Policyholder Pulse
When Frank Sinatra famously sang “if I can make it there, I’ll make it anywhere,” he was probably not crooning about making a claim for insurer bad faith. New York has indeed acquired a reputation as a difficult place to obtain an award of extra-contractual damages for an insurer’s unreasonable denial of coverage—one reason that insurance companies perceive New York to be a relatively favorable venue for coverage litigation. While New York law does in fact provide remedies for insurer misconduct, a bill recently introduced in the New York State Assembly could further expand policyholder protections. The legislation would create a private right of action for policyholders to sue their insurers (and for injured parties to sue tortfeasors’ insurers directly) for unreasonable refusal or delay of coverage and for categories of damages that include attorneys’ fees, consequential damages, and punitive damages. This sweeping legislation would allow New York to “be a part of it” along with many other states, like California and Washington, that have robust statutory protections against unfair claims practices.
The insurance industry and law firms that represent it have already begun to voice their opposition to Bill A7285—formally titled “An Act to Amend the Insurance Law, in Relation to Unfair Claim Settlement Practices”—arguing that it could lead to increased insurance litigation and higher premiums. Of course, that is all highly speculative, it has not been borne out in other states with similar statutes, and proponents of these arguments have not advanced meaningful evidence supporting these claims. They have also argued that existing policyholder remedies are already sufficient. If the bill is not ultimately signed into law, this latter argument should be used against insurers who advocate for unduly narrow applications of the current law.
Among other current protections for insureds, New York recognizes a common law cause of action for breach of the implied duty of good faith and fair dealing as well as various tort causes of action that can be asserted in some circumstances (including negligent and fraudulent misrepresentation). Additionally, General Business Law § 349 outlaws deceptive business practices. An insurer’s breach of the duty to investigate a claim, refusal to settle a claim in good faith, or denial of coverage without reasonable basis, for example, may be actionable, and may be compensable with extra-contractual damages, including punitive damages, if the insurer’s conduct was “egregious” and/or part of a pattern of conduct directed at the public generally. Consequential damages may be available when such damages were reasonably contemplated by the parties when the policy was issued. The New York Department of Financial Services (NYDFS), which regulates insurer conduct in the state, has also issued claims practices guidance and offers a consumer complaint procedure. NYDFS’ superintendent may enforce certain unfair claims practices regulations against insurers.
But the legislative sponsors of Bill A7285 have an even greater vision, motivated by what they perceive as the insurance industry’s unfair treatment of vulnerable policyholders. According to the sponsors, the insurance industry’s “power and financial incentive to deny or delay coverage and otherwise avoid fair payment of legitimate claims” became increasingly apparent in the wake of two catastrophic events that hit New York particularly hard: Superstorm Sandy in 2012 and COVID-19 in 2020 – 21. The denial of claims in these contexts has “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.” Bill A7285 seeks to address this imbalance of power by creating a private right of action to seek damages when an insurer unreasonably refuses to pay or unreasonably delays payment “without substantial justification.”
The proposed statute enumerates examples of actionable insurer misconduct, including an insurer’s:
- Failure to provide accurate information regarding applicable policy provisions;
- Failure to effectuate in good faith a prompt, fair, and equitable settlement of a claim;
- Failure to give at least equal consideration to the insured’s interests as the insurer did to its own interests, including by exposing the insured to a judgment in excess of policy limits;
- Failure to provide a timely written denial of a claim with a full and complete explanation, including references to specific policy provisions;
- Failure to act in good faith by compelling an insured to initiate coverage litigation;
- Failure to timely provide documentation of the insurer’s investigation of the claim, including the entire claim file; and
- Refusal to pay a claim without conducting a reasonable investigation.
Liability for this bad behavior, once established, is compensable under the bill by several categories of damages, including attorneys’ fees, consequential damages, interest, and punitive damages. The bill would also prevent an insurer from raising premiums in an attempt to pass the costs of its liability back to its insured. Importantly, the bill grants these same rights of recovery to an injured person who directly sues a tortfeasor’s insurer.
The proposed bill affords other highly significant protections to insureds, including the guarantee of a jury trial on claims under the statute—i.e., a policy’s arbitration provision would not be enforceable as to bad faith claims under the statute. The bill also prohibits insurers from refusing to renew a policy on the grounds that the policyholder had brought an action under the statute.
Contrary to the insurance industry’s howls, Bill A7285 is simply designed to ensure that insurers fulfill their basic duties to their insureds in handling and paying claims. As the bill’s sponsors put it: “New Yorkers who pay insurance premiums should expect insurers to live up to their obligations to deal in good faith with regard to claims submitted under the policy.” New York policyholders should consider contacting their Assembly members and state Senators to express their support for the legislation. As Ol’ Blue Eyes’ exhortation goes: “It’s up to you, New York.”
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