New York Insurance Bill Addresses Bad Faith Insurance Practices

Albany, NY On May 18, New York Senate Bill 6813 (S6813) was referred to the Senate Insurance Committee. If enacted into law, it would add a new Section 2601-a to the New York Insurance law. Proponents of the legislation see an opportunity to address the problem of insurance companies’ bad faith insurance claim practices. Detractors predict the opening of the proverbial floodgates to insurance lawsuits. Similar legislation has died in committee before.

Bad faith insurance

Bad faith insurance generally refers to an insurance company’s efforts to renege on obligations to its policyholders either by refusing to pay a claim, or investigate and process a claim in a timely manner. It may also occur when an insurer makes unreasonable or duplicate requests for information to support the policyholder’s contention that the claim is covered.

Insurance companies also act in bad faith when they misrepresent the insurance contract’s provisions, particularly before a policyholder purchases a policy. Bad faith insurance claims processing complaints can occur with any type of insurance policy, including life, health and disability insurance, homeowner’s insurance or car insurance. Plaintiffs’ lawyers often have reason to believe that the practice is endemic.

New York unfair claim settlement law

In New York, S6813, officially titled “An act to amend the insurance law, in relation to unfair claim settlement practices” addresses the familiar insurance company tactics of delay, denial, low-ball settlement offers, and forcing shallow-pocketed claimants into expensive lawsuits. More specifically, S6813 and an identical Assembly Bill provide that an insurer is not justified in refusing or delaying payment when it:

• Fails to provide the claimant with accurate information regarding policy provisions relating to the coverage at issue; or
• Fails to effectuate in good faith a prompt, fair and equitable settlement of a claim or portion of a claim or
• Where the insurer fails give least equal or more favorable consideration to the insured’s interests as it did to its own interests, and thereby exposed the insured to a judgment in excess of the policy limits or caused other damage to a claimant; or
• Fails to provide a timely written denial of a claimant's claim with a full explanation referring to specific policy provisions; or
• Fails to act in good faith by compelling such claimant to initiate a lawsuit to recover under the policy by offering substantially less than the amounts ultimately recovered in a lawsuit; or
• Fails to timely provide, on request of the policy holder, all reports or other documentation arising from the investigation of a claim; or
• Refuses to pay a claim without conducting a reasonable investigation first.

Any policyholder who establishes liability for these actions may recover:

• amounts due under the policy;
• costs and disbursements;
• consequential damages;
• reasonable attorney's fees;
• interest from the time of the loss or failure to offer a fair and reasonable settlement; and
• punitive damages.

Under existing New York Insurance Law, as set out in Section 2601, only the Superintendent of the Department of Financial Services can enforce the legal prohibition against unfair claims settlement practices. The New York insurance bar is predictably aghast at the peril posed by the proposed changes.

The insurance bar’s objections

Attorneys who represent the interests of insurance companies variously claim that:

• S6813 is a solution looking for a problem – that instances of bad faith insurance claims processing are rare;
• Insureds already have adequate remedies in Section 2601 of the Insurance Law;
• That the remedy offered – the creation of a new right to sue on the part of the policyholder or potentially by other third parties – looks outside the terms of the insurance contract;
• Good faith settlement negotiations would become admissible evidence at trial, in violation of the insurance companies’ privacy rights and punishing those companies who attempt to settle claims;
• The law will create unnecessary cost and paperwork for insurance companies, costs that will be passed onto consumers; and
• The bill is a gift to plaintiffs’ attorneys, who will abuse its terms to make a profit.

Similar legislation has failed before

Similar bills have died in committee in several previous legislative sessions – in 2013 and 2019, at least. There is no guarantee that the same will not happen again.

Insurance is big business, especially in New York. The insurance industry reportedly contributed $56.3 billion to the New York gross state product in 2017, accounting for 3.51 percent of it. Premium taxes paid by insurance companies in New York totaled $1.9 billion in 2019. That alone is reason to believe that the industry may still have considerably lobbying heft.