549 F.Supp.3d 334
S.D.N.Y.2021Background
- Scottsdale issued a D&O policy to Watershed Ventures covering Watershed and its "Subsidiaries"; the policy defined "Directors and Officers" to include directors/managers of subsidiaries.
- Rocky Aspen was formed as a joint venture; AH DB (McGrath’s affiliate) defaulted on funding obligations, triggering a Watershed option that ultimately produced Watershed control during a brief period when McGrath served as a manager.
- Rocky Aspen later entered Chapter 7 and the Trustee and Hanford asserted claims implicating McGrath; Watershed notified Scottsdale of the Hanford litigation in November 2016.
- Scottsdale informed Watershed in January 2017 it did not consider McGrath an insured; McGrath did not receive a policy copy and learned of the policy only later. McGrath tendered the Trustee’s settlement demand in June 2019; Scottsdale reserved rights and denied coverage in July 2019.
- Scottsdale sued for declaratory relief; this Court previously held McGrath was an insured for a limited period but left coverage and damages questions unresolved. McGrath counterclaimed for bad faith and sought consequential and punitive damages beyond policy limits.
- The Court granted Scottsdale’s partial summary judgment: dismissing McGrath’s independent bad-faith claim and striking his prayer for consequential and punitive damages beyond the policy limit.
Issues
| Issue | Plaintiff's Argument (Scottsdale) | Defendant's Argument (McGrath) | Held |
|---|---|---|---|
| Whether McGrath stated an independent extracontractual bad-faith claim for denial of coverage | No; New York presumes against bad-faith liability and none of the facts show gross disregard or duty independent of contract | Scottsdale acted in bad faith by failing to notify McGrath, delaying response, and denying coverage, depriving him of settlement opportunity | Court: No triable bad-faith claim; dismissal granted |
| Whether Scottsdale had exclusive control of defense/settlement creating duty re: settlement | No; Scottsdale never assumed defense and timely reserved rights, so it did not control settlement decisions | Scottsdale’s reservation/denial prevented timely settlement and thus was culpable | Court: Scottsdale never assumed exclusive control; no bad-faith failure-to-settle claim |
| Whether consequential damages beyond policy limits are recoverable for breach of contract | No; consequential damages require they were reasonably within parties’ contemplation (Bi-Economy framework) and here damages are speculative and not within core contract purpose | The D&O policy foreseeably covers defense/settlement costs and consequential harms to an insured manager | Court: Consequential damages unavailable; prayer stricken |
| Whether punitive damages are available | No; punitive damages require an independent tort, egregious conduct directed at plaintiff and public pattern—none alleged | Scottsdale and Watershed willfully hid the policy and colluded to deprive McGrath of coverage, warranting punitive relief | Court: Punitive damages denied—no independent tort or requisite egregious, public-directed conduct |
Key Cases Cited
- Hugo Boss Fashions, Inc. v. Fed. Ins. Co., 252 F.3d 608 (2d Cir. 2001) (strong presumption against insurer bad-faith liability; denial must show more than an arguable difference of opinion)
- Pavia v. State Farm Mut. Auto. Ins. Co., 605 N.Y.S.2d 208 (N.Y. App. Div. 1993) (recognizes bad-faith refusal-to-settle doctrine where insurer controls defense)
- New Eng. Ins. Co. v. Healthcare Underwriters Mut. Ins. Co., 295 F.3d 232 (2d Cir. 2002) (insurer’s duty of good faith re: settlement arises after it assumes defense)
- Bi-Economy Market, Inc. v. Harleysville Ins. Co. of N.Y., 856 N.Y.S.2d 505 (N.Y. 2008) (limited exception allowing consequential damages in first-party insurance where such harms were within contemplation and core purpose of the policy)
- N.Y. Univ. v. Cont'l Ins. Co., 639 N.Y.S.2d 283 (N.Y. 1996) (no independent tort for bad-faith insurance claim absent duty separate from contract)