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GREATER NEW YORK MUT. INS. CO. v. NORTH RIVER INS.

January 18, 1995

GREATER NEW YORK MUTUAL INSURANCE COMPANY
v.
NORTH RIVER INSURANCE COMPANY, et al.; NORTH RIVER INSURANCE COMPANY v. GREATER NEW YORK MUTUAL INSURANCE COMPANY



The opinion of the court was delivered by: HARVEY BARTLE, III

 Bartle, J.

 These consolidated diversity actions involve a dispute between a primary and an excess insurance company. Before the court are cross motions to dismiss pursuant to Rule 12(b)(6) and to strike pursuant to Rule 12(f) of the Federal Rules of Civil Procedure. Pennsylvania law applies to both cases.

 The dispute arises over a complicated settlement of a state court personal injury lawsuit. The settlement was reached after trial and the entry of a $ 5,796,000 judgment against the companies' insureds. The primary carrier, Greater New York Mutual Insurance Company ("GNY"), seeks to recover the funds it contributed in settlement. It contends that the excess insurer, North River Insurance Company ("North River"), its parent company, Crum & Forster Holdings, Inc. ("Crum & Forster"), and the insured parties, Crown Park Investors and Rodin Management Incorporated (the "insureds") acted wrongfully in structuring the settlement which provides, among other things, for North River to sue GNY in the present action. North River, in its lawsuit, contends that GNY acted in bad faith in failing to settle the case before trial within its $ 1,000,000 policy limits. North River seeks to impose liability on GNY for the entire amount of the settlement.

 A complaint should be dismissed pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure only where "it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Hishon v. King & Spalding, 467 U.S. 69, 73, 81 L. Ed. 2d 59, 104 S. Ct. 2229 (1984). All well pleaded factual allegations in the complaint are assumed to be true and are viewed in the light most favorable to the plaintiff. Jenkins v. McKeithen, 395 U.S. 411, 421, 23 L. Ed. 2d 404, 89 S. Ct. 1843 (1969).

 Pursuant to the settlement agreement, North River paid McIlhenny $ 1,949,629 and provided her with a lifetime annuity. In return, McIlhenny released North River and the insureds from all further liability. The agreement, however, provides that the "full settlement amount" is $ 5,250,000. Since the "full settlement amount" is more than the total amount McIlhenny has received from North River and GNY, North River agreed to "exercise its best efforts to recover the full settlement amount ($ 5,250,000.00) from [GNY] through litigation or other proceedings." If North River prevails, under a formula set forth in the agreement, it would retain the first $ 1,000,000 and 60% of any amount over that figure. The remaining 40% of the recovered funds would then be paid to McIlhenny. To fund the present litigation, McIlhenny provided North River with $ 400,000 of the $ 1,000,000 she received from GNY.

 North River brought suit against GNY in its own right and as the assignee and equitable subrogee of the insureds. North River seeks to recover $ 4,250,000 from GNY, that is, the stated "full settlement amount" of $ 5,250,000 minus the $ 1,000,000 GNY already paid to McIlhenny. If North River succeeds in recovering $ 4,250,000 from GNY in this suit, the 60%-40% split of these funds with McIlhenny will apparently reimburse North River fully for the amount it has paid her or on her behalf. Before North River brought its lawsuit, GNY filed suit against the North River, Crum & Forster, and the insureds (collectively known as "North River defendants") seeking the return of the $ 1,000,000 GNY paid McIlhenny on behalf of the insureds.

 I. The North River defendants' motion to dismiss

 The North River defendants move to dismiss Counts I, II and III of GNY's amended complaint. In Count I, GNY contends that the North River defendants breached "an implied covenant of good faith and fair dealing towards GNY" in negotiating a settlement of the underlying action which requires North River to sue GNY. Count II alleges a civil conspiracy among the North River defendants to injure GNY by means of the settlement. *fn1" Count III asserts that Crum & Forster "acted in concert with the insureds in breaching the duty owed by the insureds to GNY, and the duty owed by North River to GNY." *fn2" Finally, the North River defendants have also moved to strike paragraphs 77 and 78 *fn3" of the complaint, which seek declaratory relief.

 The North River defendants correctly note that Count I of GNY's amended complaint hinges on the proposition that they owe a duty of care to GNY. The parties have cited and this court has found no Pennsylvania cases on the issue of whether an excess liability insurer such as North River owes a duty of care to a primary insurance carrier such as GNY. Accordingly, this court must predict how the Pennsylvania Supreme Court would rule if presented with this issue. See, e.g., Robertson v. Allied Signal, Inc., 914 F.2d 360, 364 (3d Cir. 1990).

 There is, of course, no contractual relationship between North River and GNY on which a duty of good faith owing to GNY may be premised. In the converse situation, the Court of Appeals for the Third Circuit has held that Pennsylvania would reject the theory "of a direct duty running from the primary to the excess carrier." Puritan Ins. Co. v. Canadian Univ. Ins. Co., 775 F.2d 76, 79 (3d Cir. 1985), citing United States Fire Ins. Co. v. Royal Ins. Co., 759 F.2d 306, 309, n.3 (3d Cir. 1985). Moreover, the Pennsylvania Supreme Court has ruled that there is no common law cause of action arising in tort for failure to act in good faith in connection with an insurance policy. See D'Ambrosio v. Pennsylvania Nat'l Mut. Cas. Ins. Co., 494 Pa. 501, 431 A.2d 966, 969-70 (Pa. 1981). On the basis of the Puritan and D'Ambrosio cases, this court predicts that the Supreme Court of Pennsylvania would decide that an excess insurer owes no direct duty of good faith to a primary insurer. We see no reason why a duty of good faith would run from an excess carrier to a primary carrier when no such duty runs in the opposite direction.

 GNY has also sued Crum & Forster, North River's parent company, for breach of a duty of good faith. As Crum & Forster has no contractual relationship with GNY, it, like North River, owes GNY no direct duty. Count I of GNY's amended complaint, alleging breach of such a duty, must be dismissed insofar as it relates to North River and Crum & Forster.

 We now turn to the question whether an insured owes a duty of good faith to its insurer. The Pennsylvania courts have not specifically addressed the question. In contrast to the relationship between a primary and an excess carrier, an insurance company and its insured are parties to the same contract. While there are no cases directly on point, various decisions of the Pennsylvania courts on the nature of the duty of good faith in the context of an insurance contract as well as certain statutes provide some guidance on this issue.

 A leading case is Gray v. Nationwide Mutual Insurance Co., 422 Pa. 500, 223 A.2d 8 (Pa. 1966). There, Gray originally sued MacLatchie, Nationwide's insured, as a result of an automobile accident. MacLatchie's policy with Nationwide was limited to $ 5,000, but Gray obtained a $ 15,000 jury verdict against MacLatchie. After Nationwide tendered its policy limits, Gray demanded the remainder from MacLatchie. MacLatchie settled with Gray by assigning to Gray all rights MacLatchie had against Nationwide. Gray brought suit alleging that Nationwide had breached an obligation to act in good faith towards MacLatchie in refusing to settle with Gray within its insured's policy limits.

 The Supreme Court of Pennsylvania held in Gray that an insurance company's obligation to act in good faith towards its insured in deciding whether to settle a claim is implied in the contractual relationship between the parties. Id. at 11. Failure to abide by this obligation resulted in a cause of action for breach of contract. Id. at 12. The Gray court further held that Gray could recover from Nationwide as the assignee of MacLatchie, its insured. Id.

 In the D'Ambrosio case, the Pennsylvania Supreme Court resolved the issue of whether an insured could bring a claim in tort as well as in contract against an insurer for a breach of its duty of good faith. 431 A.2d at 967. D'Ambrosio brought suit after his insurer refused to pay him first-party benefits for storm damage to his motor boat. D'Ambrosio brought one count in assumpsit seeking contractual damages for the amount allegedly due under his insurance policy. In another count, D'Ambrosio sued in ...


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