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An insurer does not act in bad faith when it rejects a demand that would make its settlement contribution contingent on a later declaratory judgment action that sets the limits of its liability, a Southern District of New York magistrate judge ruled Thursday. Magistrate Judge James V. Francis IV, addressing a novel issue under New York law, said that “several well-established principles lead to the conclusion that an insurer can refuse such a demand without violating its good faith obligation to the insured,” in Greenidge v. Allstate Insurance Co., 02 Civ. 9796. The case before Francis concerned landlords Gail and Geary Greenidge, who were sued for poisoning from lead paint exposure to Taniya Seay, the daughter of one of their tenants on Billingsley Terrace in the Bronx. The Greenidges’ insurer, Allstate, acknowledged that Seay may have been exposed to the lead paint over two policy periods. But the company said that even if Seay’s injuries were covered by two policies, a single limitation of liability applied under the “anti-stacking” provision in its policies, which provided for up to $300,000 in indemnification. Urging a settlement that would have Allstate agree that the policy limit was $600,000, the plaintiffs made an alternative offer of settlement on Oct. 14, 1999, one asking Allstate to pay somewhere between $300,000 and $600,000, with $300,000 payable immediately and the rest contingent on the results of a declaratory judgment action on the issue of whether policy limits applied for one period or two. Allstate rejected the offer. Counsel for the plaintiffs told Allstate that, unless it paid $600,000, settlement talks were off and they would launch a bad faith action against the insurance company. Allstate pursued the opinions of two different outside counsels, with one concluding, after reviewing the anti-stacking provisions, that coverage for one loss is “limited to a single policy, notwithstanding that the lead poisoning injury may continue into a second policy period.” Trial began on Oct. 25, and within one week counsel for the plaintiff put on the record that he would institute a bad faith proceeding unless Allstate agreed to settle on the basis of the policy limits to be determined during a declaratory judgment proceeding. Counsel for the Greenidges urged Allstate to negotiate in good faith, but no settlement was reached. On Nov. 5, the jury awarded Seay $42 million, and on July 7, 2000, judgment was entered against the Greenidges for $1.6 million. The Greenidges responded by beginning a bad faith action against Allstate in Bronx County, which was later removed to federal court. Allstate moved for summary judgment before Francis. The Greenidges claimed Allstate could not argue for a single policy limit because it had failed to issue a timely disclaimer on the second policy, an argument rejected by the magistrate judge. Francis said that Allstate “never sought to rescind or reform the policies at issue; it simply advanced its interpretation of the limits of liability.” “Under those circumstances, it was not required to disclaim,” he said. “Moreover, even if an insurer’s narrow reading of its liability limits could be considered a ‘disclaimer,’ Allstate had no obligation to disclaim here.” BAD FAITH ISSUE On the issue of bad faith, Francis said that “the policy did not require Allstate to assent to a declaratory judgment action to determine the policy limits, and it therefore breached no good faith obligation by declining to do so.” “Even if the ‘contingent’ settlement proposed by the plaintiffs in the Seay action were costless to Allstate, it was not required to accede to the demand,” he said. He added that “Allstate would have been put to the cost of litigating” the proceeding and, by agreeing to the procedure, would have waived the chance to seek attorneys fees and costs on the grounds that the insureds’ position was frivolous. “To hold that a tort plaintiff’s attorney can assert bad faith merely because an insurer declines to offer policy limits as determined by some future proceeding � regardless of the objective merit of the insurer’s interpretation of the policy � would tilt the playing field and give the tort plaintiff unwarranted leverage in settlement negotiations,” the magistrate judge said. The Greenidges might still have had a claim if Allstate had declined settlement “based on an unreasonable construction of the policy,” he said, “But that is not the case.” Even if Allstate’s interpretation was mistaken, he said, “it is far from unreasonable, as demonstrated by the fact that Allstate obtained opinion letters from two separate sets of outside counsel that confirmed its reading of the policies.” The magistrate judge granted Allstate’s summary judgment motion and dismissed the complaint. Bertram Herman of Mount Kisco represented Greenidges. Barry I. Levy and Beth Shapiro of Shapiro, Beilly, Rosenberg, Aronowitz, Levy & Fox represented Allstate.

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