New York Appellate Division Split on Claim Preclusion of Bad Faith Action

By decision dated June 8, 2018, the New York State Supreme Court, Appellate Division, Fourth Department, affirmed the trial court’s denial of an insurer’s motion to dismiss bad faith claims based on res judicata, in defiance of prior precedent from a separate Department of the Appellate Division.

Corle v. Allstate Ins. Co., N.Y.S.3d , 2018 WL 2751204 (4th Dept. 2018) arises out of an incident in which the plaintiff, Colin Corle (Corle) was shot by Jeoffrey lee Bauter Teeter (Teeter).  Teeter’s homeowners’ insurer disclaimed coverage.  Corle’s father commenced suit against Teeter and obtained a judgment in excess of $350,000.

Corle’s father thereafter commenced suit against the insurer pursuant to New York Insurance Law Section 3240(a)(2) and (b)(1), which permits an underlying claimant to maintain an action against the tortfeasor’s insurer when certain conditions are met.  Specifically, the statute provides that “any person who… has obtained a judgment against the insured… for damages for injury sustained… during the life of the policy or contract” may maintain an action against the insurer “to recover the amount of a judgment against the insured.”   In that action, the court found that the shooting was a covered loss and awarded Corle’s father the policy limits.

Thereafter, Teeter assigned all of his rights and claims against the insurer to Corle and his father, who then commenced a new suit against the insurer alleging it disclaimed coverage in bad faith.  The insurer responded by filing a pre-answer motion to dismiss based on res judicata, alleging the Corles’ failure to litigate the bad faith claim in Section 3240(a) action bars the instant action.   The Fourth Department disagreed.  The court held that because an action pursuant to Insurance Law Section 3240(a)(2) and (b)(1) is limited to recovering only the policy limits of the insured’s policy, and because the plaintiffs lacked standing to assert the bad faith claims in the absence of the insured’s assignment of its rights under the policy, the doctrine of res judicata did not bar the bad faith action.

The Fourth Department explicitly refused to follow precedent from the First Department addressing this exact issue.  In Cirone v. Tower Ins. Co. of N.Y., 76 A.D.3d (1st Dept. 2010), a matter with a similar fact pattern (except that the court found that there was no coverage under the relevant policy), the First Department found that “plaintiffs’ failure to litigate the bad faith claims in the Insurance Law Section 3420 action against Tower [the insurer] bars litigation of those claims in this action, as both sets of claims arise from the same series of transactions.”  Id. at 884.  In Corle, the Fourth Department rejected this decision, finding that since Corle’s father did not have standing to assert a bad faith claim against the insurer until it obtained the assignment from the tortfeasor-insured, the claim cannot be barred by res judicata.

In light of the Fourth Department’s explicit rejection of the First Department’s decision in Cirone, the insurer may seek further review of this issue from New York’s highest court, the New York Court of Appeals.

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