Monday, December 21, 2009

Return to Panasia Estates -- First Department Holds that Bad Faith Not Needed for Recovery of Consequential Damages Against Insurer

Panasia Estates, Inc. v. Hudson Ins. Co.
(1st Dept., decided 12/15/2009)

Since February 2008, when the New York Court of Appeals issued its groundbreaking, 5-2 decisions in Bi-Economy Mkt., Inc. v. Harleysville Ins. Co. of N.Y., 10 NY3d 187 (2008) and Panasia Estates, Inc. v. Hudson Ins. Co., 10 NY3d 200 (2008), first-party insurance litigants and commentators have debated whether, under the rulings of those decisions, an insured must allege and prove that its insurer acted in "bad faith" in denying payment of first-party property insurance benefits in order to recover consequential damages for the allegedly wrongful denial of coverage or inadequate payment.

In Panasia Estate's first return to the Appellate Division since the Court of Appeals issued its decisions, the First Department, Appellate Division, has now answered that question in the negative, holding that a claim for consequential damages against an insurer does lie absent bad faith.

Panasia Estates brought this action to recover insurance proceeds it alleged were due from its commercial property insurer, Hudson Insurance Company, in connection with losses Panasia allegedly sustained when rain infiltrated the roof of its building while repairs were being undertaken to the roof.  At the lime of the loss, Panasia had a property insurance policy in effect with Hudson that included builders risk coverage.  After the loss, Hudson allegedly investigated and denied Panasia's claim, having determined that the loss was excluded as having been the result of repeated water infiltration over time and wear and tear rather than a risk covered under the builders risk provisions of the policy.  In its original complaint, Panasia alleged that Hudson had breached its insurance contract and engaged in bad faith dealings in conducting its investigation of the loss and reaching its conclusion that the policy did not cover Panasia's loss.  Panasia contended that it was entitled to the amount it claimed as losses under the policy, the additional, reasonably foreseeable costs and expenses it incurred as a result of Hudson's alleged bad faith breach of the insurance contract, and legal fees Panasia had incurred.

In 2006, Hudson moved for partial summary judgment; “...dismissing all of Plaintiff's bad faith allegations and all prayers for consequential, extra-contractual, or incidental damages or attorneys [sic] fees[.]”  New York County Supreme Court Justice Karen Smith granted Hudson's motion only to the extent of precluding Panasia from asserting any claims for legal fees incurred in the prosecution of its action, and in 2007 the First Department unanimously affirmed, holding:
An insured may recover foreseeable damages, beyond the limits of its policy, for breach of a duty to investigate, bargain for and settle claims in good faith (Acquista v New York Life Ins. Co., 285 AD2d 73 [2001]). The court's denial of defendant's application to dismiss plaintiff's claims for consequential damages from the alleged breach of such a duty was proper. Defendant has not shown that the proffered exclusion for "consequential loss" was an applicable provision under this policy.  "Consequential loss" and "consequential damages" are not synonymous, as suggested by defendant.
The First Department granted Hudson leave to appeal to the Court of Appeals, and in a 5-2 decision, the Court of Appeals affirmed, holding:
The courts below properly rejected Hudson's contention that it was entitled to judgment as a matter of law because consequential damages are not recoverable in a claim for breach of an insurance contract. As we explained in Bi-Economy Mkt., Inc. v Harleysville Ins. Co. of N.Y. (10 NY3d 187 [2008] [decided today]), 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' " (at 192, quoting Kenford Co. v County of Erie, 73 NY2d 312, 319 [1989]). Here, the courts below failed to consider whether the specific damages sought by Panasia were foreseeable damages as the result of Hudson's breach. Because the record before us is not fully developed on that issue, such claim must be considered by Supreme Court.
Following the Court of Appeals' decision in February 2008, Panasia moved to amend its complaint to add a separate cause of action for consequential damages based on Hudson's alleged breach of contract.  Although New York Supreme Court Justice Milton Tingling granted Panasia's motion, in referring to and interpreting the Court of Appeal's Bi-Economy ruling, Justice Tingling's decision stated that "[t]hese type of damages are to be called consequential damages and are triggered solely by a breach of contract in bad faith."

Both Panasia and Hudson appealed to the First Department, which REVERSED the order appealed from and denied Panasia's motion for leave to amend it complaint as duplicative and unnecessary:
Plaintiff is correct in arguing that the motion court erred by stating that consequential damages do not lie for breach of an insurance contract absent bad faith, since the determinative issue is whether such damages were "within the contemplation of the parties as the probable result of a breach at the time of or prior to contracting" (Bi-Economy Mkt., Inc. v Harleysville Ins. Co. of N.Y., 10 NY3d 187, 192 [2008] [internal quotation marks and citation omitted]; see Panasia Estates, Inc. v Hudson Ins. Co., 10 NY3d 200, 203 [2008]). However, the motion to amend the complaint should not have been granted since the breach of contract claim that plaintiff sought to add was duplicative of its existing claim for breach of the implied covenant of good faith (see Canstar v Jones Constr. Co., 212 AD2d 452, 453 [1995]). Furthermore, contrary to defendants' contention, plaintiff's claim for consequential damages in its cause of action for breach of the implied covenant of good faith was not insufficiently pled. The reference to such damages as "special" in Bi-Economy Mkt. (10 NY3d at 192) was not intended to establish a requirement of specificity in pleading.
Two points can be drawn from the First Department's most recent decision:
  1. At least in the opinion of the First Department, it is not necessary for an insured to allege or prove "bad faith" in order to recover consequential damages against its insurer.
  2. The alleged consequential damages need not be specifically pled in a complaint to state a claim for such damages.  
It is interesting to this coverage attorney to note that yet undecided in this case is "whether the specific [consequential] damages sought by Panasia [in this action] were foreseeable damages as the result of Hudson's breach", a determination the Court of Appeals expressly directed Supreme Court to make.  In his March 2009 decision, Justice Tingling procedurally sidestepped that determination: 
The awarding of these damages are [sic] not before the court at this time.  In the case at bar Plaintiff is moving to amend the Complaint to assert a cause of action for consequential damages under the aforementioned holdings.  There is no need for the court to examine whether  the claim will be successful at this juncture or whether same is viable.  The court simply decides whether the plaintiff meets its burden in demonstrating that its proposed amended pleading is sufficient under the current state of the law.
Presumably left for another day and another motion is the question of whether the specific consequential damages Panasia seeks in this action -- the particularization of which can be obtained via various discovery mechanisms -- are viable as "foreseeable damages", i.e., were within the contemplation of Panasia and Hudson at the inception of the insurance policy on which Panasia has sued.  In my opinion, those who would argue that Panasia Estates stands for the general proposition that consequential damages are recoverable in all types of insurance policy contexts regardless of the coverages afforded and types of consequential damages claimed, would be grossly overreading the Court of Appeals' holding in this case.  In light of the Court of Appeals' explicit direction to Supreme Court in its Panasia Estates ruling, the decision of any court that has not made that required threshold determination -- whether consequential damages were foreseeable as being within the contemplation of the insured and insurer at the inception of the policy-- is arguably defective and subject to being upset on appeal.


Roy A. Mura said...

Michael Zicherman, the attorney who represents Panasia Estates in this case, sent me the following email late Monday evening, which I am posting in the interest of providing Coverage Counsel readers with his perspective on this ruling:


Overall a fair treatment of the decision. If I am reading your summary correctly, though, I don't necessarily agree with your overall conclusion. Pursuant to the various decisions, consequential damages are legally available as a remedy in all types of insurance policy contexts. The courts are viewing such disputes as straightforward breach of contract cases. However, whether they are recoverable in any case will be dependent upon the specific facts and circumstances of each particular case. As for Panasia, Judge Tingling did not sidestep the issue of foreseeability, since the issue was never before him.

Generally, foreseeability is a factual issue to be determined by the trier of fact, and in this case, discovery still has not been completed, making it unripe for determination by the court.

Stay tuned. There are many interesting legal issues between Panasia and Hudson and, I suspect, more appeals are yet to come.

-- Michael

Michael S. Zicherman, Esq.
Peckar & Abramson, P.C.
70 Grand Avenue
River Edge, NJ 07661
direct dial: 201.441.4992
phone: 201.343.3434
fax: 201.343.6306

Thanks for logging in, Michael. We will stay tuned and watch for further developments in this case.

Roy A. Mura said...

And here is my response to Michael Zicherman:

Thank you for your email, Michael.

In my opinion, some NY state and federal courts have already misapplied the rulings of Bi-Economy and Panasia Estates to find consequential damages recoverable without making the necessary analysis of whether they were within the parties’ contemplation at the time of contracting. Take the Suffolk County Supreme Court’s March 2009 decision in Savino v. The Hartford, for example, in which the court denied Hartford’s motion for summary judgment dismissing plaintiff’s non-economic pain and suffering damages claim allegedly consequent from Hartford’s wrongful denial of no-fault benefits. Even on a CPLR 3211(a)(7) motion, the court must determine whether a particular claim is legally viable. Courts have been stopping at the “consequential damages are now recoverable against insurers” part without considering, as I believe they should, whether the particular insurance contract at issue contemplated such damages. Judge Piggott seemed to think that the question of whether specific, consequential damages sought were foreseeable damages as the result of an insurer’s breach is an issue for the court’s determination. I agree. In his Bi-Economy majority opinion, Judge Piggott wrote:

To 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'[.]"

If judges have a hard time understanding the limits of the Bi-Economy and Panasia Estates rulings, how will juries? Just as it can be in negligence cases, this legal question of foreseeability is a threshold issue for the court’s determination, in my opinion, not the jury’s. If the court determines that the damages were foreseeable, then the jury gets to decide the amount plaintiff has proven and recovers.

I expect you’ll probably disagree with some of this, but I respect the job you’ve already done for your client. I’ll be watching this and the other Bi-Economy/Panasia Estates progeny for further appellate developments.

Happy Holidays.


Roy A. Mura said...

And Zicherman's slightly edited reply back to me:


I do not mind at all. I am not familiar with the case you cite, and thus, not sure whether I would agree or disagree with the decision. However, I do agree with you that the issue of foreseeability is critical and an insurer should not be held accountable for damages that were not reasonably foreseeable (i.e., considered by the parties). The question becomes, when is it procedurally appropriate to determine that question. In my view, it will vary, depending on the facts of each case. There may be certain instances in which the court can make the determination as a matter of law at the inception of the case on a pre-answer motion to dismiss, based on the nature of the damages claimed and the type of policy at issue. Other times, it may not be until a post-NOI motion for summary judgment is filed, where the insurer can argue that the insured cannot meet its burden of proof that such damages were reasonably foreseeable. And still other times, like negligence cases, the issue of foreseeability will become a factual issue for the jury to determine (hence the PJI on foreseeability). In this regard, the Court of Appeals in Bi-Economy was able to make the determination as a matter of law on the facts before it, overruling the lower courts. The issue was never before the lower court in Panasia and thus not before the Court of Appeals because at the time this legal issue arose, we had not yet articulated the various damages claimed. Another interesting issue that I am sure will start to creep into future decisions, though, is whether particular damages are direct (arising proximately from the breach of the insurance contract) or whether they are consequential.


-- Michael