In this new era of personal injury "nuclear verdicts" that far exceed policy limits, insurance companies are searching for protection. The underutilized offer of a "high-low" agreement provides that protection. A "high-low" agreement is in fact a conditional settlement. When a jury renders a verdict, this condition is triggered and the "high" or the "low" (or a number in between) becomes binding upon the parties and is considered a settlement.

Definition

A high-low agreement is simply an agreement in which the parties stipulate that, regardless of the jury verdict, the plaintiff will either receive the low amount, the high amount or an amount in between these two numbers. For example, if the parties agree to a high-low of $1 million/$100,000, then plaintiff will still receive the low of $100,000 if a defense verdict is rendered. If the verdict is $3 million, or any amount above the "high," the defendant will only have to pay the $1 million. And, if the jury returns a monetary award between these two numbers, say $500,000, then the plaintiff will receive that amount. High-low agreements must be in writing or made in open court on the record.

Bad Faith and High-Low Agreements

'Vecchione'. Not only does a high-low agreement protect an insurance company and its insured, it can also bar a bad faith claim where there is a verdict that exceeds the policy limits. The Second Department in Vecchione v. Amica Mutual Insurance Company, 274 A.D.2d 576 (2d Dept. 2000) held that the insurer's offering a "high-low" settlement in response to a demand for policy limits did not evidence gross disregard of the insured's rights and thus was not a bad faith refusal to settle within the policy limits.

The underlying personal injury action arose from a two-car collision between a vehicle owned by Vecchione and one owned by defendant Kossman. Kathleen and Patricia Neary, passengers in the Kossman vehicle, were comatose and confined to a wheelchair, respectfully, as a result of the crash. Amica Mutual Insurance Company had a single limit policy of $300,000. At a pre-trial conference, the Amica claim supervisor sought authority to offer the Nearys a "high-low" agreement. The terms were that the Nearys would receive the full policy limits after the liability phase of the trial if defendant Vecchione was found to be at fault. Amica would still pay $100,000 even if the jury found no liability on Vecchione's part.

Prior to trial, plaintiff's counsel sent a demand letter to counsel for Vecchione seeking tender of the policy limit within 48 hours or the settlement offer would be withdrawn. The claim supervisor responded by presenting the "high-low" proposal, which was not only rejected by plaintiff's counsel, but counsel refused to even discuss it with his clients.

The jury rendered a $1.5 million verdict, holding the defendant Vecchione 5% at fault. A bad faith action was commenced against Amica by the Vecchiones and the Nearys, as assignees. The jury found that Amica's failure to offer its full policy was a gross disregard of the Vecchione's interest and thus constituted bad faith, and Amica was responsible for the entire $1.5 million verdict. The trial court set aside the verdict and the Second Department reviewed the decision and affirmed the trial court.

The Appellate Court held that bad faith by an insurance company is defined as conduct constituting "a gross disregard of the policy holder's interest—that is, a deliberate or reckless failure to place on an equal footing its own interests and those of the policyholder when considering a settlement offer" (citing Pavia v. State Farm Mut. Auto Ins. Co., 82 N.Y.2d 445, 452, (1993)). "In other words, a bad-faith plaintiff must establish that the defendant insurer engaged in a pattern of behavior evincing a conscious or knowing indifference to the probability that an insured would be held personally accountable for a large judgment if a settlement offer within the policy limits were not accepted." Pavia, 82 N.Y.2d 453-54.

The court in Vecchione found that Amica's offer of the "high-low" agreement in response to the Neary's demand letter "clearly negates a finding that its refusal to tender the policy limits amounted to a deliberate or reckless failure to place the policy holder's interests on an equal footing with its own. Rather, the evidence demonstrates that Amica made the proposal for the purpose of protecting the policy holder from a potential excess judgment."

Accordingly, it is clear that the ruling in Vecchione provides that a "high-low" agreement put on the record and refused by plaintiff's counsel that offers the entire policy limits as a high cannot be interpreted as bad faith on behalf of the insurance company holding them responsible for a verdict in excess of the policy limits.

'Doherty'. Similarly, in Doherty v. Merchant's Mutual Insurance Company, 74 A.D.3d 1870 (4th Dept. 2010) the Fourth Department found that in a case where the "high-low" offer was made after the trial was commenced, the insurance company would not be held to have grossly disregarded its insured's interest. In Doherty, the policy limits were $300,000. Plaintiff's demand was $240,000 and the offer never exceeded $55,000. The "high-low" offer at trial was "not well received" and rejected.

The dissent in Doherty argued that the "high-low" offer made four days after the trial commenced did not exonerate the carrier from a "pre-existing" liability for bad faith failure to settle within the policy limits. The "high-low" offer was but a factor for the jury to consider on the question of bad faith.

When the 'high' is not the policy limit. While these two cases concern a high-low agreement where the high is the policy limit, what if the high was set at plaintiff's demand, even though the policy limit is higher?

Let's say the plaintiff's demand was $750,000, the insurance carrier's offer was $150,000, the policy limit was $1 million and the high-low put forth by the carrier was $150,000/$750,000. Would there be bad faith if plaintiff rejected that offer? While there are no cases on point, it would appear that this proposal would demonstrate an attempt to protect the policy holder from an excess judgment and would not constitute bad faith.

Conclusion

Based on Vecchione and Doherty, in order to defeat a bad faith claim, an insurer should:

• offer a "high-low" agreement before the trial begins or as soon thereafter as possible;
• offer the full policy limits as the high.
• place the offer and rejection of the offer on the record;

This litigation tool will ensure that that if the jury renders a verdict in excess of the policy, the timely and properly placed "high-low" agreement will not only protect its insured but will protect the carrier from a bad faith claim and responsibility to pay an excess verdict. All carriers should develop this strategy: to offer a "high-low" when a possible runaway verdict looms large. Even if the plaintiff rejects the "high-low," the carrier has taken appropriate steps to insure that it will not be responsible for an excess verdict.

Andrea M. Alonso and Kevin G. Faley are partners in the firm of Morris Duffy Alonso & Faley.