I. INTRODUCTION
Clearly not all claims can be settled, and, sometimes, those that can, take on a "life of their own," resulting in settlement outside policy limits. In such cases, the settling defendant's carrier potentially faces exposure to a bad faith claim for failure to settle within policy limits.As with most bad faith claims, diligent claim handling has far-reaching benefits in avoiding bad faith exposure, such as thorough documentation of claims assessment, valuation and settlement efforts, and prompt attention to facts and legal strategies that bear directly on the claim's value.
  New York courts have been particularly prolific in their written opinions addressing the diligence necessary to successfully defend against a bad faith claim for failure to settle within policy limits under New York law.This article surveys the key New York decisional law involving claims of bad faith for failure to settle within policy limits, and suggests some simple, yet essential claim handling procedures insurers can adopt to avoid exposure to such claims.

II THE STANDARD FOR BAD FAITH FAILURE TO SETTLE WITHIN POLICY LIMITS UNDER NEW YORK LAW.

The leading, and most often-cited case in New York regarding bad faith for failure to settle within policy limits is Pavia v. State Farm Mut. Auto. Ins. Co., 82 N.Y. 2d. 445 (N.Y. 1993), in which the New York Court of Appeals established the parameters for such a claim.Most importantly, the Court held that while claims for bad faith for failure to settle within policy limits must be based on conduct amounting to more than ordinary negligence, a plaintiff is not required to show a "sinister motive." Id. at 453. Rather, the Court held, 
  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 an insured's interest - that is, a deliberate or reckless failure to place on equal footing the interests of its insured with its own interests when considering a settlement offer [citations omitted].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 or settlement offer within the policy limits were not accepted.

Id. at 453-454see also Commerce and Industry Ins. Co. v. North Shore Towers Management, Inc., 617 N.Y.S. 2d. 632, 635 (N.Y. Civ. Ct. 1994) (same, citing Pavia)



III ACTS OR OMISSIONS THAT POTENTIALLY EXPOSE A CARRIER TO A BAD FAITH CLAIM FOR FAILURE TO SETTLE WITHIN POLICY LIMITS.

In general, New York courts have allowed bad faith claims where it is clear that there was no viable liability defense, and that the potential damages far exceeded the policy limits.For example, in Knobloch v. Royal Globe Ins. Co., 38 N.Y. 2d. 471 (N.Y. 1976), the Court reversed the Appellate Division's reversal of the jury verdict in favor of the insured on his bad faith claim for failure to settle within limits of an insurance policy.In the underlying action, the insured's passenger sued the insured for injuries the passenger sustained when the car the insured was driving hit a rough spot on the Taconic Parkway and overturned.The insurer's refusal to settle within policy limits prior to trial was based, in part, on its intent to assert a defense of contributory negligence by the plaintiff passenger.Notably, however, at the trial of the bad faith claim, the insurer offered no proof of its own evaluation of the case for settlement purposes, or any outside counsels' or other qualified outsider's assessment of the settlement potential and cost of the case.Id. at 474-78, 480.
 The Court concluded that on the issue of liability, the jury hearing the bad faith case could have found that a defense of contributory negligence by the passenger was highly problematic, and not viable, and that therefore, there was no issue as to causation.Id. at 480.Given this, the Court also held that given the nature and extent of the hospital and medical care the claimant underwent as a result of the accident, the jury was entitled to conclude that, if liability were found, damages would almost certainly far exceed the $10,000 policy limit that the insurer ultimately offered on the eve of trial.Id.Thus, the court affirmed the jury's determination of bad faith.
 However, New York courts have acknowledged that an insurer is not obligated to accept any settlement offer within policy limits because an insurer has a right to refuse to pay a claim based on both legitimate liability and damages defenses.See, e.g., New England Ins. Co. v. Healthcare Mut. Ins. Co., 295 F. 3d 232 (2d Cir. 2002) (for bad faith claim to survive, plaintiff must show a causal connection between the alleged bad faith and the loss of an actual settlement opportunity, such as clear liability), vacated and remanded in part on other grounds, 352 F.3d 599 (2d Cir. 2003); U.B. Vehicle Leasing, Inc. v. Atlantic Mut. Ins. Co., 2004 U.S. LEXIS 3967 (S.D.N.Y. March 12, 2004) (no bad faith where insurer made increased settlement offers without movement by plaintiffs in settlement discussions, and insurer had legitimate reason for delaying settlement in order to determine key factual issue).Similarly, New York courts also have held that insurers confronted with multiple claims arising out of the same accident are not required to accept a package deal within the overall policy limits if, in doing so, the insurer would be overpaying on some of the claims.See, e.g., Red Cross v. Aetna Cas. and Surety Co., 688 N.Y.S. 2d. 817 (N.Y. Sup. Ct. 1999); Bates v. Merchant's Mut. Ins. Co., 277 F. Supp. 308 (N.D.N.Y. 1967).
  New York courts also appear to be less likely to allow a claim for bad faith where the insurer's failure to settle within policy limits is based, at least in part, on the insured's representations to the insurer regarding the factual background of the underlying case against the insured.For example, in Dous v. Lumberman's Mut. Cas. Co., 659 N.Y.S. 2d. 584 (N.Y. Sup. Ct. 1997), the underlying case was a one-car accident in which the plaintiff obtained a default judgment against the vehicle owner and driver, Thomas Fanniff.The policy at issue had a $10,000 liability limit, but the plaintiff recovered almost $170,000 in damages.The insured assigned all of his rights and claims against the insurance company to the plaintiff, and the plaintiff pursued a direct action against the insurer, charging the insurer with bad faith in its failure to settle.The Supreme Court denied the insurer's motion for summary judgment, and the insurer appealed that denial.
  The New York Court of Appeals held that the plaintiff had failed to establish the necessary elements of a cause of action for bad faith for failure to settle within policy limits.Citing the Pavia standard outlined above, the court first instructed that the plaintiff's burden was to show that an opportunity to settle was lost "at a time when all serious doubts about the insured's liability were removed."Id. at 585, citing Pavia at 454.
  The Court noted that the defendant insurer initially rejected plaintiff's settlement offer because the insured had represented that he was not the driver when the accident occurred.Based on this statement, the Court concluded that the plaintiff, who stood in the insured's shoes in the direct action, was estopped from contending that the insurer acted in bad faith by failing to disregard or question those statements.Id. at 585.Furthermore, there was documentary evidence that raised a question as to whether Fanniff was driving the car, and therefore, the Court concluded it could not be said the plaintiff's settlement offers came at a time when all serious doubts about the insured's liability had been removed.Id.The Court further explained that additional investigation would not have resolved these factual questions because neither the insured's subsequent testimony nor the favorable outcome of plaintiff's trial established unequivocally that the insured was actually the driver of the car.Id.Thus, the Court reversed the judgment denying the insurer summary judgment, granted summary judgment to the insurer and dismissed the complaint.Id.
  New York law also focuses on the degree to which an insurer itself engages in settlement discussion prior to trial, and whether it includes the insured in that process. For example, in Young v. American Cas. Co. of Reading, Pennsylvania, 416 F.2d. 906 (2d Cir. 1969), the Second Circuit, applying New York law, held that an insurer that receives an offer of settlement in excess of the coverage of its policy acts in bad faith if it fails to make any attempt to engage the injured plaintiff's counsel in settlement discussions that would reduce the demand to within the policy limits.Id. at 910-11.he Court rejected the insurer's claim that it could not be liable for bad faith absent proof that a settlement within the policy limits was possible, or alternatively, that the insureds were willing and able to contribute any excess required to effect a settlement beyond the policy limits.Rather, the Court placed the burden squarely on the insurer to "flush out" the settlement potential for the case, and to engage in preliminary settlement negotiations designed either to bring a demand within the policy limits or toward a number higher than the policy limits to which the insured realistically could contribute.Id. atSee also Hartford Ins. Co. v. The Methodist Hospital, 785 F. Supp. 38, 41 (E.D.N.Y. 1992) (denying insurer's motion for summary judgment on basis that plaintiffs never indicated they would accept offer within policy limits; underlying plaintiff's willingness to settle for policy limits is one, but not only way, to show actual opportunity to settle existed and therefore triable issue of fact remained as to whether insurer lost an actual opportunity to settle within the coverage limits by reason of bad faith).An insurer also is required to keep the insured informed regarding settlement discussions, and its failure to do so can be a factor in determining bad faith.For example, in Smith v. General Accident Ins. Co., 91 N.Y. 2d. 648 (N.Y. 1998) the Court held that the lower court properly instructed a jury considering a bad faith claim for failure to settle within policy limits that the insurer's failure to keep its insured abreast of settlement offers and negotiations was one of several factors relevant to the bad faith determination.The Court reasoned, "if an insurer acting in good faith would ordinarily keep its insured informed of settlement negotiations, then the failure of an insurer to do so could raise the inference that the insurer is acting in bad faith by failing to provide its insured with settlement information, regardless of the insurer's legal obligations."Id. at 654.Furthermore, a jury could consider this factor, the Court continued, even though the policy explicitly reserved to the insurer alone the right to negotiate and control settlement of claims against the insured.Id.
 New York courts also are more likely to find bad faith where the insurer's pre-trial settlement efforts, or lack thereof, expose the insured to punitive damages and/or are calculated to force the insured into making a larger contribution toward settlement.For example, in Ansonia Associates Ltd. Partnership v. Public Serv. Mut. Ins. Co., 692 N.Y.S. 2d. 5 (N.Y. Sup.Ct. 1999), the Court affirmed the lower decision denying summary judgment to the defendant insurers on a bad faith failure to settle within policy limits claim because the record before the trial court contained evidence from which a jury might conclude that the insurer ignored the underlying plaintiff's settlement overtures in an effort to force the insured to come up with its own settlement money.Initially, the plaintiff in the underlying action made a settlement demand well within the policy limits, which included a contribution from the plaintiff insured of $375,000.The insurance company's counsel urged it to accept the offer, but the insurer decided not to act on that recommendation.Subsequently, the 10 co-defendants in the case settled out separately.The insurer's counsel urged settlement, a second time, stating that resolving the action and extinguishing any liability of the insured, including possible punitive damages, was the preferred action.However, the insurer again ignored that suggestion.
  At a trial on liability, the jury returned a verdict that apportioned fault among all of the original defendants, finding the insured to be 80% liable for the injury and answerable for punitive damages for gross negligence and/or willful misconduct.The insured offered its own funds in an attempt to settle the matter for $500,000 above the amount of the $1 million policy issued by the insurer, but the plaintiffs demanded $2.5 million.Shortly thereafter, the case settled for $1.5 million, the entire amount being paid by the plaintiff/insured because the defendant/insurer refused to make any contribution toward the settlement.
  The Court concluded that given these facts, "a trier of fact could certainly conclude that the intransigence of the insurer deprived the plaintiff of a legitimate opportunity to compromise the action within the limits of the available coverage at a point when there remained no doubt as to liability."Id. at 10, citing Pavia at 454.Notably, the defendant insured did not claim that the amount of the settlement was unreasonable.The Court also noted that the record contained evidence from which a jury might conclude that the insurer's rejection of all offers to settle the claim against the insured was part of a deliberate strategy to avoid payment on the claim, and leave the insured exposed to punitive damages.The Court characterized this as "maneuvering the insured into unilaterally entering into a settlement to avoid the potential of an award of punitive damages, thereby exhibiting bad faith by using economic duress to deprive the insured of the very insurance coverage for which plaintiff contracted."Id. at 15.
  In contrast, in Brochstein v. Nationwide Mut. Ins. Co., 448 F.2d. 987 (2d Cir. 1971), the Second Circuit affirmed the lower court's ruling that an insurer that failed to request contribution from its insured toward settlement above the policy limits did not act in bad faith.In that case, the plaintiffs alleged that the insurer's failure to settle resulted in a judgment against the insured of $95,000 which was $45,000 more than the amount of the policy limits.The Second Circuit had previously considered the case, and had remanded it to the District Court for further findings as to precisely what the insureds were told or knew about the amount needed to settle the underlying action, the amount the insurer was willing to contribute, what the insureds' potential personal liability was, and what they were willing to contribute themselves toward settlement.On remand, the District Court held that even though, in some cases, a fact finder properly could infer constructive bad faith from an insurer's failure to mention to the insured his opportunity to contribute toward settlement, the facts in the casebefore it did not establish bad faith.More particularly, the District Court found that the insureds were well-advised of the potential for a verdict in excess of the policy limits, what the insurer was willing to offer, and that they would be personally liable for any amount rendered against them in excess of the policy limits.Though the insurer made no mention of the possibility that the plaintiffs might make a contribution, the insurer apparently thought that doing so would have been improper.[1] In affirming the District Court's dismissal of the bad faith claim, the Second Circuit explained that the ultimate issue before the District Judge was whether the insurance company dealt fairly and adequately with its insured, and agreed with the District Court that the defendant insurer had done so.Id. at 989-90.
  Finally, in Greenidge v. Allstate Ins. Co., 312 F. Supp. 2d. 430 (S.D.N.Y. 2004), the District Court considered the novel question of whether an insurer acts in bad faith when it rejects a demand that would make its contribution to a settlement contingent upon the outcome of a subsequent declaratory judgment action in which the limits of liability under the relevant policy would be established.The Court concluded that an insurer can refuse such a demand without violating its good faith obligation to the insured.The factual background of the case involved the plaintiffs, the owners of a three family home in the Bronx, who were sued by Ray Tetchy and his daughter for lead poisoning that his daughter allegedly suffered from exposure to lead while she resided in the Greenidge's rental property.The Greenidges were insured under a homeowner's policy that Allstate had issued to them.
  The Greenidges tendered a defense to Allstate, and Allstate assigned defense counsel.Allstate also advised the insureds that the plaintiffs were seeking damages beyond the policy limit, and that the Greenidges could be personally liable for the difference, and were entitled to retain separate counsel at their own expense.Eventually, the plaintiffs advised the Allstate claims representative that they would not discuss settlement unless Allstate agreed that the policy limit was $600,000:$300,000 for each of the two policy periods at issue. Alternatively, plaintiff's counsel proposed a settlement between $300,000 and $600,000, with the $300,000 to be paid immediately, and the balance contingent upon the outcome of a declaratory judgment action that Allstate would agree to litigate to resolve the issue of whether the policy limits for one policy period or two applied.The claims representative rejected this demand, and referred the question of the relationship between the policy limits and the anti-stacking provisions to three sets of outside counsel for their review.
  Shortly thereafter, the co-defendants settled for $150,000.In the meantime, outside counsel retained by Aetna individually advised that only a single $300,000 limit would apply, and that Allstate was not obligated to pay twice that based upon either the anti-stacking or the successive policy period provisions of the policies.Additionally, counsel for Aetna also wrote to Aetna suggesting that there was no proof that the minor plaintiff had been exposed to lead paint during the first policy period and that therefore, only the second policy had been triggered.  Ultimately, a jury returned a verdict for the plaintiffs in the amount of $2 million and a judgment entered on the verdict in the amount $1,643,000.The Greenidges appealed the judgment, but it was affirmed. Thereafter, the Greenidges instituted a bad faith action in New York State Supreme Court against Allstate, which Allstate removed to the Federal Court.
  On the issue of bad faith, the District Court noted that bad faith is not a "free floating concept" to be invoked whenever the insurer fails to maximize the interests of the insured. More particularly, bad faith could not be imputed to an insurer who declines to perform an act that does not arise from the policy itself. Id. at 439.The Court held that an insurer is not required to engage in extra-contractual conduct.More specifically, the Court concluded that the policy at issue did not require Allstate to assent to a declaratory judgment action to determine the policy limits and that therefore, it did not act in bad faith when it declined to do so.Greenidge, 312 F. Supp. 2d at 439-40.The Court noted that the contingent settlement proposed by the plaintiffs was not without cost to Allstate in that it would be required to incur the expense of litigating the declaratory judgment proceeding, and it would potentially waive the opportunity to seek an award of costs and attorneys fees on the ground that the position of the insureds in the litigation was frivolous.
  Furthermore, even if Allstate's interpretation of the policies was mistaken, it was not unreasonable, given that Allstate had obtained opinion letters from several different outside counsel.Id.Thus, the Court concluded that Allstate did not act in bad faith, and granted Allstate summary judgment on plaintiffs' bad faith claim.

IV. CLAIM HANDLING PROCEDURES THAT FEND OFF BAD FAITH CLAIMS FOR FAILURE TO SETTLE WITHIN POLICY LIMITS.

Given this New York decisional law, there are several general principles by which carriers may guide their claim handling, which would prevent successful prosecution of a bad faith claim for failure to settle within policy limits.
  First, courts look to the degree to which the insurer has taken an active interest and role in pursing settlement during the course of the pre-trial litigation, and an insurer is not shielded from bad faith liability simply because the plaintiff never made a settlement demand.Thus, after making an initial assessment of the case, a carrier and/or its defense counsel should make a preliminary inquiry of plaintiff's counsel regarding plaintiff's settlement position.If the demand is unreasonable, based on the facts known at the time, the carrier is at liberty to continue investigating and defending the matter vigorously.
  However, if additional litigation reveals that the insured's liability defense is highly problematic, or unlikely to succeed, New York case law appears to establish that the carrier's settlement efforts will face greater scrutiny.Thus, at this stage, the carrier would be well-served to document, or have its defense counsel document, all settlement-related activity on the file, in order to establish a pattern of continued, good-faith settlement efforts.As noted above, a lack of liability defense does not necessarily obligate the carrier to pay any settlement demand made within policy limits.However, New York courts are more likely to focus on the carrier's settlement efforts after it becomes clear that no viable liability defense exists.
  Finally, regular communications with the insured, either through the carrier, or defense counsel, regarding the status of settlement negotiations, and the insured's potential exposure in the event of a judgment above policy limits, go a long way in New York toward insulating an insurer against a claim for bad faith to settle within policy limits. As such, the carrier should incorporate in its defense counsel guidelines a requirement of regular settlement-related communications with the insured, and similarly incorporate that requirement into the carrier's in-house claims handling guides and materials.Additionally, the carrier should notify the insured at the initiation of the suit, and periodically throughout the litigation, that the insured has the opportunity to contribute toward settlement at any time.
   In sum, to avoid bad faith for failure to settle within policy limits under New York law, a carrier must give equal consideration to the interests of the insured when contemplating settlement offers.Specific methods to achieve this include: making a preliminary inquiry to ascertain plaintiff's settlement position; recording all settlement-related activity; keeping the insured informed of the status of the case, and the settlement negotiations; and settling cases with no viable defense.


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In a separate ruling, the Second Circuit held that an insurer's suggestion of contribution to an insured was not improper under New York law.448 F.2d 987, 989 (2d Cir. 1971) citing Brockstein v. Nationwide Mut. Ins. Co., 417 F.2d 703, 708-709 (2d Cir. 1969)