Juanita Peterson, Individually and as Assignee of Nathaniel Washington v. Allcity Insurance Company

MOORE, Circuit Judge

(dissenting):

In my opinion, there is every likelihood here that the insured (or his assignee) is being awarded a substantial windfall by the Court — a result cautioned against in this Court’s past decisions (see Harris v. Standard Acc. & Ins. Co., 297 F.2d 627, 631-32 (2d Cir. 1961), cert. denied, 369 U.S. 843 , 82 S.Ct. 875 , 7 L.Ed.2d 847 (1962); Bourget v. Government Employees Ins. Co., 456 F.2d 282, 285 (2d Cir. 1972); compare Young v. American Cas. Co., 416 F.2d 906, 911 (2d Cir. 1969), cert. dismissed, 396 U.S. 997 , 90 S.Ct. 580 , 24 L.Ed.2d 490 (1970)) and in the recent decision of the New York Court of Appeals in Gordon v. Nationwide Life Ins. Co., 30 N.Y.2d 427 , 334 N.Y.S.2d 601 , 285 N.E.2d 849 (1972) (concurring opinion of Chief Judge Fuld, and the opinion of Judge Breitel, joined by Burke and Gibson, JJ.).

Reversible error here stems from the trial court’s error in his charge with relation to possible damages. This was error as a matter of law — New York law, concededly applicable. Nor is the problem of honoring Erie 1 without difficulty, particularly since the law of the State as expounded by one group of judges (State) has to be interpreted by another group (Federal).

Search for New York law on the question of damages can largely be restricted to Gordon, supra, and the cases cited therein. The search should be thorough —especially so where, as here, the trial judge posted danger signals which have been clearly seen by the majority. Warnings that the verdict was “a miscarriage of justice”, 2 and that “the $70,000 verdict [was] many times the most generous estimate of what could ever have been collected from [the insured’s] own assets”, 3 should upon review call for an attempted answer to the question: “Why this result, then?”

The result is achieved because the majority ignores a fundamental element in the insured’s right to recover against his insurer: viz., whether the insured was in fact exposed to pecuniary loss as a result of the insurer’s refusal to settle the claim. Stated differently, and within the context of this appeal, the relevant inquiry should be: Is the award to the insured of the full amount of the excess judgment ($70,000) commensurate with the “damage” caused him by the insurer’s failure to settle when his total assets may total considerably less than $70,000? Because the proof below regarding the insured’s asset holdings (if any) was, at best, confused, 4 and because I think the trial court erred in his jury instructions regarding damages, I would reverse and remand the case for proper determination of the insured’s economic status and the question of damages.

In light of the insubstantial evidence adduced below, despite the insured’s self-serving testimony that he owned assets consisting of a cleaning business, a *82 truck, and part interest in a house (highly dubious assets), I agree with the trial court that the $70,000 verdict in the insured’s favor represents many times the most generous estimate of what could have been collected from his assets. In fact, the trial court virtually admitted error in stating that “My instructions to the jury permitted a verdict for the [insured] even if [he] was insolvent at the time of trial * * 5

The court’s instructions were as follows :

“If [the insured] had no property that he could lose as a result of the judgment, the insurance company still couldn’t disregard his rights because an unsatisfied judgment against you stays for 20 years * * (Appendix, p. 1477a)

“[I]f you find by a preponderance of the evidence that there was bad faith by the insurance company in the defense of this action * * * and you determine [its] liability — [in] a verdict for the plaintiff, you have to give a verdict for the full amount of the excess of $70,000 that is due on the judgment * * (Id. at p. 1487a)

It is clear beyond peradventure that the foregoing instructions are erroneous, when tested in light of the opinions accompanying the decision in Gordon, supra, the New York Court of Appeals’ most recent pronouncement on the question of damages in insurer “bad faith” actions. It is not clear in Gordon whether the insured there was insolvent. In his concurring opinion Chief Judge Fuld appeared to assume that the insured was at best only barely solvent in concluding that the insured’s economic condition was so poor that he had no assets to be imperiled and that, therefore, he had suffered no actual damage by the insurer’s refusal to settle the claim against him. Chief Judge Fuld said:

“There are * * * decisions in some jurisdictions which hold that an excess judgment entered against the insured measures the damages suffered by him even though he may be insolvent and the judgment uncollecti-ble. I find such a rule both unreasonable and unfair. Recovery against an insurer should not be sanctioned or upheld as punishment or a punitive measure. In my view, an insured is not harmed and, by that token, suffers no damage when an uncollectible judgment is entered against him. (Cf., e. g., Bourget v. Government Employees Ins. Co., 456 F.2d 282 ; Harris v. Standard Acc. Ins. Co., 297 F.2d 627, 631-32 , cert. den. 369 U.S. 843 , 82 S.Ct. 875 , 7 L.Ed.2d 847 .” 30 N.Y.2d at 439-440 , 334 N.Y.S.2d at 611 , 285 N.E.2d at 856 .

Judge Breitel, writing in Gordon for three judges, also argued that the trial court had erred in charging that, if the insurer’s bad faith were found, the insured’s damages should be measured by the full amount of the excess judgment. 30 N.Y.2d at 441 , 334 N.Y.S.2d at 613 , 285 N.E.2d at 857 . Judge Breitel expressed his view of the measure of damages as follows:

“[T]he better rule, in cases involving other than a solvent insured, would be for a trial court to instruct a jury with respect to the applicable factors, [e. g., the insured’s economic status, age, economic prospects, skills, health, economic prospects of his estate,] bearing on the pecuniary and tangible harm done to the insured and assess that harm to include the economic harm to the insured now and in the reasonably anticipated future, of the overhanging excess judgment. Included, too, would be any other tangible harms, such as the loss of the right to operate motor vehicles or to obtain employment or insurance.” 30 N.Y.2d at 451 , 334 N.Y.S.2d at 621 , 285 N.E. 2d at 863 .

Such an approach realistically protects both the insured and the insurer; the insured is protected against exposure to *83 actual loss suffered by him due to the insurer’s bad faith refusal to settle a claim; and the insurer will not be compelled to provide his insured with unlimited coverage on a policy, as here, which the parties had agreed would carry a limit of $10,000.

In Harris, supra, (in language quoted with approval by Chief Judge Fuld in Gordon, supra) we said:

“The law of New York requires proof of actual loss to support recovery for a tort of this type. The purpose of tort damages is to compensate an injured person for a loss suffered and only for that. The law attempts to put the plaintiff in a position as nearly possible equivalent to his position before the tort. Recovery is permitted not in order to penalize the tortfeasor, but only to give damages ‘precisely commensurate with the injury’ ” (footnotes omitted) 297 F.2d at 631-632 . 6

The majority’s opinion concedes that the “ * * * insured (or his representative or assignee) should only be entitled to recover to the extent that he has been or, in the reasonably foreseeable future, will be damaged by the outstanding judgment [resulting from the insurer’s bad faith refusal to settle].” But, having so stated, the majority proceeds to disregard this sound principle, on the questionable ground that “this realistic approach for the semi-solvent insured is limited to the extreme case where the magnitude of the excess judgment is so great as to make unjust [imposition upon the insurer of] liability to its full amount.” The majority, in effect, is saying that its conscience is not offended by imposing on the insurer here a judgment of only $70,000 on a $10,000 policy, regardless whether the semi-solvent insured has in fact suffered damages in that full amount, because “the verdict here [is not] extreme or punitive.” The Court intimates that if the figures had been those involved in Gordon, supra (an excess judgment of $259,058.87 and a policy with a $20,000 limit), it would consider the magnitude of that judgment “so great as to make unjust” imposition of liability to the full amount of the excess judgment. Such an approach establishes a standard rife with arbitrary and inconsistent results, and one not susceptible of even-handed application. Thus, for example, if two insurers are found liable for bad faith in failing to settle, and each has a “semi-solvent” insured with a $10,000 policy limit, and the resulting excess judgment against insured A was only $70,000, while that against insured B was $170,000, under the majority’s formulation the latter situation would presumably be deemed “extreme or punitive” and the insurer would not be forced to indemnify his insured to the full amount of the excess judgment; whereas the $70,000 judgment, as in our case, not being “extreme or punitive”, would be imposed to the full amount on the insurer of insured A, without inquiry as to actual harm suffered by the insured. Would an excess judgment of $100,000 on a $10,000 policy be considered punitive? What of a $150,000 judgment on a $30,000 policy? What is to guide a court in resolving the issue? The problems inherent in the majority’s approach are manifest. The better rule, clearly, is to focus not on the magnitude of the excess judgment in ratio to the policy of coverage, but rather, on the amount of actual harm occasioned on the semi-solvent insured — and then impose on the bad faith insurer the amount of damage suffered by the insured. This was not done in the instant case.

“[W]hat gives rise to the [insurer’s] duty and measures its extent is the conflict between the insurer’s interest to pay less than the policy limits and the insured’s interest not to suffer liability for any judgment exceeding them. In the rare instance where the insured has no such interest, there can he no conflict and the duty does not arise" (emphasis added).

In view of the insured’s questionable solvency at trial below, in my opinion, it *84 was error to charge the jury to return a $70,000 verdict against the insurer or nothing at all, if bad faith were found. If the insured was in fact insolvent and had no prospects of future income, the excess judgment against him would be worth zero. If he were barely solvent, or even moderately so, the excess judgment against him might be worth something (which the bad faith insurer should be required to pay) but certainly not the full amount ($70,000). The only proper resolution of this issue is to submit the question of the insured’s solvency to the jury, with proper instructions, and to require the jury to fix the amount of the insured’s actual damage suffered as being somewhere between zero and the full amount of the excess judgment. Judge Breitel has clearly indicated the determinative factors to be presented to the jury for a proper assessment of damages under New York law. The trial court erred in not so charging the jury, and in not establishing conclusively the insured’s economic status. I would therefore reverse and remand the cause for a proper determination on the question of damages.

. Erie R. R. Co. v. Tompkins, 304 U.S. 64 , 58 S.Ct.. 817, 82 L.Ed. 1188 (1938).

. Opinion Accompanying Trial Court’s Decision Denying Defendant’s Motions, reprinted in Appendix, at 1559a.

. Id. at 1561a.

. There was testimony, including that of the insured himself, that he owned no assets and was “judgment proof” in the tort action brought against him by Miss Peterson. The insured later changed his story'.

. Opinion, supra note 2, at 1560a,

. Cf. Bourget v. Government Employees Ins. Co., supra, where Judge Friendly, 456 F.2d at p. 285 , stated :