When a policyholder feels their insurance claim has been mishandled or denied unfairly, pursuing recovery for the insurer’s bad faith is often front of mind. While many states recognize a common law and/or statutory cause of action for bad faith, the circumstances that constitute bad faith vary amongst jurisdictions.
As prescribed in The Rockefeller Univ. vs. Aetna Cas. & Sur. Co., et al.,[1] New York recognizes a claim for breach of the implied covenant of good faith and fair dealing – otherwise known as bad faith – involving three elements of proof: (1) the facts establishing the insurer’s bad faith conduct must be separate from the facts giving rise to the breach of contract claim, (2) the damages sought as a result of the insurer’s bad faith must be distinct from the damages sought in the breach of contract claim, and (3) the facts must demonstrate that the insurer grossly disregarded its policyholder’s interests.
New York policyholders can also recover damages under a lesser-known New York statute: New York’s General Business Law § 349(a) (“Section 349”). Section 349 prohibits “deceptive acts or practices in the conduct of any business, trade or commerce” within New York. Case law interpreting Section 349 has held that policyholders must satisfy three elements to sustain a private right of action: (1) the defendant’s deceptive acts must be directed at consumers, (2) the acts must be materially misleading, and (3) the plaintiff must have suffered a resulting injury.[2]
When addressing the viability of bad faith and Section 349 claims, New York courts often face difficult threshold questions regarding what makes bad faith sufficiently distinct from a breach of contract claim and what allegations illustrate that an insurer’s conduct is “directed at consumers” under the meaning of Section 349. The Rockefeller decision answers these questions.
The Rockefeller University (“Rockefeller”) sued Aetna Casualty & Surety Company, among other insurers (collectively, the “Insurers”), for breach of contract, bad faith, and violation of Section 349. In support of its bad faith claim, Rockefeller alleged that the Insurers adopted a “wait-and-see approach” to delay or avoid financial contributions to the underlying claims. Specifically, Rockefeller alleged that the Insurers failed to resolve claims stemming from the 2019 Child Victims Act promptly, ignored Rockefeller’s requests for decades-old policies, failed to issue coverage decisions, refused to pay any settlement of the underlying claims, refused to investigate the underlying claims properly, and pressured Rockefeller to discontinue insurance coverage litigation. As a result, Rockefeller alleged that it had to self-fund over $700M in settlements and defense fees with its endowment, that it lost investment opportunities and endowment income, and that it incurred additional debt and attorney’s fees to enforce its rights against the Insurers through insurance coverage litigation.
In support of its Section 349 claim, Rockefeller alleged that the Insurers’ “wait-and-see approach” violated the statute, as it damaged not only Rockefeller but potentially other policyholders, sexual abuse survivors, and the Insurer’s investors:
[The Insurers have] taken improper coverage positions and engaged in unjustifiable delays, which they improperly and without a good-faith basis purported to justify as interpretations of the same standard-form insurance policy language that, upon information and belief, [the Insurer Defendants] use in insurance policies sold to many other educational and hospital institutions in New York and elsewhere, in a manner that would affect, apply to, and injure all of their policyholders with similar policy language that suffer losses and bring coverage claims to [the Insurer Defendants] expecting fair and good-faith treatment.[3]
In response to the allegations, the Insurers moved to dismiss the bad faith claim, arguing that Rockefeller hadn’t alleged any conduct or damages distinct from its breach of contract claim. The Insurers also moved to dismiss the Section 349 claim, arguing that the alleged conduct was not “directed at consumers.” Instead, the Insurers argued that Rockefeller’s action amounted to a “private contractual dispute” between “sophisticated parties.” The trial court denied the Insurers’ motions to dismiss, and the Insurers appealed.
In affirming the trial court’s decision not to dismiss the bad faith claim, the Appellate Division made three key conclusions. First, Rockefeller’s allegations regarding the Insurers’ bad faith conduct were not duplicative of the breach of contract claim, as the bad faith claim focused on the Insurers’ claim-handling practices, whereas the breach of contract claim focused on the Insurers’ coverage obligations. Second, the damages that Rockefeller sought as a result of the Insurers’ bad faith were distinct from the damages sought via Rockefeller’s breach of contract claim, as Rockefeller alleged financial debts and expenses – such as its endowment and investment income losses – that extended beyond policy-related damages. Third, Rockefeller sufficiently pled facts demonstrating the Insurers’ gross disregard of Rockefeller’s interests, as Rockefeller pled with specificity that the Insurers employed a wait-and-see strategy to limit their financial exposure in disregard of Rockefeller’s financial exposure.
The Appellate Division also addressed the Insurers’ argument that the trial court erred in denying the motion to dismiss the Section 349 claim because Rockefeller’s allegations amounted to a “private contractual dispute” between “sophisticated parties” and because Rockefeller failed to allege a “consumer-oriented” impact as is required by Section 349. In affirming the trial court’s decision, the Appellate Division held that Rockefeller’s complaint “alleges a standard form policy provided to multiple consumers.” Specifically, Rockefeller convinced the court that the Insurers’ issuance of similar policies to “other educational and hospital institutions in New York” constituted a sufficient factual basis to sustain a claim alleging consumer-oriented misconduct.
The Rockefeller case provides meaningful takeaways for policyholders. First, Rockefeller enumerates specific criteria for policyholders who wish to plead a common law bad faith claim. Specifically, the case demonstrates that policyholders can survive a motion to dismiss a bad faith claim by alleging facts and damages that support bad faith distinct from a breach of contract claim. Policyholders are also more likely to survive dispositive motions when they allege facts demonstrating an insurer’s gross disregard for its policyholder’s interests. Second, the Rockefeller holding indicates that it is possible to maintain a Section 349 claim against an insurer even when the policyholder’s claim arises from an ostensibly “private” contract. Overall, Rockefeller confirms that New York policyholders are not limited to breach of contract claims when an insurer acts in bad faith.
For more information or questions, please contact Bethany L. Barrese at BBarrese@sdvlaw.com, or Michael A. Amato at MAmato@sdvlaw.com.
[1] Rockefeller Univ. v. Aetna Cas. & Sur. Co., et al., 231 A.D.3d 457 (1st Dept. 2024).
[2] See Vitolo v. Mentor H/S, Inc., 426 F. Supp. 2d 28, 34 (E.D.N.Y. 2006) (citing Oswego Laborers’ Local 214 Pension Fund v. Marine Midland Bank, N.A., 85 N.Y.2d 20, 25 (N.Y. 1995)).
[3] The Rockefeller Univ., 2023 WL 8522972, at *4 (N.Y. Sup. Ct. Dec. 08, 2023) (citing Rockefeller’s Second Amended Complaint at ¶ 145).