Senator Frank Padavan and Assemblyman Adriano Espaillat proposed strong legislation designed to hold insurance companies accountable for failing to treat policyholders fairly when disasters strike, citing the prolonged insurance disputes at Ground Zero as evidence that insurance companies too often try to avoid their responsibilities rather than live up to their promises.

The legislation would specifically allow policyholders to sue insurance companies who act in "bad faith," putting teeth into the existing requirement that insurers deal fairly with their insured when a disaster strikes by making it clear they will pay a financial price if they do not. The legislation would ensure that in the event of a "catastrophic event" that causes in excess of $1 billion of damages, insurers can be held liable for both interest and attorney fees if they act in bad faith. In the most egregious cases, the legislation would hold insurers liable for punitive damages. In the legislation, bad faith is defined as when an insured who sues an insurer wins an award that is 20 percent or more above the settlement offer it received from the insurer.

Senator Padavan said, "When faced with large claims, insurance companies too often would rather pay for lawyers to delay or reduce their responsibilities rather than pay what they owe. Unfortunately, without laws requiring insurers to deal with their policyholders in good faith in place, there is a strong economic incentive for companies to pay lawyers to fight claims rather than live up to their obligations. This legislation is designed to make sure that insurance companies have an economic incentive to do the right thing and make fair settlement offers to their customers."

In New York, several insurance companies, including Allianz, Royal and Travelers, have refused to pay their claims on the World Trade Center, which was destroyed more than five years ago by terrorists on September 11, 2001. Today, those insurance companies owe Silverstein Properties and the Port Authority of New York and New Jersey more than $2.2 billion in claims before interest, monies critical to rebuilding the World Trade Center.

Under New York law, it is currently unlawful for an insurer to engage in unfair claims practices by, for example, failing to attempt "to effectuate prompt, fair and equitable settlements of claims" and by "compelling policyholders to institute suits to recover amounts due under its policies by offering substantially less than the amounts ultimately recovered." However, in New York, the only mechanism available for enforcing this requirement is a weak regulatory proceeding brought by the Superintendent of Insurance, who does not even have the power to force an insurer to pay a claim. The superintendent can only impose relatively minor fines, or resort to the draconian step of suspending the company's license to do business in New York.

Senator Padavan added, "When faced with a choice between a traffic ticket and the death penalty, insurance companies have been willing to risk the regulatory proceeding since regulators have been reluctant to take the drastic steps of suspending a company, which in turn would likely have to cut jobs in New York. We need more appropriate measures to hold these bad actors accountable and protect New Yorkers in the face of tragic events."

In addition, policyholders do not have the right to sue their insurers for violating the insurance laws, and New York common law does not presently recognize a claim for bad faith against an insurer that wrongfully refuses to pay claims. New York law is outside of the national mainstream by refusing to allow insureds to pursue a private course of action against an insurer that engages in unfair claims practices. More than 30 states permit some type of bad faith claims, including Alabama, Alaska, Arizona, California, Colorado, Florida, Georgia, Hawaii, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maryland, Michigan, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, North Carolina, Ohio, Oklahoma, South Carolina, Tennessee, Texas, Utah, Virginia, Washington and Wisconsin.

The bill is retroactive and, by its terms, is intended to cover losses suffered as a result of the September 11 terrorist attacks. The reason for this is to encourage insurers that have not yet settled claims arising out of those catastrophic events to do so promptly so that New York can move on with the important task of rebuilding, knowing that the insurance money is in the bank and that money that could be used to rebuild the World Trade Center is not spent on forcing insurance companies to live up to their obligations.