Coverage Pointers - Volume XXII, Special Edition
New York “Bad Faith” Legislative Alert
Dear Coverage Pointers Subscribers:
The Legislature is considering creating a “situation”. If you are an insurer, issuing policies in New York State, or an attorney, representing insurance partners, be aware of this bill and be prepared to oppose it.
For those familiar with New York legislative activity, you will know that the end of the legislative session often brings simmering issues to the forefront. Bills are introduced, and race through (or completely avoid) the committee process to be brought before the Assembly and Senate without public discourse or debate. Late last week, A07285, which would create statutory insurance company bad faith, was introduced in the New York State Assembly. There is no Senate Companion bill as of this writing.
For New York State insurers, this bill creates a nightmare, exposing insurers to extracontractual damages, interest, attorneys fees, double and treble damages and other penalties, if they fail to settle cases claims in as little as six months – or even shorter periods of time -- even though there may be disputed question about liability, damages and coverage. Current statutory, regulatory and common law remedies already exist to address unfair claims settlement practices.
Attached is our detailed summary of the proposed legislation with comments that may be useful to you in crafting opposing memoranda.
Assembly Bill 7285
Memorandum in Opposition
Relates to claim settlement practices when an insurer refuses to pay or delays payment of a settlement; providing a policyholder or injured person with a private right of action against such insurer that has refused or delayed payment of an insurance claim.
Dan D. Kohane
Lee S. Siegel
Diane L. Bucci
Brian D. Barnas
Hurwitz & Fine, P.C.
1300 Liberty Building
Buffalo, NY 14202
This Bill Proposes Harsh Penalties to Create Solutions for Perceived Problems that Already Have Well-Established Remedies
This is a bill that the Legislature must reject.
New York Assembly Bill 7285, recently introduced, proposes extreme solutions to a non-existent problem in the State of New York, crafting a statutory cause of action for “bad faith” when common law already establishes a remedy. New York law currently provides policyholder protections from excess judgment bad faith, untimely or insufficient denials of coverage, expansive rights to independent counsel at the insurer’s expense, and an outdated 9% interest rate, among other rights. The Court of Appeals and the Legislature have maintained a careful balance between carriers and their insureds, avoiding the lopsided approach adopted by some states.
In an effort to tilt the tables out of balance, the sponsor’s memorandum in support of the legislation frames the need for the legislation with a false premise:
Insurance companies have an overwhelming advantage in the handling of a claim, with the power and financial incentive to deny or delay coverage and otherwise avoid fair payment of legitimate claims. Under current law, there is no consequence to the insurer when a denial or delay of coverage is unfounded, or when the insurer offers an unreasonably low settlement. The importance of this issue became increasingly apparent in the aftermath of Superstorm Sandy, when tens of thousands of New Yorkers making claims to insurers experienced unfair claims practices. More recently, COVID-19 claims denials have left many victims without even a settlement offer in the absence of the threat of a trial and many small businesses in danger of shuttering after insurers refused to pay for losses due to mandated closures.
There is categorically no proof that “tens of thousands of New Yorkers” who made Superstorm Sandy claims experienced unfair claims practices. In fact, the opposite is true. “The New York regulators’ latest “report cards” on the performance of insurers in the wake of Superstorm Sandy shows that 1,830 consumer complaints have been filed from 381,827 Sandy-related claims—at the rate of 0.48 percent.” Insurance Journal, January 24, 2013. Indeed, the Department of Financial Services and the Governor insisted that insurers respond quickly to these claims or face Draconian penalties. By April 2013, New York state reported that 95% of all Sandy claims had been resolved. See Insurance Journal, April 17, 2013. As to Covid-19 claims, all judicial decisions interpreting property policies in New York, by both state and federal courts, determined that property insurance does not cover loss without physical damage and, accordingly, the claim denials were proper, appropriate, and lawful, consistent with policy language. Decisions across the country have overwhelmingly followed suit.
But the sponsors would penalize insurers with increased litigation, expansive discovery, double and triple damages, awards of attorney’s fees, extracontractual and punitive damages, for conduct that has traditionally not been considered bad faith. This legislation will lead to “set up” demands that have no other purpose than to try to force insurers to pay more money for claims than they are worth, or fear horrendous penalties.
The sponsors ignore that there are already statutory and common law consequences for improper insurance claims practice. The Department of Financial Services can impose severe sanctions on insurers for unfair claims settlement practices under Insurance Law § 2601. For example, last year the Department rendered a $2.1 million fine and collected $10.6 million in consumer restitution as a result of an investigation. See DFS Press Release, November 3, 2020. Policyholders (and by assignment, injured claimants) also have well-established common law remedies to seek compensatory and, if appropriate, punitive damages against insurers that commit acts of bad faith. See Pavia v State Farm Mut. Auto. Ins. Co., 82 N.Y.2d 445 (1993); Smith v Gen. Acc. Ins. Co., 91 N.Y.2d 648 (1998); and New York Pattern Jury Instruction 4:67. Moreover, even without a demonstration of bad faith, courts may impose extracontractual and consequential damages for violations of the implied contract of good faith and fair dealing. See Bi-Economy Market, Inc. v Harleysville Insurance Company of New York, 10 N.Y.3d 187 (2008).
In addition, if an insurer engages in consumer-oriented business practices that are misleading to the general public, it is subject to claims under General Business Law § 349, which imposes statutory penalties and a private cause of action for deceptive business acts and practices. See Vescon Const., Inc. v Gerelli Ins. Agency, Inc., 97 A.D.3d 658, 659 (2d Dept. 2012).
We offer a detailed outline of the bill, with commentary.
The first section of the bill creates Insurance Law § 2601-a which reads, with commentary, as follows:
§ 2601-a. Unfair claim settlement practices; civil remedy.
The holder of a policy issued or renewed pursuant to article thirty-four of this chapter or injured person shall have a private right of action against any insurer doing business in this state for damages as provided in this section upon proof by a preponderance of the evidence that such insurer's refusal to pay or unreasonably delay payment to the policyholder or injured person of amounts claimed to be due under a policy was not reasonably justified.
Significantly, the bill, while creating additional remedies for policyholders, goes beyond even the most bad-faith friendly jurisdictions to vest third-parties (total strangers to the insurance contract) with unprecedented rights to obtain discovery and seek extracontractual damages.
The bill then describes the ten circumstances when an insurer “is not reasonably justified in refusing to pay or is unreasonably delaying payment.” Most of the categories, objectively, have nothing at all to do with the “refusal to pay” or “unreasonable delay” in claim settlement.
“When an insurer:
1. Failed to provide the policyholder with accurate information concerning policy provisions relating to the coverage at issue;
Comment: What is “accurate information?” If the insurer provides the policyholder only with policy language, has it complied with the statute? How will a court determine whether a summary of the policy language is or is not “accurate?” What penalties are proportionately related to the provision of inaccurate information and what constitutes a material inaccuracy? As a result of this provision, coverage letters could grow to scores and scores of pages as carriers restate the entire terms of coverage in order to avoid liability. The goal of effective carrier to insured communication is jeopardized.
2. 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 itreceived actual or constructive notice of the loss upon which the claim is based;
Comment: This provision forces an insurer to reach a conclusion on liability and valuation of damages within six months of receiving notice of a loss, which, in many instances may be impossible, and apparently would preclude a carrier from changing its determinations on discovery obtained after the six-month mark. In the third-party contexts, this provisions robs both insureds and carriers of the right to contest disputed liability at trial and a later provision even allows adverse litigants discovery of the insurer’s claim file. Consider a claim arising out of an automobile accident, where witnesses have different views of the actions of the drivers, and depositions are necessary to evaluate the contentions and credibility. Expert witnesses may need to be retained. Considerations of claim value of an injured party who continues to seek medical attention may need close scrutiny by independent medical examinations, etc. Will the insurer’s valuation be discoverable in the civil proceeding? And, while the provision speaks to liability, is it also meant to address first-party claims?
3. failed to act in good faith by compelling a policyholder to institutesuit to recover amounts due under its policy by offering substantially less than the amounts ultimately recovered in suitbrought by such policyholder;
Comment: This section imposes penalties on insurers, acting in good faith, that reasonably believe that there are legal or factual grounds to dispute a claim, yet impose no penalties on policyholders who fail to establish their right to coverage in litigation. This section threatens insurers with severe penalties, even if they have a good faith reason, based on fact or law, to deny a claim or seek a judicial ruling of its rights and responsibilities.
There are times when the insurer and the insured simply have differences of opinion as to responsibility to pay a claim and the value of the pending claim. For example, in a claim arising out of a building loss, where the investigating authorities believe that arson was involved, and the insurer in good faith relies on that investigation and conclusion, is the insurer acting in bad faith if a jury disagrees with the investigator’s conclusions?
4. failed to advise a policyholder that a claim may exceed policy limits, that counsel assignedbytheinsurermaybesubjecttoa conflictof interest, or that the policyholder may retain independent counsel;
Comment: There is already a requirement that insurers advise the insured of its right to independent counsel. See Elacqua v Physicians' Reciprocal Insurers, 52 A.D.3d 886, 890 (3d Dept. 2008). Carriers already risk responsibility for excess verdicts where they fail to keep the insured apprised of settlement discussions and the potential for an excess judgment. See Pavia, supra.
5. 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;
Comment: Insurers routinely share claim information with their policyholders. If there is a claim by a policyholder which the carrier believes is fraudulent, requiring the insurer to turn over all of its investigation, before the resolution of the claim, that requirement can compromise effective fraud investigations. And, in the UM/UIM context, especially involving disputed claims, the insurer takes on the role of the at-fault driver. Sharing information with the policyholder would be antithetical to the very nature of the adversarial process.
6. refused to pay a claim without conducting a reasonable investigation;
Comment: Insurers conduct investigations before paying claims. It is unclear what behavior this category is designed to encourage.
7. 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;
Comment: If a policyholder prefers to negotiate all or part of a claim without the use of counsel, why deprive the policyholder of that opportunity? The choice belongs to the insured.
This bill provides a “solution” to a perceived non-problem that already has practical and enforceable remedies. This legislation is unnecessary and dangerously upsets the balance New York has carefully maintained between insureds and insurers. The ability of carriers to fairly contest disputed claims (both first- and third-party), and to litigate issues of liability, damages, and coverage would be severely curtailed under the bill, unfairly raising the risk of simply being wrong. The unintended consequences may include higher settlement payments across all lines of business, leading to higher insurance premiums for all New York insureds, and resulting higher prices for products and services. Surely, at a minimum, there will be an exponential increase in bad faith insurance litigation in our already overburdened courts.