Bad Faith Insurance Disclaimer After 16 Months: Roemer v Allstate in New York

Allstate’s Surprise Disclaimer: Insurance Bad Faith in Action

The Third Department’s decision in Roemer v Allstate Indemnity Insurance Co. provides a striking example of how an insurer’s conduct can rise to the level of bad faith under New York law. After 16 months of investigating a fire claim, paying benefits, and participating in the appraisal process, Allstate unexpectedly disclaimed coverage — raising serious questions about the covenant of good faith and fair dealing.

Roemer v Allstate Indem. Ins. Co., 2018 NY Slip Op 05392 (3d Dept. 2018)

The Legal Standard: Good Faith and Fair Dealing in Insurance

The court began by outlining the well-established legal framework for bad faith insurance claims in New York:

“A covenant of good faith and fair dealing is implicit in every insurance contract and encompasses not only any promise that a reasonable promisee would understand to be included, but also that ‘a reasonable insured would understand that the insurer promises to investigate in good faith and pay covered claims’” (New York Univ. v Continental Ins. Co., 87 NY2d 308, 318; Bi-Economy Mkt., Inc. v Harleysville Ins. Co. of N.Y., 10 NY3d 187, 194; see Gutierrez v Government Empls. Ins. Co., 136 AD3d 975, 976).

Consequential Damages and the Bad Faith Standard

The court also confirmed the availability of consequential damages:

“Consequential damages resulting from a breach of the covenant of good faith and fair dealing may be asserted in an insurance contract context, so long as the damages were within the contemplation of the parties as the probable result of a breach at the time of or prior to contracting” (Panasia Estates, Inc. v Hudson Ins. Co., 10 NY3d 200, 203; accord Yar-Lo, Inc. v Travelers Indem. Co., 130 AD3d 1402, 1403).

To establish a prima facie case of bad faith, the insured must demonstrate that the insurer’s conduct constituted “a gross disregard of the insured’s interests — that is, a deliberate or reckless failure to place on equal footing the interests of its insured with its own interests when considering a settlement offer” (Pavia v State Farm Mut. Auto. Ins. Co., 82 NY2d 445, 453; see Smith v General Acc. Ins. Co., 91 NY2d 648, 653).

Factors Courts Consider

In evaluating bad faith claims, courts will examine:

• Whether liability is clear
• Whether potential damages far exceed the insurance coverage
• Any other evidence tending to establish or negate the insurer’s bad faith in refusing to settle

The Facts: Allstate’s 16-Month Investigation and Surprise Disclaimer

The court rejected Allstate’s motion for summary judgment, finding the following timeline deeply problematic:

1. Day after the fire: Plaintiff submitted a standard fire claim form notifying Allstate of the loss
2. Investigation period: Allstate commenced an investigation and advanced $5,000 for debris removal
3. Fire cause determination: The Warren County Fire Investigation Office determined the fire was accidental — no dispute that the accident was covered
4. 12 months of benefits: Allstate paid plaintiff additional living expenses in accordance with the policy
5. Failed negotiations: Initial settlement negotiations proved unsuccessful, and plaintiff commenced the appraisal process
6. Appraisers agreed: In June 2011, both parties’ independent appraisers mutually agreed on the amount of loss
7. The surprise disclaimer: On July 1, 2011 — 16 months after plaintiff’s residence was destroyed by fire — Allstate unexpectedly disclaimed coverage on the basis that plaintiff did not have insurable interest in the property

Why the Court Denied Allstate’s Summary Judgment Motion

The court’s conclusion was pointed:

“We find that defendant failed to present any admissible evidence in support of its motion to explain why, after 16 months of investigation (see generally Insurance Law § 2601), it only disclaimed coverage after the parties’ independent appraisers had reached a mutual agreement as to the amount of loss incurred.”

At no point prior to paying plaintiff various benefits, or during settlement negotiations or the appraisal process, did Allstate ever indicate to plaintiff that coverage might ultimately be denied because he was apparently not the titled owner of the property — a fact of which plaintiff avers he made his insurance agent aware prior to purchasing the subject policy.

Practical Implications for Policyholders

This case underscores several important principles for policyholders and no-fault insurance defense practitioners:

• Insurers cannot string claimants along for months while paying benefits, then reverse course after the claims process nears resolution
• A 16-month delay in asserting a coverage defense — particularly one that could have been discovered at the outset — undermines summary judgment
• Policyholders should document all communications with insurers, especially representations about coverage
• The insured’s disclosure of relevant facts to the insurance agent before purchasing the policy is significant evidence against disclaimer

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