Kings Supreme Denies Dismissal of Claim for Bad Faith Denial of SUM Claims

AUTO – SUM – BAD FAITH DENIAL OF CLAIM
Grinshpun v. Travelers Cas. Co. of Conn.
(Sup. Ct., Kings Co., decided 3/11/2009)

The three plaintiffs were involved in a car accident on July 31, 2004. The owner and driver of the car that hit plaintiffs had a GEICO policy with $25,000 per person and $50,000 per accident liability coverage limits.  GEICO tendered the full policy to plaintiffs, who accepted with the approval of their own SUM insurer, Travelers.

The Travelers policy included "Supplementary Uninsured/Underinsured Motorist" (SUM) coverage with $100,000/$300,000 policy limits. Plaintiffs were "covered persons" under the terms of the policy.  Plaintiffs Dimitry Grinshpun and Sergio Rovner alleged they suffered injuries which entitled them to the full $100,000 SUM coverage each under Rovner's policy held with Travelers.  Plaintiff Anna Rovner asserted she was entitled to full coverage of $100,000, as she suffered loss of consortium resulting from the injuries sustained by her husband.

Apparently Travelers did not believe plaintiffs' claims were worth the GEICO policy limits and denied payment to them on their SUM claims.  The decision does not reveal the exact basis of Travelers' declination to pay SUM benefits, but there does not appear to have been any denial of coverage.  Plantiffs commenced this action , each seeking $100,000 in SUM benefits.  In addition to seeking payment of SUM coverage benefits, plaintiffs' complaint alleged that Travelers' refusal to pay SUM benefits was not made in good faith and further sought a judgment "awarding damages" in the sum of $1,000,000 each, plus interest, costs and disbursements of bringing this action.

Travelers moved to dismiss plaintiffs' "bad faith" cause of action and disqualify plaintiffs' counsel from representing the plaintiffs.  Travelers argued that plaintiffs' complaint failed to allege the necessary factual predicates, such as that Travelers acted with "gross disregard" in refusing to settle or pay plaintiffs' claims, to support an insurer "bad faith" claim.  According to the decision, plaintiffs countered that "although this specific cause of action has not yet been recognized in New York, the law is evolving in this area and this court should permit the action to go forward to permit Plaintiffs to seek relief in excess of the policy limits."

In denying Travelers' motion to dismiss the "bad faith" cause of action, Kings County Supreme Court Justice Wayne Saitta relied on the New York Court of Appeals' 1967 decision in Sukup v. State of New York, noting: 

Plaintiffs are seeking damages in excess of the policy limits due to Defendant's alleged breach of its duty under the policy to exercise good faith in paying Plaintiffs' SUM claims.This claim differs from the situation where an insured seeks damages where the insurer refuses to settle a tort action against the insured within the policy limits and the insured is subjected to a judgment in excess of the policy limits. Here Plaintiff seeks extra contractual damages for a denial of a first party claim, not for being exposed to further liability to a third party. Also, this is not a claim for punitive damages as Plaintiffs seek to be compensated for the cost of having to commence a lawsuit to enforce their claim, not to punish the Defendant for its alleged bad faith. 

Despite Plaintiffs' assertion that this is a novel legal theory, the Court of Appeals in Sukup v. State of New York, 19 NY2d 519, 281 NYS2d 28 (1967), established that there is a cause of action for extra contractual damages where an insurer refuses, in bad faith, to pay a claim of its own insured. 

In Sukup, the Court determined that a viable cause of action could be maintained for "extra-contractual damages" from an insurer's bad faith denial of coverage, even though in the case before it, plaintiff did not demonstrate that the insurer denied his worker's compensation coverage in bad faith. 

The Sukup Court held that while an insured cannot recover his legal expenses in a controversy with a carrier over coverage merely because the carrier is held responsible for the loss, or where the dispute is an arguable difference of opinion, it can recover such costs where the denial is made in bad faith. 

The Court of Appeals set forth the standard required in order to prevail on such a claim, holding, "It would require more than an arguable difference of opinion between carrier and insured over coverage to impose an extra contractual liability for legal expenses in a controversy of this kind. It would require a showing of such bad faith in denying coverage that no reasonable carrier would, under the given facts, be able to assert it". Id. at 522. 

The court also cited and relied on several other New York state and federal court decisions which appear to have followed the ruling of the Court of Appeals in Sukup and sustained pleaded claims (but not recoveries) for attorneys' fees and costs of bringing a declaratory judgment or breach of contract action where it is alleged that the insurer denied coverage in bad faith.  Justice Saitta, however, declined to apply the consequential damages rule of the Court of Appeals in the Bi-Economy and Panasia Estates cases:

In the case at bar, Plaintiffs do not allege that they suffered any damages as a consequence of Defendant's bad faith refusal to pay their claims other than the costs associated with having to commence a legal action to enforce their claims. Such damages are not consequential damages that were contemplated by the policy as in the situations in Bi-Economy and Panasia.

However, the expanded recognition of recovering foreseeable consequential damages of Bi-Economy and Panasia did not disturb the Court's recognition in Sukup of a cause of action for the costs of a suit to enforce a claim by an insured where its insurer denies a claim in bad faith.

The motion before the Court is to dismiss for failure to state a cause of action pursuant to CPLR §3211, not for summary judgment. Therefore in deciding this motion the Court does not consider whether Plaintiffs will in fact be able to establish that the insurer acted in bad faith in denying their claims.

One could argue that the court erred in relying on Sukup and its progeny to deny Travelers' CPLR Rule 3211(a)(7) motion to dismiss the bad faith claim. Sukup and the other cases cited have some distinguishing features.  Nevertheless, the decision in this case can and should be considered to be limited to two points: (1) if a complaint alleges that an insurer denied coverage in bad faith, it probably will withstand a motion to dismiss a claim for attorneys' fees and costs related to the commencement and prosecution of the action; and (2) recoverable damages for such an alleged bad faith denial of coverage, if proven, are limited to the legal expenses -- attorneys' fees and costs -- of bringing the action to enforce the insureds' coverage rights. 

Travelers should and probably will move for summary judgment to dismiss the bad faith cause of action following the completion of discovery.  Some quick research failed to uncover any reported New York cases in which Sukup damages -- attorneys' fees and costs of bringing the coverage lawsuit -- have actually been awarded.  In fact, in all the cases cited by Justice Saitta in his decision in this case, Sukup damages were ultimately denied based on the courts' findings that each of the insurers' coverage denials was based on an "arguable difference of opinion".  Although dismissal motions directed to the complaint may not succeed on this limited theory of recovery and type of damages, establishing that the insurer had an "arguable basis" for its disclaimer or denial of coverage should be possible on a motion for summary judgment.