Legal Update for Insurance Services
Special Alert - New York
For many years, the state of New York has been a jurisdiction where bad faith and punitive damages have been extremely difficult to obtain by an insured against an insurance company. Recently, however, there has been activity in the state’s legislature seeking to change that by creating statutory bad faith in the state.
For decades, the bad faith laws in New York have been consistent and fairly reasonable in comparison to those of many other states. Currently, in the third-party liability context, in order to establish bad faith, an insured must prove that the insurer’s conduct constituted a “gross disregard” of the insured’s interests, i.e., a deliberate or reckless failure to place on equal footing the interests of its insured with its own interests when considering a settlement offer. In the first-party context, damages arising from a breach of an insurance contract are ordinarily limited to contract damages as necessary to redress a private wrong against the insured. Consequential damages that are “reasonably forseeable” and are the proximate cause of an insurer’s breach of contract may also apply in the first-party context.
New York already has an Unfair Claims Settlement Act under Insurance Law §2601 but there is no private right of action for an insured or injured person to seek damages for violations. Instead, Insurance Department regulators have sole authority to penalize an insurer for conduct that violates the act. New York General Obligations Law §349 is a statute that affords an insured a private right of action against an insurer for deceptive business practices. However, an insured cannot recover under that statute unless the insured can prove that an insurer’s deceptive practices have a broad impact on consumers at large. Punitive damages against an insurer are only available to deter it from engaging in conduct directed at the public at large and such conduct must be proven to be "morally reprehensible " and "of such wanton dishonesty as to imply criminal indifference to civil obligations."
There is now a proposed bill in the state’s legislature that, if passed, would drastically change the landscape and open the floodgates to statutory bad faith claims and lawsuits against insurers. Proposed bill A07285 has been read three times on the legislature’s floor but has not yet been voted upon. The proposed bill seeks to create an unfair claim settlement practices statute allowing a policyholder or injured person a private right of action against any insurer that does business in New York. Violations of the proposed statute would include an insurer’s failure to:
- provide the policyholder with accurate information;
- effectuate a prompt and fair settlement of a claim or any portion thereof;
- provide a timely written denial of a policyholder's claim with a full and complete explanation;
- make a final determination and notify the policyholder in writing of its position on both liability and the insurer's valuation within six months of the date on which it received actual or constructive notice of the loss;
- act in good faith to not compel a policyholder to institute suit to recover amounts due under its policy by offering substantially less than the amounts ultimately recovered;
- advise a policyholder that a claim may exceed policy limits, that assigned counsel may be subject to a conflict of interest, or that the policyholder may retain independent counsel;
- 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 and valuation;
- conduct a reasonable investigation; and
- communicate with a policyholder’s attorney (if the policyholder has one) regarding proposed settlements.
The proposed bill also creates a cause of action for third-party bad faith that would allow a direct action to be maintained against an insurer by “any injured person or representative.” Further, a policyholder who establishes liability against an insurer would be able to recover consequential damages, reasonable attorneys' fees, interest from the date of the loss and punitive damages as determined by the finder of fact, in addition to amounts due under the policy.
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.
If you have any questions about this alert, please contact:
Jeffrey J. Imeri
Shareholder and Managing Attorney of our NYC office
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