Last month, the New York Supreme Court issued a well-reasoned order denying the Archdiocese’s insurers’[1] motion to dismiss its claim against them for breach of the covenant of good faith and fair dealing, holding that the policyholder’s complaint sufficiently alleged its Insurers claim handling conduct amounted to bad faith.[2] The Order is part of a new trend in New York that allows bad-faith claims to proceed when styled as claims for breach of the duty of good faith and fair dealing, where the conduct supporting the alleged bad-faith claim is independent of the alleged conduct giving rise to a breach of contract claim, and the policyholder sufficiently alleges damages arising from the bad-faith conduct.
It is well-established in New York that a covenant of good faith and fair dealing is implied in every insurance policy. This covenant requires all parties to the policy to refrain from unfairly depriving the other of the policy’s benefits. Insurer misconduct that violates this covenant varies, but it must show that the insurer has grossly disregarded its insured’s financial interest, elevating its own financial interests above those of its policyholders. For decades, New York courts reflexively dismissed bad-faith claims for breach of the duty of good faith and fair dealing as duplicative of claims for insurers’ breaches of their contractual obligations.[3] This result was troubling, because in New York, unlike many states, policyholders have no private cause of action under the state’s version of the unfair claim settlement practices act.[4] As illustrated in the recent New York Supreme Court opinion, New York courts have started to recognize the importance of holding insurers responsible for damages caused not only by the wrongful denial of claims but also from the manner in which they handle claims.[5]
The Archdiocese Insurance Litigation arises from underlying litigation emanating from the New York legislature’s passage of the New York Child Victims Act (“CVA”) in 2019 and the Adult Survivors Act (“ASA”) in 2022. The CVA allows adults who survived sexual abuse as children to bring claims against their alleged abusers until the victims turn 55. The ASA allowed victims of sexual offenses for which the statute of limitations had lapsed to file civil suits for a one-year period, from November 24, 2022, to November 24, 2023. After the laws passed, the Archdiocese faced an onslaught of civil litigation as alleged victims sought compensation for past harms. The Archdiocese looked to its Insurers for help defending and settling these claims.
In response, the Insurers brought the Archdiocese’s Insurance Litigation, seeking a declaration that they have no duty to defend or indemnify the Archdiocese in the 1,700 sexual abuse lawsuits filed after the passage of the CVA and ASA. In turn, the Archdiocese claimed its Insurers wrongfully denied coverage and handled its claims in bad faith.
The Archdiocese alleged that Insurers’ “wait-and-see” strategy in which they obstructed the timely and fair resolution of the Archdiocese’s claims while waiting to see the impact similar laws in other jurisdictions on their reserves improperly placed the Insurers’ interests ahead of the Archdiocese’s interest in a prompt claims investigation. The court agreed that these factual allegations could serve as the basis for a bad-faith claim. Specifically, the court considered allegations that Insurers denied coverage based on meritless and untimely defenses; rejected the Archdiocese’s requests to participate in underlying mediations and settlement discussions; refused to provide consent to any underlying settlements; attempted to intimidate the Archdiocese into abandoning coverage or accepting reduced coverage by initiating coverage litigation while defending the underlying claims; took positions in the coverage litigation antithetical to the duty to defend; and grossly disregarded the Archdiocese’s interests by repeatedly seeking to elevate their own interests to the serious detriment of the Archdiocese.[6]
Importantly, the court found that the Archdiocese’s bad-faith claim is not duplicative of its breach of contract claim, because the bad-faith claim is premised on Insurers’ refusal to participate in settlement discussions, whereas the breach of contract claim is based on Insurers’ refusal to indemnify the Archdiocese for those settlements. Further, the bad-faith claim seeks consequential damages, such as attorney’s fees incurred in pursuing coverage and additional costs derivative of the Insurers’ alleged misconduct, but the contract claim seeks reimbursement for any settlement payments the Archdiocese might pay.
The Archdiocese Insurance Litigation ruling provides a road map for how insureds should plead insurers breached their duty of good faith and fair dealing. Bad-faith claims can be a powerful tool in a policyholder’s arsenal for deterring insurer misconduct and ensuring the timely payment of claims. Policyholders should work with their coverage counsel to make sure these claims are properly pled.
[1] Century Indemnity Company, as Successor to CCI Insurance Company, as Successor to Insurance Co. of North America and as Successor to Indemnity Insurance Company of North America, Insurance Company of North America, Indemnity Insurance Company of North America, Great Northern Insurance Company, Westchester Fire Insurance Company, Pacific Employers Insurance Company, Federal Insurance Company, Illinois Union Insurance Company, and Vigilant Insurance Company (collectively, the “Insurers”).
[2] See The Archdiocese of New York et al. v. Century Indemnity Company, as Successor to CCI Insurance Company, as Successor to Insurance Co. of North America and as Successor to Indemnity Insurance Company of North America et al. (Case No. 652825/2023) (the “Archdiocese Insurance Litigation”), ECF Doc. No. 407 (the “Order”).
[3] See, e.g., New York Univ. v. Cont’l Ins. Co., 662 N.E.2d 763 (1995) (dismissing insured’s bad-faith claim as duplicative of its breach of contract claim).
[4] New York Insurance Law § 2601 (listing prohibited unfair claims settlement practices); Rocanova v. Equitable Life Assur. Soc. of U.S., 634 N.E.2d 940 (1994) (New York does not recognize a private cause of action under Insurance Law
§ 2601).
[5] New York courts also allowed claims for breach of the covenant of good faith and fair dealing to proceed in Rockefeller Univ. v. Aetna Cas. & Sur. Co., 231 A.D.3d 457 (1st Dep’t 2024) (affirming the denial of insurers’ motion to dismiss insured’s bad-faith claim); Xerox Corp. v. Travelers Cas. & Sur. Co. of Am., 225 A.D.3d 510 (1st Dep’t 2024) (affirming the denial of insurer’s motion for summary judgment to dismiss insured’s bad-faith claim); and New York Botanical Garden v. Allied World Assurance Co. (U.S.) Inc., 206 A.D.3d 474 (1st Dep’t 2022) (affirming the denial of insurer’s motion to dismiss insured’s bad-faith claim).
[6] See Order at 5-6,7.
