New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

Eliot Spitzer
Governor

Eric R. Dinallo
Superintendent

The Office of General Counsel issued the following opinion on February 7, 2008, representing the position of the New York State Insurance Department.

Re: Insurance Company Reserves

Questions Presented:

1. Must a liability insurer establish a reserve upon receipt of a liability claim?

2. Must a liability insurer effectuate settlements of claims in good faith when liability under the policy is shown to be clear?

Conclusions:

1. Yes. A liability insurer in New York is required to establish reserves for claims.

2. Yes. An insurer is required to effectuate settlement agreements in good faith.

Facts:

The inquiry is of a general nature, without reference to specific facts.

Analysis:

N.Y. Ins. Law § 1303 (McKinney 2006), which discusses the requirement of establishing reserves, is relevant to the inquiry. That statute reads in pertinent part as follows:

Every insurer shall, except as provided in section one thousand three hundred four 1 of this article and subject to specific provisions of this chapter, maintain reserves in an amount estimated in the aggregate to provide for the payment of all losses or claims incurred on or prior to the date of statement, whether reported or unreported, which are unpaid as of such date and for which such insurer may be liable, and also reserves in an amount estimated to provide for the expenses of adjustment or settlement of such losses or claims. (Emphasis added.)

Thus, by its very terms, Section 1303 of the Insurance Law requires that insurers maintain reserves for the payment of losses or claims and expenses, incurred on or prior to the statement date, whether reported or unreported. Reserves are funds created for the purpose of paying anticipated claims under insurance policies. In general, upon receipt of a claim, the insurance company will review the claim to establish whether there is a potential exposure that a claim will have to be paid. If there is liability, the insurer must establish an estimated reserve, in an amount that is adequate to fully settle the claim.

The inquirer’s second question asks whether an insurer is obliged to effectuate the prompt settlements of a claim. Insurance Law § 2601(a)(4) is relevant to the inquiry. It defines certain acts that constitute unfair claims settlement practices and prohibits insurers doing business in New York from engaging in such acts. The statute reads in pertinent part, as follows:

(a) No insurer doing business in this state shall engage in unfair claim settlement practices. Any of the following acts by an insurer, if committed without just cause and performed with such frequency as to indicate a general business practice, shall constitute unfair claim settlement practices:

….

(4) not attempting in good faith to effectuate prompt, fair and equitable settlements of claims submitted in which liability has become reasonably clear, except where there is a reasonable basis supported by specific information available for review by the department that the claimant has caused the loss to occur by arson. After receiving a properly executed proof of loss, the insurer shall advise the claimant of acceptance or denial of the claim within thirty working days; … (Emphasis added.)

Additionally, N.Y. Comp. Codes R. & Regs. tit. 11, Part 216 (2006) (Regulation 64) addresses unfair claims settlement practices and claim cost control measures of insurers doing business in New York. The preamble to Regulation 64, which is summarily set forth in N.Y. Comp. Codes R. & Regs. tit. 11, § 216.0(a), provides, in pertinent part, as follows:

(a) Section 2601 of the Insurance Law prohibits insurers doing business in this State from engaging in unfair claims settlement practices and provides that, if any insurer performs any of the acts or practices proscribed by that section without just cause and with such frequency as to indicate a general business practice, then those acts shall constitute unfair claims settlement practices. This Part contains claim practice rules which insurers must apply to the processing of all first- and third-party claims arising under policies subject to this Part….

Consequently, both Insurance Law § 2601 and Regulation 64 provide that an insurance company must effectuate a settlement promptly and in good faith when there is a reasonable basis for doing so.

For further information, you may contact Supervising Attorney D. Monica Marsh at the New York City office.

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1 Insurance Law §1304 provides that most insurers authorized to transact insurance under Insurance Law § 1113 must maintain reserves on all life insurance policies or certificates and annuity contracts in force; on disability benefits; and additional reserves as prescribed by the superintendent  as necessary on account of the particular insurer’s policies, certificates and contracts.