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Effort to Establish Private Cause of Action in New York Against Insurers for Unfair Settlement Practices Fails to Pass State Legislature in 2015
Wednesday, August 19, 2015

The New York State Legislature actively considered a bill during the recently completed legislative session that would have amended the New York State Insurance Law regarding unfair claims settlement practices in a way that may have subjected insurers to increased liability. When the 2015 legislative session ended in June, however, neither branch of the Legislature passed the bill before it.

New York Senate Bill S. 4049-B, introduced by Senator Andrew Lanza (R-Staten Island), and Assembly Bill A. 257-A, introduced by Assembly Member Helene Weinstein (D-Brooklyn), would have created a new section of the Insurance Law (§2601-A) providing a civil remedy to policyholders by creating a private cause of action against insurers. This cause of action could be invoked if a policyholder established that an insurer’s refusal to pay or its unreasonable delay in payment was not substantially justified.  In addition to recovering the amounts due under the policy, any policyholder who established liability under the statute would be entitled to recover interest, costs, compensatory damages, reasonable attorneys' fees and punitive damages as determined by the court.

The proposed statute lists ten forms of conduct that could give rise to a successful claim, including, in part:

  • Failure to provide accurate information to a policyholder

  • Failure to effectuate in good faith a prompt, fair and equitable settlement

  • Failure to provide a written denial of a claim with a full and complete explanation

  • Failure to advise a policyholder that a claim may exceed policy limits

  • Failure to provide on request all documentation arising from the investigation of a claim

  • Refusal to pay a claim without conducting a reasonable investigation

  • Negotiating or settling a claim directly with a policyholder known to be represented by an attorney without the attorney’s knowledge or consent.

Additionally, the bill would prohibit insurers from including damages and fees paid as a result of an action authorized by the new law in determining premiums.

Many insurers opposed the legislation on a variety of grounds, including that the New York State Department of Financial Services (DFS) is already empowered to regulate unfair claims. Indeed, DFS used its regulatory and enforcement powers in the aftermath of Superstorm Sandy to hold insurers accountable and ensure that all proper claims were paid in a timely manner.

In addition, insurers predicted that the bill’s extremely broad definition of “unfair practices” would lead to a surge of litigation, and that insurance companies would bear the entire financial impact of this legislation because they would be unable to recoup through rate filing any costs associated with payouts that occurred under this new law.

The Senate and Assembly versions of this bill may be considered in 2016 during the second year of the current legislative session.

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