Bad Faith/Unfair Claim Settlement Practices Proposed NY State Assembly Bill

May 11, 2021

Commentary by William Parra & Corey Reichardt 

On May 3, 2021, Bill A7285 was introduced in the NY State Assembly, which would create a private right of action for policyholders and personal injury claimants to bring suit against insurers for “bad faith” or unfair claims settlement practices, such as an insurer’s unreasonable delay or refusal to settle a claim. The bill appears to apply to both first and third-party claims. This type of statute has had a significant impact on the insurance landscape in states such as Florida and California, increasing claim and litigation costs.

The latest NY bill is significantly more comprehensive than similar bills proposed in 2020-21. Given that the NY State Assembly and Senate have both been democratically controlled under a democratic Governor since 2019, a trifecta not seen since 1992 (other than 2010-11), a democratically-sponsored bill of this type has its best chance of being enacted in decades.

The bill proposes to amend provisions of the NY Ins. Law to create a private right of action against insurers by creating liability against them for a comprehensive list of reasons, including:

  • failing to give equal or more consideration to an insured’s interests than its own, thereby exposing the insured to judgment in excess of its policy limits;
  • failing to provide an insured with a timely written denial of his claim with a full and complete explanation of the denial, including references to specific policy provisions (this requirement is not limited to exclusionary disclaimers of coverage, as in Ins. Law 3420(d));
  • failing to provide an insured with the insurer’s assessment of liability and the value of the underlying claim’s damages, within 6 months of notice of claim;
  • offering substantially less than the amounts ultimately recovered in a suit brought by a first-party insured;
  • failing to advise an insured that a claim may exceed the policy limits, that assigned defense counsel may be subject to a conflict of interest or that the insured may have a right to retain independent counsel (presumably when a CGL carrier provides a defense under a reservation of rights); and
  • failing to provide an insured, upon request, all documents from the insurer’s investigation and liability or damages evaluation of a claim (i.e., its claims file). It is unclear how attorney-client, work product and similar privileges will mesh with such a disclosure requirement.

The bill also provides that any insured that established liability under the statute will be entitled to recover, in addition to the amount due under the policy, costs, disbursements, consequential damages and attorneys’ fees incurred in bringing suit, pre-judgment interest from the date of loss and punitive damages. The bill further provides a private right of action for injured claimants to recover similar damages, including pre-judgment interest from the time of the failure to offer a fair and reasonable settlement and punitive damages not limited to the policy limits.

The bill requires an underlying claimant to issue an insurer a written demand and the basis for the unfair settlement claim at least 30 days before filing suit. An insurer who within 30 days of receipt of this demand issues a written tender of settlement which is rejected by the claimant, may limit his exposure in a subsequent action under the statute to the settlement amount the insurer offered, if the finder of fact determines the insurer’s settlement offer was reasonable. If the trier of fact finds for the claimant, however, his recovery under the statute will be the amount of actual damages or up to 3 but not less than 2 times the actual damages, regardless of the policy limits, if the trier of fact determines the unfair claims practice was either a willful or knowing violation, or not reasonably justified and the insurer had knowledge or reason to know that the act or practice was a violation.

The bill separately requires that an insurer provide an insured or claimant with its entire claims file, within 30 days of a demand for same. Again, it is unclear whether attorney-client, attorney work product and similar privileges are intended to apply to such claims file disclosure requirements. However, the impact on the litigation process of claimants being entitled to insurer claims files upon demand are potentially game-changing.

Should any portion of this bill be enacted, it will become even more imperative for insurers to work with coverage counsel to ensure compliance with the additional statutory requirements for reservation of rights, disclaimer and other coverage position letters in situations where a disclaimer of coverage may be based on non-coverage grounds (not specifically required now), or risk incurring these new consequential and punitive damages. We will be monitoring the progress of the bill closely.