Most insureds who sue to collect insurance benefits contend that the insurer has engaged in a breach of contract. The recent trend, however, has insureds increasingly alleging tort or statutory-based claims. These “bad faith” or “deceptive practices” claims are designed to obtain extra-contractual damages, such as the attorney fees incurred in establishing policy coverage. A survey of New York law indicates that three types of bad faith claims have been recognized, including excess verdict claims, disputed coverage claims, and statutory claims.
Excess Verdict Claims
The first and most traditional type of bad faith claim arises when:
(1) a liability policy requires the insurer to assume a duty to defend its insured against a third-party claim;
(2) the insurer assumes the duty to defend;
(3) the insured’s liability is clear;
(4) there is no dispute that the claim is covered under the policy;
(5) the potential amount of the verdict far exceeds the insurance coverage;
(6) the insurer recklessly fails to settle the claim within policy limits when there is an actual opportunity to do so; and
(7) the trier-of-fact issues a verdict against the insured for an amount of money that exceeds the policy limits.
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