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New York “bad faith” bill seeks to expand recovery for insureds and third parties

9/2/21

By: Christopher Donnelly

In 2020, the New York State Assembly and Senate each proposed bills which sought to expand a policyholder’s ability to seek recovery from its insurer via claims for unfair settlement practices or “bad faith” claims.  

The proposed bills, A5623B and S06216A provided “that plaintiff may recover interest, costs and disbursements; compensatory damages, consequential damages and reasonable attorneys’ fees in addition to amounts due under the policy when the insurer refused to pay or unreasonable delay of payment was not reasonably justified.” In defining “reasonabl[e] justifi[cation],” the New York legislature enumerated eleven specific instances in which an insurer could not assert that its claim settlement posture was reasonably justified.  

The bills made it to Committee but stalled in July of last year and never made it to the Floor Calendar. 

On May 3, 2021, the New York legislature put forth a second bite at the apple with a new pair of bills originating the Assembly and the Senate, respectively, A7285 and S6813. The proposed bills, officially titled “An act to amend the insurance law, in relation to unfair claim settlement practices,” essentially provide the same enumerated instances in which an insurer could not assert that it was reasonably justified in delaying or refusing settlement. These instances include when an insurer:  

(1) failed to  provide  the  policyholder  with  accurate  information concerning policy provisions relating to the coverage at issue; 

(2)  failed to effectuate a prompt and fair settlement of a 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; 

(3)  failed to provide a timely written denial of a policyholder’s claim with a full and complete explanation of such denial, including references to specific policy provisions wherever possible; 

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

(5) failed to 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 in suit brought by such policyholder; 

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

(7) failed to 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 of such claim; 

(8)  refused to pay a claim without conducting a reasonable investigation; 

(9) negotiated or settled a claim directly with a  policyholder known to be represented by an attorney without the attorney’s knowledge or consent the provisions of this paragraph shall not be deemed to prohibit routine inquiries to a policyholder to obtain details concerning the claim. 

Perhaps most notably, the proposed bills also seek to create a third-party private right of action for “bad faith” “by any injured person  or representative.” 

Once liability has been proven, the bills would allow policyholders and third-party injured persons to recover: (in addition to amounts due under the policy, in the case of a policyholder) 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.  

One can only speculate that this expanded toolkit for insureds and those injured by tortfeasors alike would incite a deluge of new “bad faith” claims in New York.  

Notable critics of the bills include the Business Council of New York State, which opposes both bills as it fears an inevitable increase in premium costs for businesses which are already struggling in the wake of the COVID-19 pandemic. The Business Council cites to similar laws enacted in California, West Virginia, and Florida which created standing for third parties in “bad faith” claims.¹ The Business Council warns that premiums in those states increased anywhere from 30% to 50% in the years following the enactment of similar legislation.  

Both bills remain in Committee and as of June 2, 2021, A7285 has had favorable votes in the Insurance and Code Committees and has been referred to the Rules Committee.  

For additional questions, please contact Christopher Donnelly at christopher.donnelly@fmglaw.com