Soto v. State Farm Ins. Co.
Court of Appeals of New York
March 23, 1994, Argued ; May 10, 1994, Decided
No. 78
Reporter
83 N.Y.2d 718 *; 635 N.E.2d 1222 **; 613 N.Y.S.2d 352 ***; 1994 N.Y. LEXIS 1034 ****
Ilde A. Soto, Individually and as Administratrix of the Estate
of Nelson Rivera, Deceased, et al., Appellants, v. State Farm
Insurance Company, Respondent.
Prior History:  [****1]  Appeal, by permission of the Court
of Appeals, from an order of the Appellate Division of the
Supreme Court in the Fourth Judicial Department, entered
July 16, 1993, which affirmed a judgment of the Supreme
Court (Jerome C. Gorski, J.), entered in Erie County, denying
a cross motion by plaintiffs for summary judgment, granting a
motion by defendant for summary judgment dismissing the
complaint, and dismissing the complaint.
Soto v State Farm Ins. Co., 195 AD2d 992, affirmed.
Disposition: Order affirmed, with costs.
Counsel: John Lloyd Egan & Associates, Buffalo (John Lloyd
Egan, Jr., of counsel), for appellants. I. The measure of
excess damages in a bad-faith insurance action is the full
amount of the underlying judgment including punitive
damages that are in excess of the policy limits. ( DiBlasi v
Aetna Life & Cas. Ins. Co., 147 AD2d 93; Roldan v Allstate
Ins. Co., 149 AD2d 20; Gordon v Nationwide Mut. Ins. Co.,
37 AD2d 265, 30 NY2d 427, 410 US 931; AFIA v Continental
Ins. Co., 140 AD2d 167; United States Fid. & Guar. Co. v
Copfer, 48 NY2d 871.) II. Plaintiffs/appellants are entitled to
the full measure of damages for
defendant/respondent's [****2]  breach of covenant of fair
dealing which damages were contemplated and consciously
weighed by defendant/respondent at the time of its failure to
settle within the policy limits when time was so afforded
creating the punitive damages now in question. ( Gordon v
Nationwide Mut. Ins. Co., 30 NY2d 427; DiBlasi v Aetna Life
& Cas. Ins. Co., 147 AD2d 93; Walker v Sheldon, 10 NY2d
401; Samovar of Russia Jewelry Antique Corp. v Generali,
Gen. Ins. Co., 102 AD2d 279; Belco Petroleum Corp. v AIG
Oil Rig, 164 AD2d 583; Kenford Co. v County of Erie, 73
NY2d 312; Chapman v Fargo, 223 NY 32; Kerr S. S. Co. v
Radio Corp., 245 NY 284; Booth v Spuyten Duyvil Rolling
Mill Co., 60 NY 487; Baldwin v United States Tel. Co., 45 NY
744.) III. Defendant has failed to introduce facts in
evidentiary form at the trial level in opposition to
plaintiffs/appellants' allegations of insurance bad faith, and
therefore said issue is deemed admitted by operation of law. (
South Bay Ctr. v Butler, Herrick & Marshall, 43 Misc 2d 269;
Hanson v Ontario Milk Producers Coop., 58 Misc 2d 138;
Banasik v Reed Prentice Div., 34 AD2d 746, 28 NY2d 770;
Payne v  [****3]  Payne, 28 NY2d 399.)
Maghran, McCarthy & Flynn, Buffalo (W. Donn McCarthy
and Kevin E. Ketchum of counsel), for respondent. I. There is
no legal merit to plaintiffs' cause of action because New York
public policy prohibits insurance companies from paying
punitive damages assessed against their insureds. ( Home
Ins. Co. v American Home Prods. Corp., 75 NY2d 196; Public
Serv. Mut. Ins. Co. v Goldfarb, 53 NY2d 392; Hartford Acc. &
Indem. Co. v Village of Hempstead, 48 NY2d 218; Zieman
Mfg. Co. v St. Paul Fire & Mar. Ins. Co., 724 F2d 1343.) II.
Punitive damages could not have been within the
contemplation of the parties to the insurance contract at the
time the contract was made. ( Gordon v Nationwide Mut. Ins.
Co., 30 NY2d 427; Kenford Co. v County of Erie, 73 NY2d
312; Public Serv. Mut. Ins. Co. v Goldfarb, 53 NY2d 392.) III.
There is no legal merit to plaintiffs' cause of action seeking
recovery of an unpaid punitive damages award because an
unsatisfied punitive damages award does not constitute
damage to plaintiffs. ( Hartford Acc. & Indem. Co. v Village
of Hempstead, 48 NY2d 218; Home Ins. Co. v American
Home Prods.  [****4]  Corp., 75 NY2d 196.) IV. The denial
of plaintiffs' cross motion was proper because plaintiffs did
not submit competent evidence to establish as a matter of law
any bad-faith conduct by State Farm. ( Pavia v State Farm
Mut. Auto. Ins. Co., 82 NY2d 445; Friends of Animals v
Associated Fur Mfrs., 46 NY2d 1065; Zuckerman v City of
New York, 49 NY2d 557; Crawford v Hospital of Albert
Einstein Coll. of Medicine, 159 AD2d 304.)
Charles Platto, New York City, James Kimble, of the District
of Columbia Bar, admitted pro hac vice, and Keith

Soto v. State Farm Ins. Co.
Hopkinson, of the Illinois Bar, admitted pro hac vice, for
American Insurance Association and another, amici curiae. I.
Punitive damages are inappropriate in first-party claims.
( Halpin v Prudential Ins. Co., 48 NY2d 906; Public Serv.
Mut. Ins. Co. v Goldfarb, 53 NY2d 392; Home Ins. Co. v
American Home Prods. Corp., 75 NY2d 196.) II. A private
cause of action for damages under Insurance Law § 2601 does
not lie for any damages no less punitive damages. ( Varela v
Investors Ins. Holding Corp., 81 NY2d 958; Pilot Life Ins. Co.
v Dedeaux, 481 US 41; Royal Globe Ins. Co. v Chock Full
[****5]  O'Nuts Corp., 86 AD2d 315; A & E Supply Co. v
Nationwide Mut. Fire Ins. Co., 798 F2d 669, 479 US 1091.)
Anderson Kill Olick & Oshinsky, P. C. (Eugene R. Anderson,
Robert M. Horkovich and Michael J. Keane of counsel),
Robert P. Walton, New York City, and Martha Churchill, of
the Illinois Bar, admitted pro hac vice, for New York
University and another, amici curiae. I. New York Insurance
Law and regulations do not provide the exclusive remedy for
policyholders. ( Riordan v Nationwide Mut. Fire Ins. Co.,
756 F Supp 732, 977 F2d 47; In re Insurance Antitrust Litig.,
938 F2d 919, 5 F3d 1556; Sulner v General Acc. Fire & Life
Assur. Corp., 122 Misc 2d 597; Hartford Acc. & Indem. Co. v
Michigan Mut. Ins. Co., 93 AD2d 337, 61 NY2d 569; Unigard
Sec. Ins. Co. v North Riv. Ins. Co., 762 F Supp 566, 4 F3d
1049; Walker v Sheldon, 10 NY2d 401; State of New York v
Merchants Ins. Co., 109 AD2d 935; Fredericks v Home
Indem. Co., 101 AD2d 614; Cornwell v Safeco Ins. Co., 42
AD2d 127; Pavia v State Farm Mut. Auto. Ins. Co., 82 NY2d
445.) II. Allowing for punitive damages in actions alleging
bad-faith claims handling [****6]  practices against insurance
companies is sound public policy. ( German Alliance Ins. Co.
v Kansas, 233 US 389; Hartford Acc. & Indem. Co. v
Michigan Mut. Ins. Co., 93 AD2d 337, 61 NY2d 569;
Christiania Gen. Ins. Corp. v Great Am. Ins. Co., 745 F Supp
150.) III. Insurance companies should be forced to follow the
set of rules they require their policyholders to follow, and not
be allowed to have a different set of rules apply to their own
conduct.
Judges: Chief Judge Kaye and Judges Simons, Bellacosa,
Smith, Levine and Ciparick concur.
Opinion by: Titone, J.
Opinion
Page 2 of 4
 [*721]  [**1223]  [***353]  Titone, J.
Defendant's insureds were adjudged liable to pay a total of $
420,000 in compensatory damages and $ 450,000 in punitive
damages in connection with a fatal automobile accident. The
insureds' assignees, the actual injured parties, then
commenced the present action against the defendant insurer,
alleging that it should be held liable for the full amount of the
judgment, which far exceeded the policy limits, because it
acted in bad faith in refusing a pretrial settlement offer that
was within the policy limits. The issue in this appeal is
whether the insureds' assignees [****7]  may recover the
portion of the judgment that represents an award of punitive
damages. We conclude that they cannot.
On May 21, 1988, Nelson Rivera and Angel Luis Echevarria
were hit by a car and fatally injured while they were standing
and conversing with some individuals who were sitting in
another car. The vehicle that hit Rivera and Echevarria had
been operated by Elisio Montanez, but was registered and
insured in the name of Mary Casey, Montanez's live-in
girlfriend.
The victims' administrators brought wrongful death and
survival actions against Casey and Montanez. Although the
administrators' counsel had allegedly expressed a willingness
to settle the case before trial for the $ 50,000 per death
insurance policy limit, defendant, Casey's insurer, never
offered that sum in settlement. Instead, it decided to litigate
the case on the theory that its insured had never consented to
Montanez's use of the car. The result was a judgment far in
excess of the limits of Casey's policy and an award against
Montanez that included $ 450,000 in punitive damages.
In awarding damages to the plaintiffs, the jury apparently
[*722]  found that Montanez had been operating the
vehicle [****8]  with Casey's permission at the time the
accident occurred. It also evidently credited the substantial
proof that Montanez, who had no driver's license, was legally
blind when not wearing eyeglasses and had been intoxicated
at the time of the accident.
The plaintiffs were paid the full amount of the compensatory
damage award. Defendant insurer, however, declined to pay
any portion of the judgment that represented punitive
damages.
Unable to collect the full amount of their judgment, the
decedents' administrators subsequently took an assignment of
Montanez's and Casey's rights against defendant insurer. They
then commenced the present action against defendant,

Soto v. State Farm Ins. Co.
alleging that it had been guilty of bad faith in refusing to settle
the Rivera-Echevarria action within the policy limits before
trial despite the opportunity to do so. In support of their
claim, plaintiffs alleged that defendant had recklessly
disregarded the interests of its insureds and that its conduct
had been particularly egregious in light of the overwhelming
evidence against Montanez and the clear likelihood of a jury
award in excess of the policy limits.
Defendant insurer responded by moving to dismiss plaintiffs'
[****9]  complaint for failure to state a claim for which relief
could be granted. Inasmuch as the full amount of the
compensatory damage award in the Rivera-Echevarria action
had already been paid, the only remaining basis for monetary
relief was the punitive damages award. Relying on the well-
established New York policy against indemnification for
punitive damages (see, Home Ins. Co. v American Home
Prods. Corp., 75 NY2d 196), defendant contended that
plaintiffs' claim for reimbursement for the punitive damages
award could not be maintained.
Both courts below adopted defendant's argument and
dismissed the complaint. In ruling in defendant's favor, both
courts stressed that since punitive damages are not insurable
in this State, they could not have been within the
contemplation of the parties when they made their insurance
contract and therefore were not properly recoverable as a
[**1224]   [***354]  consequential damage for defendant's
alleged breach of its obligation of good faith. Following the
Appellate Division's affirmance of the order dismissing the
complaint, this Court granted plaintiffs leave to take a further
appeal. We now affirm.
 [*723]  It is well established [****10]  that an insurer who
refuses a settlement offer in bad faith may be held liable in
damages to its insured (e.g., Gordon v Nationwide Mut. Ins.
Co., 30 NY2d 427; Best Bldg. Co. v Employers' Liab. Assur.
Corp., 247 NY 451, 453). Indeed, we recently observed that
an insurer which acts in " 'gross disregard' of [its] insured's
interests * * * when considering a settlement offer" may be
required to pay damages, provided the plaintiff can show that
" 'the insured lost an actual opportunity to settle the * * *
claim' * * * at a time when all serious doubts about the
insured's liability were removed" ( Pavia v State Farm Mut.
Auto. Ins. Co., 82 NY2d 445, 453, 454 [quoting United States
Fid. & Guar. Co. v Copfer, 48 NY2d 871, 873]).
The damages recoverable in an action based on an insurer's
bad-faith refusal to settle are generally measured by "the
amount for which the insured becomes charged in excess of
Page 3 of 4
his policy coverage" (7C Appleman, Insurance Law and
Practice § 4711, at 414 [Berdal ed]; see, Gordon v Nationwide
Mut. Ins. Co., supra, at 436-437; see generally, 14 Couch,
Insurance 2d § 51:143 [rev ed]). An excess judgment is a
class of harm that [****11]  naturally and foreseeably flows
from an insurer's failure to accept a pretrial settlement offer
within the policy limits. Accordingly, when the harm has
been caused by the insurer's breach of its obligation to
perform in good faith, the insurer should be required to
remedy that harm by paying the excess judgment ( Gordon v
Nationwide Mut. Ins. Co., supra, at 436-437; see, Brassil v
Maryland Cas. Co., 210 NY 235; DiBlasi v Aetna Life & Cas.
Ins. Co., 147 AD2d 93; see also, Kenford Co. v County of
Erie, 73 NY2d 312, 321).
This principle is more complicated when, as here, a portion of
the excess judgment for which the insured seeks
compensation represents an award of punitive damages
obtained by an injured plaintiff. * On the one hand, for
purposes of measuring the amounts recoverable in a bad-faith
action against an insurer, such an award is no different in
principle from an award of excess personal injury damages;
both are unindemnified liabilities to which the insured would
not have been  [*724]  exposed if the insurer had acted in
good faith to reach a fair pretrial settlement. On the other
hand our State's public policy clearly precludes
indemnification [****12]  for punitive damages ( Home Ins.
Co. v American Home Prods. Corp., 75 NY2d 196, supra;
Public Serv. Mut. Ins. Co. v Goldfarb, 53 NY2d 392; Hartford
Acc. & Indem. Co. v Village of Hempstead, 48 NY2d 218).
While the relief an insured seeks in an action for bad faith is
more in the nature of compensation than indemnification, the
nature of the underlying reason for the recovery, i.e., a civil
punitive damage award, cannot be ignored.
We conclude that a rule permitting recovery for excess civil
judgments attributable to punitive damage awards [****13] 
would be unsound public policy. We have previously
endorsed the " 'fundamental principle that no one shall be
permitted to take advantage of his own wrong' " ( Hartford
Acc. & Indem. Co., supra, at 226, quoting Messersmith v
American Fid. Co., 232 NY 161, 165; accord, Public Serv.
*  To be distinguished are situations in which the insured is seeking
to recover punitive damages from the insurer because of the
insurer's own alleged misconduct in handling a settlement offer. We
do not here address the recoverability of this category of damages
(cf., Rocanova v Equitable Life Assur. Socy., 83 NY2d 603 [decided
today] [discussing availability of punitive damages for insurer's
own alleged misconduct in settling first-party claims]).
 Page 4 of 4
Soto v. State Farm Ins. Co.

Mut. Ins. Co. v Goldfarb, 53 NY2d 392, 400).  [***355]    basis of plaintiffs' action against defendant insurer in this
[**1225]  This principle is not vitiated by the existence of an case, their complaint was properly dismissed.
entirely separate and analytically distinct wrong on the part of
the insurer. Accordingly, the order of the Appellate Division should be
affirmed, with costs.
As we have noted on other occasions, since punitive
damages are not designed to compensate an injured plaintiff Chief Judge Kaye and Judges Simons, Bellacosa, Smith,
for the actual injury that that person may have suffered, their Levine and Ciparick concur.
only real purpose is to punish and deter the wrongdoer (
Order affirmed, with costs.
Home Ins. Co. v American Home Prods. Corp., supra, at 200;
Hartford Acc. & Indem. Co. v Village of Hempstead, supra, at
226). While the deterrent value of the rule against
End of Document
indemnification may be somewhat attenuated in this context,
the rule's equally important goal of preserving the
condemnatory and retributive character of punitive damage
awards remains clear and undiminished. That goal cannot be
reconciled with a conclusion that would allow the
insured [****14]  wrongdoer to divert the economic
punishment to an insurer because of the insurer's unrelated,
independent wrongful act in improperly refusing a settlement
within policy limits.

Where an insurer has acted in bad faith in relation to an

available pretrial settlement opportunity, it is guilty only of
placing its insured at risk that a jury will deem him or her so
morally culpable as to warrant the imposition of punitive
damages. Stated another way, an insurer's failure to agree to a
settlement, whether reasonable or wrongful, does no more
than deprive the insured of a chance to avoid the possibility of
having to suffer a punitive damage award for his or her own
[*725]  misconduct. Regardless of how egregious the insurer's
conduct has been, the fact remains that any award of punitive
damages that might ensue is still directly attributable to the
insured's immoral and blameworthy behavior.

Our system of civil justice may be organized so as to allow a

wrongdoer to escape the punitive consequences of his own
malfeasance in order that the injured plaintiff may enjoy the
advantages of a swift and certain pretrial settlement.
However, the benefit that a morally culpable
wrongdoer [****15]  obtains as a result of this system, i.e.,
being released from exposure to liability for punitive
damages, is no more than a necessary incident of the process.
It is certainly not a right whose loss need be made subject to
compensation when a favorable pretrial settlement offer has
been wasted by a reckless or faithless insurer.

In summary, we hold that the punitive damages awarded

against an insured in a civil suit are not a proper element of
the compensatory damages recoverable in a suit against an
insurer for a bad-faith refusal to settle. Since that is the sole