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An insurer has agreed to a $1.8 million settlement of a bad faith claim in a Brooklyn Supreme Court case. The settlement was the largest reported in New York state since 1993, when the Court of Appeals made it significantly more difficult for a policyholder to prove that an insurer refused coverage in bad faith. “They thought that bad faith was dead in New York,” said Jeffrey A. Block of Block & Associates. Block and Daniel P. O’Toole of the Block firm represented plaintiff Linda Schwartz, first in her personal injury case and subsequently in the bad faith claim. “But bad faith is not dead,” Block added. The case, Schwartz v. Allstate Insurance Co., 4135-00, was on the docket of Kings County Supreme Court Justice Gerald Held. Settlement was reached last month, two days before the scheduled date for a court-ordered exchange of documents. The plaintiff, Schwartz, was assigned the claim by the policyholder, Frances Rosenthal, who was driving a car in which Schwartz was injured while a passenger. In the personal injury case stemming from the 1990 auto accident, Allstate Insurance Co. had refused to tender an insurance policy limit of $100,000, even after a liability jury verdict had been handed down against its policyholder. The insurer tendered its policy limits only when the jury completed work on the damage phase of the trial. The damage verdict was originally $4.1 million, later whittled down to $1.35 million by the Appellate Division, 2nd Department. Attorneys for the plaintiff in the bad faith litigation said that Allstate, after its policyholder had been deemed 30 percent liable for the accident victim’s injuries, knew of but disregarded the risk of a verdict that could result in excess liability for its policyholder. A co-defendant was held 70 percent responsible for the accident. During the liability phase, defense counsel argued that the co-defendant, Maria V. Ramos, struck Rosenthal’s car in the rear and was therefore wholly responsible for injuries suffered by Schwartz. Defense lawyers also contested the cause of Schwartz’s injuries, which consisted of at least four disc herniations, but which did not require surgery. Defendants said that Schwartz had a degenerative disc condition unrelated to the auto accident. The plaintiff said that once liability had been established, Allstate acted in bad faith when it refused to budge on settling the claim. According to the claims file, Allstate’s adjusters recommended against tendering the policy limits unless the co-defendant’s insurer tendered its policy limit. A claim file note reflecting a conversation between Allstate adjusters and Andrew Small, its trial counsel in the personal injury case, said that “a verdict could come in high on this.” The plaintiff theorized that the note reflected that the adjuster was cognizant of the risk of an excess verdict against its policyholder. However, Allstate offered only $35,000 of the $100,000 policy after the liability verdict was announced, according to plaintiff’s lawyers. When the jury’s $4.1 million verdict was announced, the adjuster gave the company authority to tender the policy limit, the claim file notes say. The notes reflect also that the insurer viewed the jury decision as “obviously … a runaway verdict.” The question that a jury would have had to decide was whether Allstate acted in bad faith from the time its policyholder was held 30 percent liable — a decision that carried the potential of exposure to the entire verdict under joint and several liability principles — to the time the damage verdict came in. Schwartz’s lawyers said that Allstate failed to place its policyholder’s interest on an equal footing with its own when conducting negotiations on the claim. They also said that the policyholder was never informed by Allstate of the risk of a judgment in excess of the policy limits. VERDICT PLUS INTEREST The $1.8 million settlement, Schwartz’s attorneys said, represents the $1.35 million verdict plus interest accrued since 1996, when the verdict was handed down. Christine Malafi, of Lewis, Johs, Avallone, Aviles & Kaufman in Melville, who represented Allstate, said that the settlement does not represent full interest on the verdict. Bad faith litigation was made far more difficult for plaintiffs in 1993, when the New York Court of Appeals, in Pavia v. State Farm Automobile Insurance Co., 82 NY2d 445, held that in order to recover damages for bad faith, plaintiffs must prove that the insurer had “gross disregard” for a policyholder’s interest. The Pavia court rejected a negligence standard in bad faith cases. Since Pavia came down, the largest reported settlement in bad faith litigation was a March 2000 accord for $800,000 reached in Suffolk County.

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