insure[d]”, to paraphrase Soto . Succinctly stated, while two wrongs do not make a right, one wrong remains just that.
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