New York Mulling Over Bill Making It Easier to Obtain Bad Faith and Punitive Damages

For many years, the state of New York has been a jurisdiction where bad faith and punitive damages were extremely difficult to obtain by an insured against his or her insurance company.  Recently, however, there has been activity in the state’s legislature seeking to change that. Bill A07285 has been read three times on the legislature’s floor but has not yet been voted upon. 

The New Bill

Bill A07285, “§ 2601-a. Unfair claim settlement practices; civil remedy,” allows a policyholder or injured person a private right of action against any insurer doing business in the state of New York for damages, upon proof by a preponderance of the evidence, that such insurer's refusal to pay or unreasonably delay payment was not reasonably justified.

Under the proposed bill, there are ten situations where an insurer will not be reasonably justified in refusing to pay or will be considered to have unreasonably delayed payment. These include when the insurer fails to:

(1) provide the policyholder with accurate information;

(2) effectuate a prompt and fair settlement of a claim or any portion thereof;

(3) provide a timely written denial of a policyholder's claim with a full and complete explanation;

(4) make a final determination and notify the policyholder in writing of its position on both liability for and the insurer's valuation within six months of the date on which it received actual or constructive notice of the loss;

(5) act in good faith by compelling a policyholder to institute suit to recover amounts due under its policy by offering substantially less than the amounts ultimately recovered;

(6) advise a policyholder that a claim may exceed policy limits, that assigned counsel may be subject to a conflict of interest, or the policyholder may retain independent counsel; and

(7) provide, on request of the policyholder or their representative, all reports, letters or other documentation arising from the investigation of a claim and evaluating liability for or valuation.

Other examples of “bad faith” in the proposed bill include where an insurer: (1) refuses to pay a claim without conducting a reasonable investigation; (2) negotiates or settles a claim directly with a policyholder known to be represented by an attorney without the attorney's knowledge or consent; and (3) acts in violation of section 2601 of this article or any regulation promulgated pursuant thereto.

Section 1(b) of the bill permits any policyholder who establishes liability pursuant to subsection (a) to recover consequential damages, reasonable attorneys' fees, interest from the date of the loss, and punitive damages as determined by the finder of fact. The foregoing recoveries would be in addition to amounts due under the policy, costs, and disbursements.

Under Section 1(c), any policyholder may recover damages from an insurer doing business in New York pursuant to this section as part of an action to recover under terms of an insurance policy or in a separate action.

Section 1(d) allows for evidence of settlement discussions, written and verbal offers to compromise, and other evidence relating to the claims process to be admissible “in any trial of a cause of action asserted against an insurer pursuant to this section.”

Section 1(e) of the bill prohibits insurers from using amounts recovered from an insurer as damages and reasonable attorneys’ fees in any action authorized in this section, in its determinations of the premiums charged to all policyholders.

Section 1(f) of the bill creates a cause of action for “third-party bad faith” and allows an action to be “maintained by any injured person or representative … against an insurer to recover damages including costs and disbursements, consequential damages, reasonable attorney's fees, interest from the time of failure to offer a fair and reasonable settlement in accordance with this section, and punitive damages as determined by the finder of fact or court, not limited to the policy limits.” This will be available where a preponderance of the evidence establishes that the insurer failed to effectuate a prompt and fair settlement of a claim or any portion thereof, in that, under the totality of the facts and circumstances related to the claim, the insurer failed to reasonably accord at least equal or more favorable consideration to its insured's interests as it did to its own interests.

Under Section 1(g), a written demand for relief, identifying the claimant and reasonably describing the unfair claim settlement act or practice and the injury suffered, shall be delivered to any insurer doing business in New York, at least 30 days prior to the filing of any action pursuant to this section. Any insurer doing business in New York who receives such a demand, and within 30 days of the mailing or delivery of the demand, that makes a written tender of settlement that is rejected by the claimant may, in any subsequent action, file the written tender and an affidavit concerning its rejection. This would limit any recovery to the relief tendered if the finder of fact finds that the relief tendered was reasonable in relation to the injury actually suffered by the claimant.

In all other cases, if the factfinder finds for the claimant, recovery shall be in the amount of actual damages, or double, or treble damages, where the factfinder determines that the unfair act or practice was a willful or a knowing violation of subsection (a) or (f). This will also apply where the factfinder determines that the refusal to grant relief upon demand was not reasonably justified. The amount of actual damages to be multiplied by the factfinder will be the amount of the damages as determined by the factfinder on all claims arising out of the same and underlying transaction or occurrence, regardless of the existence or nonexistence of insurance coverage available in payment of the claim. This provision also allows for the court to award such other equitable relief, including an injunction, as it deems to be necessary and proper.

Section 3 of the bill amends Section 2601(a)(4) the Unfair Claims Settlement Practices section of the New York’s Insurance Law.  If the bill becomes law, the revised section will read:

(4) where the insurer failed to effectuate a prompt and fair settlement of claim or any portion thereof, in that the insurer failed to reasonably accord at least equal or more favorable consideration to its insured's interests as it did to its own interests, and thereby exposed the insured to a judgment in excess of the policy limits, except where there is a reasonable basis supported by specific information available for review by the department that the claimant has caused the loss to occur by arson. After receiving a properly executed proof of loss, the insurer shall advise the claimant of acceptance or denial of the claim within thirty working days.

The Current Law

 Currently, Section 2601 of New York’s Insurance Law provides for penalties for unfair claims settlement practices, leaving to the regulatory agency to enforce, fine or otherwise penalize insurers who do not act in good faith, including penalties for:

(1) knowingly misrepresenting pertinent facts or policy provisions to claimants pertinent;

(2) failing to acknowledge with reasonable promptness pertinent communications as to claims;

(3) failing to adopt and implement reasonable standards for the prompt investigation of claims;

(4) not attempting in good faith to effectuate prompt, fair and equitable settlements of claims where liability has become reasonably clear (except where there is a reasonable basis supported by specific information of arson);

(5) compelling policyholders to institute suits to recover amounts due under its policies by offering substantially less than the amounts ultimately recovered in suits; 

(6) failing to promptly disclose coverage pursuant to subsection (d) or subparagraph (A) of paragraph two of subsection (f) of section 3420;

(7) submitting reasonably rendered claims to the independent dispute resolution process; and

(8) artificially deflating or otherwise lowering cost data used for adjusted claims, or using cost data that is not appropriate for the region of the state where the loss occurred.

Penalty (4) also requires the insurer to advise the claimant of acceptance or denial of the claim within 30 working days after receiving a properly executed proof of loss.

Section 2601(a)(4), the Unfair Claims Settlement Practices section of the Insurance Law currently provides that an “unfair claim settlement” practice includes:

(4) not attempting in good faith to effectuate prompt, fair and equitable settlements of claims submitted in which liability has become reasonably clear, except where there is a reasonable basis supported by specific information available for review by the department that the claimant has caused the loss to occur by arson. After receiving a properly executed proof of loss, the insurer shall advise the claimant of acceptance or denial of the claim within thirty working days.

New York also provides remedies to policyholders who believe that an insurance carrier acted in bad faith. Under Insurance Law § 2601, insurers are subject to significant penalties by the Department of Financial Services. Additionally, in the third-party liability context, there are judicial remedies available to insureds who are not treated in good faith by their liability carriers. See Soto v. State Farm Ins. Co., 635 N.E.2d 1222 (N.Y. 1994) (insurer may be held liable for damages to its insured for the bad faith refusal of a settlement offer); see also Pavia v. State Farm Mut. Auto. Ins. Co., 626 N.E.2d 24 (N.Y. 1993) (in order to establish bad faith in failing to settle a claim, the insured must show “the insurer's conduct constituted a ‘gross disregard’ of the insured's interests . . . a deliberate or reckless failure to place on equal footing the interests of its insured with its own interests when considering a settlement offer.”); Smith v. Gen. Acc. Ins. Co., 697 N.E.2d 168 (N.Y. 1998); Lozier v. Auto Owners Ins. Co., 951 F.2d 251 (9th Cir. 1992). 

Additionally, the Court of Appeals has recognized that an insurer can be held liable for consequential damages for failure to carry out the implied contractual promise of good faith and fair dealing in the first-party context. See New York Univ. v. Continental Ins. Co., 662 N.E.2d 763 (N.Y. 1995).

Finally, General Business Law § 349 provides a civil remedy and a private cause of action against insurance carriers that engage in improper business conduct aimed at the general public.

Commentary on the New Bill

Section 2601-a(2) merely restates well-established case law, which is already the standard used by courts and juries to determine whether an insurer acted in bad faith in the third-part liability context. See Pavia, supra.

Section 2601-a(3) discusses rules already in existence under 11 NYCRR § 216.3 and N.Y. Ins. Law § 3420(d)(2). Additionally, insurers are subject to Department of Financial Services sanctions if they fail to comply with those regulations. New York law already provides that an insurer will lose its right to rely on limitations to coverage unless it provides a prompt response to tender of coverage.

Section 2601-a(6) also provides for requirements already in effect, as insurers are already, at least in the third appellate department in New York, required to advise insureds of the right to independent counsel. See Elacqua v. Physicians' Reciprocal Insurers, 52 A.D.3d 886, 890 (3d Dept. 2008). Carriers in the third-party liability context already risk responsibility for excess verdicts in New York where they fail to keep the insured apprised of settlement discussions and the potential for an excess judgment. See Pavia, supra.

Section 1(d) be totally abrogates CPLR § 4547 and FRE 408, which provide that offers of compromise are wholly inadmissible.

Section 1(f) allows all injured persons, even after a negotiated settlement of their bodily injury claim, to sue the insured’s carrier for bad faith.

Section 1(g) allows a successful claimant to receive double to triple damages from the insurer and equitable or injunctive relief. Upon receipt, the insurer has 30 days to investigate a claim and make an offer, and if the insurer does not accept the demand, or if the carrier makes an offer that is rejected, and the jury later determines that the offer was reasonable, the court can limit the recovery to the carrier’s tender (or lack of tender). However, if a factfinder determines that the offer was “not reasonable in relation to the damages actually suffered by the claimant,” the claimant can recover at least double and up to treble actual damages.

Section 2601(a)(4) allows an insurer to be held liable for an unfair claims settlement practice in the event of a judgment in excess of the policy limits, even if the insurer tries to settle a case, even where liability is not clear or damages not likely to exceed the available coverage. Under the current statute, if an insurer fails, in good faith, to settle a claim where liability is reasonably clear, that failure can constitute an unfair claims settlement practice. Additionally, at common law, an insurer can be held responsible for bad faith for an excess liability judgment under the Pavia factors.

These new requirements, if enacted into law, would almost certainly increase bad faith litigation to a level that has never been seen before in New York. Insurers who issue policies in the state should be aware of this possibility. We will follow the legislative progress of the proposed bill and provide updates as warranted.

*Ashley is an associate working in our New York City office. She can be reached at 212.376.6446 or anheffernan@mdwcg.com.

_{Defense Digest, Vol. 27, No. 3, June 2021 is prepared by Marshall Dennehey Warner Coleman & Goggin to provide information on recent legal developments of interest to our readers. This publication is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. ATTORNEY ADVERTISING pursuant to New York RPC 7.1. © 2021 Marshall Dennehey Warner Coleman & Goggin. All Rights Reserved. This article may not be reprinted without the express written permission of our firm. For reprints, contact tamontemuro@mdwcg.com.}