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Using Unfair Claim Settlement Statutes to Prove Bad Faith

Oct. 10, 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).

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