Monday, May 12, 2008

Second Citing of Bi-Economy

We have our second citing of the Bi-Economy holding. This one is a bit more intriguing than the first.

Hoffman v. Unionmutual Stock Life Ins. Co. of NY, (2nd Dept., decided 5/6/2008) appears to be a breach of contract action for denied disability insurance benefits. On defendant First Unum's separate motions, the lower court: (1) denied summary judgment based on First Unum's SOL defense; (2) granted that branch of First Unum's motion to dismiss the second and third causes of action of plaintiff's complaint insofar as they were premised on First Unum's alleged bad faith handling of the plaintiff's claim for disability insurance benefits; (3) granted the plaintiff leave to serve an amended complaint incorporating the allegations of bad faith into the first cause of action, premised on breach of contract; and (4) denied First Unum's motion to strike the portions of the amended complaint that alleged "bad faith".

In AFFIRMING the lower court's rulings in all respects, and without commenting on whether the "bad faith" allegations were added to support a claim for consequential damages, the Second Department somewhat cryptically stated:

Supreme Court was correct in allowing the allegations of bad faith to be incorporated in an amended complaint and in denying that branch of the appellant's motion which [sic] to strike those portions of the amended complaint (see Bi-Economy Mkt., Inc. v Harleysville Ins. Co. of New York, 10 NY3d 187; Panasia Estates v Hudson Ins. Co., 10 NY3d 200).

Although the Second Department does not cite to it, in 2001 the First Department in Acquista v. New York Life Ins. Co. held that a plaintiff insured could claim consequential damages from the defendant disability insurer for its alleged breach of its duty to investigate, bargain, and settle the plaintiff's claim in good faith to the amount specified in the insurance policy. To the extent that Acquista was the first decision in New York to court to recognize the recoverability of consequential damages for what some characterize as insurer "bad faith", the court's reasoning in Acquista is worthy of another look:

Plaintiff's fifth and sixth causes of action allege a pattern of bad faith conduct and unfair practices on the part of defendant insurer, and claim resulting emotional distress as well as economic and non-economic injury. The claim that defendant insurance company acted in bad faith is founded upon allegations that it undertook a conscious campaign calculated to delay and avoid payment on his claims, while having determined at the outset that it would deny coverage. He sets forth defendant's ongoing pattern of avoiding the claim, by which it would make multiple requests for additional documentation, upon receipt of which further documents would be demanded, after which plaintiff's claims file would then be transferred to a new examiner, who in turn would make more requests. Plaintiff adds that defendant waited more than two years to request or schedule an independent medical examination.

In seeking dismissal of the bad faith claim, defendant asserts that New York law does not recognize an independent tort cause of action for an insurer's alleged failure to perform its contractual obligations under an insurance policy, relying upon Rocanova v Equitable Life Assur. Socy. (83 NY2d 603) and New York Univ. v Continental Ins. Co. (87 NY2d 308).

It is correct that, to date, this State has maintained the traditional view that an insurer's failure to make payments or provide benefits in accordance with a policy of insurance constitutes merely a breach of contract, which is remedied by contract damages (citations omitted). Yet, for some time, courts and commentators around the country have increasingly acknowledged that a fundamental injustice may result when a traditional contract analysis is applied to circumstances where insurance claims were denied despite the insurers' lack of a reasonable basis to deny them (citations omitted).

Under the traditional analysis, because insurance policies are viewed as contracts for the payment of money only, the damages available for an insurer's failure to pay or provide benefits have been limited to the amount of the policy plus interest (citation omitted). Yet, an award, at the conclusion of litigation, of money damages equal to what the insurer should have paid in the first place, may not actually achieve the goal of contract damages, which is to place the plaintiff in the position he would have been in had the contract been performed (citation omitted).

Among other things, this concept of damages presumes that a plaintiff has access to an alternative source of funds from which to pay that which the insurer refuses to pay. This is frequently an inaccurate assumption. Additionally, an insured's inability to pay that which the insurer should be covering may result in further damages to the insured. Of course, limiting the potential damages to the policy amount also fails to address the potential for emotional distress or even further physical injury that may result where a plaintiff under the strain of serious medical problems is forced to also undertake the stress of extended litigation. What is more, if statutory interest is lower than that which the insurer can earn on the sums payable, the insurer has a financial incentive to decline to cover or pay on a claim (citation omitted).

In view of the inadequacy of contract remedies where an insurer purposefully declines or avoids a claim without a reasonable basis for doing so, a majority of states have responded to this need for a more suitable remedy by adopting a tort cause of action applicable to circumstances where an insurer has used bad faith in handling a policyholder's claim (citations omitted).

This cause of action is generally stated as a breach of the insurer's duty of good faith. Under this approach, where an insured demonstrates more than merely a denial of benefits promised under a policy of insurance, but instead, that the insurer's denial of the claim was deliberately made in bad faith, with knowledge of the lack of a reasonable basis for the denial, the insured may be entitled to compensatory tort damages. Other states, troubled by imposing upon insurance companies a tort duty in such circumstances, have instead expanded the scope of contract remedies to encompass more than just the policy limits. These courts have instead held that the contract damages available, where an insurer fails to pay benefits to which the insured was entitled, may include foreseeable money damages beyond the policy limit (citations omitted). While some states would exclude compensation for mental or emotional distress unrelated to physical injury, caused by the denial of a claim (citations omitted), others include the possibility of consequential damages for mental distress or aggravation and inconvenience (citations omitted). Of course, such non-economic losses would be compensable only in circumstances where they were a foreseeable result of a breach at the time the policy was entered into (emphasis added).

We are unwilling to adopt the widely accepted tort cause of action for "bad faith" in the context of a first-party claim, because we recognize that to do so would constitute an extreme change in the law of this State. (Emphasis added.) Essentially, we accept the more conservative approach adopted by the minority of jurisdictions that "the duties and obligations of the parties [to an insurance policy] are contractual rather than fiduciary" (citation omitted). However, as this Court has recently acknowledged, "an insured should have an adequate remedy to redress an insurer's bad faith refusal of benefits under its policy" (citation omitted). Providing such a remedy cannot be accomplished where a policyholder who makes out a claim of bad faith avoidance of a valid insurance claim may only obtain a judgment for the face amount of the policy.

Therefore, in order to ensure the availability of an appropriate and sufficient remedy, we adopt the reasoning of the Beck court that "there is no reason to limit damages recoverable for breach of a duty to investigate, bargain, and settle claims in good faith to the amount specified in the insurance policy. Nothing inherent in the contract law approach mandates this narrow definition of recoverable damages. Although the policy limits define the amount for which the insurer may be held responsible in performing the contract, they do not define the amount for which it may be liable upon a breach." (citation omitted)

We consider the need for this form of damages to be apparent. The problem of dilatory tactics by insurance companies seeking to delay and avoid payment of proper claims has apparently become widespread enough to prompt most states to respond with some sort of remedy for aggrieved policyholders. To term such a claim "unique to these parties" as the dissent does, and therefore not warranting a remedy beyond that traditionally available for an insurer's failure to pay on a claim, is to utterly ignore this fact.

As to the dissent's suggestion that the claim of bad faith is undermined by our finding that an issue of fact exists as to whether plaintiff is entitled to coverage at all, we must recall that we have before us a dismissal motion under CPLR 3211. Just as it may ultimately be found that plaintiff was entitled to coverage, it may also be found, as he alleges, that the insurer's delay, avoidance and ultimate rejection of the claim was based not upon a reasonable assessment of the situation but rather, solely upon its own financial self-interest. For this Court to say, in the context of a motion under CPLR 3211, that the denial of benefits was reasonable as a matter of law, is to reject out of hand plaintiff's factual assertions and to accept the facts as defendant insurer alleges them to be.

By the same token, the dissent's conclusion that plaintiff is partially to blame for the delay in the processing of his claim is inappropriate in the context of this motion, in which we are required to accept the facts as plaintiff alleges them to be. For all the foregoing reasons, while plaintiff's cause of action alleging bad faith conduct on the part of the insurer cannot stand as a distinct tort cause of action, we conclude that its allegations may be employed to interpose a claim for consequential damages beyond the limits of the policy for the claimed breach of contract.

The Second Department's decision in Hoffman will undoubtedly be heralded as the strongest signal yet that New York courts will permit insureds to assert "bad faith" claims or causes of action against their insurers. My professional colleague Kathy Burr, who argued Bi-Economy's position to the Court of Appeals, also believes Hoffman may be a sign that Bi-Economy is not going to be read as being limited to commercial fire insurance with business interruption coverage. I'm not so sure, and certainly won't and can't concede that interpretation just yet based solely on the Second Department's one-liner citation to Bi-Econony and Panasia in Hoffman.

To me, Hoffman is understandable in light of Acquista, in that both cases involved claims for disability insurance benefits. Not to be overlooked, as well, is the fact that the lower granted that branch of First Unum's motion to dismiss the second and third causes of action of plaintiff's complaint insofar as they were premised on First Unum's alleged bad faith handling of the plaintiff's claim for disability insurance benefits, i.e., the "bad faith" causes of action.

My reading of Bi-Economy, Panasia and Hoffman is that they do not create a new cause of action of insurer "bad faith" but merely permit insureds to assert claims for consequential damages that were foreseeable at the time of the policy's inception, where it can be and is alleged that the insurer breached its duty to act in good faith vis-a-vis the insured and her claim. In other words, these cases are not so much about an expanded theory of imposable liability as they are about an expanded theory of recoverable damages.

1 comment:

Heidi said...

It is "reasonably foreseeable" that any claim that is denied could result in the awarding of consequential damages when the insured sues the insurer and prevails. We all know it can take years to prepare for a trial. The insured can claim that they were unable to live in their house because they had no funds to repair it and thus, the ALE claim could far exceed the limit of liability for this coverage. Better yet, they could not afford to continue to pay the mortgage and pay rent at a temporary location. Maybe the mortgagee forecloses on the house. I can "foresee" a lot of different scenarios here.