This year, the legal industry has seen unprecedented changes across the country, and New York is no exception. With the ever-evolving landscape, it is crucial for the insurance industry to stay up to date on cases coming through the courts and potential legislation which could have a large impact on how policies are issued and claims are handled.

In particular, despite not having a private cause of action for bad faith in the performance of insurance contracts, recently, New York courts have demonstrated an openness to “bad faith” or “good-faith covenant” lawsuits brought by policyholders against insurers stemming from how their claims were handled.

It is well established that implicit in every contract, including insurance policies, is an implied covenant of good faith and fair dealing.[i] The Second Department explained that the covenant requires the insurer to “investigate claims for coverage in good faith, must not manufacture factually incorrect reasons to deny insurance coverage, must not deviate from its own practices or from industry practices, and must not act with ‘gross disregard’ of the insured’s interests.”[ii]

However, New York does not recognize a private cause of action for bad faith in the performance of insurance contracts.[iii] Instead, policyholders could bring a cause of action for breach of the implied covenant of good faith and fair dealing.[iv] Oftentimes, however, courts would dismiss a breach of covenant claim as duplicative of a breach of contract claim. This distinction is particularly important when considering the potential damages recoverable by the plaintiff, such as consequential damages versus punitive damages.

In a recent decision from New York County, the court denied the defendants’ motion to dismiss, holding that the breach of covenant claim was in fact not duplicative of the breach of contract claim.[v] The court considered a number of factors, including the extent of overlap in the facts asserted to support each claim and the damages sought. In particular, the breach of covenant claim sought consequential damages for pre- and post-judgment interest as a result of the defendant’s delays and unfair claim settlement practice, while the breach of contract claim sought damage for any settlement or judgment the plaintiffs would incur without the benefit of the coverage owed by the defendants.

It is not only the courts that are foreshadowing a shift in how these insurance disputes are handled in New York. A 2025 bill New York Senate Bill (S166) would, if enacted, add a statutory private right of action permitting policyholders to sue insurers for “unreasonable refusal or delay”.[vi] The Bill, currently in the Senate Insurance Committee, defines fourteen (14) practices as “unfair claim settlement”, including failure to effectuate settlement when liability is “reasonably clear”, failing to promptly investigate, and delaying payments.[vii]

Since it appears New York may potentially join the majority of states who already have statutes permitting private causes of action, there are a number of strategies and practices that insurers and defense counsel can employ to mitigate their risk. Insurers should treat all claim-handling with utmost attention and care by responding promptly, documenting communications, investigate early and thoroughly, ensure all decisions are reasonably justified and avoid unnecessary delay. Defense attorneys should begin building strategies that anticipate not just “coverage denial” claims, but also “unfair settlement practices” allegations.

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Sources

[i] E. Ramapo Cent. School Dist. v New York Schools Ins. Reciprocal, 199 AD3d 881 (2d Dept 2021).

[ii] Id. (internal citations omitted).

[iii] Rocanova v. Equitable Life Assur. Socy. of U.S., 83 N.Y.2d 603, 614-615 (1994); Govt. Employees Ins. Co. v Picone, 2025 NY Slip Op 06604 (2d Dept Nov. 26, 2025).

[iv] Brown v. Erie Insurance Company, 207 A3d 1144, 1145 (4th Dept 2022).

[v] 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. (Index No. 652825/2023), NYSCEF Doc. No. 407.

[vi] An act to amend the insurance law, in relation to unfair claim settlement practices, S., S166, § § 2601-a(a)(2025).

[vii] An act to amend the insurance law, in relation to unfair claim settlement practices, S., S166, § § 2601-a(a)(1)-(14)(2025).