United States: NY's Evolving Acceptance Of Policyholder Bad Faith Claims

Originally published on Law360, New York - June 2016

The availability of extracontractual remedies for policyholders denied full and prompt payment of their claims is a crucial means of leveling the playing field between policyholders and the insurance industry. When a policyholder's damages are limited to the value of the contract, insurance companies can leverage their financial clout to extract favorable settlements from policyholders who cannot bear the cost of litigation, knowing that they will never be forced to pay more than policy limits.

New York, however, has not statutorily enacted rules which would allow policyholders to seek extracontractual damages. Recently, though, New York courts and the New York State Legislature have taken up this issue. In addition to the recent court decisions discussed below, the Legislature is considering the New York Policyholders' Protection Act. The impetus for such developments appears to be the handling (or perhaps mishandling) of claims related to Superstorm Sandy.

Before Bi-Economy

Prior to 2008, New York courts held that Section 2601 of the New York Insurance Law, which prohibits insurance companies from engaging in bad faith claims handling practices, did not provide policyholders with a private cause of action. See Rocanova v. Equitable Life Assurance Society, 83 N.Y.2d 603 (N.Y. 1994). Relatedly, New York courts held that there is no statutory cause of action for bad faith.

Through the development of the common law, policyholders were permitted to maintain a bad faith action against an insurance company where the insurance company unreasonably refused to settle with an underlying plaintiff within policy limits and the underlying plaintiff subsequently obtained a judgment in excess of policy limits against the policyholder. See, e.g., Pavia v. State Farm Mutual Automobile Insurance Co., 82 N.Y.2d 445 (N.Y. 1993).

Although not couched in bad faith, New York courts also provided policyholders with a means of recovering extracontractual damages against an insurance company when an insurance company's actions, such as filing a lawsuit against its policyholder, placed the policyholder in "a defensive posture." See Mighty Midgets Inc. v. Centennial Insurance Co., 47 N.Y.2d 12 (N.Y. 1979). In such situations, the policyholder can recover attorneys' fees in addition to any amounts due under the insurance policy.

Bi-Economy Clarifies the Recovery of Consequential

The common law truly changed following the Court of Appeals decision in Bi-Economy Markets Inc. v. Harleysville Insurance Co. of N.Y., 10 N.Y.3d 187 (N.Y. 2008). In Bi-Economy, the Court of Appeals held that a policyholder could recover consequential damages for an insurance company's breach of an insurance policy.

The policyholder, a family-owned meat market, suffered a fire loss and sought recovery from its insurance company for lost business income. The insurance company delayed paying the claim and then only made payment for seven months of lost income even though the policy provided coverage for 12. Due to the insurance company's actions, the policyholder went bankrupt and was unable to reopen.

The Court of Appeals held that the bankruptcy and closure were foreseeable consequences of the insurance company's breach of its contractual obligation to "evaluate a claim, and to do so honestly, adequately and — most importantly — promptly." Accordingly, Bi-Economy was permitted to recover the damages it suffered as a consequence of the insurance company's breach of contract, above policy limits, such as the lost business income the policyholder incurred for having to permanently.

In the companion case, Panasia Estates Inc. v. Hudson Insurance Co., 10 N.Y.3d 200 (N.Y. 2008), decided the same day as Bi-Economy, the Court of Appeals held that a policyholder could recover consequential damages, including attorneys' fees, from an insurance company for its breach of the policy.

In Panasia Estates, the policyholder bought a builders' risk policy to cover damage to a property while the property underwent renovations. During the construction, the roof of the building was open, allowing rain to enter the building and damage the property. The insurance company delayed investigating the loss and subsequently denied the claim. As with Bi-Economy, the Court of Appeals permitted the policyholder to recover consequential damages against the insurance company due to the breach.

Following these decisions, New York courts have reinforced the view that attorneys' fees may be recoverable as consequential damages in breach of contract actions against insurance companies. For example, in Richman v. Harleysville Worcester Insurance Co., No. 600467/06, 2010 N.Y. Misc. LEXIS 6832, at *3 (N.Y. Sup. Ct. Nov. 1, 2010), Justice Emily Goodman held:

Contrary to Harleysville's argument, consequential damages, other than attorney's fees, have been sufficiently identified (e.g., plaintiff's costs of renting another home, which Harleysville allegedly approved). Further, attorney's fees could be recovered.

Comparing Mighty Midgets Inc. and Panasia, Judge Goodman concluded that "the 2008 Court of Appeals cases [Bi-Economy and Panasia] have ended the question of whether attorneys' fees may be recovered in the breach of insurance contract context, whether it is a first party or third party action." Richman, 2010 N.Y. Misc. LEXIS 6832, at *3.

In National Railroad Passenger Corp. v. Arch Specialty Insurance Co., a case currently pending appeal on other grounds, Judge Jed Rakoff found that the policyholder could "demand attorneys' fees and costs and consequential damages in the form of unnecessary expenses imposed on [it] through the unduly protracted adjustment process." 14-cv-7510, at 2 (ECF No. 158, Feb. 17, 2015); see also order (ECF No. 260, dated June 29, 2015) ("den[ying] defendants' request to dismiss Amtrak's claims for breach of contract and consequential damages.")

Similarly, a state court in New York reached a similar decision in Niesenbaum v. AXA/Equitable Life Insurance Co., Case No. 2013/600412 (N.Y. Sup. Ct., Nassau County). In the case, Judge Bruce Cozzens denied an insurance company's motion for summary judgment to dismiss a claim for consequential damages, concluding that the plaintiff policyholder could seek attorneys' fees and costs against her insurance company.

Sandy Litigation and Bad Faith

Predating the Amtrak decision, however, was a decision which may have been the precursor to the present legislative efforts.

In Raimey v. Wright National Flood Insurance Co. (In re Hurricane Sandy Cases), 303 F.R.D. 17 (E.D.N.Y. 2014), an insurance company and its counsel failed to produce engineering reports prepared by the insurance company's engineering firm. Upon the release of one such "draft" report, it became clear that the draft — which had found coverage — was jettisoned in favor of a draft which found no coverage. The former, however, had not been produced in discovery.

The court found that the failure to produce such a critical document "constitute[d] a severe injustice" and imposed sanctions on the insurance company and (monetary) sanctions on the insurance company's counsel for failing to abide by a discovery order and misleading the court about the nature of the draft engineering reports.

The court then ordered all parties to the Sandy cases to produce all draft engineering reports pursuant to the earlier discovery order. While the judge's order did not rely on a bad faith cause of action to support the issuance of sanctions, the notion that insurance companies and the engineering firms developed a system of altering reports to avoid paying claims led to the result.

Post-Sandy Legislation

In 2015, the New York State Senate and the New York General Assembly introduced the New York Policyholders' Protection Act, a set of identical bills entitled "An act to amend the insurance law, in relation to unfair claim settlement practices." Materials circulated in support of the bill, echoing Wright, noted that:

It has also been widely reported that some insurance company experts' opinions and reports have been falsified and conclusions changed to favor a claim denial to the prejudice of the premium paying public on a massive scale. This activity was so widespread that it has resulted in reopening 144,000 Sandy claims.

The purpose of the legislation is to "allow holders of property and casualty insurance policies to recover damages when an insurance company's refusal to pay or unreasonable delay in paying a claim was not substantially justified." Thus, it aims to enshrine a statutory cause of action for bad faith conduct. Under the bill, a statutory remedy would be available to policyholders where an insurance company is not justified in refusing to pay a claim or unreasonably delays payment.

Conclusion

New York policyholders should stay abreast of these developments, both judicial and legislative, as they portend a future in which parties will be on a level playing field.

Anderson Kill represented National Railroad Passenger Corp. and Niesenbaum in the cases cited above.


Peter A. Halprin is an attorney in Anderson Kill's New York office. His practice concentrates in commercial litigation and insurance recovery, exclusively on behalf of policyholders. Mr. Halprin also acts as counsel for U.S. and foreign companies in domestic and international arbitrations. He is a member of the Chartered Institute of Arbitrators and earned a Postgraduate Diploma in International Commercial Arbitration at Queen Mary, University of London. | phalprin@andersonkill.com

Bruce Strong is an attorney in Anderson Kill's New York office. Mr. Strong's practice concentrates in Insurance Recovery, exclusively on behalf of policyholders, and in Corporate and Commercial Litigation. He is also a member of the firm's Regulated Products group. | bstrong@andersonkill.com


About Anderson Kill

Anderson Kill practices law in the areas of Insurance Recovery, Commercial Litigation, Environmental Law, Estates, Trusts and Tax Services, Corporate and Securities, Antitrust, Banking and Lending, Bankruptcy and Restructuring, Real Estate and Construction, Foreign Investment Recovery, Public Law, Government Affairs, Employment and Labor Law, Captive Insurance, Intellectual Property, Corporate Tax, Hospitality, and Health Reform. Recognized nationwide by Chambers USA for Client Service and Commercial Awareness, and best-known for its work in insurance recovery, the firm represents policyholders only in insurance coverage disputes - with no ties to insurance companies and has no conflicts of interest. Clients include Fortune 1000 companies, small and medium-sized businesses, governmental entities, and nonprofits as well as personal estates. Based in New York City, the firm also has offices in Philadelphia, PA, Stamford, CT, Washington, DC and Newark, NJ.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Anderson Kill
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Anderson Kill
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions