May an insurer reject a demand that would make its contribution to a settlement contingent upon the outcome of a suit to establish the limits of liability under the policy? In Greenridge v. Allstate, the United States District Court for the Southern District of New York answered that question in the positive. Greenridge v. Allstate Ins. Co., 312 F. Supp. 2d 430 (S.D.N.Y. 2004).

The plaintiffs (the “Greenridges”) owned a three-family home in the Bronx. One of their tenants sued them, alleging that his daughter suffered lead poisoning from exposure to lead paint in the building owned by the Greenridges. The plaintiffs were insured by Allstate Insurance Company (“Allstate”). They purchased homeowners’ liability insurance from them on an annual basis from February 1988 through the time of the dispute. The policy provided coverage for claims for bodily injury up to a $300,000 limit. The Greenridges alleged that the limit should be $600,000 because the exposure at issue allegedly occurred over two different policy periods. Allstate argued its liability was limited to $300,000.

The plaintiff tenant offered to settle his claim against the Greenridges for $300,000 plus an additional $300,000 if, through a declaratory judgment, a court ruled that Allstate was liable for the second policy limit. Allstate subsequently refused to consent to the settlement. A judgment of more than $1.6 million was eventually entered against the Greenridges. They then sued Allstate, claiming it was liable for the $600,000 under the two policies. They also claimed the company was liable because it had demonstrated bad faith when refusing to accept the settlement.

The Greenridge Court acknowledged that an insurer may be held liable for a breach of its duty of good faith in defending and settling claims against its insured. Pavia v. State Farm Mutual Automobile Insurance Co, 82 N.Y.2d 445, 452 (1993). But it also held that bad faith “is not a free-floating concept to be invoked whenever the insurer fails to maximize the interests of the insured.” Gordon v. Nationwide Mut. Ins. Co.¸ 30 N.Y.2d 427, 437 (1972). Bad faith is an implied obligation that derives from an insurance contract. Id. at 452.  The Greenridge Court found in favor of Allstate, denying the bad faith claim and finding that an anti-stacking clause in the contract between the two parties was arguably enforceable. Therefore, there was a basis for the insurer’s position that its liability was limited to one policy period ($300,000.00), rather than stacking two policy periods that followed one another (which would double the limit to $600,000.00), was enforceable. The decision was later affirmed by the United States Court of Appeals for the Second Circuit.

The Greenridge Court’s decision suggests that an insurer’s refusal to consent to an insured’s declaratory judgment action is not likely to be considered sufficient to find that the insurer grossly disregarded the interests of the insured party.


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