Court Opinion

ID: 5794537
Source: CourtListenerOpinion
Date Created: 2022-01-12 18:15:50.08915+00
Date Added: 2024-06-11T08:42:22.877292
License: Public Domain

Hopkins, J. (concurring in part and dissenting in part).
I vote to reverse and to grant a new trial.
The defendant requested the following charge:
“ The defendant is not responsible in damages for negligence in failing to .settle [a] claim within the limits of recovery of judgment for [an] amount over policy limits in absence of fraud or bad faith.”
The trial court refused so to charge, and the defendant excepted to the refusal. The request was made -in accordance with the law. of New York (Best Bldg. Co. v. Employers’ Liab. Assur. Corp., 247 N. Y. 451, 455-456). Thus, the refusal to charge was error, and I think, in the context of this case, error which undermined the verdict and requires a new trial. Although the jury was charged that the defendant could be held liable for bad faith in failing to settle the action, the defendant was entitled to a charge that bad faith did not include negligent conduct.
As the proof in the case concerning the defendant’s conduct was susceptible of a finding of negligence on the part of the defendant, as distinguished from bad faith, the verdict was left in a posture in which it cannot be said with certainty that it was based on a finding of bad. faith alone, or based on findings of negligence and bad faith together, or on a finding of bad faith alone. Hence, the verdict was ambiguous, and a new trial must be had.
I am not in agreement with the majority view that the proof at the trial did not establish prima facie a case against the defendant for its bad faith in failing to settle the suit against the plaintiffs. I agree rather with the opinion of my brother Presiding justice Gulotta that the proof established a question of fact for the jury. There is no need to comment at length on the facts which induce my conclusion; the emphasis which is placed on the facts in the majority opinion and in the opinion *289of Presiding Justice Gulotta clearly indicates that reasonable men may differ in their findings, and this in itself is sufficient to demonstrate that a jury question was presented.
The trial court at the new trial, however, should be assisted by a statement of the nature and limits of bad faith for consideration in charging the jury. It is true that the law of New York “ is indefinite in many respects ” (Brown v. United States Fid. & Guar. Co., 314 F. 2d 675, 677; cf. Young v. American Cas. Co. of Reading, Pa., 416 F. 2d 906, 910; Brockstein v. Nationwide Mut. Ins. Co., 417 F. 2d 703, 705; Peterson v. Allcity Ins. Co., 472 F. 2d 71, 76). It is therefore necessary to analyze the relationship which exists between insurer and insured under a policy of insurance.
Insurance policies generally reserve to the insurer both the right to select counsel in the event of an action against the insured within the scope of the policy and the right to settle the action. Within the right to settle must be included a discretion exercisable by the insurer whether an offer to settle by the party suing should be accepted. Obviously, there are two interests which inhere in the policy: (1) the mutual interest of the insurer and insured to defeat the action and (2) the interest of the insurer and insured (which may not be the same under all circumstances) to settle on advantageous terms, when recovery in the action appears probable.
The interests of the insurer and the insured to settle the action are not mutual when recovery may reasonably exceed the policy limits and liability of the insured seems reasonably certain, or at least reasonably debatable. This was the position of the parties in the instant appeal. It is not enough, as my brother Presiding Justice Gulotta ably points out in his dissent, that the insurer on the brink of trial offers to pay the policy limits to the party suing its insured, for by that time the mood to settle may have passed, or facts developed (as in this case) which persuade the suing party that the policy limits are unacceptable. Since the policy limits are static, and recovery beyond the limits probable, the burden of the excess must fall on the insured. The insurer by the terms of its contract has undertaken to defend the insured under all circumstances. The question then is how shall the relative interests of insurer and insured be reconciled?
The earlier New York cases speak in terms of contract and relegate the parties to a strict construction of their rights under the policy (cf. Auerbach v. Maryland Cas. Co., 236 N. Y. 247; Streat Coal Co. v, Frankfort Gen. Ins. Co., 237 N. Y. 60; Best
*290Bldg. Co. v. Employers’ Liab. Assur. Corp., 247 N. Y. 451, supra). Other jurisdictions have transcended the concept of strict contract law and have fastened a greater responsibility on the insurer toward the insured ( see, e.g., Farmers Ins. Exch. v. Henderson, 82 Ariz. 335; Crisci v. Security Ins. Co. of New Haven, Conn., 66 Cal. 2d 425; Rova Farms Resort v. Investors Ins. Co. of Amer., 65 N. J. 474; Cowden v. Aetna Cas. & Sur. Co., 389 Pa. 459). Instead of a strict contractual duty arising under the policy, the modern view treats the insurer’s responsibility as a fiduciary vis-a-vis the insured. Indeed, in Rova the New Jersey Supreme Court considered that the insurer had become the agent of the insured in settling the action (Rova Farms Resort v. Investors Ins. Co. of Amer., supra, p. 474).1 An agency concept is particularly appropriate, as the insured is bound under the policy not to compromise the action against him; he is thus left to the insurer for the proper representation of his interests.
An agent is, of course, a fiduciary (Restatement, Agency 2d, § 13), subject to a duty to his principal to act solely for the benefit of the principal in all matters connected with his agency (Restatement, Agency 2d, § 387; cf. Haluka v. Baker, 66 Ohio App. 308, 312). “ A fiduciary relationship involves a duty on the part of the fiduciary to act for the benefit of the other party to the relation as to matters within the scope of the relation” (1 Scott, Trusts [3d ed.], § 2.5, p. 39). As part of Ms fiduciary duty, he may not use confidential information obtained by him through his relationship for his own benefit to the detriment of the other party to the relationship (5 Scott, Trusts, §§ 504, 505). Agency and trust concepts have common elements in that " in both the intermediary is held to a high standard of honesty, must admit no selfish interest, and cannot delegate the performance of discretionary duties ” (Bogert, Trusts and Trustees [2d ed.], § 15, p. 70, citing Bain v. Brown, 56 N. Y. 285; cf. Tyler v. Grange Ins. Assn., 3 Wn. App. 167). Where such a fiduciary relationship exists, the agent is required to make full disclosure to the principal and to demonstrate extreme good faith in Ms dealings with Ms principal (Wendt v. Fischer, 243 N. Y. 439; see, generally, Bogert, Trusts and Trustees [2d ed.], § 544).
*291Two features in an automobile insurance policy distinguish the relationship between insurer and insured from the usual agent-principal concept. First, as I have said before, the insurer has its own financial stake under the contract, i.e., the policy limits. This financial interest the insured implicitly recognizes, for it is the protection bargained for. Some of the courts have said, accordingly, that the insurer need not sacrifice its own interest in settling a case, but may place its interest on an equal setting with the interest of the insured (see, e.g., Cernocky v. Indemnity Ins. Co. of North Amer., 69 Ill. App. 2d 196; Western Cas. & Sur. Co. v. Fowler, 390 P. 2d 602 [Wyo.]; General Acc. Fire & Life Assur. Corp. v. Little, 103 Ariz. 435; Dumas v. Hartford Acc. & Ind. Co., 94 N. H. 484; cf. Cappano v. Phoenix Assur. Co. of N. Y., 28 A D 2d 639; Young v. American Cas. Co. of Reading, Pa., 416 F. 2d 906, supra; Garcia & Diaz v. Liberty Mut. Ins. Co., 147 N. Y. S. 2d 306). Other courts have said that the insured’s interest must be held paramount to the insurer’s interest (see, e.g., Tiger Riv. Pine Co. v. Maryland Cas. Co., 163 S. C. 229; cf. Rova Farms Resort v. Investors Ins. Co. of Amer., 65 N. J. 474, 496, supra). It is sometimes said by courts which place the relative interests on a parity in dealing with the insurer’s duty to settle that the insurer should consider the matter as if it alone would be liable for the judgment recovered (e.g., Bowers v. Camden Fire Ins. Assn., 51 N. J. 62; Bell v. Commercial Ins. Co. of Newark, N. J., 280 F. 2d 514; Cowden v. Aetna Cas, & Sur. Co., 389 Pa. 459, supra). This test of good faith, in my view, is tantamount to saying that the insured’s interest must be given priority, for clearly the insurer’s interest is limited to the policy amount. Hence, such a test submerges the insurer’s interest into the insured’s interest and analogizes the insurer’s duty to the traditional duty resting on an agent to perform its actions with regard only to the interests of the principal (see, also; Keeton, Liability Insurance and Responsibility for Settlement, 67 Harv. L. Rev. 1136, 1146-1147).
It is true that the traditional duty of an agent does not require that the agent in a relationship where his own interests are independently involved relinquish those interests in favor of the principal (5 Scott, Trusts [3d ed.], § 504, p. 3564). But his interests must be superior in the sense that they arise outside' of the relationship (Restatement, Agency 2d, § 418, Comment b). Here the interests of the insurer and the insured arose out of the policy, and the conflict is inherent whenever an action against the insured may result in a recovery in excess *292of the policy amount. Beyond this consideration, it is also a condition of the relationship that the insured, unlike other principals, has no right to select counsel to represent him in the action, or to direct the course of negotiations to settle the action. Hence, the traditional characteristic of a fiduciary’s duty to subordinate his interests for the promotion of his principal’s interests should apply to the insurer.
The second feature of an automobile insurance policy strengthens this analysis. New York’s public policy demands that an owner of an automobile may not register it for operation within the State unless it is insured. The State Insurance Department is authorized to approve the policy (Vehicle and Traffic Law, § 345, subd. [h]). The standard policy contains the provisions that the insurer shall select counsel for the insured and that the insured may not compromise the action, and these provisions are intended to vest the insurer with complete control over the litigation (14 Couch, Insurance 2d, § 51:125). The policy provisions thus constitute a contract of adhesion, over which the insured has no choice if he desires to operate his automobile in New York (7 Williston, Contracts [3d ed.], § 900, pp. 29-34). Since the insurer has acquired control of the action, it thereby assumes a status of a fiduciary toward the insured, to whom it owes the duty of utmost good faith. The duty of good faith includes recognition of the interest of the insured in case of conflict in the settlement of actions against the insured, and the advancement of the interests of the insured in such a case, even above its own interests. This liberal interpretation of the policy in favor of the insured follows the rule which is usually enforced in contracts of adhesion (see, generally, 4 Williston, Contracts [3d ed.], § 626, pp. 855-857).
In summary, the trial court should charge that the defendant, was required to use the utmost good faith in carrying on settlement negotiations of the action against the plaintiff. In determining whether on the circumstances of the case the defendant exercised that good faith, the jury should consider the conduct of the defendant during the negotiations, bearing in mind that the defendant must place the interests of the insured before its own. If, under the facts, the defendant in good faith concluded that a settlement of the action was advantageous to the insured and that recovery in the action might be beyond the policy limits, it was the duty of the defendant to offer the amount of the policy in settlement. Whether under the facts the defendant performed its duty would be a question for the *293jury to determine. Good faith in this context means conduct by the insurer in accordance with its honest judgment after consideration of the facts and giving priority to the interests of the insured before its own. In the absence of bad faith, negligence alone on the part of the insurer does not result in liability for failure to settle.2
By this rule the interests of the insured are protected and the jury is provided with a standard of conduct which is neither complicated nor difficult of understanding.

. In other eases the standard is said to be that of a fiduciary relationship (Bailey V. Prudence Mut. Cas. Co., 429 F. 2d 1388; Tiger Riv. Pine Co. V. Maryland Cos. Co., 163 S. C. 229, later app. 170 S. C. 286; see, generally, Ann. 40 ALR 2d 181; Ann. 34 ALR 3d 535).

. I am aware that an agent may be liable to the principal to act skillfully in the matters confided to him and that a mistake of judgment, no less, may subject him to liability if he fails to exercise the care which is exacted from an agent under similar conditions in the industry (Restatement, Agency 2d, § 379; cf. Marchitto v. Central R.R. Co. of N. J., 9 N. J. 456; Highway Ins. Underwriters v. Lufkin-Beaumont Motor Coaches, 215 S; W. 2d 904 [Tex.]). Nevertheless, I am, impressed with the fact that an insurer should not be held to the standard of due care in managing settlement negotiations, because they are delicate and sometimes intricate maneuvers which may involve more than one defendant (as in this ease). Too, in' the usual agent-principal relationship, settlement negotiations are the exception, not the usual routine duties, which an agent is called upon to execute.