Mikaela Whitman | Law.com | October 11, 2019
The covenant of good faith and fair dealing is implied in all insurance contracts. While most states recognize that an action for breach of this covenant (also known as “bad faith”) sounds in breach of contract, some states also recognize an independent tort that can be separate from or in addition to the breach of contract claim. All states also have an insurance code that imposes liability on an insurer which fails to meet the statutory standards. These claims settlement practices statutes are modeled after the National Association of Insurance Commissions’ Model Unfair Claims Settlement Practices Act and often contain a long list of proscribed insurer practices, including whether in an insurer’s defense or settlement of its insured’s claim (third-party bad faith) or its unreasonable refusal or delay in adjusting or resolving an insured’s first-party claim (first-party bad faith).
For example, New York Insurance Law §2601 defines certain acts that constitute “unfair claim settlement practices,” including, among others, “failing to adopt and implement reasonable standards for the prompt investigation of claims arising under its policies” and failing to “advise the claimant of acceptance or denial of the claim within thirty working days.” NY Ins. §2601(a)(3), (a)(4) (2018). However, most jurisdictions, including New York, may not recognize a private cause of action in favor of an insured and only the state’s insurance commissioner can bring a cause of action alleging a violation of these statutes. See, e.g., Rocanova v. Equitable Life Assurance Soc’y, 83 N.Y.2d 603, 614 (1994) (New York law does not “recognize a private cause of action under Insurance Law §2601”); Moradi-Shalal v. Fireman’s Fund Ins. Cos., 46 Cal. 3d 287, 304 (1988) (violations of Insurance Code §790.03 and the Fair Claims Settlement Practices Regulations do not by themselves give rise to a separate right of action and are not bad faith per se); Davidson v. Travelers Home and Marine Ins. Co., 2011 WL 7063521, at *2 (Del. Super. Dec. 30, 2011) (holding that the purpose of the Delaware Unfair Trade Practices Act is to regulate trade practices in the insurance business and only the Insurance Commissioner has the authority to investigate or file claims of alleged bad faith acts).
Yet even though these statutes may not provide insureds a private cause of action, insureds should not disregard their benefit as violations of and failures to comply with these statutes can still be used as evidence of an insurers’ bad faith. See, e.g., Reid v. Mercury Ins. Co., 220 Cal. App. 4th 262 (2013) (discussing that while there is no private civil cause of action against an insurer that commits one of the various acts listed in statutes governing unfair claims settlement practices, violations of the section may evidence the insurer’s breach of duty to its insured under the implied covenant of good faith and fair dealing); Davidson, 2011 WL 7063521, at *2 (stating that “[t]he court assumes without deciding here, however, that an insurer’s violation of the [Unfair Trade Practices] Act may be used as evidence of bad faith”); State of N.Y. v. Merchants Ins. Co. of New Hampshire, 109 A.D.2d 935, 926 (3d Dept. 1985) (in a private cause of action for bad faith, court relied on NY Insurance Law 2601 as evidence that the insurer acted in bad faith).
In Belco Petroleum v. AIG Oil Rig, the First Department held that not only can these statutes be used as evidence of bad faith, but they can also be used as evidence when seeking punitive damages for a bad faith claim, stating: “Now, an insured aggrieved by an unfair claim settlement practice can take his grievance to the Superintendent of Insurance; if the grievance has merit, the Superintendent will presumably take it up and investigate; the insured, be he of modest means or substantial, should then be able to use the results of that investigation in pressing a claim for punitive damages.” 164 A.D.2d 583, 591 (1st Dept. 1991).
The use of these statutes as evidence of insurer bad faith takes on greater significance when one considers the standard most jurisdictions apply to determine whether an insurer has acted in bad faith. This broad and general standard typically requires the insurer to act “fairly” and “reasonably.” See N.Y. Univ. v. Cont’l. Ins. Co., 87 N.Y.2d 308, 318 (1995) (bad faith claims can be predicated on an insurer’s failure to investigate, process, or pay an insurance claim, or a general business practice of denying insurance claims without a reasonable basis). As a result, insureds, insurers and courts alike are left to puzzle what it means to act “reasonably” and how to prove that an insurers’ acts were or were not “reasonable.” While traditional sources of proof such as legal precedent, expert testimony, an insurers’ past acts, industry customs, and legal consensuses (i.e., the Restatement), should certainly be considered, unfair claim settlement statutes likewise should not be overlooked.