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Woodson v. American Transit Insurance Co.10/11/2005
ON TO DISMISS
ATIC's motion to dismiss is denied. The defense based upon lack of damages is untenable. Even accepting as undisputed the evidence that Dansby was insolvent, the weight of authority in New York and elsewhere is that "excess judgments are damages in themselves, even where the insured is insolvent, and so properly the subject of awards in bad faith claims" (Pinto v Allstate Ins. Co., 221 F2d 394, 402 [2d Cir 2000]). This is because " o allow an insurer to escape bad faith liability because its insured lacks the ability to pay an excess judgment would introduce a perverse and undesirable incentive into personal liability actions, discouraging rather than encouraging settlement . . . uch a rule would allow an insurer who has acted in bad faith to reap a windfall because its insured is of limited means, and would ignore the very real harm an excess judgment can work on an insured's credit and financial future" (Id. at 403).
The New York Court of Appeals has not addressed whether the insured's insolvency precludes a bad faith claim. The plurality in Gordon v Nationwide Mut. Ins. Co., 30 NY2d 427 (1972) failed to reach the issue, although a concurring and a dissenting opinion proposed rules either limiting or eliminating damages for uncollectible judgments (see, id. at 339-40 [Fuld, C.J., concurring]; id. at 350-51 [Breitel, dissenting]. The existing appellate authority, however, suggests a bright-line rule: " eason as well as economic fact dictate that the mere existence of an excess final judgment causes harm to the judgment debtor . . . he judgment increases his debts, it damages his credit, it subjects his property to the lien of the ubiquitous judgment" (Henegan v Merchants Mut. Ins. Co., 1 AD2d 12, 13 [1st Dept 1968]). Although there is dicta in some cases suggesting that the rule might be different in situations where, as here, the insured is completely judgment-proof (see, Pavia v State Farm Mut. Auto. Ins. Co., 183 AD2d 189 [2d Dep't 1992], aff'd in part and rev'd on other grounds, 82 NY2d 445 ), there is little reason to distinguish between those defendants who can satisfy an insignificant fraction of the excess judgment, and those who can satisfy none of it. In either case, despite its bad faith, the insurer reaps a windfall by reason of the happenstance that the insured is impecunious. Furthermore, regardless of the defendant's assets, his or her ability to re-establish credit, accumulate assets, seek employment, benefit from an inheritance or engage in estate planning is impaired.
Similarly unavailing is ATIC's argument that plaintiff, having alleged Dansby's negligence in the personal injury action in order to procure the default judgment, is judicially estopped from disputing that negligence for the purpose of the bad faith action. Although a number of jurisdictions have precluded a plaintiff from taking assignment of a defendant's bad faith or malpractice claims and then pursuing theory that the plaintiff's judgment should never have been entered (see, Picadilly, Inc. v Raikos, 582 NE2d, 338 [Ind. 1991]; Coffey v Jefferson Co. Bd of Ed., 756 SW2d 155 [Ky. App. 1984]; Wagener v McDonald, 509 NW2d 188 [Minn. App. 1993]; Kommavongsa v Haskell, 67 P3d 1068 [Wash. 2003]; Zuniga v Groce, Locke & Hebdon, 878 SW2d, 313 [Tex. App. 1994]; Alcman Servs. Corp. v. Samuel H. Bullock, P.C., 925 F Supp 252, 258 [D NJ 1996], aff'd, 124 F3d 185 [3d Cir. 1997]), New York has not adopted that policy. Rather, "assignment of the defendant's bad faith claim to the plaintiff in a personal liability suit is the ordinary mechanism for pursuing such claim against the insurer" (Pinto, supra at 403; see, e.g., Pavia v State Farm Mut. Automobile Ins. Co., 82 NY2d 445 ); Greevy v Becker
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