Court Dismisses Bad Faith/Punitive Damages Claims Against Homeowners & CGL Insurers

HOMEOWNERS – CGL – UNDERLYING FALSE ARREST & IMPRISONMENT CLAIMS – BAD FAITH – PUNITIVE DAMAGES
Neff v. Automobile Ins. Co. of Hartford, CT
(SDNY, decided 2/20/2009)

Plaintiff was sued in New York Supreme Court for damages arising from his alleged filing of a false criminal complaint.  The complaint in the underlying action alleged that plaintiff "knew or should have known that the aforementioned arrest and imprisonment were false and without probable cause," "the aforesaid arrest was made without knowledge of and/or negligent and/or reckless disregard of the material falseness of the criminal complaint filed by [plaintiff]", and that plaintiff "knew, or should have known through the exercise of reasonable care and proper police procedure that the said investigation into this matter was flawed and incomplete[.]"

Plaintiff tendered the underlying complaint to his homeowners (Automobile Insurance Company of Hartford, CT) and CGL (Travelers) insurers for defense and indemnification coverage, but they disclaimed on various grounds not set forth in this decision.  Plaintiff then commenced this action for declaratory judgment and breach of contract.  In addition to seeking in excess of $100,000 in "consequential damages", plaintiff's complaint alleged that defendants' refusals to defend him in the underlying action were fraudulent and "so egregious, morally culpable, willful and wanton as to warrant the imposition of punitive damages in the minimum sum of $1,000,000."  Defendant insurers moved to dismiss the complaint's punitive damages claims pursuant to Fed. R. Civ. P. 12(b)(6).

The district court GRANTED the motion, dismissing the punitive damages claims.  Citing the New York Court of Appeals' seminal decision in New York Univ. v. Cont'l Ins. Co., 87 N.Y.2d 308 (1995), the district court reminded that ""the pleading elements required to state a claim for punitive damages as an additional and exemplary remedy when the claim arises from a breach of contract" are:

(1) defendant's conduct must be actionable as an independent tort; 

(2) the tortious conduct must be of the egregious nature set forth in Walker v. Sheldon, 10 N.Y.2d 401, 404-405; 

(3) the egregious conduct must be directed to plaintiff; and 

(4) it must be part of a pattern directed at the public generally.

In an effort to meet the Walker v. Sheldon pleading requirement, plaintiff's complaint alleged:

Defendants' disclaimer of coverage was without an arguable basis and was deliberately made in bad faith and with knowledge of the lack of a reasonable basis, since Hartford was a party to Automobile Ins. Co. of Hartford v. Cook, 7 N.Y. 3d 131, 850 N.E.2d 1152, 818 N.Y.S.2d 176 (2006), which held that Hartford is required to defend its insured in an action where it is alleged that the injury was caused by the negligent conduct of the insured, as negligent conduct is an "occurrence" as defined in the insurance policy.  Defendants' continued failure to defend their insureds against claims alleging negligent conduct, in spite of the holding in Cook, is part of a pattern of behavior aimed at the public generally.

In opposition to defendants' motion, plaintiff argued that "[d]efendants' continued disclaimer of coverage upon grounds previously rejected by the highest court is evidence of defendants' continued scheme to deny coverage to the public without any legitimate basis" constituting "a pattern of fraudulent behavior."

Apparently the district court granted plaintiff leave to amend his complaint prior to the issuance of this decision, but plaintiff decided not to do so.  In granting the defendants' motion, the district court held:

Plaintiff's allegations in this case that "Defendants' disclaimer of coverage was without an arguable basis and was deliberately made in bad faith and with knowledge of the lack of a reasonable basis," Compl. P 26, are equivalent to the allegations held to be insufficient to support punitive damages in New York University.  Plaintiff does not allege that Defendants made any misrepresentation or omission of material fact to support a claim for fraud or that Defendants' breached any other duty independent of their contractual obligations.

Plaintiff's bad faith allegations are inseparable from his contract claims[.]