Opinions of the United
1996 Decisions States Court of Appeals
for the Third Circuit
6-10-1996
Greater NY Mut'l Ins. v. N. River Ins Co
Precedential or Non-Precedential:
Docket 95-1484
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________
No. 95-1484
___________
GREATER NEW YORK MUTUAL INSURANCE COMPANY
v.
THE NORTH RIVER INSURANCE COMPANY;
CRUM AND FORSTER HOLDINGS, INC.;
RODIN MANAGEMENT INCORPORATED;
CROWN PARK INVESTORS
(D.C. Civil No. 94-cv-05223)
NORTH RIVER INSURANCE COMPANY
v.
GREATER NEW YORK MUTUAL INSURANCE COMPANY
(D.C. Civil No. 94-cv-05554)
Greater New York Mutual Insurance Company,
Appellant
_______________________________________________
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. Civil Action Nos. 94-cv-05223 & 94-cv-05554)
___________________
Argued March 11, 1996
Before: STAPLETON, SCIRICA and COWEN, Circuit Judges
(Filed June 10, 1996)
JAMES D. CRAWFORD, ESQUIRE (ARGUED)
Schnader, Harrison, Segal & Lewis
1600 Market Street, Suite 3600
Philadelphia, Pennsylvania 19103
Attorney for Appellant
FRANCIS J. DEASEY, ESQUIRE (ARGUED)
TIMOTHY COSTELLO, ESQUIRE
Deasey, Mahoney & Bender
Three Parkway, Suite 1400
Philadelphia, Pennsylvania 19102-1374
Attorneys for Appellees
__________________
OPINION OF THE COURT
__________________
SCIRICA, Circuit Judge.
In Trustees of the Univ. of Pennsylvania v. Lexington
Ins. Co., 815 F.2d 890 (3d Cir. 1987), we predicted Pennsylvania
law would allow a two-tiered or conditional settlement between a
plaintiff and an insured when the insurer refused to defend
against plaintiff's suit. In this case we predict Pennsylvania
law would also permit a two-tiered settlement between a
plaintiff, an insured and the insured's excess insurer, when the
primary insurer refused to settle plaintiff's claim.
I.
A.
In January 1987, Sandra McIlhenny slipped and bruised
herself on the steps of the Crown Park Apartments in Lansdale,
Pennsylvania. Three months later she was diagnosed with multiple
sclerosis. Shortly thereafter, McIlhenny brought suit in the Court
of Common Pleas for Philadelphia County against the owner and
manager of the building, Rodin Management, Inc., alleging the fall
had precipitated or aggravated a previously dormant condition.
Rodin purchased primary liability insurance from the
Greater New York Mutual Insurance Company with a one million dollar
limit per occurrence. Rodin also purchased excess general
liability insurance from the North River Insurance Company, with
coverage from one million to ten million dollars.
Greater New York retained counsel to defend Rodin in
McIlhenny's personal injury action, as it was obligated to do under
its policy. McIlhenny initially made a demand of $770,000, but
later increased the amount to $1 million. Defense counsel
recommended settlement between $500,000 and $750,000, but Greater
New York made no offer. The case went to trial and after the jury
began deliberating, Greater New York offered $350,000. Plaintiff's
counsel considered this amount to be a non-offer because "no
reasonable person who had sat in that courtroom could make this
offer." The jury awarded McIlhenny $4 million. The trial judge
molded the verdict resulting in a total award of $5,796,000.
Greater New York appealed to the Pennsylvania Superior Court.
The appeal was withdrawn, however, because North River on
behalf of itself and Rodin, negotiated a settlement directly with
McIlhenny for $5.25 million. Under the settlement agreement,
North River paid McIlhenny $l,949,629 and provided her with a
lifetime annuity. In return, McIlhenny released North River and
Rodin from all further liability. Because the $5.25 million
settlement was greater than the amount McIlhenny received from
North River and Greater New York, North River agreed to "exercise
its best efforts to recover the full settlement amount from Greater
New York through litigation or other proceedings." If North River
prevailed, it would retain the first million and 60% of the
overage; McIlhenny would receive the remaining 40%. To fund the
litigation, McIlhenny channeled North River $400,000 of the one
million she received from Greater New York.
B.
Before North River could bring an action against Greater
New York, as it had agreed to do, Greater New York brought this
suit in federal district court, alleging the settlement was invalid
as a matter of law, and that North River and Rodin breached its
duty of good faith. Greater New York also sought the return of the
one million dollars it had paid McIlhenny.
North River then filed suit in the Court of Common Pleas
for Philadelphia County against Greater New York for bad faith on
behalf of itself and as the assignee and equitable subrogee of
Rodin. North River sought $4,250,000, representing the full value
of the settlement less $1,000,000 already paid by Greater New York.
Greater New York removed the claim to federal court, and the two
cases were consolidated for discovery and trial.
In a pretrial order, the district court upheld the two-
tiered settlement and dismissed all of Greater New York's claims
against North River. Greater New York Mut. Ins. Co. v. North River
Ins. Co., 872 F. Supp. 1403 (E.D. Pa. 1995). Holding two-tiered
settlements are permitted under Pennsylvania law, it also
determined an excess insurer owes no direct duty of good faith to
a primary insurer when negotiating a settlement agreement. Greater
New York appeals these orders.
At trial, a jury found Greater New York breached its duty
of good faith to Rodin by failing to settle McIlhenny's lawsuit in
a timely and satisfactory manner. The jury also found Rodin did
not breach its duty of good faith to Greater New York by entering
into the two-tiered settlement agreement. It gave North River a
verdict for $4,432,324 ($5.25 million minus one million already
paid by Greater New York plus other costs). Greater New York
contends it was entitled to a directed verdict that it did not
breach its duty of good faith. It also appeals certain evidentiary
rulings.
II.
A.
The district court had jurisdiction based on diversity of
citizenship. 28 U.S.C. 1332. We have jurisdiction under 28
U.S.C. 1291. In diversity cases we must apply the substantive
law of the state whose law governs the action. Erie R.R. Co. v.
Tompkins, 304 U.S. 64, 78 (1938). The parties agree Pennsylvania
law governs. Our review of the district court's interpretations
and predictions of state law is plenary. Salve Regina College v.
Russell, 499 U.S. 225, 231 (1991); Wiley v. State Farm Fire &
Casualty Co., 995 F.2d 457, 459 (3d Cir. 1993).
B.
The principal issue on appeal is whether the two-tiered
conditional settlement assented to by McIlhenny, Rodin, and North
River is permitted under Pennsylvania law. Because no Pennsylvania
case has directly addressed the enforceability of two-tiered
settlement agreements we must predict how the Pennsylvania Supreme
Court would decide the issues before us. U.S. Underwriters Ins.
Co. v. Liberty Mut. Ins. Co., 80 F.3d 90, 93 (3d Cir. 1996). But
this is not the first time we have examined a two-tiered
settlement. In a similar case, after an exhaustive review of
Pennsylvania case law and a thorough analysis of the relevant
policies, we predicted the Pennsylvania Supreme Court would enforce
a two-tiered settlement. Lexington, 815 F.2d 890.
Lexington involved a settlement by the Hospital of the
University of Pennsylvania with a personal injury plaintiff. Under
the settlement's terms, HUP agreed to pay $2.2 million itself and
an additional $4.8 million if it won a suit against its insurer,
Lexington, which had refused coverage. Applying Pennsylvania law,
we upheld the validity of the two-tiered settlement, subject to the
requirements of good faith and reasonableness. Lexington, 815 F.2d
at 902. "Prohibiting two-tiered settlements," we noted, may "force
insureds to turn down advantageous settlement offers." Id. at
901-02.
We see nothing in the facts of this case that would lead
us to a different outcome. Lexington's central rationale that a
prohibition on two-tiered settlements would prevent some insureds
from accepting advantageous settlements also applies where an
excess insurer, an insured and a victim/plaintiff collectively
forge a settlement. The mere addition of an excess insurer into
the settlement equation does not alter our sense of how the
Pennsylvania courts would assess the legality of two-tiered
settlements.
Greater New York contends Lexington is inapposite because
it involved a bad faith failure to defend while this case involves
a failure to settle. Greater New York points out that in failure-
to-settle cases the victim/plaintiff, its counsel, and the excess
insurer have an incentive to color their testimony about settlement
negotiations in the underlying lawsuit in order to recover as much
as possible from the primary insurer. In contrast, failure-to-
defend-cases brought by an insured against an insurer revolve
around contractual duties and typically will not require the
testimony of the victim/plaintiff or its counsel.
As Lexington makes clear, there are dangers associated
with two-tier settlements, including the prospect of self-dealing
and self-serving testimony. See Lexington, 815 F.2d at 902.
Arguably this danger is heightened in excess insurer versus primary
insurer failure-to-settle cases. But many kinds of cases provide
inducements to color testimony, and we routinely leave it to juries
to assess the forthrightness and honesty of witnesses. Witness
credibility and the reasonableness of settlement agreements are
questions of fact. Nothing in Pennsylvania law indicates we should
prohibit two-tiered settlements in order to guard against jury
imperfection. In this case reasonableness and good faith are
factual issues that were squarely put to the jury.
III.
A.
The central issue at trial was whether Greater New York
acted in bad faith in refusing to settle McIlhenny's claims.
Greater New York maintains the evidence did not support the jury's
finding it had failed to meet its duty. It argues it presented an
adequate defense and believed it would prevail at trial on
causation. Contending it had no affirmative obligation to make a
settlement offer, it claims it never received a settlement offer
within the range suggested by its counsel.
The district court required North River to prove by clear
and convincing evidence that Greater New York did not honestly,
intelligently, and objectively evaluate the McIlhenny case for jury
verdict potential and settlement value. See Puritan Ins. Co. v.
Canadian Universal Ins. Co., 775 F.2d 76, 79 (3d Cir. 1985)
(enunciating standard of proof). Indeed, Greater New York does not
challenge the jury instruction. Reviewing the record, we find
there was ample evidence to support the jury's verdict. See Walter
v. Holiday Inns, Inc., 985 F.2d 1232, 1238 (3d Cir. 1993) (a motion
for judgment as a matter of law should only be granted if viewing
all the evidence in the light most favorable to nonmovant, no jury
could decide in favor of the nonmovant).
The record reveals North River presented substantial
evidence of Greater New York's bad faith in evaluating the claim
and in refusing to settle. Regarding causation, Roberta D.
Pichini, McIlhenny's counsel in the underlying litigation,
testified defense counsel submitted a report from its medical
expert, Dr. Alter, which agreed with plaintiff's medical expert,
Dr. Poser, that trauma can cause dormant multiple sclerosis to
become symptomatic. Furthermore, defense counsel supplied no
expert report that could contradict the findings of plaintiff's
rehabilitation witnesses.
With respect to damages, early in the litigation Pichini
supplied Greater New York's defense counsel with reports from
medical and rehabilitation experts, projecting rehabilitation
damages of $5,000,000. At that time, plaintiff's settlement demand
was $700,000 plus repayment of the Workmen's Compensation lien of
$77,700. Pichini testified that she would have recommended
acceptance of a pretrial offer of $750,000. As we have noted,
neither defense counsel nor Greater New York made any offer of
settlement before trial. After the jury began deliberating,
Greater New York offered $350,000.
Max Solomon, Greater New York's Executive Vice President
for Claims, had authority to settle claims between $25,000 and
$1,000,000. Solomon testified that defense counsel wrote a
pretrial report for Greater New York on July 12, 1993, four days
before trial, offering little or no hope that Rodin could escape
liability for McIlhenny's fall. Defense counsel advised Greater
New York there was a 50-50 chance the jury would believe the
plaintiff's theory of medical causation and if so, could award a
verdict from one to two million dollars. As a result, defense
counsel recommended settlement between $500,000 and $750,000. On
July 15, 1993, the day before trial, Solomon discussed the
McIlhenny case with defense counsel. Solomon admitted that he had
not evaluated letters or reports from defense counsel. Despite not
having read defense counsel's pretrial report or having discussed
the case in any detail with defense counsel, Solomon believed
liability was questionable and the case should be tried. As a
result, there was no offer of settlement.
North River presented experts to support its claim of a
bad faith refusal to settle. Perry S. Bechtle, Esq., testified
Greater New York acted in bad faith in not evaluating the case
after Dr. Alter examined plaintiff and in failing to settle within
Greater New York's policy limits. Some of Greater New York's own
witnesses also supported the jury's finding of bad faith. For
example, Maureen Rowan, Esq., the defense attorney in the
underlying suit, testified she believed it "probably" would have
been reasonable to attempt to settle between $500,000 and $750,000
before trial. During the course of her representation, Greater New
York never asked her to provide an evaluation of jury verdict
potential or settlement value (although four days before trial she
wrote and transmitted an unsolicited report). Greater New York's
own insurance expert, Walter Zimmer, testified that written
evaluations are a necessary part of claims evaluation where the
potential exposure exceeds one million dollars. Nonetheless, he
admitted that no written evaluations were contained in the
McIlhenny file. Together this evidence was more than sufficient
for the jury to conclude Greater New York had acted in bad faith in
refusing to settle.
B.
There was also substantial evidence of the reasonableness
of the settlement. Pamela McKinney, a claims representative for
North River, testified that following the verdict she engaged in
settlement discussions with McIlhenny's counsel, Pichini. North
River settled, she said, because it received an opinion from
counsel that Rodin's chances to prevail on appeal were less than
50%. In addition, post-judgment interest was accruing at the rate
of $l,000 a day. The settlement agreement resulted in the complete
release of all claims against Rodin and satisfied the judgment
entered against Rodin.
Pichini testified that she believed the settlement was
reasonable. Despite her confidence the verdict would be upheld on
appeal, her client was in immediate need of funds for medical care.
North River offered expert opinion from Joseph H. Foster, Esq., who
testified that after a thorough examination of the trial record, he
found the trial judge committed no reversible error. The chances
of success on appeal, he said, were "very slim."
Perry Bechtle, Esq., also testified that the chances of
success on appeal were very slim. Because post-judgment interest
was accruing at the rate of $l,000 a day, and because appeals to
the Pennsylvania Superior Court and Pennsylvania Supreme Court
would take one to one and a half and two years respectively, he
concluded it was reasonable to settle the case for $5.25 million.
The settlement agreement gave McIlhenny money for immediate medical
care while providing Rodin with complete releases and satisfaction
of the judgment.
C.
Greater New York also contends the district court should
have ruled as a matter of law that it did not breach its duty of
good faith. We do not agree. The district court correctly
observed that under Pennsylvania law primary insurers owe no direct
duty of good faith to excess insurers. Greater New York, 872 F.
Supp. at 1409. But it also correctly ruled North River could, as
Rodin's subrogee, sue Greater New York for acting in bad faith.
Id. Therefore, we will affirm the district court's refusal to
dismiss all counts of North River's complaint alleging a breach of
Greater New York's duty of good faith.
IV.
Additionally, Greater New York contends the two-tiered
settlement here offends the principles of equitable subrogation.
See Johnson v. Beane, 664 A.2d 96, 100 (Pa. 1995) (discussing the
doctrine under Pennsylvania law). As we have noted, North River
brought this action as Rodin's subrogee.
Greater New York contends that under Pennsylvania law a
subrogee can only recover the amount it has paid on behalf of the
subrogor. See, e.g., Johnson, 664 A.2d at 100 (subrogee stands in
shoes of subrogor and may pursue an action to recover amounts paid
to subrogor); Associated Hospital Service v. Pustilnik, 439 A.2d
1149, 1151 (Pa. 1981) ("It is settled that the right of subrogation
exists only to the extent of actual payment by the subrogee.").
Because North River never paid, nor will it ever pay the second
tier of the settlement agreement, Greater New York maintains North
River cannot recover the amount "payable" under this tier. Its
liability, if any, therefore must be limited to the first tier.
But equitable subrogation is a legal construct, employed
by courts when one person, acting involuntarily or under some
obligation, pays the debt of another. The rule is designed to
facilitate the placement of the burden of debt on the party who
should bear it. Johnson, 664 A.2d at 100. And whether in contract
or equity, subrogation "is to be regarded as based upon and
governed by equitable principles." F.B. Washburn Candy Corp. v.
Fireman's Fund, 541 A.2d 771, 774 (Pa. Super. Ct. 1988) (quotingAllstate
Ins. Co. v. Clarke, 527 A.2d 1021, 1023-24 (Pa. Super. Ct.
1987)). An insurer, including an excess insurer, upon discharging
an insured's liability, can become equitably subrogated and may
assert its insured's claims against third parties, including a
primary insurer. Cf. Brinkley v. Pealer, 491 A.2d 894, 898 (Pa.
Super. Ct. 1985) (insurer's payment to insured renders insurer
insured's subrogee and places insured in precise position of
insurer); see also Barry R. Ostranger & Thomas R. Newman, Handbook
on Insurance Disputes 13.05 (1995).
Subrogation aims to avoid unjust enrichment. United
States Fidelity and Guar. Co. v. United Penn Bank, 524 A.2d 958,
964 (Pa. Super. Ct.), appeal denied, 536 A.2d 1333 (Pa. 1987). But
the two-tiered settlement here will not result in North River
obtaining any more money than it paid to McIlhenny on behalf of
Rodin. As the district court pointed out, the settlement only
permits North River to reimburse itself for amounts already paid to
McIlhenny. Any amount in excess of the first tier will be paid to
McIlhenny. Greater New York, 872 F. Supp. at 1410. North River
has not sued Greater New York for more than it owes on behalf of
Rodin; what it pays for Rodin will turn on its suit against Greater
New York. Moreover, the fact that McIlhenny accepted a second-tier
as part of the settlement does not create a cause of action for
North River against Greater New York, nor does it make North
River's suit against Greater New York more likely to succeed on the
merits.
What Greater New York contests is that the level of
payment to McIlhenny may vary depending on whether North River can
make out a successful claim against Greater New York. As noted,
Greater New York contends the right of subrogation exists only to
the extent of actual payment by the subrogee. Yet in view of our
discussion of the purposes of subrogation, without contrary
direction from the Pennsylvania courts, we see no reason to
proscribe two-tiered settlements because they involve payments
conditioned on the outcome of suits by excess insurers against
primary insurers.
V.
Greater New York also contends North River owed it a duty
of good faith in negotiating the settlement, and the district court
erred by dismissing its claim for breach of duty. Confronted with
an absence of definitive Pennsylvania case law, the district court
looked to our prior holding in Puritan Ins. Co. v. Canadian
Universal Ins. Co., 775 F.2d 76, 79 (3d Cir. 1985) (Pennsylvania
would reject the theory of a direct duty running from primary to
excess insurer), and to the Pennsylvania Supreme Court's decision
in D'Ambrosio v. Pennsylvania Nat'l Mut. Cas. Ins., 431 A.2d 966,
969-70 (Pa. 1981) (there is no common law cause of action arising
in tort for failure to act in good faith in connection with an
insurance policy). Because a primary insurer owes no direct duty
of good faith to an excess insurer, the district court could "see
no reason" why this duty would run in the opposite direction.
Therefore, the district court held that an excess insurer owes a
primary insurer no direct duty of good faith under Pennsylvania
law. Greater New York, 872 F. Supp. at 1406.
Nonetheless, Greater New York contends the district court
was mistaken. It argues "[t]his duty arises as matter of law based
on the doctrine of subrogation, and arises as a matter of necessity
if an excess insurer is to be allowed to negotiate two-tiered
settlement agreements."
Because in Lexington we approved two-tiered settlements
subject to the conditions of "reasonableness and good faith,"
Greater New York contends that by negotiating a two-tiered
settlement, North River assumed a duty of good faith. Greater New
York also argues that because an insured owes a duty of good faith
to its insurer, North River, by negotiating on behalf of its
insured and becoming its subrogee, assumed the insured's duty to
act in good faith.
We are not convinced. Lexington's requirement of "good
faith and reasonableness" attaches to the settlement between the
plaintiff and the insured or those standing in its place. It does
not create an independent set of duties running between primary and
excess insurers. Even if under Pennsylvania law an insured owes a
duty of good faith to its insurer, equitable subrogation does not
create a distinct duty of good faith between the insured's
subrogee, here the excess insurer, and a primary insurer.
Although Greater New York suggests two-tiered settlements
necessitate the imposition of a duty of good faith on an excess
insurer, nothing in Pennsylvania law indicates that equitable
subrogation creates a duty of excess insurer to a primary insurer,
independent of the duties the excess insurer assumed as subrogee.
Of course, North River, as Rodin's subrogee, in its suit against
Greater New York became subject to the claims and defenses Greater
New York was entitled to assert against Rodin. See U.S. Fire Ins.
Co. v. Royal Ins. Co., 759 F.2d 306, 309 (3d Cir. 1985) (with
equitable subrogation "[i]t follows the excess insurer should
assume the rights as well as the obligations of the insured in that
position").
Yet the existence of Rodin's duty is undisputed. Indeed,
the jury in the Greater New York-North River suit found that Rodin
had not breached its duty of good faith to Greater New York. In
so doing, the jury established that North River did not breach the
only form of duty it might have had to Greater New York.
VI.
Finally, Greater New York argues the district court erred
by precluding the testimony of one of its central witnesses, Joseph
McMahon, an employee with responsibility for handling McIlhenny's
personal injury claim. Before trial, Greater New York represented
that McMahon was seriously ill and could not be deposed or testify
at trial. Then, on the Friday before trial he was deemed well
enough to appear. The jury had already been selected and the
discovery deadline had long since passed. So had the date for
submitting pre-trial memoranda. McMahon was not listed in pre-
trial documents as a prospective witness. For several months
Greater New York had insisted that McMahon would be unable to
testify at deposition or at trial. North River relied on this
representation in preparing for trial. For these reasons, the
court determined his appearance would be highly prejudicial to
North River. Balancing the equities, the court found the prejudice
to North River from allowing McMahon to testify would be far
greater than any potential prejudice to Greater New York.
Greater New York asserts this ruling "eviscerated" its
ability to defend itself against the charge that it handled the
McIlhenny claim in bad faith, and challenges the district court's
ruling. We review such judgments under an abuse of discretion
standard. See Sowell v. Butcher & Singer, Inc., 926 F.2d 289, 301
(3d Cir. 1991). In light of the district court's thoughtful
consideration of the equities, and its sound reasons, articulated
after a hearing, we find the court acted well within its authority.
We see no abuse of discretion.
VII.
Neither these alleged evidentiary errors nor the court's
rulings on the issue of Greater New York's duty of good faith
provide any basis for concluding the district court abused its
discretion. Therefore, we find Greater New York's motion for a new
trial was appropriately denied. See Dunn v. Hovic, 1 F.3d 1362,
1364 (3d Cir.), cert. denied, 114 S. Ct. 650 (1993) (denial of
motion for new trial is reviewed for abuse of discretion).
VIII.
For the foregoing reasons we will affirm the judgment of
the district court.