Sonnenschein Nath & Rosenthal LLP on Bad-Faith Claims In New York Following Bi-Economy Market, Inc. v. Harleysville Insurance Co. and Panasia Estates, Inc. v. Hudson Insurance Co.
Plaintiffs have long sought to recover in excess of policy limits against insurance carriers who are alleged to have handled or denied claims in bad faith. Until recently, the New York Court of Appeals has squarely rebuffed any such efforts. However, in its decisions in Bi-Economy Market, Inc. v. Harleysville Insurance Co., 2008 N.Y. Lexis 278 (Feb. 19, 2008), and Panasia Estates, Inc. v. Hudson Insurance Co., 2008 N.Y. Lexis 275 (Feb. 19, 2008), the Court of Appeals permitted insureds to seek consequential damages, in excess of policy limits, against an insurer that was alleged to have violated its insurance contract in bad faith.
In this Expert Commentary, partners of Sonnenschein Nath & Rosenthal LLP discuss Bi-Economy Market and Panasia Estates and the potentially significant shift in New York law signaled by these decisions. The authors write:
Based on these decisions, it appears that consequential damages will often, perhaps always, be recoverable if they result from failure to “evaluate a claim” in good faith, i.e. “honestly, adequately, and . . . promptly.” All insurance is designed to respond to some sort of “calamitous event” by indemnifying a resulting economic loss, and Bi-Economy Market suggests that this is enough to permit recovery of consequential damages for bad faith denial of benefits.
It is not clear whether this reasoning will be extended to permit recovery of emotional distress damages resulting from bad faith denial. But Bi-Economy Market suggests that it might be so extended.
But they see no reason to read these cases as retreating from New York’s existing high threshold for punitive damages.
The other major unresolved question is what will prove bad faith. The authors review existing New York law that, in the context of an insurer’s duty to settle claims against an insured, requires proof of “’gross disregard’ of the insured’s interests--that is, a deliberate or reckless failure to place on an equal footing the interests of its insured.” They also review the law on bad faith in other states, which they find suggests that New York would likely apply the “gross disregard” standard (or some more demanding standard) to first-party bad faith claims and that, in any event New York is unlikely to adopt any less demanding standard than applied elsewhere.
Based on that analyis, the authors conclude:
Insurers facing New York bad faith claims should aggressively argue for the application of a demanding standard to putative bad faith claims. But carriers should also focus on demonstrating objectively reasonable grounds for delaying or denying payment, a showing that should preclude bad faith even under the least demanding of the standards commonly applied elsewhere. Such a focus may permit them to avoid entanglement in the issues left unresolved by Bi-Economy Market and Panasia Estates.
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