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Counterfactual Thought Experiments Do Not Establish Bad Faith in New York
Tuesday, October 31, 2017

The title above is taken from a quote found in a recent Second Circuit non-precedential summary order in an insurance bad faith case.  Bad faith is not easy to establish in New York.  Strategic differences between an insurance company and its insured over whether, how and when to settle an underlying case generally do not rise to support bad faith allegations.  In this recent case, the Second Circuit affirmed the dismissal of bad faith allegations.

In Sea Tow Services International, Inc. v. St. Paul Fire & Marine Ins. Co., No. 16-3672-cv (2d Cir. Oct. 27, 2017), the insured appealed a district court judgment dismissing all claims for coverage against the insurance company.  The case involved a boating accident at one of the insured’s franchises.  The insured and its franchisee had a joint defense strategy and wanted to enter into a global settlement approach covering the insured and the franchisee.  The insurance company objected and only wanted to enter into a unilateral settlement on behalf of the insured.  The insured did not want a unilateral settlement because it feared being subject to a claim by the franchisee for contractual indemnification.   Ultimately, a global settlement was entered into and paid for by the insurance carrier giving all parties the relief they sought.

In affirming the order granting summary judgment in favor of the insurance company, the court noted that “[e]stablishing that an insurer acted in bad faith when settling a claim can be a tough row to hoe under New York law.” The court held that the insured failed in that undertaking.  The court found that there was no lost opportunity to settle given that the settlement gave all parties what they wanted and was within the policy limits.  The court stated that a difference of opinion between the insured and the insurance company on pre-settlement strategy does not amount to bad faith.  Here’s what the court said:

“At most, [the insured] proffered evidence that [the carrier’s] strategy inadequately factored in a hypothetical scenario under which [the insured] might have been liable to  . . . its franchisee, for contractual indemnification—a hypothetical scenario, it should be emphasized, that never came to pass. Such counterfactual thought experiments do not establish bad faith.”  I had to quote this because the last sentence is brilliant.

While in other jurisdictions it may not be quite the same case, at least in New York, there has to be real bad faith (an actual lost opportunity to settle, actual gross disregard for the insured’s interest) for there to be liability when there is a disagreement between the insured and the insurer over settlement strategy.  In this case, held the Second Circuit, the insured did not come close to meeting the New York bad faith requirements.

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