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Are Bad Faith Claims Against Liability Insurers Viable in New York?

On December 18, the Daily News reported that Reliastar, a life insurance company, was accused of acting in bad faith for refusing to pay out on its policy insuring actor Heath Ledger. Although Reliastar has held up payment pending the completion of its investigation as to whether his death was caused by suicide, Ledger's estate contends that since the Medical Examiner's official report has already ruled that his death was caused by an accidental overdose of prescription medication, Reliastar has no valid basis upon which they can withhold payment.

While the term "bad faith" may seem like mere inflammatory rhetoric to some, the truth is that this term has legal significance, because if an insurer is found by a judge or jury to have acted in bad faith, the consequences for the insurer can be severe, such as being assessed punitive damages and attorneys' fees. So, at what point is an insurer liable for bad faith?

Although the answer to this question should be relatively simple, the truth is far more complicated, because the litmus test for bad faith varies widely depending on which state you are in. Some states have found bad faith where an insurer was little more than negligent in failing to timely and properly settle its insured's claim; at the other end of the spectrum are states like New York, whose powerful insurance lobby has successfully resisted efforts to enact any meaningful oversight of its industry practices, as a result of which bad faith may only be found where the claimant makes "an extraordinary showing of disingenuous or dishonest failure to carry out a contract."

Thus, as a practical matter, a New York insurer can stonewall, and refuse to settle a claim that is worth far more than its insured's policy for several years, and even up until the time that the jury returns with its verdict - with absolutely no adverse consequence.

In short, while it may (and likely will) prove extremely frustrating that your liability insurer - or that of the entity or person you are suing - is unreasonably refusing to settle your personal injury claim relatively quickly, you should bear in mind that the insurance company has little, if any, incentive to abide by your wishes. What could happen to them if they don't deal fairly with you? Not much.

Interestingly, the rule is apparently somewhat different in the context of business interruption insurance, which we will discuss in a separate article.

Jonathan Cooper
New York Business & Commercial Litigation Attorney