Opinion
May 26, 1978
Appeal from the Erie Supreme Court.
Present — Moule, J.P., Cardamone, Simons, Hancock, Jr., and Denman, JJ.
Judgment unanimously modified in accordance with the memorandum herein, and, as modified, affirmed, without costs. Memorandum: In a negligence action against Thomas Copfer, his parents' insurance carrier, United States Fidelity Guaranty Co. (USF) disclaimed liability and refused to defend. The Copfers retained private counsel who at all times informed USFG of the progress of the litigation and repeatedly requested it to defend the action. Judgment in that action was entered against the defendant, Thomas Copfer, in the amount of $78,862.60, which was $53,862.20 over the limits of the policy. USFG commenced a declaratory judgment action against the defendants to determine coverage under the policy and both parties moved for summary judgment. Judgment was entered for defendants in amounts representing (1) the total amount of the policy ($25,000); (2) that portion of the judgment against Copfer which exceeded the policy limits; (3) counsel fees, costs and disbursements for defense of the underlying action. USFG appeals from those judgments. An insurance carrier's obligation to defend under the policy is separate and distinct from its obligation to pay and is much broader (McGroarty v Great Amer. Ins. Co., 36 N.Y.2d 358; Goldberg v Lumber Mut. Cas. Ins. Co. of N.Y., 297 N.Y. 148; Utica Mut. Ins. Co. v Cherry, 45 A.D.2d 350, affd 38 N.Y.2d 735; Marine Midland Servs. Corp. v Kosoff Sons, 60 A.D.2d 767). The duty to defend arises when the allegations of the pleadings can be construed so as to encompass the risk undertaken by the insurer, no matter how groundless, false or fraudulent they may turn out to be (Goldberg v Lumber Mut. Cas. Ins. Co. of N.Y., supra; Lionel Freedman, Inc. v Glens Falls Ins. Co., 27 N.Y.2d 364, mot for rearg den 28 N.Y.2d 859; Commercial Pipe Supply Corp. v Allstate Ins. Co., 36 A.D.2d 412, affd 30 N.Y.2d 619). If the insurer is to be relieved of its duty to defend, it must show that the allegations rest solely and entirely within the exclusions of the policy and that the allegations are subject to no other interpretation (International Paper Co. v Continental Cas. Co., 35 N.Y.2d 322; McGroarty v Great Amer. Ins. Co., supra). The allegations of negligence in the pleadings in the underlying action were clearly within the coverage of the policy. In making its decision to disclaim, it assumed the risk as to what might be proven against its insured (McGroarty v Great Amer. Ins. Co., supra, p 365) and cannot go behind the judgment to raise defenses with respect to the merits (Manard v Hardware Mut. Cas. Co., 12 A.D.2d 29, mot for rearg or for lv to app den 12 A.D.2d 891). USFG clearly breached its obligation to defend under the policy and is consequently liable for the amount of the judgment within the policy limits plus the costs of defense to the insured (Gordon v Nationwide Mut. Ins. Co., 30 N.Y.2d 427, 436; Doyle v Allstate Ins. Co., 1 N.Y.2d 439, 444; Commercial Pipe Supply Corp. v Allstate Ins. Co., supra, p 415). A different question is presented with respect to that portion of the judgment which is in excess of the policy limits. In order to justify awards in excess of the policy, there must be a showing of bad faith on the part of the insurer. "Bad faith requires an extraordinary showing of a disingenuous or dishonest failure to carry out a contract." (Gordon v Nationwide Mut. Ins. Co., supra, p 437.) This principle has been applied solely to bad-faith failure to settle, not to breach of the obligation to defend (see Gordon v Nationwide Mut. Ins. Co., supra; Knobloch v Royal Globe Ins. Co., 38 N.Y.2d 471; Decker v Amalgamated Mut. Cas. Ins. Co., 35 N.Y.2d 950; Town of Poland v Transamerica Ins. Co., 53 A.D.2d 140). The record before us does not indicate that USFG was guilty of a "disingenuous or dishonest failure" to make a reasonable settlement; indeed, there is no evidence that it was presented with a settlement offer. That portion of the judgment in excess of the policy thus constitutes punitive damages for breach of contract and is inconsistent with established contract principles (Garrity v Lyle Stuart, Inc., 40 N.Y.2d 354; M.S.R. Assoc. v Consolidated Mut. Ins. Co., 58 A.D.2d 858).