A New York and New Jersey Lawyer Who Represents Policyholders and Beneficiaries in Life Insurance Denial Cases

I just finished reading a brief review of New York Insurance Law entitled “Insurance Coverage Review: Bad Faith Under New York Law,” issued in March 2010 by a defense firm L’Abbate, Balkan, Colavita & Contini, L.L.P., and my initial reaction was, how depressing for policyholders and consumers!

The paper divided its analysis between first and third-party bad faith claims, and for this post, I will limit my discussion to the former, which are the claims that policyholders bring against their insurance companies when they refuse to pay claims. For those not familiar with insurance law parlance, third-party bad faith claims involve disputes between an insured and an insurer that relate to a lawsuit brought by another person or entity against the insured; for instance, the insurer may refuse to settle the case, potentially opening up the insured to liability in excess of the policy limits.

(Deep breath). Okay, so, first-party bad faith claims …. let’s pretend that the insurance company acts in a overtly, blatantly anti-consumer manner and refuses to pay your claim. What’s a policyholder to do?

An initial thought might be–sue for punitive damages! But don’t hold your breath. In New York, for this claim to stick, the insurer’s conduct must be morally reprehensible, wanton, exhibiting criminal indifference–elements that courts will never uphold against insurance companies. Plus, the egregious conduct must be an independent tort and part of a pattern of conduct directed at the public generally. Not an easy standard to meet. Trust me.

In 2008, though, the Court of Appeals took a step in the right direction, holding that an insured can seek consequential damages against an insurance company. The plaintiff company claimed that the insurance company in bad faith refused to pay its building and contents damage caused by a major fire, causing the business to subsequently collapse. According to the court, the insurance company could be liable for not only the policy limits but the consequential damages arising from its refusal to properly adjust the claim.

That’s a bright spot. Let’s go back under the cover of darkness for a moment. If you take a look at Insurance Law, section 2601: Unfair Claims Settlement Practices, you will see a list of requirements imposed against insurance companies, and they look pretty good from the perspective of a policyholder. Among other things, the insurance company must promptly acknowledge claims, implement reasonable standards for the prompt investigation fo claims, and in good faith settle cases in which liability is reasonably clear. But wait, don’t get too excited. There is no private right of action under this law. So for the vast majority of policyholders who have bad faith claims, it won’t mean a thing.

But, hey, what about General Business Law 349 – Deceptive Business Practices, you might ask? The NY Consumer Protection Law. Well, the insurer’s conduct must impact consumers at large, and private contract disputes unique to the parties do not fall within the statute. Plus, the law is vague, and does not contain a meaningful damages provision like the consumer protection laws in other more consumer-friendly states such as Massachusetts and New Jersey. So it isn’t much help, either.

A plaintiff in a bad faith action will allege claims of breach of contract, breach of the duty of good faith and fair dealing, and violations of Insurance Law 2601 and GBL 349 and/or fraud. But the claims won’t cause insurance companies to start quaking in their boots. 

New York is an insurer-friendly state – no doubt about it. A general counsel as John Hancock told me that he considers it a good thing if the company is sued in New York as opposed to Massachusetts. And that’s too bad.

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