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New York Under Storm Clouds of Proposed Bad Faith Legislation

NYC Cityscape with Stormy Cloudy Blue Sky in Background
NYC Cityscape with Stormy Cloudy Blue Sky in Background. Late Autumn Skyline
Mindaugas Dulinskas/Getty Images/iStockphoto

What natural disasters and calamities aren’t doing in New York, the state’s legislature just might.

Natural disasters, while challenging to insures, also serve as change agents, forcing insurers to reassess the coverages they will offer in light of the losses experienced. Take Florida, where following the collapse of the Surfside condominium building after Hurricane Nicholas, insurers are now asking whether they should still offer particular insurance policies.

Now, the New York state legislature might also act as a similar herald of change, in its own way. New York has a perception that it’s not a favorable state in which to do business. Its taxes, regulations, and high housing costs, among other expenses, mean that many companies often skip New York in favor of friendlier pro-business jurisdictions such as the South and Midwest. Now the New York legislature might be helping that trend as it considers two pieces of legislation that would drastically change the issue of bad faith.

The proposed law would place insurers on the defensive immediately.

Bill 7285 creates a new private cause of action against an insurer that has refused or delayed payment of a claim. Bill 5623 would allow a plaintiff to recover interest, costs and disbursements, compensatory damages, consequential damages, and reasonable attorney’s fees for bad faith. Also, the plaintiff would be able to recover amounts due under the policy when the insurer has refused to pay, settle, and/or unreasonably delayed payment of a claim. Variations of these bills have been in the New York State Assembly since 2013.

Both bills would dramatically alter the existing playing field. The proposed laws would place insurers on the defensive immediately. It would require an insurer to evaluate a claim within six months and allow 30 days to settle or reject an accusation of bad faith before filing a bad faith suit.

Gubernatorial Wildcard

The wildcard is what New York’s new governor will do if these bills pass both houses of the New York legislature? In the past, this question would have been an academic exercise because the Republican party controlled the New York Senate, so the passage of an anti-insurance bill would have been nearly impossible.

But since Democrats took control of the Senate in 2018, only the governor’s veto can stop legislation passed by both houses. When Andrew Cuomo was governor, there was little chance he would sign a “progressive” law like this, since he was keenly aware of the need to keep insurance companies in New York. But Kelly Hochul, who previously served as lieutenant governor, has no track record. Given that she picked a leading New York City progressive to be her lieutenant governor, there is no assurance that she would veto this legislation.

A Legal Cudgel

In my opinion, plaintiffs’ lawyers will seek to use the new laws, if passed, as a cudgel to force carriers to pay claims and/or settle litigation that is defensible. The best way to achieve prompt and fair settlements for both sides is for insurance companies and their attorneys to negotiate and fairly settle cases aggressively.

The problem here is that the proposed legislation takes a blunderbuss approach to what is a surgical problem.

Most do not need a bad faith lawsuit to settle claims in good faith. They must evaluate claims promptly to set a reserve. They’re under pressure to evaluate claims realistically and set aside a reasonable amount of money, so the notion that they ignore open claims is an exaggeration. Of course, some carriers seek to avoid or delay their fiduciary duties. But they should be held individually responsible for their claims handling policies. The problem here is that the proposed legislation takes a blunderbuss approach to what is a surgical problem.

Bad faith suits are a threat that the plaintiffs’ bar wants to use to gain an unwarranted advantage over insurers. Forcing them to operate in an even more unfriendly business environment in New York may cause them to stop writing there at all. If they do continue to write business there, the cost will go up to reflect the increased risk.

If the purpose of the bad faith legislation is only to punish insurance companies for past misdemeanors, it may accomplish that. If, on the other hand, the objective of the bad faith legislation is to encourage prompt and fair settlements, then it will achieve nothing.

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