MUST AN INSURER MAKE GOOD FAITH EFFORTS TO SETTLE WHEN LIABILITY IS CLEAR

the NYS Insurance department thinks so.

In a February 7th, 2008 General Counsel opinion letter, the insurance department was given this question:

Must a liability insurer effectuate settlements of claims in good faith when liability under the policy is shown to be clear?

The General Counsel's office responded with this:

Yes. An insurer is required to effectuate settlement agreements in good faith.

The inquirer’s second question asks whether an insurer is obliged to effectuate the prompt settlements of a claim. Insurance Law § 2601(a)(4) is relevant to the inquiry. It defines certain acts that constitute unfair claims settlement practices and prohibits insurers doing business in New York from engaging in such acts. The statute reads in pertinent part, as follows:

(a) No insurer doing business in this state shall engage in unfair claim settlement practices. Any of the following acts by an insurer, if committed without just cause and performed with such frequency as to indicate a general business practice, shall constitute unfair claim settlement practices:

….

(4) not attempting in good faith to effectuate prompt, fair and equitable settlements of claims submitted in which liability has become reasonably clear, except where there is a reasonable basis supported by specific information available for review by the department that the claimant has caused the loss to occur by arson. After receiving a properly executed proof of loss, the insurer shall advise the claimant of acceptance or denial of the claim within thirty working days; … (Emphasis added.)

Additionally, N.Y. Comp. Codes R. & Regs. tit. 11, Part 216 (2006) (Regulation 64) addresses unfair claims settlement practices and claim cost control measures of insurers doing business in New York. The preamble to Regulation 64, which is summarily set forth in N.Y. Comp. Codes R. & Regs. tit. 11, § 216.0(a), provides, in pertinent part, as follows:

(a) Section 2601 of the Insurance Law prohibits insurers doing business in this State from engaging in unfair claims settlement practices and provides that, if any insurer performs any of the acts or practices proscribed by that section without just cause and with such frequency as to indicate a general business practice, then those acts shall constitute unfair claims settlement practices. This Part contains claim practice rules which insurers must apply to the processing of all first- and third-party claims arising under policies subject to this Part….

Consequently, both Insurance Law § 2601 and Regulation 64 provide that an insurance company must effectuate a settlement promptly and in good faith when there is a reasonable basis for doing so.

Notice the whole "good faith" thing.

In light of the recent Court of Appeals decision (Bi-Economy Mkt., Inc. v Harleysville Ins. Co. of N.Y), this letter, and the recent draft regulation, it looks like a bad faith cause of action just may exist against insurance companies who improperly deny no-fault benefits.

For example: an insurance company that issues a late denial, and with no other defense decides to proceed at trial, is not,I think we can all agree (as it turns out, we can't all agree--see comments), doing what the insurance department wants or what the law requires.