Insureds' Deceptive Acts and Practices Claim Against Their Homeowners Insurer Survives Motion to Dismiss. Broad Discovery Ordered.

HOMEOWNERS – INSURED'S OBLIGATION TO PROTECT INSURER'S SUBROGATION RIGHTS – GENERAL BUSINESS LAW § 349 – PUNITIVE DAMAGES – ATTORNEY'S FEES – DISCOVERY
Wilner v. Allstate Ins. Co.
(2nd Dept., decided 1/12/2010)

New York property insurers better sit up and pay attention to this decision.  In combination with the erosion of other longstanding common law rules regarding bad faith and consequential damages, this decision augurs poorly for avoiding expansive claims and expansive discovery in traditional first-party, breach of contract actions. Trouble is now spelled W-I-L-N-E-R.

Allstate insured the Wilners under a Deluxe Plus Homeowners' Policy.  On October 8, 2005, while that policy was in effect, a storm allegedly caused a hillside on the plaintiffs' property in the Village of Roslyn, New York, to collapse, destroyed their retaining wall, felled several trees, and caused other damage.  The Wilners' policy contained a fairly standard provision regarding protecting Allstate's subrogation rights:

When we pay for any loss, an insured person's right to recover from anyone else becomes ours up to the amount we have paid. An insured person must protect these rights and help us enforce them. You may waive your rights to recover against another person for loss involving the property covered by this policy. This waiver must be in writing prior to the date of loss.

The Wilners submitted a claim for coverage to Allstate, which they alleged Allstate deliberately refused timely to decide, forcing them to commence a lawsuit against the Village before the applicable statute of limitations expired in order to protect Allstate's potential subrogation interests.  In September 2007, the Wilners also commenced this lawsuit against Allstate, alleging in three, separate causes of action:

(1)  that Allstate breached the contract by refusing to pay the amounts due to them under their policy of insurance;

(2)  the Allstate breached the contract by refusing to provide them with a defense after the Village instituted criminal proceedings against them for damage to Village property which resulted from the collapse;

(3)  that Allstate violated New York General Business Law § 349 by deliberately refusing to reach a timely coverage decision, thereby compelling the plaintiffs to comply with the policy's provision concerning protecting Allstate's subrogation rights and sue the Village at their own expense; plaintiffs alleged that the Allstate's actions "caused injury to Plaintiffs, and have the potential to harm the public at large" because every Allstate Deluxe Plus Homeowners' Policy contains the provision requiring those insureds to protect Allstate's right to subrogate.  On this case of action plaintiffs sought the recovery of actual and punitive damages and attorney's fees. 

Allstate moved under CPLR 3211(a)(7) to dismiss the second and third causes of action of plaintiffs' complaint, contending that the plaintiffs had failed to allege consumer-oriented conduct, that any act by the defendant was deceptive or misleading in a material way, and that they had been injured as a result of an allegedly deceptive act. In addition, Allstate asserted that the insurance policy did not require an insured to file a lawsuit against anyone, and no reasonable policy holder would conclude that it did.

Plaintiffs opposed Allstate's motion and cross-moved to compel Allstate to provide full, unredacted versions of relevant computer notes, and documents and information pertaining to other claims filed under the Deluxe Plus Homeowners' Policy resulting from the October 2005 storm.

In an order entered October 7, 2008, Nassau County Supreme Court ordered Allstate to:

"produce in camera all property damage claims under the Allstate Deluxe Plus Homeowners Policy for damages resulting from a rain and/or wind storm which occurred on or about October 7, 2005 in Nassau County as well as all claims that resulted in litigation, such documents being limited to property damage claims between October 7, 2005 to January 7, 2007 in Nassau County only."

By order to show cause returnable December 8, 2008, Allstate sought leave to reargue, asserting, among other things, that the order went beyond the scope of the relief sought by the plaintiffs in their cross motion.  Allstate claimed that the plaintiffs sought information regarding claims under the Deluxe Plus Homeowners Policy, while the court's order compelled production of all property damage claims arising from the storm at issue. Allstate claimed that the requirements of the court's October 2008 order were onerous.

In an order entered January 21, 2009, Nassau County Supreme Court granted that branch of Allstate's motion which sought dismissal of the second cause of action. The court denied those branches of the defendant's motion which were pursuant to CPLR 3211(a)(7) to dismiss the third cause of action alleging a violation of General Business Law § 349, and to dismiss the demand for punitive damages and attorney's fees, stating that, "at this stage of the proceedings, it [could not] determine that Plaintiffs' cause of action under [General Business Law] § 349 is insufficient as a matter of law."  The court granted the plaintiffs' cross motion to compel discovery.  Allstate appealed.

In AFFIRMING the denial of Allstate's motion to dismiss plaintiffs' General Business Law § 349 cause of action, Justice Dickerson, writing for the Second Department, noted:

The types of goods and services to which General Business Law § 349 applies is expansive. With regard to matters pertaining to insurance, it has been determined to apply to:

Coverage & Rates (see Gaidon v Guardian Life Ins. Co. of Am., 94 NY2d 330 ["out-of-pocket premium payments [for life insurance policies] would vanish within a stated period of time"]; Monter v Massachusetts Mut. Life Ins. Co., 12 AD3d 651 [allegations of misrepresentations concerning terms of Flexible Premium Variable Life Insurance Policies, and deception concerning marketing thereof]; Beller v William Penn Life Ins. Co. of N.Y., 8 AD3d 310 [plaintiff stated General Business Law § 349 cause of action by alleging that the defendant engaged in deceptive practices by increasing the cost of insurance rates without regard to certain flexible factors which would have required the raise to decrease]; Skibinsky v State Farm Fire & Cas. Co., 6 AD3d 975 [allegations of intentional misrepresentation concerning coverage of a insurance policy provided to plaintiff]; Brenkus v Metropolitan Life Ins. Co., 309 AD2d 1260 [amount of life insurance coverage]; Batas v Prudential Ins. Co. of Am., 281 AD2d 260; Makastchian v Oxford Health Plans, 270 AD2d 25 [allegations of deceptive practices that would cause subscribers to believe that they still had health insurance when coverage had already been cancelled]);

Provision Of Defense Counsel (see Elacqua v Physicians' Reciprocal Insurers, 52 AD3d 886 ["This threat of divided loyalty and conflict of interest between the insurer and the insured is the precise evil sought to be remedied . . . hence the requirement that independent counsel be provided at the expense of the insurer and that the insurer advise the insured of this right. Defendant's failure to inform plaintiffs of this right, together with plaintiffs' showing that undivided and uncompromised conflict-free representation was not provided to them, constitutes harm within the meaning of General Business Law § 349"]);

Claims Procedures (see Shebar v Metropolitan Life Ins. Co., 25 AD3d 858 [allegations that "despite promises to the contrary in its standard-form policy sold to the public, defendant made practice of not investigating claims for long-term disability benefits in good faith, in a timely fashion, and in accordance with acceptable medical standards . . . when the person submitting the claim . . . is relatively young and suffers from a mental illness'"]; Makuch v New York Cent. Mut. Fire Ins. Co., 12 AD3d 1110; Acquista v New York Life Ins. Co., 285 AD2d 73 ["allegation that the insurer makes a practice of inordinately delaying and then denying a claim without reference to its viability, may be said to fall within the parameters of" an unfair or deceptive practice]; Rubinoff v U.S. Capitol Ins. Co., NYLJ, May 10, 1996, at 31, col 3 [automobile insurance company fails to provide timely defense to insured as promised]).

Justice Dickerson then continued his analysis by holding that plaintiffs' complaint adequately stated a cause of action under General Business Law § 349 by alleging:

• consumer-oriented conduct ("Consequently, any consumer holding this policy, whose loss is potentially attributable to a third party, is required to protect the defendant's rights. Therefore, the conduct complained of has a "broad impact on consumers at large" and is thus consumer-oriented"); 
• materially misleading acts ("In essence, the plaintiffs are alleging that the defendant purposely failed to reach a decision on the merits of their insurance claim in order to force the plaintiffs to bring a suit against the Village before the statute of limitations expired, because, if they did not do so, the defendant could refuse reimbursement of the claim on the ground that the plaintiffs had failed to protect the defendant's subrogation rights (citation omitted). Presumably, the purpose of this alleged conduct would be to save the defendant money; if the plaintiffs initiate the suit, the plaintiffs have to pay for it, whereas if the defendant initiates its own suit, the cost will fall upon the defendant. Accepting the plaintiffs' allegations as true (citations omitted), the plaintiffs have successfully pleaded conduct on the part of the defendant which was misleading in a material way."); and
• injury ("Here, the plaintiffs allege that, as a result of the defendant's conduct, they were forced to 'incur the costs and expense of hiring an attorney to prevent forfeiture of coverage for a covered loss.' ... The plaintiffs alleged that they were forced to pay for an attorney, and thus adequately pleaded damages under General Business Law § 349").

In discussing plaintiffs' recoverable damages under General Business Law § 349, Justice Dickerson pointed out that the statute permits the recovery of actual, treble and punitive damages.  With respect to plaintiffs' claim for punitive damages, without citing to and in seeming departure from earlier New York insurance case law precedent, the court held:

"An award of punitive damages is warranted where the conduct of the party being held liable evidences a high degree of moral culpability, or where the conduct is so flagrant as to transcend mere carelessness, or where the conduct constitutes willful or wanton negligence or recklessness'" (Pellegrini v Richmond County Ambulance Serv., Inc., 48 AD3d 436, 437, quoting Buckholz v Maple Garden Apts., LLC, 38 AD3d 584, 585). Initially, it should be noted that the plaintiffs do not seek punitive damages on their breach of contract claim, but only on their claim under General Business Law § 349. Under that claim, they allege that the defendant intentionally did not reach a final decision on their claim, so as to force them to commence a suit against the Village. If that is true, and for purposes of a CPLR 3211(a)(7) motion to dismiss, "all allegations must be accepted as true" (Pacific Carlton Dev. Corp. v 752 Pac., LLC, 62 AD3d at 679; see Leon v Martinez, 84 NY2d at 87), such conduct may be considered to be "so flagrant as to transcend mere carelessness'" (Pellegrini v Richmond County Ambulance Serv., Inc., 48 AD3d at 437, quoting Buckholz v Maple Garden Apts., LLC, 38 AD3d at 585). Consequently, the plaintiffs' claim for punitive damages should not be dismissed.

On plaintiffs' claim for attorney's fees, the Second Department ruled that "[s]ince General Business Law § 349(h) provides that the court has the discretion to award reasonable attorney's fees, the plaintiffs' request for attorney's fees should not be dismissed."

Finally, with respect to the lower court's order compelling Allstate to produce information and materials regarding certain property damage claims, Justice Dickerson agreed with plaintiffs that since Allstate's objections to plaintiffs' discovery demands were not served within 20 days of service as required by CPLR 3122(a), the appellate court's review was limited to determining whether the requested material was privileged under CPLR 3101 or the demand was palpably improper.  Finding neither to be the case, Justice Dickerson concluded:

The defendant states that the information sought is likely to contain privileged information. However, this conclusory statement is insufficient to establish that the information sought is, in fact, privileged. Moreover, there is nothing "palpably improper" about the plaintiffs' demand. Here, the court has already narrowed the plaintiffs' request and ordered the defendant to produce documents relating to 375 claims made in connection with the October 2005 storm.

The defendant argues that it was improper for the court to allow discovery to bolster what is otherwise an insufficient cause of action. However, as discussed above, the cause of action was sufficiently pleaded. The information sought, regarding claims the defendant has handled for other insureds, relates to the plaintiffs' attempt to establish that the defendant has engaged in a pattern of deception, and, thus, the request is proper (see Gillen v Utica First Ins. Co., 41 AD3d 647, 647 [information sought "was relevant to the plaintiff's cause of action alleging a violation of General Business Law § 349"]).

One need not be prescient to predict that this decision will become the model upon which policyholders will construct future General Business Law § 349 causes of action and their associated claims for punitive damages and attorney's fees.  For now, property insurers in New York may wish to consider clarifying what the Second Department apparently believes is an ambiguous standard subrogation protection provision of a homeowners policy.   At a point in time when Allstate had not yet reached its coverage decision, would it have mattered if Allstate had sent a letter to the Wilners advising them that they were not obligated to sue the Village in order to protect Allstate's then only potential subrogation rights?