Can Carrier Commit Bad Faith After Successfully Disclaiming for Late Notice?

Cirone v. Tower Ins. Co. of New York
--- N.Y.S.2d ----, 2010 WL 3632360
N.Y.A.D. 1 Dept.,2010.

This recent case contains a rare interesting twist on the issue of late notice, with a touch of bad faith thrown in. The interesting question raised in the title of this blog unfortunately was not addressed by the majority and only obliquely referenced in the dissent. It nevertheless raises an interesting scenario.

The underlying personal injury action involved plaintiffs injured by a restaurant’s delivery man. The restaurant’s carrier disclaimed coverage on the grounds of late notice and obtained a declaratory judgment confirming the propriety of the disclaimer. After the plaintiffs obtained a judgment in the personal injury action against the restaurant they brought their own DJ action against the carrier to recover the judgment pursuant to Insurance Law § 3420(b)(1). The court granted plaintiffs summary judgment, finding they gave the carrier proper notice of the accident, even if the insured did not.

Thereafter, the insured assigned all of its rights and claims against the carrier to the plaintiffs, who commenced an action for the carrier’s alleged bad faith in failing to settle the personal injury action within the policy limits.

The motion court dismissed the bad-faith claims which the appellate court affirmed. Although the result seemed pre-ordained, given the unlikelihood that any carrier would or should consider a substantial settlement after its disclaimer was confirmed on appeal, the Judge Catterson writing in dissent, suggested that the carrier still owed the insured a duty to settle the case within the policy limits given the plaintiffs' success in putting the policy limits in play.

The majority found that the carrier owned its insured nothing, given the late notice, but it is not altogether clear that they really understood the argument. The majority relied on hornbook law that “[A]n assignee never stands in any better position than his assignor” ( Madison Liquidity Invs. 119, LLC, 57 AD3d at 440) [internal quotation marks and Citations omitted]. Thus, plaintiffs' rights were equal to the rights of the insured restaurant, no more. The Court found that since the insured failed to give the carrier timely notice, it would be “estopped” from having a claim of bad faith to assign. The majority's use of the word “estopped” was inappropriate. This author recently pointed out that the First Department has misunderstood the concept of estoppel for decades. See NYLJ, 9/20/10, Outside Counsel, Coverage by Estoppel? It May Depend on the Court, p. 4, col. 1. The reason the court was saying that the insured had no bad faith claim was not due to estoppel, which involves detrimental reliance, but more prosaically, because the carrier owed the insured nothing(not even a defense), much less a duty to settle the case.

While this seems simple enough, is it correct? Judge Catterson, besides a clumsy attempt to distinguish the case relied upon by the majority, Zeldin v. Interboro Mut. Indem. Ins. Co. (44 A.D.3d 652, 834 N.Y.S.2d 366 (2d Dept.2007)), seems to ultimately ask an excellent question. If plaintiffs' notice was timely, does not the carrier owe its insured a duty to settlement within policy limits, even if it does not owe its insured a duty to defend?

The argument goes like this. Since the assignees' notice was timely, the policy provides indemnity coverage to the injured plaintiffs even if does not not provide the insured with a defense. Under such a scenario, Judge Catterson is saying that the carrier would owe its insured a good faith duty to settle the case within policy limits despite the fact it has no duty to defend. What the majority should have addressed is whether the insured’s late notice vitiated such duty? I do not believe this question has been addressed by any New York court, but I have not done the research.

Perhaps the answer is in the timing. Whether the carrier acted in bad faith involves a question of what the carrier knew at the time it was provided with a chance to settle. If at the time of the carrier's opportunity to settle, the plaintiffs had not yet obtained declaratory relief on its claim against the policy pursuant to 3420(b)(1), the underpinning of Judge Catterson's argument would be missing. In fact, the decision suggests that plaintiffs only obtained declaratory relief after they obtained a verdict in excess of the policy. It would not seem likely that a bad faith claim could be predicated on the mere possibility that a third party might establish coverage pursuant to 3420(b)(1), but if plaintiffs put the carrier on notice as soon as reasonably possible, such a legal possibility just might be viable.

If anyone has any thoughts on the matter, your comment would be appreciated.