As the Waves of Superstorms Recede, States Seek to Amend Insurance Laws

In the wake of Superstorm Sandy, the New York Assembly (i.e., the House) introduced Bill No. A05780 on March 6, 2013. Proposed Bill No. A05780 amends Insurance Law ' 2601 to provide a private cause of action against insurers for unfair claims practices in the handling of property damage claims in regions where the governor has declared a disaster emergency.

In its current form, ' 2601 provides that no insurer doing business in New York shall engage in unfair claim settlement practices and, if the practice is performed with such frequency as to indicate a general business practice, the insurer shall be in violation of ' 2601. Section 2601 was enacted to allow New York's Superintendent of Insurance to determine “which carriers were comparatively egregious in their claims settlement practices and to give the Superintendent the discretion to take appropriate action against those carriers whose claims settlement practices substantially exceeded industry norms.” See Okslen Acupuncture P.C. v. Dinallo, 884 N.Y.S.2d 804, 811 (2009). Under its current form, consumers do not have standing to bring a claim under ' 2601.

Bill No. A05780 amends ' 2601 to add the following additional provision: “where the [G]overnor has declared a disaster emergency pursuant to section twenty-eight of the executive law ' any person who has suffered loss or injury by reason of any violation of this section relating to an insurance claim for property damage in an affected area encompassed by the executive order declaring the disaster emergency may bring an action in his or her name as a plaintiff to enjoin such unlawful act or practice and in an action to recover his or her actual damages.” The bill also provides that courts may, in their discretion, award punitive damages and attorney's fees where there is a finding of an insurer's willful or knowing violation of ' 2601.

In a memorandum accompanying the bill, the drafter and primary sponsor, Assemblywomen Helen E. Weinstein (D-NY-041) who represents constituents in Brooklyn, explained the purpose behind the bill: “insurers have every right to attempt to lawfully deny claims, but all too often these attempts create unreasonable situations for homeowners attempting to simply access the benefits to which they are entitled. This is especially acute in situations where the homeowner may have lost most or even all of their possessions due to a storm declared emergency.” She goes on to state that the expansion of ' 2601 is warranted due to evidence that “some insurers have taken advantage of insured[s] as concerns the adjusting of losses sustained in disaster emergencies declared by the Governor.” Thus, according to Weinstein, “a private right of action is necessary, in addition to the possibility of administrative action, to make certain that insurers are held responsible for unfair claims practices.”

Bill No. A05780 has been pending in the Insurance Committee, since March 6, 2013. If enacted, the legislation will take effect immediately and its impact will likely be widespread. Since taking office in 2011, New York Governor Andrew M. Cuomo has issued nine executive orders declaring a disaster emergency in the state of New York.

New Jersey: S-2460

On Jan. 8, 2013, the New Jersey State Senate introduced Bill S-2460, captioned “Consumer Protection Act,” which seeks to amend New Jersey Statutes ' 17:29B-4 and codify the private cause of action for unfair claims settlement practices articulated by the State Supreme Court in Rova Farms Resort Inc. v. Investors Ins. Co., 65 N.J. 474 (1974).

In its current form, ' 17:29B-4 does not provide a private right of action. Rather, it merely provides that the New Jersey Commissioner of Banking and Insurance has the power to examine and investigate into the affairs of an insurer in order to determine whether such company has been or is engaged in any unfair method of competition or in any unfair or deceptive act or practice with such frequency as to indicate a general business practice.

The New Jersey Supreme Court has twice examined whether a private cause of action should be permitted with respect to unfair claims settlement practices under ' 17:29B-4, with differing results. The court first considered the issue in the context of a third-party claim. Rova Farms, supra. In Rova Farms, the court found that, “an insurer, having contractually restricted the independent negotiating power of its insured, has a positive fiduciary duty to take the initiative and attempt to negotiate a settlement within the policy limits and ultimately allowed the plaintiff policy holder to bring a bad faith claim against its insurer for its failure to settle within the policy limits. Id. at 479, 496. Nearly 20 years later, the court reached the opposite conclusion with respect to a first-party claim. Pickett v. Lloyd's, 131 N.J. 457, 466 (1993). Interestingly, in Picket, the court found that while an insurer owes a duty of good faith to its insured in processing a first-party claim, the regulatory framework set forth in ' 17:29B-4 does not permit a private right of action.

Bill S-2460 now seeks to codify the Rova Farms decision and expand the reach of ' 17-29B-4. Specifically, if enacted, Bill S-2460 will allow an insured, regardless of any action by the Commissioner of Banking and Insurance, to file a civil action against its insurer for any violation of the provisions of subsection (9) of N.J.S.A. 17:29B-4, notwithstanding that the insurer did not violate any applicable provision with enough frequency as to indicate a general business practice. It will allow an insured to recover the full amount of damages set forth in the final judgment, as well as prejudgment interest, reasonable attorney's fees, and punitive damages, if he/she can prove actual malice or wanton and willful disregard.

Bill S-2460 was introduced in the New Jersey Senate and referred to the Senate Commerce Committee on Jan. 8, 2013. An identical bill, A3710, was introduced in the Assembly, on Jan. 28, 2013 and was referred to the Assembly Financial Institutions and Insurance Committee. If enacted, this legislation will take effect immediately and apply retroactively to all claims filed on or after Oct. 1, 2012 (the month Superstorm Sandy hit).

Florida: House Bill 813

On March 15, 2013, House Bill 813, “An Act Relating to Civil Remedies Against Insurers,” was introduced in the Florida House of Representatives. If enacted, it would have provided great clarity to the existing, but indefinite, bad faith law of Florida. In contrast to the tri-state area, Florida has not experienced a significant weather event for a number of years. Nonetheless, more storms hit Florida than any other U.S. state. Indeed, since 2004, multiple major hurricanes have made landfall, including Hurricane Charley (2004), the strongest since Hurricane Andrew in 1992. Other major hurricanes to hit landfall during that period include Hurricanes Jeanne, Dennis, Wilma, Ivan, and of course Katrina. Thus, while House Bill 813 was not necessarily introduced in reaction to a particular storm, it undoubtedly would have had a major impact in the aftermath of the next storm to inevitably hit.

Like many jurisdictions, Florida currently imposes a common law duty of good faith on insurers when negotiating a third-party claim on behalf of their insureds. As explained by the Florida Supreme Court, in the seminal case of Auto Mut. Indem. Co. v. Shaw, 134 Fla. 815, 830-31 (1938), the relationship between an insurer and insured “imposes upon the insurer the duty, not under the terms of the contract strictly speaking, but because of and flowing from it, to act honestly and in good faith toward the insured.” 134 Fla. at 830-31. Thus, in the context of third-party claims, it is well established under Florida common law that an insurer is held to “that degree of care and diligence which a man of ordinary care and prudence should exercise in the management of his own business” and must exercise good faith. Id. at 830.

In order to determine if an insurer breached the duty of good faith, Florida courts look to the “totality of the circumstances.” One common consideration is the amount of time it took for the insurer to investigate the claim and determine whether settlement would be appropriate. This case-by-case approach has led to inconsistent rulings. For example, one Florida court has found that an issue of fact arises as to whether an insurer acted in bad faith in delaying settlement negotiations, when the insurer waited two months to tender its policy limits; while another Florida court found that the dismissal of a bad faith claim was proper where the settlement demand gave a 10-day window in which to accept the settlement. See Goheagan v. American Vehicle Ins. Co., 107 So.3d 433, 439 (Fla. 4th DCA 2012); and also DeLaune v. Liberty Mut. Ins. Co., 314 So.2d 601, 603 (Fla. 4th DCA 1975).

Further complicating matters is the fact that Florida Statute ' 624.155 recognizes a statutory claim for bad faith by both first and third-party claimants. Specifically, ' 624.155 provides that any person may bring a civil action against an insurer who has: 1) failed to attempt in good faith to settle claims when, under all the circumstances, it could and should have done so, had it acted fairly and honestly toward its insured and with due regard for her or his interests; 2) made claims payments without a statement setting forth the coverage under which payments are being made; and/or 3) failed to promptly settle claims, when the obligation to settle a claim has become reasonably clear, under one portion of the insurance policy coverage in order to influence settlements under other portions of the insurance policy coverage.

Under ' 624.155, however, a claimant must give the insurer 60 days written notice of the violation, prior to filing suit. During that 60-day period, the insurer may pay the damages or correct the circumstances giving rise to the violation and avoid suit. Since first-party bad faith claims exist only by way of statute, a first-party cause of action simply does not exist until the 60-day period expires. Third-party bad faith claims, on the other hand, exist by way of statute and common law; thus, under current Florida law, an insurer cannot guarantee that a third-party bad faith claim will not be initiated during the 60-day period.

The proposed legislation, HB 813, endeavored to rectify some of the inconsistencies outlined above. Specifically, it set forth a clear time period within which an insured and insurer must take certain steps. Namely, HB 813 amends ' 624.155 such that, if it had passed, an insured or claimant asserting a cause of action for bad faith ' whether based in statute or common law ' must provide a written notice of loss to the insurer. Further, if the claimant communicates to the insurer by means other than written notice, within 72 hours of the communication, the insurer must request that the claimant put the communication in writing. If the insurer timely provides a disclosure statement already required under law and offers to pay the claimant the lesser of the amount the claimant is willing to accept or the policy's liability limit within 45 days, in exchange for a full release from liability, then the insurer is not liable for bad faith.

The proposed legislation also provided that common law third-party actions for bad faith are subject to the same requirements as a statutory claim of bad faith. Thus, first-party and third-party bad faith claimants would both be required to provide 60 days' written notice of the alleged violations before filing suit.

If enacted, the HB 813 would have taken effect on July 1, 2013. Unfortunately, however, in early May, HB 813 died in the House Judiciary Committee. At this stage, we can only guess at the reasons why the bill died. Given the muddled state of Florida's bad faith law, it is hard to imagine that it was due to any defects in or squabble over its language. Lack of interest? Maybe. As noted above, the weather has been relatively calm in Florida for the last few years. If waning interest was the cause, it's probably safe to assume that the form and substance of HB 813 will reappear in the wake of Florida's next major weather event. Indeed, the spark may be reignited even sooner, as claims continue to pour in from the intense May storm season that pummeled the Midwest.

Conclusion

The legislation discussed above demonstrates that in the wake of the extreme weather plaguing the United States over the last few years, state legislatures, particularly on the Eastern Seaboard, are beginning to take a harder look at their bad faith laws. Indeed, if passed, the legislation of New York and New Jersey alone will have far-reaching impacts on insurers, policyholders and third-party claimants alike.

While the legislation proposed in Florida sought to provide a necessary limit on bad faith liability, the proposed bills in New York and New Jersey seek to do just the opposite. In fact, they both greatly expand the consumer's ability to pursue claims of bad faith and to collect punitive damages and attorney's fees. Luckily, the New York legislation limits the proposed private cause of action to claims arising from a declared state of emergency. However, if the extreme weather continues, that limitation may be somewhat illusory. The New Jersey bill, on the other hand, sweeps broadly on its face, providing consumers with a private cause of action under any circumstance. It can be expected that if the New York and New Jersey bills pass, insurers operating in those states will be exposed to more frequent, costly and protracted litigation. In states like Connecticut, where a private cause of action for bad faith is well established, plaintiffs routinely allege claims of common law and statutory bad faith, regardless of whether they are viable. Indeed, it now appears to be the standard practice of the plaintiffs' bar to add a claim(s) of bad faith to any complaint asserting breach of contract against an insurer. Thus, it will probably not take long before policyholders in New York and New Jersey follow suit.

Elizabeth Ahlstrand is an attorney with Seiger Gfeller & Laurie LLP in West Hartford, CT.

From an October 2011 blizzard, to Hurricane Irene, and most recently, Superstorm Sandy, states along the East Coast have endured an unprecedented torrent of intense storms in recent years. The storms have caused tremendous property damage and, as citizens continue to rebuild, legislatures in the affected areas are responding. Indeed, many state legislatures began the 2013 legislative session several months early, with a majority convening in January.

Significantly, legislatures in three Eastern Seaboard states ' New York, New Jersey and Florida ' have already proposed new bills, which if enacted, would change their state's insurance laws with respect to insurer bad faith. As explained in more detail below, bills proposed in New York and New Jersey emerged in the wake of Superstorm Sandy and, if passed, will amend and strengthen existing bad faith law in favor of policyholders. In contrast, the legislation proposed in Florida, which died in the House Judiciary Committee, sought to clarify existing law and implement legislation favorable to insurers.

New York: Bill No. A05780

In the wake of Superstorm Sandy, the New York Assembly (i.e., the House) introduced Bill No. A05780 on March 6, 2013. Proposed Bill No. A05780 amends Insurance Law ' 2601 to provide a private cause of action against insurers for unfair claims practices in the handling of property damage claims in regions where the governor has declared a disaster emergency.

In its current form, ' 2601 provides that no insurer doing business in New York shall engage in unfair claim settlement practices and, if the practice is performed with such frequency as to indicate a general business practice, the insurer shall be in violation of ' 2601. Section 2601 was enacted to allow New York's Superintendent of Insurance to determine “which carriers were comparatively egregious in their claims settlement practices and to give the Superintendent the discretion to take appropriate action against those carriers whose claims settlement practices substantially exceeded industry norms.” See Okslen Acupuncture P.C. v. Dinallo , 884 N.Y.S.2d 804, 811 (2009). Under its current form, consumers do not have standing to bring a claim under ' 2601.

Bill No. A05780 amends ' 2601 to add the following additional provision: “where the [G]overnor has declared a disaster emergency pursuant to section twenty-eight of the executive law ' any person who has suffered loss or injury by reason of any violation of this section relating to an insurance claim for property damage in an affected area encompassed by the executive order declaring the disaster emergency may bring an action in his or her name as a plaintiff to enjoin such unlawful act or practice and in an action to recover his or her actual damages.” The bill also provides that courts may, in their discretion, award punitive damages and attorney's fees where there is a finding of an insurer's willful or knowing violation of ' 2601.

In a memorandum accompanying the bill, the drafter and primary sponsor, Assemblywomen Helen E. Weinstein (D-NY-041) who represents constituents in Brooklyn, explained the purpose behind the bill: “insurers have every right to attempt to lawfully deny claims, but all too often these attempts create unreasonable situations for homeowners attempting to simply access the benefits to which they are entitled. This is especially acute in situations where the homeowner may have lost most or even all of their possessions due to a storm declared emergency.” She goes on to state that the expansion of ' 2601 is warranted due to evidence that “some insurers have taken advantage of insured[s] as concerns the adjusting of losses sustained in disaster emergencies declared by the Governor.” Thus, according to Weinstein, “a private right of action is necessary, in addition to the possibility of administrative action, to make certain that insurers are held responsible for unfair claims practices.”

Bill No. A05780 has been pending in the Insurance Committee, since March 6, 2013. If enacted, the legislation will take effect immediately and its impact will likely be widespread. Since taking office in 2011, New York Governor Andrew M. Cuomo has issued nine executive orders declaring a disaster emergency in the state of New York.

New Jersey: S-2460

On Jan. 8, 2013, the New Jersey State Senate introduced Bill S-2460, captioned “Consumer Protection Act,” which seeks to amend New Jersey Statutes ' 17:29B-4 and codify the private cause of action for unfair claims settlement practices articulated by the State Supreme Court in Rova Farms Resort Inc. v. Investors Ins. Co. , 65 N.J. 474 (1974).

In its current form, ' 17:29B-4 does not provide a private right of action. Rather, it merely provides that the New Jersey Commissioner of Banking and Insurance has the power to examine and investigate into the affairs of an insurer in order to determine whether such company has been or is engaged in any unfair method of competition or in any unfair or deceptive act or practice with such frequency as to indicate a general business practice.

The New Jersey Supreme Court has twice examined whether a private cause of action should be permitted with respect to unfair claims settlement practices under ' 17:29B-4, with differing results. The court first considered the issue in the context of a third-party claim. Rova Farms, supra. In Rova Farms, the court found that, “an insurer, having contractually restricted the independent negotiating power of its insured, has a positive fiduciary duty to take the initiative and attempt to negotiate a settlement within the policy limits and ultimately allowed the plaintiff policy holder to bring a bad faith claim against its insurer for its failure to settle within the policy limits. Id. at 479, 496. Nearly 20 years later, the court reached the opposite conclusion with respect to a first-party claim. Pickett v. Lloyd's , 131 N.J. 457, 466 (1993). Interestingly, in Picket, the court found that while an insurer owes a duty of good faith to its insured in processing a first-party claim, the regulatory framework set forth in ' 17:29B-4 does not permit a private right of action.

Bill S-2460 now seeks to codify the Rova Farms decision and expand the reach of ' 17-29B-4. Specifically, if enacted, Bill S-2460 will allow an insured, regardless of any action by the Commissioner of Banking and Insurance, to file a civil action against its insurer for any violation of the provisions of subsection (9) of N.J.S.A. 17:29B-4, notwithstanding that the insurer did not violate any applicable provision with enough frequency as to indicate a general business practice. It will allow an insured to recover the full amount of damages set forth in the final judgment, as well as prejudgment interest, reasonable attorney's fees, and punitive damages, if he/she can prove actual malice or wanton and willful disregard.

Bill S-2460 was introduced in the New Jersey Senate and referred to the Senate Commerce Committee on Jan. 8, 2013. An identical bill, A3710, was introduced in the Assembly, on Jan. 28, 2013 and was referred to the Assembly Financial Institutions and Insurance Committee. If enacted, this legislation will take effect immediately and apply retroactively to all claims filed on or after Oct. 1, 2012 (the month Superstorm Sandy hit).

Florida: House Bill 813

On March 15, 2013, House Bill 813, “An Act Relating to Civil Remedies Against Insurers,” was introduced in the Florida House of Representatives. If enacted, it would have provided great clarity to the existing, but indefinite, bad faith law of Florida. In contrast to the tri-state area, Florida has not experienced a significant weather event for a number of years. Nonetheless, more storms hit Florida than any other U.S. state. Indeed, since 2004, multiple major hurricanes have made landfall, including Hurricane Charley (2004), the strongest since Hurricane Andrew in 1992. Other major hurricanes to hit landfall during that period include Hurricanes Jeanne, Dennis, Wilma, Ivan, and of course Katrina. Thus, while House Bill 813 was not necessarily introduced in reaction to a particular storm, it undoubtedly would have had a major impact in the aftermath of the next storm to inevitably hit.

Like many jurisdictions, Florida currently imposes a common law duty of good faith on insurers when negotiating a third-party claim on behalf of their insureds. As explained by the Florida Supreme Court, in the seminal case of Auto Mut. Indem. Co. v. Shaw , 134 Fla. 815, 830-31 (1938), the relationship between an insurer and insured “imposes upon the insurer the duty, not under the terms of the contract strictly speaking, but because of and flowing from it, to act honestly and in good faith toward the insured.” 134 Fla. at 830-31. Thus, in the context of third-party claims, it is well established under Florida common law that an insurer is held to “that degree of care and diligence which a man of ordinary care and prudence should exercise in the management of his own business” and must exercise good faith. Id. at 830.

In order to determine if an insurer breached the duty of good faith, Florida courts look to the “totality of the circumstances.” One common consideration is the amount of time it took for the insurer to investigate the claim and determine whether settlement would be appropriate. This case-by-case approach has led to inconsistent rulings. For example, one Florida court has found that an issue of fact arises as to whether an insurer acted in bad faith in delaying settlement negotiations, when the insurer waited two months to tender its policy limits; while another Florida court found that the dismissal of a bad faith claim was proper where the settlement demand gave a 10-day window in which to accept the settlement. See Goheagan v. American Vehicle Ins. Co. , 107 So.3d 433, 439 (Fla. 4th DCA 2012); and also DeLaune v. Liberty Mut. Ins. Co. , 314 So.2d 601, 603 (Fla. 4th DCA 1975).

Further complicating matters is the fact that Florida Statute ' 624.155 recognizes a statutory claim for bad faith by both first and third-party claimants. Specifically, ' 624.155 provides that any person may bring a civil action against an insurer who has: 1) failed to attempt in good faith to settle claims when, under all the circumstances, it could and should have done so, had it acted fairly and honestly toward its insured and with due regard for her or his interests; 2) made claims payments without a statement setting forth the coverage under which payments are being made; and/or 3) failed to promptly settle claims, when the obligation to settle a claim has become reasonably clear, under one portion of the insurance policy coverage in order to influence settlements under other portions of the insurance policy coverage.

Under ' 624.155, however, a claimant must give the insurer 60 days written notice of the violation, prior to filing suit. During that 60-day period, the insurer may pay the damages or correct the circumstances giving rise to the violation and avoid suit. Since first-party bad faith claims exist only by way of statute, a first-party cause of action simply does not exist until the 60-day period expires. Third-party bad faith claims, on the other hand, exist by way of statute and common law; thus, under current Florida law, an insurer cannot guarantee that a third-party bad faith claim will not be initiated during the 60-day period.

The proposed legislation, HB 813, endeavored to rectify some of the inconsistencies outlined above. Specifically, it set forth a clear time period within which an insured and insurer must take certain steps. Namely, HB 813 amends ' 624.155 such that, if it had passed, an insured or claimant asserting a cause of action for bad faith ' whether based in statute or common law ' must provide a written notice of loss to the insurer. Further, if the claimant communicates to the insurer by means other than written notice, within 72 hours of the communication, the insurer must request that the claimant put the communication in writing. If the insurer timely provides a disclosure statement already required under law and offers to pay the claimant the lesser of the amount the claimant is willing to accept or the policy's liability limit within 45 days, in exchange for a full release from liability, then the insurer is not liable for bad faith.

The proposed legislation also provided that common law third-party actions for bad faith are subject to the same requirements as a statutory claim of bad faith. Thus, first-party and third-party bad faith claimants would both be required to provide 60 days' written notice of the alleged violations before filing suit.

If enacted, the HB 813 would have taken effect on July 1, 2013. Unfortunately, however, in early May, HB 813 died in the House Judiciary Committee. At this stage, we can only guess at the reasons why the bill died. Given the muddled state of Florida's bad faith law, it is hard to imagine that it was due to any defects in or squabble over its language. Lack of interest? Maybe. As noted above, the weather has been relatively calm in Florida for the last few years. If waning interest was the cause, it's probably safe to assume that the form and substance of HB 813 will reappear in the wake of Florida's next major weather event. Indeed, the spark may be reignited even sooner, as claims continue to pour in from the intense May storm season that pummeled the Midwest.

Conclusion

The legislation discussed above demonstrates that in the wake of the extreme weather plaguing the United States over the last few years, state legislatures, particularly on the Eastern Seaboard, are beginning to take a harder look at their bad faith laws. Indeed, if passed, the legislation of New York and New Jersey alone will have far-reaching impacts on insurers, policyholders and third-party claimants alike.

While the legislation proposed in Florida sought to provide a necessary limit on bad faith liability, the proposed bills in New York and New Jersey seek to do just the opposite. In fact, they both greatly expand the consumer's ability to pursue claims of bad faith and to collect punitive damages and attorney's fees. Luckily, the New York legislation limits the proposed private cause of action to claims arising from a declared state of emergency. However, if the extreme weather continues, that limitation may be somewhat illusory. The New Jersey bill, on the other hand, sweeps broadly on its face, providing consumers with a private cause of action under any circumstance. It can be expected that if the New York and New Jersey bills pass, insurers operating in those states will be exposed to more frequent, costly and protracted litigation. In states like Connecticut, where a private cause of action for bad faith is well established, plaintiffs routinely allege claims of common law and statutory bad faith, regardless of whether they are viable. Indeed, it now appears to be the standard practice of the plaintiffs' bar to add a claim(s) of bad faith to any complaint asserting breach of contract against an insurer. Thus, it will probably not take long before policyholders in New York and New Jersey follow suit.

Elizabeth Ahlstrand is an attorney with Seiger Gfeller & Laurie LLP in West Hartford, CT.