New York Court Confirms Viability of Bad Faith Claims against Liability Insurers
By David A. Gauntlett*
Introduction
Every jurisdiction in America recognizes the validity of bad faith claims against insurers in the context of first-party coverage (i.e., a policy for when the insured is the injured party). Unfortunately, a minority of jurisdictions have decided these protections do not extend to policies providing third-party coverage (i.e., a policy for when the insured causes the injury).[1] This despite foul play being just as common in that context. A recent New York case has explicitly ruled that New York coverage law falls within the majority, concluding that bad remedies are available for both policy types.
Renergy, Inc. v. Mt. Hawley Ins. Co.
The case, Renergy Inc. v. Mt. Hawley Insurance Co.,[2] arose from a dispute over coverage under a site-specific environmental liability insurance policy. After a pollution incident at Renergy’s Ohio facility in December 2022, the company sought approximately $1.56 million in corrective-action costs that it claimed were covered under the policy. Mt. Hawley retained a consultant to review the claim but ultimately paid only a small portion of the requested amount. Renergy alleged that the insurer engaged in bad-faith claims handling by making repetitive document requests, relying excessively on its consultant’s analysis, changing coverage positions after years of claim activity, and accusing the insured of intentional wrongdoing without adequate support. As a result, Renergy claimed consequential damages, including liens from unpaid vendors, penalties, and lost business opportunities.
When Renergy sought leave to amend its complaint to strengthen its bad-faith allegations, Mt. Hawley argued that amendment would be futile because New York law limits bad-faith claims to first-party insurance, the bad-faith claim merely duplicated the breach-of-contract claim, and the alleged consequential damages were inadequately pleaded. The court rejected all three arguments. First, it held that New York’s bad-faith doctrine is not confined to first-party insurance and may apply in the third-party liability context as well. Relying in part on Rockefeller University v. Aetna Casualty & Surety Co.,[3] the court concluded that bad-faith claims handling can constitute a viable standalone cause of action regardless of the type of coverage involved.
The court further held that a bad-faith claim is not duplicative of a breach-of-contract claim when it is based on misconduct extending beyond the mere failure to pay policy benefits. Allegations concerning inadequate investigation, unreasonable claims practices, shifting coverage positions, and misleading statements were sufficiently distinct to support an independent claim. Finally, the court reaffirmed that consequential damages may be recoverable even when not expressly mentioned in the insurance contract, provided they were foreseeable. Questions about foreseeability, the court explained, generally require factual development and should not be resolved at the pleading stage.
Importance in the Broader Context of Insurance Law
Renergy is significant because it strengthens policyholder remedies under New York insurance law and builds upon the foundation established by Bi-Economy Market Inc. v. Harleysville Insurance Co. of New York[4] and Panasia Estates Inc. v. Hudson Insurance Co..[5] Those earlier decisions recognized that insurers may be liable for consequential damages arising from breaches of the duty of good faith and fair dealing. Renergy extends that principle by rejecting the common insurer argument that such remedies are limited to first-party coverage disputes. In doing so, the decision clarifies that insurers handling liability claims may face similar exposure for unfair or dilatory conduct.
The decision also reflects a broader trend in New York courts toward increased scrutiny of insurer claims-handling practices. By recognizing that burdensome information requests, inadequate investigations, “wait-and-see” strategies, and unsupported coverage positions can form the basis of independent liability, the court emphasizes that insurers’ obligations extend beyond simply making payment decisions. The ruling signals that the claims process itself must be conducted in good faith and that insurers cannot avoid responsibility by delegating claim review to third-party consultants.
More broadly, Renergy may influence future litigation involving a wide range of insurance products, including directors-and-officers, cyber, and professional liability policies. The case reinforces the principle that insurance is intended to provide meaningful protection at the time of loss and that unreasonable delays or unfair claims practices can create compensable harms beyond the policy limits. As a result, Renergy is likely to serve as an important precedent for policyholders seeking damages caused by insurer misconduct and for courts evaluating the scope of bad-faith liability in New York.
Some States Apply Different Standards for First- vs. Third-Party Bad Faith Claims
In Gruenberg v. Aetna Ins. Co.,[6] the California Supreme Court first extended the concept of “bad faith” to first-party cases.
It is manifest that a common legal principle underlies all of the foregoing decisions; namely, that in every insurance contract there is an implied covenant of good faith and fair dealing. The duty to so act is immanent in the contract whether the company is attending to the claims of third persons against the insured or the claims of the insured itself. Accordingly, when the insurer unreasonably and in bad faith withholds payment of the claim of its insured, it is subject to liability in tort.[7]
The term “genuine dispute” did not emerge as a label until nearly a decade later in Safeco Ins. Co. v. Guyton.[8] The modern and most cited articulation of the rule comes from Chateau Chamberay Homeowners Ass'n v. Associated Internat. Ins. Co.:
[A]n insurer denying or delaying the payment of policy benefits due to the existence of a genuine dispute with its insured as to the existence of coverage liability or the amount of the insured's coverage claim is not liable in bad faith even though it might be liable for breach of contract.[9]
By contrast, California courts have determined that the test for third-party bad faith is a “reasonableness” standard.[10]
Conclusion
Given the different views on third-party bad faith claims in various jurisdictions, it is promising to see New York definitively join the majority in acknowledging the existence of such claims. Further litigation will reveal whether New York will recycle the same tests used for first-party claims or apply a distinct standard as California courts have done.
*David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. Mr. Gauntlett can be reached at (949) 514-5662 or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.
[1] For example, Tennessee passed Tenn. Code Ann. § 56-8-113 which states it ““shall provide the sole and exclusive statutory remedies and sanctions applicable to an insurer, person, or entity licensed, permitted, or authorized to do business under this title for alleged breach of, or for alleged unfair or deceptive acts or practices in connection with, a contract of insurance.” However, it does not “create or imply a private cause of action for a violation of this part,” thus leaving insurers with no actionable ways to push back for bad faith handling of a third-party claim since Tennessee does not recognize a common law tort of bad faith. Watry v. Allstate Prop. & Cas. Ins. Co., No. M2011-00243-COA-R3-CV, 2011 Tenn. App. LEXIS 692, at *11 (Ct. App. Dec. 28, 2011) (“Tennessee does not recognize a general common law tort for bad faith by an insurer against an insured.”)
[2]Renergy, Inc. v. Mt. Hawley Ins. Co., No. 25-CV-5073 (AT) (KHP), 2026 LX 220845 (S.D.N.Y. May 1, 2026).
[3]Rockefeller Univ. v. Aetna Cas. & Sur. Co., 2023 NY Slip Op 34294(U) (Sup. Ct.).
[4]Bi-Economy Mkt., Inc. v. Harleysville Ins. Co. of N.Y., 10 N.Y.3d 187 (2008).
[5]Panasia Ests., Inc. v. Hudson Insurance Co., 10 N.Y.3d 200 (2008).
[6]Gruenberg v. Aetna Ins. Co., 9 Cal. 3d 566 (1973).
[7]Id. at 375.
[8]Safeco Ins. Co. v. Guyton, 692 F.2d 551, 557 (9th Cir. (Cal.) 1982).
[9]Chateau Chamberay Homeowners Ass'n v. Associated Internat. Ins. Co., 90 Cal. App. 4th 335, 347 (2001).
[10]My Choice Software, LLC v. Travelers Cas. Ins. Co. of Am., No. SACV 19-680 JVS (KESx), 2021 U.S. Dist. LEXIS 59763, *20 (C.D. Cal. Mar. 17, 2021) (“The Court agrees with MyChoice and finds that the genuine dispute doctrine is inapplicable in third party cases such as this one because a third party insurer, such as Travelers, ‘must defend a suit which potentially seeks damages within the coverage of the policy.’”) (quoting Gray v. Zurich Ins. Co., 65 Cal. 2d 263, 275 (1966)); Teleflex Med. Inc. v. Nat’l Union Fire Ins. Co., 851 F.3d 976, 988, n.3 (9th Cir. (Cal.) 2017) (“[O]ur court and several California appellate courts have expressed skepticism about [the ‘genuine dispute’ doctrine’s] applicability to ‘third party claim’ cases like this one.”). Public Serv. Mut. Ins. Co. v. Liberty Surplus Ins. Corp., 205 F. Supp.3d 1161, 1175 (E.D. Cal. 2016) (The court noted a different test is required because “‘[t]here are material differences in the purposes of first party insurance policies (that obligate the insurer to pay damages claimed by the insured itself) and third party insurance policies (that obligate the insurer to defend, settle and pay damages claimed by a third party against the insured).’” (quoting Howard v. American Nat'l Fire Ins. Co.,187 Cal. App. 4th 498, 530 (2010)).