Insurance Legislation and the response to Hurricane Sandy

Background
The Model Unfair Claim Settlement Practices Act was developed by the National Association of Insurance Commissioners (NAIC) in 1990 as a template for state legislation that would allow a state’s insurance commissioner to investigate and sanction certain activities constituting unfair claims practices on the part of insurers.(1)  In states that were acutely affected by Hurricane Sandy, lawmakers have proposed several amendments to their state’s Unfair Claim Settlement Practices Act, as well as additional legislation to empower policyholders against their insurers in the event of alleged bad-faith denial of claims. Insurers should familiarise themselves with these proposals, as there is a significant likelihood that such proposals will have a considerable impact on the way in which they will soon be required to conduct claim reviews.

Most states have adopted their own version of the model Unfair Claim Settlement Practices Act, developed by the NAIC.(2)  The purpose of these laws is to allow a state’s insurance commissioner to investigate and sanction certain activities constituting unfair practices.(3)  The New York Unfair Claim Settlement Practices Act imposes strict time limits on an insurer’s response to investigation of a claim, acceptance or rejection of a claim and tender of settlement payment.(4)  However, the New York act creates no private cause of action for claimants in the absence of specific requirements. In Rocanova v Equitable Life Ass Soc Of US, the Court of Appeals held that a claimant has a private cause of action for bad faith under the New York act only where there has been egregious tortious conduct directed at the insured, coupled with a pattern of tortious conduct directed at the public. (5)  The provisions of the New Jersey Unfair Claims Practices Act are similar to those of the New York act. (6)  In addition to requiring that a claimant show that the alleged bad-faith denial of coverage was part of a general business practice, in Pickett v Lloyd’s the New Jersey Supreme Court held that a private cause of action for bad faith exists only where the claimant can also show that there was no fairly debatable reason for the insurer’s failure to honour its obligations.(7)  In New York, New Jersey, and many other states, a claimant’s burden of proof for establishing the existence of a private first-hand cause of action for bad-faith denial of coverage is, more often than not, prohibitively high.

Proposed changes
In response to the aftermath of Hurricane Sandy, both the New York and New Jersey legislatures are considering amending their laws covering unfair claims practices, which could make it significantly easier for claimants to bring a private cause of action for bad-faith denial of coverage. In 2013 New York State Assemblywoman Nicole Malliotakis drafted legislation that, if passed, will create a private cause of action for specific unfair claims settlement practices during a declared state emergency.(8)  The enumerated practices include failure to:

•    conduct an onsite inspection within seven days of submission of a claim;
•    provide a determination on the claim within 30 days of the report; and
•    pay at least 20% of covered damages on determination of coverage.(9)

As of March 2014, this bill has yet to pass the New York State Assembly.

The New Jersey legislature is considering a bill that would grant a private right of action to policyholders for substantive violations of the Unfair Claims Settlement Practices Act and eliminate the requirement that a claimant prove that an insurer’s unfair conduct was part of a general business practice.(10)  The proposed bill would allow a policyholder to recover for bad-faith actions by proving a specific violation of one or more prohibited practices.(11)  As of March 2014, this bill has yet to pass the New Jersey Senate.

In addition to these proposed changes to the New York and New Jersey Unfair Claims Settlement Practices Acts, other legislation has been proposed in response to the effects of Hurricane Sandy on insurance policyholders. The New York State Assembly has approved a bill (12) introduced by Speaker Sheldon Silver that would create a so-called Homeowners’ Bill of Rights, which would require insurers to provide property owners with plain-language disclosure notices regarding catastrophes and the process for filing a claim or obtaining coverage in the event of one.  The bill never made it out of the Insurance Committee in the Senate and has since been returned to the assembly. In addition, in New York, State Assembly Bill A01222 (13) would establish a $1,500 cap on hurricane deductibles for home insurance or dwelling fire personal lines policies and make hurricane deductibles applicable only to losses incurred in storms with wind speeds above 125 miles per hour. As of March 2014, the bill remains in the assembly. In May 2013 Governor Chris Christie signed into law Bill A3642, which requires home insurance providers to supply a simple, clear, understandable, and easily readable one-page summary of the policy explaining notable coverages and exclusions.

Comment
Whatever the outcome of these proposals, it is apparent that Hurricane Sandy has had a significant impact on the trend of legislative proposals in states most affected by the storm. Policyholders and lawmakers are mobilizing to propose and pass legislation that will enforce greater structure on the work of claims handlers and potentially result in increased liability for insurers.

While it is important that every insurer acts with the utmost good faith, if these proposals eventually become law, it will nonetheless be more difficult for insurers to insulate themselves from lawsuits for alleged bad-faith denial of coverage. Insurers should be familiar with these proposals for a number of reasons.

First, they may eventually become law and therefore have a significant impact on the way in which insurers operate, making policies more expensive in order to account for the extra costs that are likely to arise from both complying with the law and paying for a likely increase in litigation.

Second, even if these proposals do not become law now, insurers should be cautious of the fact that policyholders and lawmakers are prone to connect and react in response to natural disasters such as Hurricane Sandy, making it more likely that proposals such as these will become law at some point in the not too distant future.

By being aware of such reactionary legislative proposals, insurers can anticipate what is to come and prepare themselves accordingly.

*Written with Jessica Parra.

(1) See Steven Plitt, “Essentials: A Roadmap for NAIC’s Unfair Claims Settlement Practices Act”, Claims Journal, March 3, 2011.
(2) Id. See also NY Ins Law § 2601 (1984), “Unfair Claims Settlement Practices Act; Other Misconduct; Discrimination”.
(3) See Plitt, supra at endnote 1.
(4) NY Ins Law § 2601 (1984).
(5) 83 NY 2d 603, 612 NYS 2d 339 (1994).
(6) New Jersey’s Unfair Claim Settlement Practices Act §§ NJSA 17:29B-4(9); 17B:30-13.1.
(7) 131 NJ 457, 621 A2d 445 (1993).
(8) New York State Assembly Bill A04699 (proposed). See also “NY Lawmaker Aims to Clamp Down on Unfair Claim Settlement Practices”, Insurance Journal, January 30, 2013.
(9) Id.
(10) New Jersey Senate Bill S-2460 (proposed January 2013).
(11) Id.
(12) New York State Assembly Bill A07455 (referred to Senate June 2013). See also “NY Assembly Approves a Flurry of Post-Sandy Insurance Reform Bills”, Insurance Journal, June 5, 2013.
(13) Proposed January 2013.