On October 29, 2012, Hurricane Sandy's storm surge hit theeastern seaboard of the United States. By conservative estimates,Sandy caused from $50 billion to $60 in damage, with the actualnumber likely closer to $75 billion. The majority of this damage occurred in New Jersey and New York.

“Unfair Practices”

With the cleanup winding down, the present focus is on therebuilding efforts and the status of insurance claims. A recentNew York Times article discussed homeowners' putative difficulties inadjusting their insurance claims. Perhaps more telling is that thearticle is an obvious example of the media's attempt to imbue anegative attitude against insurance carriers.

The article describes the insureds' attempt to settle with theirproperty insurer where the amount offered was allegedly a “fractionof what the couple said they expected to pay to restore theirhome.” The insureds' public adjuster argued, “[O]ne of the problemswe see on a regular basis is no consistency for the costs … [a]ndthat is inherently unfair.”

See related:Mitigating Bad Faith Exposure During Disaster Season

Accordingly, one of the most prominent newspapers in theNortheast is priming the region against insurers' ostensible“unfair practices.” While a mistaken coverage position doesnot—in and of itself—result in bad faith liability, the plaintiffs'bar may attempt to use the sheer number of Sandy claims as putativeevidence of improper claims handling. It therefore behoovesproperty insurers with exposure to Sandy to establish aprocedure for investigating and adjusting these claims so that asimple coverage dispute does not turn into a bad faith action.

Katrina Property Claims

It has been over half-a-year since Sandy, and we are approachingthe time when insureds decide whether to settle their claim or filesuit. While no two insurance claims—much less those arisingfrom different events—are the same, the experience gleaned in the 8years since Katrina will continue to be instructive in adjusting claims arising from Sandy and other large natural disasters.

For example, Katrina showed how the distinction between the twoprimary causes of hurricane damage—windversus water—affect coverage: (i) a policy covering“hurricane” damage does not normally extend to flood damage(Mladineo v. Schmidt, 52 So.3d 1154, 1157 (Miss. 2010))because homeowners' policies typically have “flood” exclusions(In re Katrina Canal Breaches Litig., 2009 WL 1707923,*2-3 (E.D.La. 2009)), and (ii) flood policies, unless otherwisespecified, do not cover wind damage (Berk-Cohen Associates, LLCv. Landmark American Ins., 2009 WL 3738152, 1*-2 (E.D.La.2009)).

Perhaps more saliently, Katrina demonstrates that establishing aprocedure for investigating and adjusting claims may serve toameliorate potential bad faith liability. In short, insurers thatsuccessfully defended Katrina bad faith claims were able todocument their prompt and reasonable investigation of the insured'sclaim.

New York Insurance Law

New York has codified its claims-handling regulations, whichinclude the duty to promptly investigate, communicate, and pay fora covered claim. While the New York statute does not confer aprivate right of action, violation thereof may serve as evidence ofbad faith against an insurer.

Under New York law, a cause of action for bad faith requiresproof that the insurer's conduct constitutes “a gross disregard ofthe insured's interests” such that the “insurer engaged in apattern of behavior evincing a conscious or knowing indifference tothe interests of the insured.” State Farm Cas. Co. v.Ricci, 96 A.D.3d 1571, 1572 (N.Y. 2012).

Accordingly, “[t]he carrier cannot be held liable if itsdecision not to settle was the result of an error of judgment onits part or even by a failure to exercise reasonable care.”DiBlasi v. Aetna Ins. Co., 147 A.D.2d 93, 98-99 (N.Y.1989).

Under New York law, an insurer has a duty to investigate “the validity and extent of theclaim” subject to the insured's “rights to both privacy and promptpayment of sums due under the terms of the contract.” SCWWest LLC v. Westport Ins., 856 F.Supp.2d 514, 529 (E.D.N.Y.2012)). An insurer's proactive conduct, such as meeting withthe insured, militates against a finding of badfaith. Shapiro v. Berkshire Life Ins. Co., 212 F.3d121, 127 (2nd Cir. 2000).

The “standard by which insurers are to process claims”(Cohen v. New York Property Ins., 65 A.D.2d 71, 78-79(N.Y. 1978)) is set forth in New York Insurance Law section 2601and prohibit an insurer from “unfair claim settlementpractices.” Section 2601 lists certain acts, which “ifcommitted without just cause and performed with such frequency asto indicate a general business practice, shall constitute unfairclaim settlement practices.” These include:

(2) Failing to acknowledge with reasonable promptness pertinentcommunications as to claims arising under its policies.

(3) Failing to adopt and implement reasonable standards for theprompt investigation of claims arising under its policies.

(4) Not attempting in good faith to effectuate prompt, fairand equitable settlements of claims submitted in which liabilityhas become reasonably clear, except where there is a reasonablebasis supported by specific information available for review by thedepartment that the claimant has caused the loss to occur by arson…

Source: N.Y. Ins. Law §2601(a) (McKinney 2000)

While it does not allow for a private right of action(DiBlasi, supra, 147 A.D.2d at 98-99), section2601 permits “[e]vidence as to numbers and types of complaints tothe department against an insurer … in any administrative orjudicial proceeding.” N.Y. Ins. Law §2601(b),(c) (McKinney2000). In this regard, allegations of frequent unfair claimspractices may trigger an action by the New York department ofinsurance. Mavroudis v. State Wide Ins. Co., 121A.D.2d 433, 434 (N.Y. 1986) (“[C]laims of persistent unfairsettlement practices … are the exclusive province of the New YorkState Superintendent of Insurance.”)

Because of the sheer volume of claims, Sandy presents anincreased risk that an insurer's adjustment may be “performed withsuch frequency as to indicate a general business practice” undersection 2601. If this were to happen, then individual insuredsmay use a regulatory action by the department of insurance asevidence of bad faith. Given the foregoing, it is essentialthat an insurer establish a consistent procedure to address claimsarising from Sandy.

New Jersey Insurance Law

Like New York, New Jersey has codified its claims handlingregulations and—while there is no private right of action arisingtherefrom—a breach of these standards may serve as evidence of badfaith.

Under New Jersey law, an insurer's duty of good faith includesthe obligation to protect and communicate with the insured. “An insurance company has the duty to protect its insured, thedebtor, during the settlement of the insured's claims.” Maertinv. Armstrong World Industries, Inc., 241 F.Supp.2d 434, 454(D.N.J. 2002). This includes “a duty to investigate claims ingood faith, and to communicate problems and concerns to theinsureds as they arise.” In re Tri-State ArmoredServices, Inc., 332 B.R. 690, 732-733 (D.N.J. 2005).

However, “[n]either negligence nor mistake is sufficient to showbad faith.” Miglicio v. HCM Claim Management Corp., 672A.2d 266, 271-272 (N.J. 1995). Rather, “in order to prove aclaim of bad faith under New Jersey law, a plaintiff must provethat:

1) The insurer lacked a 'fairly debatable' reason for itsfailure to pay a claim

2) The insurer knew or recklessly disregarded the lack of areasonable basis for denying the claim.” CertainUnderwriters at Lloyd's of London v. Alesi, 843 F.Supp.2d 517,531 (D.N.J. 2011).

New Jersey's statutes “set forth a standard of conduct forinsurers as to the settlement of claims” (Miglicio v. HCM ClaimManagement Corp., 672 A.2d 266, 271-272 (N.J. 1995)) andprovide that “[t]he following are hereby defined as unfair methodsof competition and unfair and deceptive acts or practices in thebusiness of insurance,” which include: b) Failing toacknowledge and act reasonably promptly upon communications withrespect to claims arising under insurance policies; c) Failingto adopt and implement reasonable standards for the promptinvestigation of claims arising under insurance policies;…f) Notattempting in good faith to effectuate prompt, fair and equitablesettlements of claims in which liability has become reasonablyclear. (New Jersey Stat. Ann. §17:29B-4(9).

Like New York, while “there is no private right of action”(Weiss v. First Unum Life Ins. Co., 482 F.3d 254, 264 (3rdCir. 2007)), an insurer's “deviation from the standards may beconsidered as evidence of bad faith” in New Jersey.(Miglicio, supra, 672 A.2d at 271-272).

Both New York and New Jersey excuse a good faith, but mistaken,coverage decision from the ambit of a bad faith claim. To suefor bad faith, the former requires a “gross disregard of theinsured's interests” involving “a conscious or knowing indifferenceto the interests of the insured,” and the latter requires theabsence of a “fairly debatable” reason such “that the insurer knewor recklessly disregarded the lack of a reasonable basis fordenying the claim.”

No one, save Mother Nature, can control the number of claims oramount of damage arising from a mass event such as Sandy. Aninsurer, however, may implement a procedure to investigate andadjust claims in a prompt and consistent manner. By doing soand documenting its position, a carrier may limit its liability tothe policy limits and avoid extra-contractual damages.

Moreover, given that a regulatory action in both New York andNew Jersey is predicated on the “frequency” of an insurer's allegedviolation of section 2601 or section 17:29B-4, respectively, anounce of prevention in handling mass Sandy claims may be worth apound of cure in defending and settling bad faith claimsthat arise.