Bi-Economy Burgles Into No-Fault

NO-FAULT – CONSEQUENTIAL DAMAGES – BREACH OF COVENANT OF GOOD FAITH & FAIR DEALING
Savino v. The Hartford
(Sup. Ct., Suffolk Co., decided 3/25/2009)

Judge Smith was so right. In his dissent in the New York Court of Appeals' February 2008 Bi-Economy Mkt., Inc. v Harleysville Ins. Co. of N.Y. 5-2 decision, he 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.

The definitions and distinctions of and between "bad faith" and "breach of the covenant of good faith and fair dealing", between punitive damages and consequential, compensatory or extra-contractual damages, have never been murkier in New York. And they just became even murkier.

Bi-Economy and its companion decision, Panasia Estates, were about the recoverability of consequential damages under first-party property insurance contracts. What Judge Smith characterized in his dissent as the majority's conceptual errors in misusing the terms"consequential damages" and "covenant of good faith" have predictably resulted in the migration of Bi-Economy's arguably inexact and ambiguous holding into disputes over disability insurance, commercial general liability insurance, environmental contamination liability insurance, and homeowners insurance. See, the Bi-Economy label, this blog.

Is it any surprise then that Bi-Economy has burgled into no-fault? No.

This matter involved a denial of no-fault benefits based on a pre-operative IME and post-operative peer review. Plaintiff sued Hartford for breach of contract. Her suit included demands for non-economic damages for her alleged pain and suffering due to Hartford's refusal to pay no-fault benefits for surgery costs, and punitive damages. Hartford moved for summary judgment, presumably to dismiss all but the complaint's breach of contract allegations and related contractual damages claims.

Accepting plaintiff's argument that the rule of Bi-Economy can apply to no-fault claims, and without any analysis of whether the alleged extra-contractual and compensatory damages were within the contemplation of the parties at the time the contract was formed, Suffolk County Supreme Court Justice Sandra Sgroi denied Hartford's motion as to the plaintiff's extra-contractual and compensatory damages claims, but granted it as to the complaint's punitive damages claims.

The court's analysis is limited to following paragraphs:

In this matter, the allegations of bad faith or fraud are not pled in a conclusory fashion nor is the complaint insufficient to support any cause of action against The Hartford (see, Batas v. Prudential Ins. Co. of America, 281 A.D.2d 260, 724 N.Y.S.2d 3). There is no allegation much less proof that the Plaintiff has exhausted her no fault benefits under the contract of insurance issued by the Hartford and that this would justify a denial of benefits to the Plaintiff by the Defendant (see, U.S. Fidelity & Guar. Co. v. Pressler, 158A.D.2d 419, 551 N.Y.S.2d 921 order reversed by 77 N.Y.2d 921, 569 N.Y.S.2d 597, 572 N.E.2d 38). In light of the decision in Bi-Economy Market, Inc. v. Harleysville Ins. Co. of New York (supra), a recovery for compensatory damages may be viable. The Court will, therefore, deny the motion to dismiss the compensatory damages claim with leave to renew, if warranted, after discovery in this action has been completed.

* * * * *

While the allegations in the complaint and the affirmation of the attorney for the Plaintiff do not allege either “wanton dishonesty as to imply a criminal indifference to civil obligations” on the part of the Defendant or that the salutary purposes of New York Insurance Law Article 51 are in danger of being undermined by the actions of the Defendant as required to support punitive damages (4 N.Y. Pract. Com. Litig. in New York State Courts § 60:22), the complaint and the papers submitted as part of this record do support a finding that The Hartford’s conduct was possibly a breach of good faith and fair dealing.

Since the complaint together with the exhibits submitted on this motion do not support the claim for punitive damages, the motion to dismiss that demand for relief must be granted. A review of the record does however support the claim for compensatory damages and the portion of the Defendant’s motion to dismiss the claim for extra-contractual damages must be denied.

Noticeably absent from the court's decision are: (1) what definition of the "[covenant of] good faith and fair dealing" the court used in determining that there "possibly" was a breach sufficient to support an award of consequential damages; and (2) whether and how pain and suffering damages from a denial of no-fault benefits were within the parties' contemplation when the plaintiff's New York personal auto policy, with its prescribed no-fault endorsement, was issued.

Even the majority in Bi-Economy recognized that before consequential damages from a breach of contract are recoverable, "such unusual or extraordinary damages must have been brought within the contemplation of the parties as the probable result of a breach at the time of or prior to contracting" and that "[t]o determine whether consequential damages were reasonably contemplated by the parties, courts must look to the nature, purpose and particular circumstances of the contract known by the parties ... as well as what liability the defendant fairly may be supposed to have assumed consciously, or to have warranted the plaintiff reasonably to suppose that it assumed, when the contract was made[.]"

New York no-fault is a statutory creature. It's mandatory. It provides coverage for basic economic loss. Basis economic loss is defined by statute (Insurance Law § 5102[a]) and is limited to $50,000. Premium rates for no-fault are mandated. Unlike voluntary or optional insurances and endorsements and their "bargained-for benefits", all New York personal auto insurers must afford BEL coverage under a prescribed policy endorsement up to $50,000 per person. Insurers and persons covered under such endorsements contemplate nothing at the time of policy formation or inception. The New York State Legislature and Insurance Department did that for them.

Moreover, under the majority's opinion in Bi-Economy, only consequential damages that are quantifiable are recoverable under a breach of the covenant of good faith and fair dealing theory. Are non-economic, pain and suffering damages quantifiable? Not in the sense the Bi-Economy majority spoke, they're not. Awarding pain and suffering damages to someone whose no-fault insurer denied basic economic loss benefits will not "put that party in as good a position as it would have been in had the contract been performed", a necessary legal predicate for the recoverability of consequential damages. For that reason alone, Justice Sgroi erred in denying Hartford's motion to dismiss plaintiff's claim for such damages.

Much more will be written and said about this decision and its impact on no-fault claims handling in New York. Some already has over at The Rogak Report and No-Fault Paradise.

If the New York courts don't understand the import and scope of the majority's opinion in Bi-Economy, how will juries? Have we reached the point in New York where what once were distinct theories of recovery -- breach of contract, negligence, etc. -- have now melded into a "bad, bad insurance company" standard of recovery in all coverage dispute actions, regardless of the nature and pre-contemplation of certain potentially consequential damages? Judge Smith was so right.

Post Script ~~  Hartford withdrew its appeal of this decision to the Second Department, so this decision will remain in place, unless and until a higher court disagrees with its holding.