Despite Leaving Client Unnecessarily Exposed to Harm, Bad Faith Claim Against NY Insurer Is Dismissed

In a recent decision, New York's Appellate Division, Second Department showed once again just how powerful New York's insurance lobby is, and how, under the current structure of the law in New York, an insurer has almost no incentive to protect its clients - the insureds - by negotiating claims in good faith. Quite the contrary, in New York, insurers have every incentive to ignore their insureds' interests, and to put their own economic self-interest first. (For more on this topic, please see "Bad Faith Claims in New York".) In CBL Path, Inc. v. Lexington Insurance Co., the plaintiff was confronted with an obvious negligence situation - their laboratory mixed up test results, causing a woman to undergo what was otherwise an unnecessary double mastectomy. Although their malpractice policy carried limits of $1 million, the defendant, a subsidiary of AIG, apparently never contacted the claimant to conduct any pre-litigation settlement negotiations, and as a result, the claimant ultimately filed suit, which brought a great deal of negative publicity to CBL. CBL then sued its insurer for damage to its business reputation, lost profits, as well as the lost business opportunities that were directly caused by the negative publicity that it suffered due to the filing of the underlying negligence action. Ultimately, and predictably, the Court was constrained to dismiss the action, following New York's legal precedent, which the Court summarized as follows: "Since an award of damages exceeding the policy limits is punitive in nature, it "is not applied routinely for breach of contract; and bad faith requires an extraordinary showing of a disingenuous or dishonest failure to carry out a contract ... "Since courts are understandably reluctant to expose insurers to liability exceeding the policy limits, the bad faith must be for conduct that is clearly more than ordinary negligence, i.e., more than merely poor judgment." The Court then articulated the rare circumstance under which an insurer can be held liable in bad faith in New York: "Naturally, proof that a demand for settlement was made is a prerequisite to a bad-faith action for failure to settle. [Additionally,] the plaintiff in a bad-faith action must show that the insured lost an actual opportunity to settle the . . . claim at a time when all serious doubts about the insured's liability were removed. "Bad faith is established only where the liability is clear and the potential recovery far exceeds the insurance coverage" (id. at 454 [internal quotations marks and citations omitted]; see also Smith v General Acc. Ins. Co., 91 NY2d 648, 653; Soto v State Farm Ins. Co., 83 NY2d 718, 723; Vecchione v Amica Mut. Ins. Co., 274 AD2d 576, 578; cf. United States Fid. & Guar. Co. v Copfer, 48 NY2d 871, 873)." Needless to say, I find this rule disturbing, because it tacitly allows insurers to ignore their fiduciary duties to their insureds - without any fear of adverse consequence. To borrow an old phrase, "There ought to be a law ..."