New York law recognizes a claim against insurance companies for breach of the implied covenant of good faith and fair dealing, specifically where the insurance company’s handling of a claim frustrates the policy’s purp
ose and results in damages beyond the mere failure to pay policy proceeds. In such circumstances, an aggrieved policyholder may recover consequential damages arising from the bad faith breach so long as it alleges: (1) the consequential damages flowed naturally and proximately from the breach; (2) the d
amages were, or reasonably should have been, foreseeable; and (3) the damages were within the reasonable contemplation of the parties when the insurance company sold the policy.
Although prior case law implied that New York permits bad faith claims in the third-party liability context, the Southern District of New York recently made that rule explicit in Renergy, Inc. v. Mt. Hawley Ins. Co., No. 25-CV-5073, 2026 WL 1192415 (S.D.N.Y. May 1, 2026). Following this decision, polic
yholders may pursue bad faith claims and seek consequential damages for bad faith claims handling of third-party coverage claims. The decision reinforces insurance companies’ accountability and confirms that claims for such damages are valid under New York law.
In Renergy, plaintiff Renergy, Inc. sued Mt. Hawley Insurance Co. for its handling of a pollution claim covered under a Site-Specific Environmental Liability Insurance Policy sold by Mt. Hawley. While investigating the claim, Mt. Hawley retained an outside consultant to review Renergy’s invoices and eventually adopted the consultant’s conclusions. Subsequently, R
energy alleged that Mt. Hawley adopted the consultant’s determinations without sufficient independent analysis and issued duplicative, burdensome document requests that resulted in Mt. Hawley’s partial denial of coverage. As a result, Renergy sought consequential damages incurred from vendors’ liens, late fees and penalties, and lost opportunities to sell the property due to those liens.
Bad Faith Claims in New York Are Not Limited to First-Party Insurance Claims
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After failed attempts to settle Renergy’s breach of contract and bad faith claims against Mt. Hawley for its handling of Renergy’s insurance claim, Renergy moved to amend its complaint to clarify and add facts to its bad faith claim.
Mt. Hawley opposed the motion, arguing that the bad faith claim should be denied because New York does not recognize bad faith claims for third-party liability policies. The court rejected this argument, holding that bad faith claims are cognizable under New York law in both first-party and third-party coverage contexts.
Although Renergy relied on cases involving first-party bad faith claims, the court explained that those decisions did not “announce[] a categorical rule that bad faith claims handling claims” are unavailable outside that context. The court also found the third-party case cited by Mt. Hawley inapp
osite, as summary judgment there turned on insufficient factual allegations to sustain a bad faith claim. Furthermore, the court pointed to a 2024 decision denying dismissal of a third-party coverage bad faith claim, confirming that adequately pled third-party bad faith claims could survive a motion to dismiss under New York law.
