Wednesday, April 30, 2008

Fair Number of Questions on Fair Price Medical Oral Argument



If you've ever attended an oral argument of an appeal, you know that an assessment of "how it went" is sometimes gauged by the questions posed to respective counsel. With grateful appreciation to Coverage Counsel's two in-court observers and correspondents, Cheryl from AIG and Andre from Progressive, here's what they saw and heard this afternoon at the Court of Appeals in Albany:

Questions for Traveler's counsel (Appellant):
  • Did Travelers obtain an affidavit from the EIP? [No.]

  • Isn't it true that the EIP didn't speak English? [Yes, but an interpreter was used.]

  • What was with Travelers' use of a 200-question questionaire?

  • If the DMEs had been received, would Travelers have paid for them? [Yes.]

  • Where does it state that fraud is not subject to the 30-day preclusion rule? [BEL not incurred, therefore not "covered"; Insurance Law § 5109 and public policy require insurers to investigate fraud.]

  • Why didn't Travelers deny for 22 months? [It doesn't matter whether the denial is one day or 2 years late where the services or supplies have not been rendered.]
Questions for Fair Price Medical's counsel (Respondent):

  • Did Fair Price obtain an affidavit from the EIP? [No. Med providers are required only to prove the bill was mailed and not paid in order to make their prima facie case.]

  • Why shouldn't a defense of fraudulent billing be available to the insurer at any time? [If not discovered within 30 days, too bad.]

  • What recourse does a no-fault insurer have if it cannot deny a claim for fraud? [Insurer can commence a DJ action or sue for recovery.]
  • Wait, so if the provider sues for payment of the billings, the insurer can counterclaim for payment back? [Yes.]
Cheryl: "It is difficult to tell which way the judges will go on this." Andre: "It went better than I thought given the facts."

To one of the two observers, Judges Smith and Pigott seemed to be more skeptical of Fair Price's position, while Chief Judge Kaye seemed to be more bothered with Travelers' 22-month delay in denying coverage.

The Court of Appeals usually issues decisions in 4-6 weeks. Look for a decision on this case in that time frame. Any predictions?

June 5th -- Court of Appeals AFFIRMED. See Fair Price Medical -- Affirmed.

FOILed Again

CGL – LATE NOTICE – NO GOOD FAITH BELIEF IN NON-LIABILITY
Patti & Johnny's, Inc. v. United States Liab. Ins. Grp.
(Sup.Ct., Nassau Co., decided 3/27/2008)

Yogi Berra, the guru of all things baseball and insurance coverage related, once said that it's not over until it's over. In this case, USLIG's persistence paid off.

Bar fight. Delayed/late reporting. Disclaim coverage. DJ suit. Move to dismiss. Lose. FOIL the police file. Discover new evidence, contradictory to what the insured had said. Move to dismiss again. Win.

In Patti & Johnny's, Inc. v. United States Liab. Ins. Grp., 2008 NY Slip Op 31203(U)(Sup.Ct., Nassau Co., decided 3/27/2008), the court reversed its earlier decision and granted USLIG's renewed motion to dismiss the insured's DJ complaint. USLIG had lost its initial motion to dismiss the complaint based on the insured's late notice of a bar fight that had started inside its premises. Afterwards, USLIG made a FOIL (Freedom of Information Law) request for and received the police file, which had been unavailable during the pendency of the assailant's criminal prosecution. The police file contained witness statements and surveillance videos that directly contradicted the insured's professed belief that it had no reason to suspect liability as a result of that altercation, including a bartender's statement that he had asked the assailant to carry the injured patron out of the bar, where the beating continued.

In ruling in favor of USLIG on it renewed motion, the court noted that an insured' s reasonable belief in nonliability will excuse the delay in giving notice to an insurer in compliance with the notice provision of an insurance policy, but the insured has the burden of showing the reasonableness of such excuse and it may be relevant on the issue of reasonableness whether and to what extent, the insured has inquired into the circumstances of the occurrence. The "overwhleming evidence" from materials obtained after the intitial motion via the FOIL request showed "that a brutal assault on [the injured party] occurred both inside and outside the establishment and that the employee of [the insured] not only stood by silently, but in fact, participated to the extent that he asked [the assailant] to carry the victim outside the bar where he proceeded to continue the assault[.]" On these newly discovered facts, the court granted USLIG's motion to dismiss the insured's DJ complaint, holding that the evidence from the police file "render[ed] the belief of non-liabilty on the part of Patti and Johnny [the insured] nonsensical and absurd."

Tuesday, April 29, 2008

NYS Supreme Court System Map








For those who may never have seen a map of the four Appellate Division judicial departments and 12 judicial districts of the New York State Supreme Court system , here it is:

Late Notice of Occurrence -- 5-Month Delay Found Unreasonable

CGL – LATE NOTICE – 5-MONTH DELAY UNREASONABLE AS A MATTER OF LAW – NO GOOD FAITH BELIEF IN NON-LIABILITY
Kaesong Corp. d/b/a Feel Health Beauty Supply, Inc. v. United National Specialty Ins. Co.
(EDNY decided 4/24/2008)

In Kaesong Corp. d/b/a Feel Health Beauty Supply, Inc. v. United National Specialty Ins. Co., 2008 U.S. Dist. LEXIS 34254 (EDNY decided 4/24/2008), the court granted summary judgment to the United National, the GL insurer, holding that the insured's 5-month delay in reporting an accident with injury on the insured's property was unreasonable as a matter of law. A customer had fallen at the plaintiff insured's store on August 10, 2006. That same day, the store manager prepared a written report, which stated that the woman had fallen on her wrist and hit her head while in the store, two employees had assisted the woman following the fall, and that she had been taken by ambulance to a local hospital. The report also states that the woman told the employees that she had "lost her balance." The insured reported the accident to United National on January 8, 2007, approximately five months later, and United National disclaimed coverage on January 18, 2007 based on the insured's late notice.

In granting summary judgment to United National, the court note that "[f]ive months is an unreasonable amount of time to delay notification to an insurer of a potential claim." Citing to New York state court decisions, the court observed that the duty to give notice arises when, from the information available relative to the accident, an insured could glean a reasonable possibility of the policy's involvement. "The reasonableness of the belief does not turn on whether the insured believes he will ultimately be found liable for the injury, but whether he has a reasonable basis for a belief that no claim will be asserted against him." "New York courts have consistently found that knowledge that an injured person had to be taken from a store's premises by ambulance should indicate a reasonable possibility that an insurance policy might be implicated by that accident. "

Notably, the court found that because the insured had not submitted any evidence of further inquiry into its potential liability, the court could not accept the insured's claim that it had a reasonable belief in its nonliability. As Coverage Counsel has said before -- a good faith belief in non-liability is something active, not passive. It requires an actual belief, based on inquiry and determination, that no claim will be brought against the insured. Assuming that no claim will be brought simply because the insured hears nothing further will not satisfy most courts, including the Eastern District.

Monday, April 28, 2008

Late Notice of Occurrence -- 7-Month Delay Found Unreasonable

HOMEOWNERS – LATE NOTICE – 7-MONTH DELAY UNREASONABLE AS A MATTER OF LAW – NO GOOD FAITH BELIEF IN NON-LIABILITY
Tower Ins. Co. of New York v. Ubah
(Sup.Ct., New York Co., decided 4/14/2008)

In Tower Ins. Co. of New York v. Ubah, 2008 NY Slip Op 31133(U)(Sup.Ct., New York Co., decided 4/14/2008), the court granted summary judgment to Tower, holding that the insured's 7-month delay in reporting an accident with injury on the insured's property was unreasonable as a matter of law. The insured had learned of the accident on June 6, 2005, was served with a complaint on December 5, 2005, and notified her broker on January 12, 2006. Tower received the complaint on January 13, 2006 and issued a disclaimer on February 10, 2006. In her signed statement given to Tower's investigator, the insured had acknowledged that she had learned of the accident and that the claimant had been taken away by ambulance on the day it happened. She also knew that a fire truck had shown up and that later that day someone had come by to take pictures of the scene.

In noting that the "issue is not whether the insured believes he will ultimately be found liable for the injury, but whether he has a reasonable basis for the belief that no claim will be asserted against him" (emphasis added), the court held that the insured's subjective belief that a claim would not be made against her, standing alone, was insufficient to exempt her from the notice requirement of the policy. The court found no extenuating factors which could have been associated with a reasonable belief that a plaintiff would not assert a claim, such as where there is no indication of injury or no defect at the accident site.

The court summarily rejected as "not supported by case law" the insured's further argument that Tower's 28-day delay in issuing its disclaimer was unreasonable.

Under the law of the First Department, a good faith belief in non-liability is an actual belief that no claim will be asserted, rather than the converse, viz, a lack of any belief that a claim will be made. This is an important distinction that should be made in investigating and assessing late notice situations and potential coverage defenses.

Corporation Not a "Person" For Purposes of Wrongful Eviction PI Coverage

CGL – PERSONAL & ADVERTISING INJURY COVERAGE – WRONGFUL EVICTION OF "PERSON"
47 Mamaroneck Ave. Corp. v. Hartford Fire Ins. Co.
(2nd Dept. decided 4/22/2008)

In 47 Mamaroneck Ave. Corp. v. Hartford Fire Ins. Co., 2008 NY Slip Op 03585 (2nd Dept. decided 4/22/2008), the 2nd Department affirmed the lower court's award of summary judgment to the insurer, finding that a corporation was not a "person" for purposes of the CGL policy's personal injury coverage for "wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling or premises that a person occupies, committed by or on behalf of its owner, landlord or lessor". The insured plaintiff had sought the costs of defending a suit brought by a former commercial tenant, Rent-a-Center, Inc., which had alleged in the underlying action that the insured and its president had "embarked on a plan of harassment and coercion with the intention of causing RAC to terminate its leasehold," which included "[t]respassing upon [RAC's] premises and interfering with RAC's business by appearing, unannounced, accompanied by Fire Department personnel and the City Building Inspector...to solicit or elicit non-existent fire code violations." Noting that although the term "person" was not defined in the CGL policy, the definition of "personal and advertising injury" in the policy distinguished between "person" and "organization" and that defamation of a "person or organization" was included in the definition, while the wrongful eviction and wrongful entry language was limited to "the right of private occupancy of a room, dwelling or premises that a person occupies[.]" Since Rent-a-Center was not a natural person, any invasion of its leasehold was not covered by the definition of "personal and advertising injury" under the policy.

The court also rejected the insured's argument that Hartford failed to disclaim in a timely fashion, correctly noting that New York Insurance Law § 3420 only applies to death or bodily injury claims. Moreover, in this case, no disclaimer was necessary because the underlying claim against the insured did not fall within the policy's insuring terms, i.e., no coverage by reason of lack of inclusion.

Sunday, April 27, 2008

Good Faith Belief in Non-Liability -- Late Notice Excused

CGL – LATE NOTICE – GOOD FAITH BELIEF IN NON-LIABILITY
North Country Ins. Co. v. Jandreau
(3rd Dept. decided 4/24/2008)

In North Country Ins. Co. v. Jandreau, 2008 NY Slip Op 3552, 2 (3rd Dept. decided 4/24/2008), the 3rd Department affirmed the lower court's denial of summary judgment to the plaintiff insurer based on its late notice defense. Although defendant GC knew a roofing subcontractor's employee had broken his leg and later had surgery after having fallen off a roof, defendant did not report the accident to his insurer until approximately one year later when he was served with a summons and complaint. The relevant provision of the policy stated that "[i]n case of an occurrence or if you become aware of anything that indicates there might be a claim under this policy, you must give us or our agent notice . . . as soon as practicable."

In this case, the defendant explained that he did not contact his insurer because the injured employee was working for the subcontractor and under the subcontractor's control and supervision at the time of the accident. The subcontractor had provided proof of liability and workers' compensation coverage prior to commencing work, and informed defendant on the day of the accident that it was submitting a claim to its insurer. Defendant did not hear from the injured worker or anyone on his behalf from the date of the accident until defendant was served with the pleadings in the underlying action. He further believed that there was no liability because the injured worker was acting contrary to his own advice, and presumably that of the worker's supervisor, that no one go on the roof. Despite owning a construction company for 12 years, defendant had never been sued for a construction site injury and was thus unfamiliar with the nuances of liability. Defendant notified plaintiff the same day that he was served process.

Under the circumstances, and in light of the preference for permitting a jury to decide the question of reasonableness, the 3rd Department held that Supreme Court did not err in denying plaintiff's motion for summary judgment.
Intentional Act Not an "Occurrence" -- No Duty to Defend or Indemnify

HOMEOWNERS – "OCCURRENCE" – INTENTIONAL ACT – ASSAULT
Desir v. Nationwide Mut. Fire Ins. Co.
(3rd Dept. decided 4/24/2008)

In Desir v. Nationwide Mut. Fire Ins. Co., 2008 NY Slip Op 3578, 1 (2nd Dept. decided 4/22/2008), the 2nd Department ruled that Nationwide was not obligated to defend or indemnify its insured because the assault alleged in the underlying action was an intentional act, which did not constitute an "occurrence" within the meaning of the policy at issue. The court also noted that the inclusion in the underlying complaint of causes of action sounding in negligence and alleging carelessness did not alter the fact that "the operative act giving rise to any recovery is the assault".

Forum Shopping for No-Fault Dollars f/k/a Determining Venue

NO-FAULT – MEDICAL PROVIDER SUIT – VENUE – NEW YORK CITY CIVIL COURT ACT § 305(b)
Tribeca Med., P.C. v Dollar Rent A Car
(NYC Civil, Richmond Co., decided 4/22/2008)

Any competent and honest no-fault litigator would have to admit that certain forums are regarded as being more favorable to medical provider assignees and less friendly to insurers than others. Or sometimes its just a matter of forum conveniens to plaintiff's counsel. Any medical provider litigator who does not at least consider the potential advantage of commencing as many no-fault recovery actions as possible in the most favorable forum would be doing the client a professional disservice.

In Tribeca Med., P.C. v Dollar Rent A Car, 2008 NY Slip Op 50812(U) (NYC Civil Court, Richmond County, decided 4/22/2008), defendant moved to change venue from Richmond County, where plaintiff's counsel's office was located, to Kings County and Queens County where the plaintiff's assignors lived. Although defendant correctly pointed out that NYCCCA § 305(a) provides that if "the plaintiff is an assignee of the cause of action, the original owner of the cause of action shall be deemed the plaintiff for the purpose of determining proper venue", Richmond Civil Court Judge Katherine Levine denied the motion based on NYCCCA § 305(b), which provides that "a corporation...shall be deemed a resident of any county wherein it transacts business, keeps an office, has an agency or is established by law."

Adopting the "more liberal construction that must be accorded to venue rules," Judge Levine ruled that under CCA § 305, there need not be a nexus between the cause of action in issue and the business transacted by the corporation in that particular county. In cases of insurer defendants, proof of the issuance of policies, collection of premiums, and forwarding of invoices and other correspondence has been deemed sufficient "transaction of business" within a county to support venue. Plaintiff submitted only one page from Verizon's Staten Island Yellow Pages and defendant did not address the "transacts business" standard of CCA § 305(b), making it "impossible" for the court to assess whether defendant transacted business in Richmond County. Because the defendant had not carried its burden of establishing that plaintiff's forum choice was improper, the court denied the defendant's motion to change venue.

So it's one thing to venue in Richmond County a matter that arguably should have been brought in Queens or Kings. How proper or fair can it be, however, to venue an Erie County loss with an Erie county assignor, Erie County treatment, an Erie County assignee, and an Erie County IME doctor in Kings County or New York County? What's up with that? Can that be anything other than unabashed forum shopping?

Fair Price Medical -- Oral Argument Scheduled at Court of Appeals

The long awaited oral argument at the Court of Appeals of the 2nd Department's decision in Fair Price Medical Supply Corp. v. Travelers Indem. Co. is scheduled for Wednesday, April 30, 2008. In Fair Price, the 2nd Department upheld the lower court's ruling that fraudulent no-fault billings (DMEs never delivered or supplied) is not a lack of coverage defense and, thus, must be included in a timely NF-10. At stake in this appeal are millions of dollars in bills for no-fault services or supplieds that either were not rendered or were rendered to people who were not really injured in either real accidents or staged events. Coverage Counsel expects to have an observer in court to report how oral argument went.

One would have thought the logic as being straightforward and self-evident: the no-fault endorsement provides reimbursement "for basic economic loss sustained by an eligible injured person on account of personal injuries caused by an accident", BEL which by definition includes health service benefits, lost earnings and other necessary expenses. Even the greenest coverage attorney knows that something not covered by reason of lack of inclusion cannot implicate waiver, estoppel or statutory preclusion. If there has been no BEL "sustained", such as the non-delivery of DMEs, there can be no coverage obligation -- not because of the appplicability of an exclusion or breach of condition subsequent to coverage, but because the facts (and non-existence of covered services or expenses) do not trigger coverage in the first place. Similarly, if there has been no "accident", PIP coverage does not lie, again not because of the appplicability of an exclusion or breach of condition subsequent to coverage, but because the insuring agreement of the PIP endorsement has not been triggered. The New York courts have repeatedly and correctly noted this tenet of insurance coverage in 3rd-party liability coverage cases, and yet seem to have overlooked it in the no-fault claim context, instead focusing slavishly on the 30-day pay or deny rule of Insurance Law § 5106(a) and the ever-expanding legacy of the Court of Appeals' decisions in Presbyterian Hosp. in City of N.Y. v. Maryland Cas. Co., 90 NY2d 274 (1997) and Central Gen. Hosp. v. Chubb Group of Ins. Cos., 90 NY2d 195 (1997).

Fair Price continues to cause consternation in the courts. Recently, Judge William A. Viscovich of Queens Civil in Northern Medical P.C., a/a/o Jose Rodriguez, v. State Farm Mut. Auto. Ins. Co., 2008 NY Slip Op 50753U, 2008 N.Y. Misc. LEXIS 2030 (NY City Civ. Ct., Queens Co., 3/19/08), in "regretfully" awarding judgment to the plaintiff, wistfully observed:

Unfortunately, the only issue which this court may address under Fair Price is whether there was a lack of coverage as contended by defendant on the basis that the alleged July 31, 2002 accident was "staged". Any testimony by Rodriguez regarding his treatment or lack thereof is being used by the court solely as evidence as to whether the loss in question resulted from an actual "covered" accident or arose from a staged collision. Any evidence that Mr. Rodriguez was not treated as claimed by the plaintiff provider or was treated to a lesser extent than claimed, has relevance only to the extent that common sense dictates that it is less likely that the participants in such a "staged" collision would actually receive treatment than in a true accident. It also follows that the alleged victim of a "staged" accident would be less likely to actually accept the risk of real injury arising from an unnecessary course of treatment (Keep in mind that this court does concede that a real injury may arise from a staged accident, but does not believe this to be the case herein).

What distresses the court is that while the defendant was not able to meet its burden of proof as to a "staged accident", there was credible evidence of provider fraud. While a full trial on that issue may reveal that there was no fraud and that services were in fact rendered, the holding in Fair Price assures that neither the court nor the defendant are able to delve further into that issue. The end result is that this court is put in the potential position of having to make an award to a possibly unethical provider.

This is exactly the concern expressed by Justice Joseph Golia in his dissent in the Appellate Term rendering of Fair Price Medical Supply Corp. a/a/o Nivelo v. Travelers Indemnity Company, 9 Misc 3rd 76 [ App. Term, 2nd & 11th Jud. Dists. 2005], in which the majority decision was upheld by the Appellate Division in the Fair Price decision that controls herein. Like Justice Golia, this court is "under the firm and unshakable belief that neither the Legislature nor the Insurance Department ever intended for an insurance carrier, or anyone else for that matter, to be forced to pay for medical equipment [or in this case, medical treatment] that was never provided "(Fair Price, supra, dissent at 82). But, alas, that is the potential outcome all but acknowledged by both the Appellate Term and Appellate Division Fair Price holdings.

It's time for the Court of Appeals to re-read its seminal decision in Zappone v. Home Ins. Co., 55 NY2d 131 (1982) and apply its principle to fraudulent no-fault billings. Not rendered. Not covered.

Saturday, April 26, 2008

Fourth Department Coverage Decisions -- April 25, 2008

UM COVERAGE – VENUE OF ARBITRATION HEARING
Matter of the Arbitration Between Erie Ins. Co. and Malcolm
(4th Dept. decided 4/25/2008)
The venue of an uninsured motorists coverage arbitration may not be held more than 100 miles from the insured's residence.
In Matter of the Arbitration Between Erie Ins. Co. and Malcolm, the court granted the insurer's CPLR article 75 petition to change the venue of the insured UM arbitration from Kings County to Erie County. In originally granting the insured's request to change the venue from Erie County to Kings County, the AAA arbitrator violated that AAA's own rule that an arbitration hearing may not be held more than 100 miles from an insured's residence. The insured's listed residence was in West Seneca, Erie County.

SUBROGATION – WAIVER OF SUBROGATION
American Motorists Ins. Co. v. Louis Ciminelli Construction Co.
(4th Dept. decided 4/25/2008)
In American Motorists Ins. Co. v. Louis Ciminelli Construction Co., the court affirmed the lower court's granting of summary judgment to the general contractor and sprinkler system subcontractor based on the waiver of subrogation provision of the general contract. The court also rejected the subrogating insurer's contention that the waiver of subrogation provision does not apply to postconstruction losses.

CGL – COINSURANCE – ADDITIONAL INSURED – PRIORITY OF COVERAGE
B.F. Yenny Construction Co. v. OneBeacon Ins. Grp.
(4th Dept. decided 4/25/2008)
In B.F. Yenny Construction Co. v. OneBeacon Ins. Grp., the court ruled that the lower court erred in relying on construction subcontract language rather than the language of the two insurance policies to determine the priority of coverage between those policies. Pursuant to the "other insurance" and "method of sharing" provisions of those policies, both One Beacon (which insured the GC as an additional insured) and Selective (which insured the GC as a named insured) were found obligated to provide primary coverage and to share equally in the costs of the GC's defense and indemnification in the underlying action.

CGL – GARAGE LIABILITY POLICY – "YOUR CUSTOMERS" – WHO IS AN "INSURED"
Graphic Arts Mutual Ins. Co. v. Russell
(4th Dept. decided 4/25/2008)
In Graphic Arts Mutual Ins. Co. v. Russell, the court affirmed the lower court's ruling that Graphic Arts Mutual was obligated to defend and indemnify defendant who was test driving a vehicle owned by the plaintiff's car dealership insured. The Graphic Arts garage liability policy excluded by definition from coverage customers of the dealership who had liability insurance of at least mandatory minimum limits. The court rejected Graphic Arts Mutual's argument that the defendant was its named insured dealership's "customer", holding that the defendant, who had had no contact with the dealership and transacted no business with the dealership, could not be construed to fall within the "[y]our customers" language of the garage liability policy.

Consequential Damages

COMMERCIAL PROPERTY -- BUSINESS INCOME LOSS COVERAGE -- CONSEQUENTIAL DAMAGES

Bi-Economy Market, Inc. v. Harleysville Ins. Co. of NY
10 N.Y.3d 187 (Ct. Apps. decided 2/19/2008)


Extracontractual damages aren't what they used to be.

On February 19, 2008, the New York Court of Appeals decided a pair of first-party property insurance cases that some have since touted as portending expanding vistas of "bad faith" litigation against insurers in New York.

In Bi-Economy Market, Inc. v. Harleysville Ins. Co. of NY, the 5-2 majority reversed the lower courts' dismissal of the insured's claim for consequential damages allegedly due to the insurer's delay in paying policy benefits. Relying on pre-existing but mostly non-insurance case law, the Court of Appeals held that

in light of the nature and purpose of the insurance contract at issue, as well as Bi-Economy's allegations that Harleysville breached its duty to act in good faith, we hold that Bi-Economy's claim for consequential damages including the demise of its business, was reasonably foreseeable and contemplated by the parties, and thus cannot be dismissed on summary judgment.

To the majority, "the very purpose of business interruption coverage would have made Harleysville aware that if it breached its obligations under the contract to investigate in good faith and pay covered claims it would have to respond in damages to Bi-Economy for the loss of its business as a result of the breach." The Court rejected the insurer's argument that the policy's "consequential loss" exclusion applied to negate coverage for the insured's alleged consequential damages.

In his dissent, Judge Smith opined that the majority's ruling effectively and erroneously re-labels punitive damages as consequential damages, and a "bad faith" failure to pay a claim as a "breach of the covenant of good faith and fair dealing." Judge Smith warned:

The majority's bad policy choice is more important than the flaws in its reasoning. This attempt to punish unscrupulous insurers will undoubtedly lead to the punishment of many honest ones. Under today's opinions, juries will decide whether claims should have been paid more promptly, or in larger amounts; whether an insurer who failed to pay a claim did so to put pressure on the insured, or from legitimate motives, or from simple inefficiency; and whether, and to what extent, the insurer's slowness and stinginess had consequences harmful to the insured. All these very difficult, often nearly unanswerable, questions will be put to jurors who will usually know little of the realities of either the insured's or the insurer's business. The jurors will no doubt do their best, but it is not hard to predict where their sympathies will lie.

The result of the uncertainty and error that the majority's opinions will generate can only be an increase in insurance premiums. That is the real "consequential damage" flowing from today's holdings.

In the companion case of Panasia Estates, Inc. v. Hudson Ins. Co., the same 5-2 majority affirmed the lower courts' denial of the insurer's motion for partial summary judgment dismissing the plaintiff's claims for consequential damages. Relying on its decision in the Bi-Economy Market case, the majority noted that "consequential damages resulting from a breach of the covenant of good faith and fair dealing may be asserted in an insurance contract context, so long as the damages were 'within the contemplation of the parties as the probable result of a breach at the time of or prior to contracting[.]'" Unlike in the Bi-Economy Market case, however, the Panasia Estates water damage claim was denied in its entirety due to the asserted applicability of one or more policy exclusions. In remanding the case back to Supreme Court, however, the Court of Appeals observed that the lower courts "failed to consider whether the specific damages sought by Panasia were foreseeable damages as the result of Hudson's breach", suggesting that there was not enough information in the record before the Court of Appeals to determine whether the consequential damages Panasia was alleging to have suffered were within the contemplation of the parties when the particular insurance policy at issue incepted.

Some commentators, including this one, believe that the Bi-Economy ruling allowing claims for consequential damages to proceed to triers-of-fact must be limited to insurance claims under commercial property policies that afford business interruption or business income loss coverage. However, Judge Smith's dissent in Bi-Economy pointed out that the Panasia Estates case involved no business interruption coverage.

Numerous signals in Bi-Economy -- including the majority's explicit reference to "the very purpose of business interruption coverage" -- would seem to indicate that its holding will support consequential damage claims only under commercial property insurance policies that afford business interruption or business income loss coverage. In his opinion for the majority, Judge Piggot explained that in "determin[ing] whether consequential damages were reasonably contemplated by the parties [and thus recoverable in a subsequent breach of contract action], courts must look to 'the nature, purpose and particular circumstances of the contract known by the parties[.]'" Having recognized that the nature and purpose of business interruption coverage in a commercial property insurance policy contemplates and is to protect against the loss of business, it is somewhat understandable that the majority concluded that Bi-Economy's claim for the "complete demise of its business" was within the contemplation of the parties at the time the insurance policy incepted.

It remains to be seen whether the Bi-Economy Market and Panasia Estates rulings will be extended to losses and claims arising under other than commercial property insurance policies. In my office we have already seen insureds' counsel seek to assert consequential damage claims in: (1) a late notice declaratory judgment action; (2) no-fault benefits recovery suits; and (3) a homeowners' policy first-party breach of contract suit. If and when we obtain or learn of written decisions addressing the scope of Bi-Economy Market and Panasia Estates, we will re-publish them here.

Meanwhile, to avoid the potential sting of consequential damages -- which by their nature are extracontractual -- in all first-party losses insurers should:

  1. ask and document whether and, if so, the insured is taking steps to mitigate the loss and return as quickly as possible to pre-loss status;
  2. use advance payment on condition of reservation of rights forms in offering and making advance payments; and
  3. pay what you believe you owe, as soon as you determine such amount is owed, and regardless of whether there is yet an agreement or settlement on numbers in place with the insured.

Coverage Counsel has learned that Harleysville has filed a motion to reargue this case to the Court of Appeals. It won't be until late May or early June that we'll know the outcome of that motion.