Southern District of New York Holds Bad Faith Claims May Lie Against Liability Carriers

By Jacob R. Zissu

In Renergy, Inc. v. Mt. Hawley Ins. Co., the U.S. District Court for the Southern District of New York addressed an insured plaintiff’s bad faith insurance claims handling allegations arising from a pollution incident submitted to the defendant, a liability carrier.

Analysis

Faced with the insurer’s arguments that a cause of action for bad faith claims handling only applies to first-party property claims, and that such claims would be duplicative of breach of contract claims in a liability insurance context, S.D.N.Y. Magistrate Judge Katherine H. Parker opined that New York law does not limit bad faith claims to first-party insurance claims, and also found, under the circumstances presented, that the bad faith claims were not truly duplicative of the breach of contact claims made against Mt. Hawley.

Harkening back to the seminal 2008 New York Court of Appeals case of Bi-Economy Market v. Harleysville Insurance Company of N.Y. (10 N.Y.3d 187), among other authorities, Magistrate Judge Parker held that, “While it is true that bad faith claims are narrowly recognized, New York does not categorically restrict them to situations involving first-party insurance coverage.”  And while Bi-Economy was a first-party property case, the essential holding of that case was that, “As in all contracts, implicit in contracts of insurance is a covenant of good faith and fair dealing, such that ‘a reasonable insured would understand that the insurer promises to investigate in good faith and pay covered claims’” Thus, “in light of the nature and purpose of the insurance contract at issue … Bi-Economy’s claim for consequential damages … was reasonably foreseeable and contemplated by the parties, and thus cannot be dismissed on summary judgment.”

Magistrate Judge Parker also addressed Mt. Hawley’s arguments that any bad faith claim against it would be duplicative of the Plaintiff’s breach of contract claim, acknowledging that, “Under New York law, a claim alleging breach of the implied covenant of good faith and fair dealing is duplicative and subject to dismissal when it rests on the same factual allegations and seeks the same relief as a breach of contract claim.” However, in distinguishing Renergy’s claims from this general principle, the Court held that the insured had “adequately alleged that the insurer ‘mishandled the claim independently of the breach itself’” by virtue of its allegations that Mt. Hawley failed to conduct a fair investigation, relied on inadequate claims-handling review, made repetitive and unnecessary document demands, made unsupported assertions that plaintiff engaged in intentional wrongdoing, and shifted coverage positions after years of claim activity. )  Hence, the Court allowed Renergy’s bad faith claims against Mt. Hawley to proceed.

Learning Point

A core facet of insurance is assessment and limitation of potential exposure.  And while the S.D.N.Y. decision in Renergy does not decide liability, it does articulate another avenue by which an insured may seek redress for consequential damages arising from claims handling that does not satisfy the implied covenant of good faith and fair dealing present in every contract of insurance.