OGC Op. No. 11-04-01

The Office of General Counsel issued the following opinion on April 21, 2011, representing the position of the New York State Insurance Department.

Re: Requiring a Third-Party Claimant to Execute a Release

Question Presented:

May an insurer require a third-party claimant to execute a release before the insurer will pay a settled claim?

Conclusion:

Yes. There is nothing in the New York Insurance Law or regulations promulgated thereunder that prohibits an insurer from requiring a third-party claimant to execute a release before the insurer will pay a settled claim, as long as the release comports with § 216.6(g) of N.Y. Comp. Codes R. & Regs. tit. 11, 216 (2003) (Regulation 64), which prohibits the insurer from requiring execution of a release on a first or third-party claim that is broader than scope of the settlement.

Facts:

The inquirer states that he owns a home in New York and that a person accidentally drove an automobile onto his property, thereby damaging landscaping on his property. The inquirer states that the driver acknowledged that he or she was 100% at fault and the driver’s insurer, ABC Insurance Company (“ABC”), agreed to pay for the damage to the inquirer’s landscaping. However, ABC requests that the inquirer sign a release before it will compensate the inquirer for the property damage.

The inquirer states that he does not wish to sign ABC’s release and that he believes that ABC has a legal obligation to pay his third-party claim without a release. Therefore, the inquirer asks whether ABC may require him to execute a release before ABC will pay his settled claim.

Analysis:

Claimants and insurers often resolve disputes through settlement. Settlement is most commonly achieved through a binding contract in which a party with a potential legal claim is compensated in exchange for executing a release or covenant not to sue. See 1 Dunham, New Appleman New York Insurance Law, Second Edition § 7.02[1][b] (Matthew Bender). By settling, a party achieves finality, avoids the time and costs of litigation or arbitration, and eliminates the risk of an adverse judgment in litigation or arbitration. See id.

While there is nothing in the Insurance Law or regulations promulgated thereunder that requires an insurer to use a release in settlement of a third-party claim, there is also nothing that prohibits it. As stated previously, an insurer often requires a third-party claimant to execute a release when settling a claim to achieve finality and ensure that the third-party claimant will not subsequently sue the insured. Thus, an insurer may require a third-party claimant to execute a release before the insurer will pay a settled claim as long as the release comports with 11 NYCRR § 216.6(g), which prohibits the insurer from requiring execution of a release on a first or third-party claim that is broader than the scope of the settlement.

For further information, you may contact Senior Attorney Joana Lucashuk at the New York City Office.