Court Opinion

ID: 9493282
Source: CourtListenerOpinion
Date Created: 2023-08-05 15:03:35.325202+00
Date Added: 2024-06-11T17:55:45.427401
License: Public Domain

JACOBS, Circuit Judge,
dissenting:
I respectfully dissent on several independent grounds.
I
To begin with the available common principles, I agree with the majority that in a bad faith claim alleging the wrongful failure to settle by a liability insurer, (i) the insurer’s misconduct in defending the underlying claim must be shown to transcend ordinary negligence and to be reckless, see Pavia v. State Farm Mut. Auto. Ins. Co., 82 N.Y.2d 445, 453, 605 N.Y.S.2d 208, 626 N.E.2d 24 (1993), and (ii) an actionable failure to settle for policy limits presupposes the willingness of the plaintiff in the underlying case to accept the limits in settlement, see id. at 454, 605 N.Y.S.2d 208, 626 N.E.2d 24. See generally Majority Op. at 399, 400 (recklessness), 400-01 (willingness to settle) (“Maj.Op.”). As Judge Glasser concluded, these showings were not made here.
A. Negligence vs. Recklessness
The majority opinion cites three defects in the defense provided by the insurer on the tort claim: the failure to depose the tort plaintiff; the failure to heed the warnings of trial counsel; and the failure to settle for policy limits after the false verdict. The majority treats the first two as cumulative events that lead up to the “[pjerhaps most damning” failure, which is the supposed failure to settle after the jury disclosed its view in the false verdict that Pinto’s injuries were worth at least twice the policy limit. Maj. Op. at 400. As I read the majority opinion, only at that point is the insurer’s conduct held tantamount to recklessness. So I begin there.
The False Verdict. The majority opinion characterizes as “[pjerhaps most damning” that the insurer failed to offer its $100,000 policy limits even after the jury returned the false verdict disclosing a finding that the plaintiff had sustained a $210,000 injury. It was never clear, however, that the finding underlying the false verdict was sufficient to support a judgment in that amount. Under New York law, Pinto could not collect a dime for non-economic loss unless the jury found either unanimously or by a 5-1 margin that she had suffered a “serious” injury, a term of art defined in Insurance Law § 5102(d) as a personal injury that results in (inter alia) “permanent loss of use of a body organ, member, function or system” or “significant limitation of use of a body function or system.” N.Y. Ins. Law § 5102(d) (McKinney 1985).
A poll of the jury revealed that the vote on whether Ms. Pinto suffered a permanent loss of the specified kind was 4-2 in favor of plaintiff, but nevertheless short of the 5-1 vote needed to support a verdict on this key question. At this point, Judge Glasser recognized the verdict as defective and instructed the jury to continue its deliberations. Referring to Pinto’s dual claims of permanent loss and significant limitation, Judge Glasser told counsel that “[wje may not have a verdict on any of these questions” (emphasis added). The insurer took some comfort from the false verdict, and Judge Glasser ruled that it was “reasonable” for the insurer to believe that the false verdict “bode[dj well for its case.” Reasonable or negligent, it was not reckless. In any event, it is undisputed that, due to a failure of communication between Allstate and Bell’s counsel, Allstate believed the false verdict to be 4-2 in its favor.
The Failures to Depose and to Heed Warnings. The majority opinion cites other failures by the insurer leading up to the false verdict. These additional items do not begin to satisfy the recklessness standard required for a bad faith recovery; if they did, a bad faith claim would be a companion action to every case that results in a verdict exceeding policy limits.
The majority opinion concedes that the insurer’s failure to depose plaintiff Pinto “cannot by itself support a bad faith claim,” but deems that omission important *406here because the only issue contested at trial was damages. Maj. Op. at 399-400. However, the opposite proposition would hold at least as much water: one could argue that the failure to depose the tort plaintiff is more egregious when liability is disputed than when it is conceded. Where the sole issues contested in a personal injury case are the fact of injury and the amount of damages, the focus is mainly medical, and it is uncontested that the defense in the underlying case reviewed the plaintiffs medical records and performed a medical examination. Unless one rules that good faith requires an insurer to conduct a deposition in every case, it is difficult to deem the omission reckless in this case.
The failure to depose' Ms. Pinto is deemed significant by the majority because if Ms. Pinto had been deposed the defense would have learned that she was an avid and accomplished athlete (a circumstance likely to increase her non-economic damages) and the defense would not have been caught off balance by that news at trial. See Maj. Op. at 399-400. This type of analysis is “retrospect[ive]” and “hindsight”-based, as Judge Glasser pointed out. Pinto v. Allstate Ins. Co., 1998 WL 760269, at *4, *5 (S.D.N.Y. Sept.10, 1998). Two other circumstances diminish the import of Ms. Pinto’s testimony concerning her athletic pursuits:
(i) The neurologist retained by the defense, Dr. Rosenblum, examined Ms. Pinto, and opined that the plaintiff was faking:
This patient exhibits some non-physiological findings. This examiner’s objective clinical neurological examination was normal. I do take note of the abnormal reports of the MRI cervical spine and EMG examination. This examiner did not find any objective clini[c]al manifestations of same.
Pinto, 1998 WL 760269, at *3 (alteration in original). Thus the defense was contesting the fact of injury (as well as the amount of damages), and that defense was not destroyed, or even impacted, by Ms. Pinto’s testimony as to her damages from such an injury.
(ii) Obviously, Ms. Pinto’s trial testimony on her athletics would tend to increase her non-economic damages, but it could do nothing to establish that she suffered an injury that was permanent and serious within the definition of Insurance Law § 5102(d), a standard that is not satisfied by diminished athletic performance. And unless she could convince the jury that she had suffered a serious injury — i.e., a personal injury which results in (inter alia) “permanent loss of use of a body organ, member, function or system” or “significant limitation of use of a body function or system” — her recovery would fall well short of the $100,000 policy limit. The more one assumes (as the majority does) that the $210,000 false verdict amount was driven by plaintiffs testimony about her lost athletic prowess, the more plausible it becomes that the $210,000 priced a real loss that was nevertheless outside the definition of Insurance Law § 5102(d) and therefore insufficient to sustain non-economic damages. See N.Y. Ins. Law. § 5102(d).
The majority opinion faults the insurer for failing to tender its policy limits despite mounting bad news during trial. The majority opinion quotes various warnings from the lawyer for the defense and the insurer’s representative at trial. However, the insurer was receiving mixed signals from the courtroom. Only information known to Allstate is relevant to ascertaining whether it acted in bad faith by declining to offer a settlement at the policy limits. But the information available to Allstate fails to support a bad faith finding:
(i) It is undisputed that, due to a mis-communication between Allstate and Bell’s counsel, Allstate believed the false verdict to be 4-2 in its favor. In any event, the false verdict indicated to Allstate that (ii) the jury was confused, a fact that Allstate might have considered favorable; and (iii) the number of jurors voting against All*407state on the only question polled was insufficient to support an a damage award, (iv) Moreover, counsel for Allstate opined that the prospects for reversal of any unfavorable verdict were good, due to the court’s evidentiary decisions, (v) Finally, counsel for Allstate “never advised Allstate to settle. for the policy amount.” Pinto, 1998 WL 760269, at *4.
Signals were mixed, but it is not unusual for a trial lawyer or a client representative to suffer bouts of panic and funk. The insurer was receiving conflicting reports, and (at least until the false verdict) the insurer could without bad faith pin hope on the opinion of the defense’s neurologist, who assured the insurer that the plaintiff was as “phoney as a $3 bill.” Pinto, 1998 WL 760269, at *3.
As the district court and the majority observe, there is “[n]o pat formula” for distinguishing between conduct that is negligent and conduct that is reckless. Maj. Op. at 399; accord Pinto, 1998 WL 760269, at *2 (quoting Peterson v. Allcity Ins. Co., 472 F.2d 71, 77 (2d Cir.1972)). But in this case that distinction is the line between liability and none, and I would affirm the district court, which carefully undertook to tell the difference.
B. Availability of Settlement
According to the majority, “the final prerequisite” to Ms. Pinto’s claim is the availability of a settlement within the limits at such time as the insurance company had information so adverse to the policyholder’s position that failure to settle would be reckless. As the majority opinion characterizes the record, it is clear that that point was reached when the “[p]er-haps most damning” event transpired, that is, when the jury returned the false verdict. Maj. Op. at 400. But what is the evidence that the plaintiff would have settled for $100,000 after hearing that the jury thought her claim was worth $210,000, especially considering that plaintiffs counsel had assiduously prepared the ground for a bad faith claim?
Proof of this element of Pinto’s claim should be easy for Pinto to adduce. She would know whether she would have accepted the $100,000 policy limit in full satisfaction of her claim even after the false verdict was rendered, and her lawyer would know whether that settlement offer then remained open. But when Pinto was asked the question at her deposition in this case, she could not recall. And her counsel at the underlying tort trial does not say whether the offer remained open, and has submitted no affidavit. The majority deems it significant that there is “no evidence” that Pinto would not have accepted policy limits after hearing the false verdict. Maj. Op. at 401. But if the tort plaintiff does not know whether she would have accepted the limits in settlement, and her lawyer will not say whether the offer remained open, who does know, and who can say? It is the burden of the policyholder (and Ms. Pinto’s burden, in the policyholder’s shoes) to prove the elements of the bad faith claim. The absence of proof on this element should be enough to affirm the district court’s grant of summary judgment in favor of the insurance company.
Moreover, as the district court pointed out in rejecting Pinto’s argument, the more it is argued that the false verdict predicts the final verdict, the clearer it becomes that the plaintiff would not have settled for the policy limits.
II
The only damages sought in Pinto’s Summary Judgment Motion is the amount of the excess judgment. However, Pinto received her claim by assignment from Bell in exchange for Pinto’s release of that obligation. See Mem. Supp. Mot. Summ. J. & Opp’n Cross-Mot. at 8, 31, Pinto v. Allstate (No. 96 Civ. 2807(ILG)) (“Summ. J. Mot.”). I would affirm on the grounds that Bell suffered no demonstrated injury or damages compensable by the insurer. Bell, who is now dead, paid nothing and was in no peril of paying anything for which indemnity was contractually re*408quired. That is so for two independent reasons: he was judgment-proof and was released by the tort plaintiff.
The principles that determine the proper outcome of this appeal — affirmance— are as follows:
• If the insurer has committed bad faith in the defense of a claim and the policyholder has suffered damages as a result, the policyholder has a claim. See Pavia, 82 N.Y.2d at 452-53, 605 N.Y.S.2d 208, 626 N.E.2d 24.
• If the policyholder has assets from which the excess judgment has been or may be collected, the measure of damages potentially includes the amount by which the tort judgment exceeds the policy limit.1 See, e.g., DiBlasi v. Aetna Life & Cas. Ins. Co., 147 A.D.2d 93, 542 N.Y.S.2d 187, 188-89 (2d Dep’t 1989).
• If, however, the policyholder is judgment-proof, the measure of damages may include the harm to the policyholder’s credit standing, the expenses and consequences of bankruptcy, and so on — but not the amount of the excess judgment. The only New York Court of Appeals case in which this issue was discussed is Gordon v. Nationwide Mut. Ins. Co., 30 N.Y.2d 427, 334 N.Y.S.2d 601, 285 N.E.2d 849 (1972). It was discussed in dicta by four judges, one concurring and three in dissent; but on this issue they were in accord, and were of the view that an insolvent policyholder-defendant cannot collect bad-faith damages in the amount of a judgment that is uncol-lectible. Chief Judge Fuld observed in his concurrence: “In my view, an insured is not harmed and, by that token, suffers no damage when an un-collectible judgment is entered against him.” Id. at 440, 334 N.Y.S.2d 601, 285 N.E.2d 849. Judge Breitel in dissent, joined by Judges Burke and Gibson, argued that in such a bad faith case with an insolvent plaintiff, an appropriate award is measured by “pecuniary and tangible harm done to the insured,” including “the economic harm to the insured now and in the reasonably anticipated future,” not by “the full amount of the excess judgment” because the latter award would be “unfair” and “unjust.” Id. at 450-51, 334 N.Y.S.2d 601, 285 N.E.2d 849 (emphasis added). The majority cites Judge Breitel’s dissenting opinion in Gordon for the proposition that “[r]e-gardless of the insured’s financial responsibility most courts automatically adopt the excess judgment as the measure of damages in the insured’s [bad faith] contract action.” Maj. Op. at 402-03 (quoting Gordon, 30 N.Y.2d at 448, 334 N.Y.S.2d 601, 285 N.E.2d 849) (alterations in original; internal quotation marks omitted). Tellingly, that passage is talking about courts other than New York’s. See Gordon, 30 N.Y.2d at 448-49, 334 N.Y.S.2d 601, 285 N.E.2d 849.
• The policyholder can assign a bad faith claim to the tort victim but can only assign such claim as the policyholder has. Neither the plaintiff nor the majority opinion cites a case in which the damages awarded in favor of a judgment-proof policyholder (or policyholder’s assignee) is measured by the (unpaid and unpayable) excess judgment.
• Thus, a policyholder who is judgment-proof can assign a claim for certain consequential damages, but not for the unpaid and unpayable amount of a judgment excess of limits, while one who is able to pay in full can assign a claim for the amount of the excess judgment (and possibly other consequential damages as well).
*409• In short, the assignor can give no more than the assignor has.
It follows from all this that Pinto cannot recover damages measured by the excess judgment — which are the only damages she is seeking — because she is the assign-ee of Bell, and (i) Bell, being judgment-proof, could not pay that obligation and (ii) in any event, Pinto released Bell from liability for it.
Judgment-proof Policyholder. On indemnity principles, the holder of a liability insurance contract who is judgment-proof and cannot pay a judgment in excess of the insured limit has no claim against the insurer for that amount. Why this is so is easily demonstrated. If, as the majority posits, Bell assigned this claim, it must be that Bell had the claim to assign notwithstanding the fact that the excess judgment was unpaid. This in turn means that if Bell had gotten a pre-appeal release by paying something more than the policy limits but less than the judgment (a deal that would probably have been acceptable to Ms. Pinto if she had been unaware of circumstances potentially amounting to bad faith), he could have pocketed the difference. It does not matter whether the absence of compensable damages in Bell’s bad faith claim stems from his insolvency (as seems to be true in fact) or his favorable settlement (as in my hypothetical). It cannot be thought that Bell could have such a claim or derive so rich a benefit from his tort.
It is elementary that one can assign no more than one has. See University Mews Assocs. v. Jeanmarie, 122 Misc.2d 434, 471 N.Y.S.2d 457, 461 (Sup.Ct.1983) (citing Fairbanks v. Sargent, 117 N.Y. 320, 22 N.E. 1039 (1889)) (“[A] right or interest is assignable only if at the time of assignment it had an actual or potential existence.”). If Bell had no claim for the excess judgment, Pinto cannot have received it as his assignee.
It is therefore critical that Mr. Bell had no assets to speak of. The majority opinion undertakes to blunt this fact as follows: “It should also be noted that there was no proof introduced in the district court that Bell in fact had no assets; the only testimony was a deposition by Allstate’s counsel regarding an out-of-court statement by Bell’s daughter.” Maj. Op. at 402. This is a strange quibble: the statement in question is sworn deposition testimony. Thus, (i) the only evidence is that Bell was judgment-proof; in any event, (ii) it appears that the point is undisputed; certainly, (iii) plaintiff introduced no evidence to show that Bell had assets, a showing essential to this claim for damages. That should be enough to carry the day on a motion for summary judgment.
Release. As the majority opinion points out, the “ordinary mechanism” for assigning a bad faith claim to a plaintiff “usually” is effected “in exchange for a covenant not to execute on the judgment,” rather than via release. Maj. Op. at 403. That is because a release releases the excess judgment, so that the policyholder’s exposure for it ends and the tort plaintiff can no longer execute upon it. Does that mean that the policyholder as assignor therefore cannot effectively convey a claim based upon exposure for a loss from which the policyholder has been released? One would think so. The majority observes that “[n]o New York court has addressed this precise question.” Id. I am not surprised. It is not commonly argued that assignment creates value, damages, or a cause of action, and few courts would have occasion to consider (even to reject) an argument that treats assignment as alchemy. Certainly the majority cites no authority from any jurisdiction to support its view that the excess judgment survives the release for any purpose.2
*410III
It is difficult to ascertain the effect of the majority opinion on this case after remand, or as a general influence. The majority opinion assumes that a judgment-proof policyholder is entitled to recover the amount of any tort judgment in excess of policy limits resulting from the insurer’s bad faith. But this point is not considered, analyzed, or expressly decided. Since the majority cites a lack of evidence as to whether Bell as policyholder and tortfea-sor was in fact judgment-proof, see Maj. Op. at 402, the point is not even reached on this appeal, and therefore is no holding.
I emphasize this limit of the majority’s holding for two reasons. First, I think it would be unwise to decide that question without certifying it to the New York Court of Appeals. Second, the majority opinion can be misread to say (as it assumes) that a tort plaintiff suing as assign-ee of the tort defendant can collect from the defendant’s insurer on the defendant’s bad faith claim the full amount of any judgment exceeding the policy limit without regard to whether that amount measures the policyholder’s injury or damages. Such a ruling would have a broad influence on litigation tactics and settlement strategy in many large tort cases. As to this case, it seems to me that the district court and the parties can consider on remand the proper measure of damages, if any.
A similarly broad influence may result from the majority’s ruling that a tort plaintiff who has taken by assignment the defendant’s bad faith claim need not prove that she would have accepted that payment if offered, or that her offer to accept it was open when the insurer became contractually obligated to settle for it. If, under these rules, a suit against a judgment-proof defendant holding a $10,000 liability indemnity policy can potentially yield millions, the settlement calculus would be upended in any case (state or federal) potentially involving damages vastly in excess of limits, because negotiations would be influenced at least as much by the prospect of a bad-faith claim as by the merits of the claim for the underlying tort. The ramifications of this error may be good or bad, but they are surely wide and unpredictable.

. Even if the defendant is not judgment-proof, a tort plaintiff may well prefer to accept the bad faith claim in exchange for a covenant not to execute on the policyholder’s assets in order to get punitive damages available in some stales, or to avoid devaluing available assets by forced sale, concealment or transfer of assets, tactical bankruptcy, or pauperizing a relative or friend.

. The release may not have impaired Bell’s claims (in Pinto’s hands) for other forms of damages potentially valuable to an insolvent policyholder who has been financially impaired (otherwise than by liability for the judgment) and embarrassed by the insurer's wrongful bad faith failure to defend. But the only form of damages sought here is for the excess judgment. See Summ. J. Mot. at 8, 31.