Wednesday's Weird But True Legal Cases - Vol L

This week's weird (but true) legal case looks at another case of an insurance company which was called on the carpet for putting itself before its policyholders.

In State v. Merchants, 109 A.D.2d 935, 486 N.Y.S.2d 412 (3d Dept. 1985), the Appellate Division dealt with a matter wherein New York State had retained Merchants Ins. Co. of New Hampshire to insure its snow plows. As sometimes occurs, a state snowplow was involved in an accident with a pickup truck which resulted in the death of the pickup driver. The estate of the pickup driver filed suit against New York State in the Court of Claims and the State tendered the matter to Merchants.

As discussed in the decision, after the accident there was communication between the estate and the insurer, but no settlement was reached. The estate's lawyer thereafter sent a letter in which he indicated that the matter could settle for $90,000, a figure within the policy's $100,000 limit of coverage. However, the insurer was not interested in settling at that figure and did not offer more than $45,000. Following a trial, the estate was awarded $179,000 and the State brought a bad faith claim against Merchants for failing to settle within the policy limits.

As noted by the court in its decision, Insurance Law §2601(a)(4) which describes unfair claims practices and is the basis for bad faith claims, states that:

[i]t is an unfair practice for insurers 'not to attempt in good faith to effectuate prompt, fair and equitable settlements of claims submitted in which liability has become reasonably clear'. A complaint adequately sets forth a prima facie case against an insurer for liability in excess of policy limits where it is asserted that “an insured lost an actual opportunity to settle the negligence claim against him within the coverage limits of his policy by reason of the insurer's purported ‘bad faith’.

The court then ruled that the insurer had engaged in bad faith in making the $45,000 offer since the offer was "unrealistic." The court observed that the:

Decedent was survived by her husband and two children. At the time of her death, she was in her mid-30s and was employed outside the home. It was readily foreseeable that a verdict would reach or exceed the policy limits. Yet, defendant never made a higher offer. Neither did defendant respond to a later signal that the case might settle for $75,000.

The record before us supports the view that defendant was well aware that its proposed $45,000 settlement figure was substantially lower than the liability it could reasonably expect to incur. The jury could reasonably have reached the conclusion that defendant exercised bad faith in failing to protect the interest of its insured by coming forth with a reasonable and fair settlement offer, as it was contractually and statutorily required to do.

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