Bad Faith - Second Circuit Holds that Insurer Did Not Act in Bad Faith By Refusing to Agree to a Settlement That Granted Plaintiffs the Right to Pursue a Declaratory Judgment Action Against the Insurer
Last week, in Greenidge v. Allstate Insurance Co., 04-1515-CV (April 25, 2006), the U.S. Court of Appeals for the Second Circuit held that an insurer did not act in bad faith by refusing to accept a proposed settlement that
would have granted the plaintiffs the right to pursue a declaratory judgment action against the insurer. The court held that the insureds could have exercised their own right under New York law to file a declaratory judgment
action or entered into an agreement with the plaintiffs that would have limited their exposure to an excess judgment. As a result, the insurer was not required to accept the proposed settlement.
The plaintiffs leased an apartment in a building owned by the insureds. The plaintiffs sued the insureds, alleging that their infant daughter suffered severe lead poisoning from lead paint in the apartment. The insurer
defended its insureds and offered to settle for its policy limit of $300,000. The plaintiffs, however, demanded $600,000 because the exposure to lead paint took place over two policy periods and, they claimed, triggered two
policy limits. The insurer refused to offer more than $300,000 because the policies contained “anti-stacking” provisions that limited the insurer’s liability for a single loss to one policy limit.
The plaintiffs proposed a settlement under which the insurer would pay $300,000 up front and would consent to a declaratory judgment action to determine whether the second policy limit was implicated. After obtaining advice
from three outside counsel, the insurer rejected the proposal. A jury awarded the plaintiffs more than $1.6 million, and the insureds sued their insurer for acting in bad faith by refusing to settle for both years’ policy
limits. The district court granted summary judgment for the insurer, reasoning that the insurer had no statutory or contractual obligation to consent to a declaratory judgment action by the plaintiffs.
On appeal, the Second Circuit held that the insurer did not act in bad faith because the insureds easily could have protected their interests in other ways. For example, the insureds could have sought a stay of the proceedings
and instituted their own declaratory judgment action to determine the insurer’s liability. Alternatively, the insureds could have agreed with the plaintiffs to a settlement of $600,000 where the insurer would pay $300,000
and the insured would assign its bad faith claim to the plaintiffs in exchange for an agreement not to collect the balance of the settlement. The court held that the insurer did not act in bad faith by failing to agree to the
plaintiffs’ proposed settlement when the insureds had other options available to reduce their exposure to an excess judgment.