Proposed Legislation In New York Would Create A Private Cause Of Action Against Insurers For Unfair Claim Settlement Practices

The New York State Senate and Assembly are considering identical bills to establish a private cause of action against insurers for unfair settlement practices. Assembly Bill 3305-2013 and Senate Bill 2544-2013 propose amending Article 26 of the Insurance Law to add section 2601-A, entitled "Unfair Claim Settlement Practices; Civil Remedy." This new section applies to "any insurer doing business in this State" and provides policyholders with a private cause of action for money damages, including consequential damages, attorney fees, and costs, if the policyholder proves "by a preponderance of the evidence" that an "insurer's refusal to pay or unreasonable delay in payment . . . of amounts claimed [under the policy] was not substantially justified."

Under the proposed section, an insurer will be found to deny a claim or delay its payment without substantial justification in five circumstances:

1. If an insurer "[i]ntentionally, recklessly or by gross negligence fails to provide the policyholder with accurate information concerning the policy provisions relating to the coverage at issue;"
2. If an insurer fails "to effectuate in good faith a prompt, fair and equitable settlement of a claim . . . in which liability of [the] insurer to [the] policyholder [is] reasonably clear;"
3. If an insurer fails to provide a policyholder with "a full and complete explanation" for a denial of a claim, "including references to specific policy provisions wherever possible;"
4. If an insurer fails to give an insured written notice 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;" or
5. If an insurer "fail[s] to act in good faith," as evidenced by an offer on a claim that is "substantially less than the amounts ultimately recovered" by the insured in a lawsuit.

The proposed amendment also prohibits insurers from considering the new statute's provisions, and any liability incurred thereunder, when setting premiums or assessing acceptable risks. It also modifies New York's State procedural rules by making "evidence of settlement discussions, written and verbal offers to compromise and other evidence relating to the claims process" admissible relative to claims asserted under its provisions. Finally, it permits courts to bifurcate the trial to determine the issue of liability under the insurance policy separately from bad faith claims asserted under the proposed legislation.

The proposed statute lacks clarity in a number of areas. For example, it is unclear whether an insurer fulfills its obligation to provide a policyholder with "accurate information concerning policy provisions" if it provides the insured with a copy of the policy. It is also uncertain when an insurer's obligation to pay a claim is "reasonably clear." Further, the proposed amendment requires insurers to notify policyholders in writing of their position on a claim, and the basis for it, within six months of receiving actual or constructive notice of a covered loss. While it is apparent that such "actual or constructive notice" of a covered loss could exist prior to receipt of a claim, the statute does not attempt to define what constitutes such notice. The legislation also provides no mechanism for an extension of time in the event that the insurer is unable to make a decision on liability within six months. Finally, the proposed legislation may penalize an insurer for having taken a good faith legal position, if a court later disagrees with its position and the policyholder recovers damages that are "substantially" more than what the insurer had offered.

Presently, unfair claim practices are prohibited by Insurance Law § 2601, which empowers the Superintendent of Insurance to enforce its provisions, including authority to impose significant fines and penalties. New York courts have repeatedly held that such administrative enforcement powers are sufficient to serve the statute's purpose of deterring unfair claim practices, demonstrating that the legislature did not intend to provide litigants with a private cause of action under Section 2601. See, e.g., Roldan v. Allstate Ins. Co., 149 A.D.2d 20 (2d Dep't 1989) (citing Cohen v. Underwriting Assn., 65 A.D.2d 71 (1st Dep't 1978)).

Neither the Senate nor the Assembly bill offers any evidence of a need for such legislation to protect consumers. In an effort to provide some justification for the legislation, the Senate Bill asserts that "[u]nder existing statutes and case law, an insurer can simply refuse to pay a claim or offer an amount well below the value of the loss with impunity." Of course, this assertion is refuted by the provisions of Section 2601 and long-established precedent that its provisions adequately protect consumers. The Senate Bill also claims that a policyholder who prevails against its insurer in a coverage dispute will still "lose because of the costs" of litigation. However, while an insured cannot recover its attorneys fees incurred in an affirmative action against its insurer concerning a coverage dispute, it can recover foreseeable consequential damages arising out of the wrongful denial of a claim. See, e.g., Handy & Harman v. American Int'l Group, Inc., 2008 N.Y. Misc. LEXIS 7522, *16 (N.Y. County Sup. Ct. 2008) (citing Panasia Estates, Inc. v. Hudson Ins. Co., 10 N.Y.3d 200, 203-204 (2008) and Bi-Economy Mkt., Inc. v. Harleysville Ins. Co. of N.Y., 10 N.Y. 3d 187, 192-195 (2008)).

For these reasons, it is evident that the proposed legislation is not needed to protect consumers, and it would likely work to the detriment of consumers. For example, passage of this legislation would almost certainly lead to a counterproductive explosion in the number of such claims asserted against insurers – even where denial of a claim was well-founded – and such a result may well lead to a harmful constriction in New York's insurance market and competition.

The proposed legislation is currently pending in the Insurance Committee of both legislative chambers. We will closely monitor its handling and any developments in this regard.

If you require further information regarding the information presented in this Legal Alert and its impact on your organization, please contact Anthony J. Piazza, Chair of the firm's Insurance Coverage & Regulation Practice Area, at (585) 295-4420 or apiazza@hblaw.com.