Primary Carrier’s Failure to Settle Results in Bad Faith Ruling in Favor of Excess Carrier

April 24, 2014

On March 31, 2014, the United States District Court for the Northern District of New York in Quincy Mutual Insurance Company v. New York Central Fire Insurance Company found the primary insurance carrier, New York Central Fire Insurance Company (“New York Central”), to have handled the defense of its insured in bad faith when, for nearly ten years after receiving a final determination as to the insured’s liability and confirming that the underlying plaintiff’s damages would far exceed New York Central’s $500,000 policy limit, New York Central refused to offer more than $75,000 to settle the underlying action. As a result, the insured’s excess carrier, Quincy Mutual Insurance Company (“Quincy”), sustained unnecessary and avoidable exposure up to its $1 million policy limits, when the underlying matter ultimately settled for $1,069,726.20, plus interest in the amount of $427,831.87. The instant action commenced due to a dispute between the insurers regarding New York Central’s obligation to reimburse Quincy for the payment of interest. (Note: the underlying action settled by entry of a stipulated judgment, pursuant to which Quincy’s rights were preserved to pursue such claim).

By way of background, the underlying action was commenced in October 2001 by the underlying plaintiff against the insured alleging that in November 2000, the insured negligently failed to yield the right-of-way of a stop sign, causing a collision with the underlying plaintiff’s vehicle. Due to the severity of the injuries sustained by the underlying plaintiff as a result of the accident, she was forced to undergo six separate surgical procedures, was unable to return to work, and was ultimately rendered disabled, with projected life care expenses between $2.4 million and $4.4 million. Immediately after the accident, the insured was cited for failure to yield the right-of-way at a stop sign and, thereafter, pled guilty to a lesser traffic violation. Therefore, after nearly eight years of protracted litigation, the underlying action settled in 2009, with New York Central paying $497,558.07, thus rendering Quincy responsible for payment of the remaining judgment in the amount of $572,168.13, plus $427,831.87 in interest.

As a result of the settlement reached in the underlying action, Quincy was exposed to indemnity up to its full $1 million policy limits, and ultimately commenced the instant action claiming that New York Central acted in bad faith with a gross disregard of Quincy’s interests as the insured’s excess insurance carrier, when it refused to settle with the underlying plaintiff on two separate occasions for significantly less than the total of both policy limits. Despite the fact that liability had already been established early on against the insured, and after sufficient evidence was received confirming that the underlying plaintiff’s injuries would far exceed the policy limits of the New York Central policy, New York Central denied several reasonable settlement demands without any basis offering no more than $75,000 to resolve the underlying action.

Of significant note for primary insurers, the court rejected New York Central’s claim that Quincy contributed to any indemnity exposure, as it failed to settle any excess exposure prior to the tender of New York Central’s policy limits. It was thus held by the court that there is “no legal obligation on an excess carrier in Quincy’s position to negotiate a claim unless and until primary coverage is exhausted” as the imposition of such an obligation would render the excess carrier a “de facto primary insurer.”

Although extreme, the Quincy holding sets a precedent that primary carriers may be held accountable for bad faith actions in connection with the handling of a mutual insured’s defense in the underlying action that so clearly and deliberately disregard an excess carrier’s interests.