Communications Between Outside Coverage Counsel and His Insurer Client Regarding "the Investigation and Potential Rescission of a Claim" Ordered Disclosed

HOMEOWNERS -- APPLICATION MISREPRESENTATION -- RESCISSION -- ATTORNEY-CLIENT PRIVILEGE -- DISCOVERY

Prorokovic v. United Property & Casualty Ins. Co.

(S.D.N.Y. 02/02/2022)

From time to time I remind my insurer clients that before a first-party insurance claim has been investigated and coverage denied, not everything they or their adjusters write to me or I write to them is protected from discovery by the doctrine of attorney-client privilege.  I also remind them that my role is not to assist them in the investigation of a claim, but to provide a legal advice and opinion to them regarding whether a particular loss and its related claim are covered under the particular policy at issue.  

Why do I remind my insurer clients of this?  Because some New York courts consider outside counsel who assist their insurer clients in investigating first-party property losses and claims to be performing "claim handling activities" that are subject to discovery.  And because of cases like this one.  

On November 5, 2020 the plaintiffs suffered a total fire loss of their recently purchased New City, New York home and initiated a claim with defendant UPCIC under their homeowners insurance policy.  They had applied for and obtained their homeowners policy in August 2020, stating , among other things, on the policy's application that the home's "roof age" was 18 years and that "the dwelling both has a Certificate of Occupancy and is not an incomplete newly constructed home. If under additional construction or renovation, will be completed within the next 90 days."

On October 13, 2020 UPCIC issued a notice of cancellation, citing the policyholder's failure to send requested self-inspection photos to confirm the property's condition.  On October 16, 2020, UPCIC emailed the insured's agent to advise that home inspection photos showed the roof to be in very poor condition, but that UPCIC would rescind the policy cancellation if the roof was fully replaced before the cancellation date of November 17, 2020.  

In investigating the fire, UPCIC learned that:

• the roof was approximately 27 years old; 
• construction of a substantial addition to the home had begun after the September 17, 2020 closing date, was underway at the time of the fire, and was not expected to be complete until January 2021; and
•  the plaintiffs were not occupying the home at the time of the policy's application, but had moved into the house on October 1, 2020.

UPCIC's investigation of the loss and claim included retaining outside counsel on November 17, 2020 to conduct an examination under oath of the policyholder, which was done on December 11, 2020.  

On January 19 2021, UPCIC rescinded the policy and denied coverage, stating, in part: 

UPC has determined that you made material misrepresentations and/or false statements on the Application for Insurance. The misrepresentations identified include, but are not limited to, false statements and/or concealment of the age of the roof, condition of the roof, concealment of renovations and/or construction efforts, questionable habitability of the subject premise, occupancy, etc. Had UPC known the true facts, the policy would not have been issued or would have been written under different terms, conditions, and premiums. As a result, the policy issued by UPC, policy number *****, will be rescinded and any policy premiums paid to date will be refunded. Therefore, there is no coverage available for the above-referenced loss. UPC denies any and all coverage.

According to UPCIC's counterclaim in this action, on January 20, 2021, a UPCIC underwriter signed an affidavit stating that "if the Insured had provided the correct information regarding the roof update year, the occupancy prior to September 17, 2020, the fact that construction on the property would not be completed in ninety (90) days, or answered 'no' in response to a question on the Application regarding the occupancy and roof, then United would either not have written the policy or have written it under different terms."

On January 22, 2021, UPCIC sent the plaintiffs a "Policy Voidance" letter based on “[m]isrepresentation of material facts in obtaining a homeowners insurance policy with UPC Insurance Company for the property located at [address], by falsely providing the incorrect roof age, incorrect occupancy type and number of months the risk is occupied or rented. In addition, there is existing damage to premises which was not disclosed on application."  A week later UPCIC refunded plaintiffs the $1,366.35 they had paid in premiums up to that point by direct deposit into their bank account. 

On March 8, 2021, plaintiffs commenced this action, seeking $600,000 in compensatory damages and $1,000,000 in punitive damages based on UPCIC allegedly having acted "intentionally, maliciously, wrongfully, and in bad faith" in disclaiming coverage.

In the course of discovery plaintiffs sought production of communications between retained outside counsel and UPCIC from when counsel was retained on November 17, 2020  through the date of UPCIC's January 19, 2021 declination.  When UPCIC refused to disclose those communications, plaintiffs' counsel wrote to the court on December 15, 2021 to request a conference, claiming 

Defendant has asserted the frivolous position that virtually its entire claim file, underwriting guidelines and communications with attorneys and non-attorneys pre-dating its declination decision, are protected from disclosure under the attorney-client and work product privileges. The parties have met and conferred in good faith on multiple occasions but have reached an impasse.

This decision is the result of that conference.  

In opposing plaintiffs' demand for production of outside counsel communications in this case, UPCIC argued that these communications were protected by attorney-client privilege because 

they relate to the retention of outside counsel for legal advice relating to the investigation and potential rescission of a claim. This is fundamentally different than advice relating to the processing of a claim, or the denial of a claim, in the ordinary course of business. UPC is in the business of processing claims, but is not in the business of rescinded policies.

Aside from the fact that claims aren't rescinded (policies are), the judge rejected UPCIC's attempted "fine line" distinction, and ordered UPCIC to produce all responsive communications with outside counsel between November 17, 2020 and January 19, 2021: 

"New York law governs the applicability of the attorney-client privilege in this diversity case." Roc Nation LLC v. HCC Int'l Ins. Co., PLC, No. 19 Civ. 554, 2020 WL 1970697, at *2 (Apr. 24, 2020). "[U]nder New York law, an insurance company's claim handling activities are generally subject to discovery even if they were performed by an attorney. Id. This rule is grounded in an obvious principle: "The payment or rejection of claims is part of the regular business of an insurance company." Advanced Chimney, Inc. v. Graziano, 153 A.D.3d 478, 480, 60 N.Y.S.3d 210 (2d Dep't 2017). Thus, "[t]he key question is whether the attorney is predominantly investigating an insurance claim or providing legal advice." Roc Nation, 2020 WL 1970697, at *2 (quotation marks and citations omitted). This approach extends to evaluations of assertions of attorney-client privilege in the context of an insurance company's decision to rescind a policy based upon alleged material misrepresentations made by the insured in the procurement of the policy. See Advanced Chimney, 153 A.D.3d at 479-80. 

Here, defendant attempts to draw a fine line between its handling of plaintiffs' claim and its evaluation of the rescission option. In the first place, defendant's proposition that it is "not in the business of rescinded policies" defies logic. Defendant is in the business of providing insurance coverage; it assesses risk (and determines whether or not to provide insurance) based (at least in part) on a potential insured's application. That is precisely why policy rescissions are often based upon misrepresentations or false statements in insurance applications. Defendant's point — that it makes no money from rescinded policies — is facially true, but ignores situations (like the one at bar) where defendant rescinds a policy and avoids paying a substantial claim. In any event, in this case, defendant's decision to rescind plaintiffs' policy was inexorably intertwined with its denial of plaintiffs' claim. In other words, any advice from outside counsel related to rescission of plaintiffs' policy cannot be parsed from defendant's denial of plaintiffs' claim. Thus, defendant's communications with outside counsel were not predominantly of a legal nature and, therefore, are not protected by attorney-client privilege.[2]

I'm not fond of UPCIC's argument that there's an important difference between claim investigations and potential policy rescission investigations.  The better argument IMO would have been on the nature of each of outside counsel's communications.  

Nevertheless, this decision is another reminder to insurers in New York that not all communications with their outside counsel made prior to a declination of coverage are protected from discovery by attorney-client privilege.  If your outside counsel is not aware of this, PLEASE pass this post along to them.

Bottom line: each of outside counsel's pre-declination communications with insurers should be one of only two, distinct kinds: 

1. routine communications (requesting file materials, scheduling, etc.);
2. communications rendering legal advice that are --key words/concept -- predominantly of a legal nature.  

Not a blend of both.  One or the other. Keeping the communications separate will support  the more forceful and likely convincing argument that outside counsel communications which render only legal advice (are predominantly of a legal nature), even if made prior to the insurer-client's coverage declination, are protected from discovery by the doctrine of attorney-client privilege.  

Cause of Action for Consequential Damages Found Allegationally Sufficient and Reinstated

COMMERCIAL PROPERTY – CONSEQUENTIAL DAMAGES – IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING – BAD FAITH – ALLEGATIONAL SUFFICIENCY 
DK Prop., Inc. v. National Union Fire Ins. Co. of Pittsburgh
(1st Dept., 1/17/2019)

Question:
Must, at the pleading stage, a claim for consequential damages arising from the insurer's processing of the insured's insurance claim requires a detailed, factual description or explanation for why such damages, which do not directly flow from the breach, are also recoverable?

Answer of the First Department:
No.  A cause of action for consequential damages is sufficiently pled by specifying the types of consequential damages claimed and alleging that such damages were reasonably contemplated by the parties prior to contracting.

The complaint in this case alleged that rather than pay the claim, defendant made unreasonable and increasingly burdensome information demands throughout the three-year period since the property damage occurred. Plaintiff contended that this was a tactic by defendant to make the claim so expensive to pursue that plaintiff would abandon it altogether. Plaintiff contended defendant's investigatory process has taken so long and become so attenuated that the structural damage to the building has worsened. Among the consequential damages alleged were engineering costs, painting, repairs, monitoring equipment, and moisture abatement to address water intrusion, loss of rents, and other expenses attributable to mitigating further damage to the property.

In REVERSING Supreme Court's dismissal of and reinstating the complaint's second, bad faith cause of action, the First Department held:

Here, plaintiff's allegations meet the pleading requirements of the CPLR with respect to consequential damages, whether in connection with the first cause of action or the second cause of action for breach of the covenant of good faith and fair dealing in the context of an insurance contract (id.). Contrary to defendant's claim, there is no heightened pleading standard requiring plaintiff to explain or describe how and why the "specific" categories of consequential damages alleged were reasonable and foreseeable at the time of contract. There is no heightened pleading requirement for consequential damages (Panasia Estates Inc. v Hudson Ins. Co., 68 AD3d 530, 530 [1st Dept 2009], affd 10 NY3d 200 [2008], citing Bi-Economy 10 NY3d at 192). Furthermore, an insured's obligation to "take all reasonable steps to protect the covered property from further damage by a covered cause of loss" supports plaintiff's allegation that some or all the alleged damages were foreseeable (Benjamin Shapiro Realty Co. v Agricultural Ins. Co., 287 AD2d 389, 389-390 [1st Dept 2001]).

As noted by the Court of Appeals in Bi-Economy, a claim for breach of contract and one for bad faith handling of an insurance claim are not necessarily duplicative (id. at 191). The first and second causes of action plead different conduct by defendant and, in any event, defendant did not cross-appeal with respect to Supreme Court's denial of its motion to dismiss the bad faith claim on the basis of duplication.

Nothing else to see here.  Move on.

Injured Party/Judgment Creditor Who Obtains Assignment of Insureds' Bad Faith Claim After Conclusion of Direct Action May Bring Second Action Against Liability Insurer

HOMEOWNERS – LIABILITY – EXCESS JUDGMENT – STANDING – BAD FAITH – INSURANCE LAW 3420(A)(2) & (B)(1) 

Corle v. Allstate Ins. Co.
(4th Dept., 6/8/2018)

Sometimes called New York's direct action statute, New York Insurance Law § 3420(b)(1) states:

(b) Subject to the limitations and conditions of paragraph two of subsection (a) of this section, an action may be maintained by the following persons against the insurer upon any policy or contract of liability insurance that is governed by such paragraph, to recover the amount of a judgment against the insured or his personal representative: 

    (1) any person who, or the personal representative of any person who, has obtained a judgment against the insured or the insured's personal representative, for damages for injury sustained or loss or damage occasioned during the life of the policy or contract[.]

Teeter accidentally shoots Corle, and Corle sues Teeter.  Allstate disclaims coverage to Teeter, asserting that the accidental shooting was not a covered loss under the policy.  Corle proceeds with his personal injury action against Teeter and obtains a judgment of over $350,000 against him.

Corle then sues Allstate as a judgment creditor under Insurance Law § 3420 (a) (2) and (b) (1), and Supreme Court grants Corle's motion for summary judgment, holding that the shooting was a covered loss under Teeter's parents' homeowners insurance policy with Allstate, awarding Corle the policy's $50,000 limit.

This is not that action, however.  This is Corle's second action against Allstate, commenced after the Teeters assigned their rights and claims against Allstate to Corle, who then sued Allstate for disclaiming coverage in bad faith.

Allstate moved to dismiss this action, arguing primarily that Corle should have taken the assignment and included his bad faith claim in his first action under Insurance Law § 3420(b)(1) against Allstate -- that Corle's judgment in that action for $50,000 was res judicata, barring any additional recovery against Allstate.

The Appellate Division, Fourth Department, disagreed:

Contrary to defendant's contention, we conclude that the failure of James [Corle] to litigate the bad faith claim in the earlier Insurance Law § 3420 (a) (2) action does not bar litigation of that claim in the instant action. "Under the doctrine of res judicata, a party may not litigate a claim where a judgment on the merits exists from a prior action between the same parties involving the same subject matter. The rule applies not only to claims actually litigated but also to claims that could have been raised in the prior litigation . . . Additionally, under New York's transactional analysis approach to res judicata, once a claim is brought to a final conclusion, all other claims arising out of the same transaction or series of transactions are barred, even if based upon different theories or if seeking a different remedy' " (Matter of Hunter, 4 NY3d 260, 269 [2005]; see O'Brien v City of Syracuse, 54 NY2d 353, 357 [1981]).  

Insurance Law § 3420 (b) (1) provides that, "[s]ubject to the limitations and conditions of paragraph two of subsection (a) of this section, . . . any person who . . . has obtained a judgment against the insured or the insured's personal representative[] for damages for injury sustained . . . during the life of the policy or contract" may maintain an action against the insurer "to recover the amount of a judgment against the insured or his personal representative." Such an action may be "maintained against the insurer under the terms of the policy or contract for the amount of such judgment not exceeding the amount of the applicable limit of coverage under such policy or contract" (§ 3420 [a] [2]).  

We conclude that, under Insurance Law § 3420 (a) (2) and (b) (1), an injured party's standing to bring an action against an insurer is limited to recovering only the policy limits of the insured's insurance policy. Contrary to defendant's contention, we conclude that, if an injured party/judgment creditor seeks to recover from the insurer an amount above the insured's policy limits on a theory of liability beyond that created by Insurance Law § 3420 (a) (2), the statute does not confer standing to do so. However, if the insured assigns his or her rights under the insurance contract to the injured party/judgment creditor, then the injured party/judgment creditor may simultaneously bring a direct action against the insurer pursuant to Insurance Law § 3420 (a) (2) along with any other appropriate claim, including a bad faith claim, seeking a judgment in a total amount beyond the insured's policy limits.  

Here, when James [Corle] commenced the prior action pursuant to Insurance Law § 3420 (a) (2) individually and on behalf of [his injured son,] Colin, the Teeters had not yet assigned their rights under the insurance contract to James and Colin. As a result, James did not have standing to bring a bad faith claim against defendant (cf. Bennion v Allstate Ins. Co., 284 AD2d 924, 924-926 [4th Dept 2001]). Thus, because James lacked standing to bring a bad faith claim against defendant at the time he brought the Insurance Law § 3420 (a) (2) action, we conclude that the doctrine of res judicata does not bar this action (see generally Hunter, 4 NY3d at 269; Summer v Marine Midland Bank, 227 AD2d 932, 934 [4th Dept 1996]), and defendant's motion insofar as it sought to dismiss the complaint pursuant to CPLR 3211 (a) (5) was properly denied. 

In so holding, the Fourth Department declined to follow the holding on similar facts of the First Department in a 2010 case:

We recognize that the First Department held otherwise on similar facts in Cirone v Tower Ins. Co. of N.Y. (76 AD3d 883 [1st Dept 2010], lv denied 16 NY3d 708 [2011]).  To the extent that the First Department in Cirone concluded that an injured person/judgment creditor who commenced an action against the insurer pursuant to Insurance Law § 3420 (a) (2) had standing to assert a bad faith settlement practices claim in that action in the absence of an assignment from the insured, we disagree with that conclusion and decline to follow Cirone. 

The Fourth Department also concluded that. contrary to Allstate's argument, Corle's complaint in this action sufficiently stated a cause of action for insurer bad faith:

We reject defendant's further contention that the court erred in denying its motion insofar as it sought to dismiss the complaint under CPLR 3211 (a) (7), for failure to state a cause of action. Viewing the facts as alleged by plaintiffs in the light most favorable to them and affording plaintiffs all favorable inferences (see generally Whitebox Concentrated Convertible Arbitrage Partners, L.P. v Superior Well Servs., Inc., 20 NY3d 59, 63 [2012]), we conclude that plaintiffs sufficiently stated a cause of action for bad faith against defendant.

With the apparent split in appellate authority on res judicata issue, it remains to be seen whether Allstate will seek leave to appeal this decision to the New York Court of Appeals.

Court Upholds Insurer's Refusal to Produce in Discovery Information Regarding Claims of Other Insureds

PROPERTY – QUESTIONS OF FACT PRECLUDING SUMMARY JUDGMENT – SCOPE OF DISCOVERY 

Gray v. Tri-State Consumer Ins. Co.
(2nd Dept., 1/31/2018)

Though not yet 50 shades of Gray, this action is growing some long legs.

The Second Department's affirmance of Supreme Court's denial of summary judgment to the parties on their respective claims and counterclaims in this first-party property coverage case is relatively unremarkable.  What is noteworthy, however, is the appellate court's brief treatment of Supreme Court's conditional granting of plaintiff's motion to strike Tri-State's answer unless it provided a "meaningful" response to plaintiff's supplemental discovery demands within 15 days.  By that supplemental demand, plaintiff had sought discovery of:

     4.  ... true and complete copies of Defendant's claim records for all fire claims for the last three years ... [and] 

     5.  ... true and complete copies of Defendant's  fire claim estimates for the last year.

In REVERSING that part of Supreme Court's order which had conditionally granted plaintiff's motion to strike Tri-State's answer if it did not respond to these supplemental discovery demands, the Second Department held:

The Supreme Court improvidently exercised its discretion in conditionally granting the plaintiff's cross motion pursuant to CPLR 3126 to strike the defendant's answer unless the defendant served a "meaningful" response to the plaintiff's supplemental demand for discovery and inspection within a specified time. "The drastic remedy of striking an answer is inappropriate absent a clear showing that a defendant's failure to comply with discovery demands is willful and contumacious" (Lantigua v Goldstein, 149 AD3d 1057, 1059). Here, the defendant had already complied with the plaintiff's supplemental demand for discovery and inspection, except for items four and five of the demand. The defendant properly objected to items four and five, which called for information regarding the claims of other insureds, as those items sought information that was not necessary and proper to the prosecution of this action (see Diaz v City of New York, 140 AD3d 826, 827; Cabrera v Allstate Indem. Co., 288 AD2d 415, 416).

It is often the case, as it is in this action, that the complaints initiating first-party actions against insurers include in addition to their breach of contract claims, causes of action for "bad faith", consequential damages, and the like.  Insureds in such actions often seek discovery of other claims and other insureds of the defendant insurers.  This decision reaffirms the principle that when something sought by plaintiffs in discovery is not necessary and proper to the prosecution of their actions, an objection to such demands is appropriate and defensible.

Suing for Bad Faith in Bad Faith Warrants Sanctions

NO-FAULT – PRIVITY – BAD FAITH – INDIVIDUAL LIABILITY – FRIVOLOUS ACTION  
Hunter v. Hereford Ins. Co.
(NYC Civ. Ct., Queens Co., decided 8/14/2015)

Even with today's pervasive lawyer advertising, can't and don't lawyers still get to pick their clients?  If so, what happened in this case?

Mary Hunter was involved in motor vehicle accident with Hereford Insurance Company's insured, Herman Charles.  Unimpressed with the unserious nature of Hunter's claimed bodily injuries, Hereford's claim examiner, Sherri Gordon, offered Hunter $3,000 to settle her BI claim.  An indignant but undaunted Hunter both complained as a "third-party insurance claimant" to the New York State Department of Financial Services' Customer Assistance Unit and sued not the adverse driver Herman, but his insurer Hereford and Hereford's claims examiner Gordon personally for $21,500, the amount to which Hunter alleged she was "entitled to for injuries...incurred as a result of the accident caused by defendant's insured." Hunter's complaint in this action purported to assert causes of action sounding in unfair claims practices and insurer bad faith.

Hereford moved to dismiss the action: (1) against Hereford for Hunter's failure to state a cause of action, or in the alternative on the ground that Hunter lacked standing to file the action for lack of privity of contract; (2) against its claim examiner Sheri Gordon on the ground as an agent of a disclosed principal she could not be held personally liable; (3) for failure to state a cause of action for unfair claims practices; and (4) for costs and sanctions against plaintiff for filing a frivolous action.

In GRANTING Hereford's motion in all respects, New York City Civil Court Judge Cheree A. Buggs first dismissed the action against Hereford's claims examiner based on the well-settled law of New York that "...[u]nless the agent has assumed authority and responsibility, as if he were acting on his own account, then the duty which the agent fails to perform is a duty owing to his principal and not to the third party, to whom he has assumed no obligation[.]"  Finding that Hunter had presented no argument or evidence that Gordon in any way assumed the "authority and responsibility" New York case law requires in order to make her personally liable, the court dismissed Hunter's complaint as to Gordon.

Judge Buggs next distinguished and rejected as authority the two cases Hunter's attorney cited --  Bi-Economy Market v Harleysville, 10 NY3d 187 (2008), and Pavia v State Mut. Auto Ins. Co., 82 NY2d 455 (1993) -- in opposition to Hereford's motion to dismiss and in support of the complaint's cause of action for unfair claim practices.  The court reasoned:

New York State Insurance Law §2601 prohibits unfair claim settlement practices; however, that statute regards oversight by the New York State Department of Financial Services (NYSDFS) of insurance companies which might be engaging in such practices, and provides for penalties which NYSDFS might impose. The statute makes no provision for an insured to have a cause of action against his or her insurance company under that section of law. In New York University v Continental Insurance Co. (87 NY2d 308 [1995]), the Court of Appeals found that §2601 "...does not give rise to a private cause of action," and that in absence of such a private cause of action, the statute "...cannot be construed to impose a tort duty of care flowing to the insured separate and apart from the insurance contract." (Id. At 317.) It follows that if the insured has no private cause of action for unfair claim settlement practices, there is also no such cause of action for a third party. 

Further, any cause of action against an insurer for "bad faith" would sound in contract; the common law duty of good faith is one that arises from the insurance contract. (See Gordon v Nationwide Mut. Ins . Co., 30 NY2d 427 [1972], cert denied 410 US 931 [1973].) Hunter, as a third party, has no privity with Hereford, and therefore would not be able to bring such an action. New York case law is consistent that in absence of privity, a cause of action may not be maintained for breach of contract (Plaisir v Royal Home Sales, 81 AD3d 799 [2d Dept 2011]; CDJ Builders Corp v Hudson Group Construction, 67 AD3d 720 [2009]; Grinnell v Ultimate Realty, LLC, 38 AD3d 600 [2007]; M. Paladino, Inc. v Lucchese & Son Contracting Corp., 247 AD2d 515 [1998]). Hereford owed no duty to Hunter.

Movant Hunter's opposing papers state that she brought this action based on a letter from an NYSDFS Customer Assistance Unit Examiner stating that Hunter's claim involved "a question of fact as to the level of the injury, and degree of liability held by the insurance company" and that "[s]uch issues are best determined by a court of competent jurisdiction." [FN1] In no way could that letter be construed to indicate that Hunter had a cause of action against the insurance company for not settling the case to her liking; and in any event, it would not be the place of NYSDFS to tell an individual whether or not she has a cause of action against an insurance company. In fact, the appropriate action would have been for Hunter to bring an action against the policyholder, Herman Charles, since any issues of fact regarding liability and damages would have been between the parties involved in the accident, not between the insurance company and the person who alleges she was injured. 

Based on the foregoing, the Court grants the motion to dismiss the action against both Hereford Insurance Company and its agent, Sheri Gordon. The case is dismissed against Hereford for failure to state a cause of action and for lack of privity; it is dismissed against Gordon, as she was acting as an agent for her employer, Hereford.

Finally, the court granted Hereford's motion for sanctions and costs "to the extent of setting this matter down for a hearing ... to determine whether Hunter's bringing this action, which according to opposition papers, was based on a letter from a NYSDFS Examiner not intended to dispense legal advice, was frivolous, and therefore a basis for sanctions and/or costs", noting:  

In further consideration of sanctions and/or costs, the opposition papers misquote both case law and the NYSDFS letter, and cite cases which in no way support the argument that a third-party has a cause of action for unfair claims practices.

Bad choice of client?  Or bad choice of lawyer?  

3-2 Majority of 4th Department Affirms Summary Judgment Dismissing Third-Party Bad Faith Action Against Personal Auto Insurer

PERSONAL AUTO – THIRD-PARTY BAD FAITH FAILURE TO SETTLE – SUMMARY JUDGMENT – JURY QUESTION
Doherty v. Merchants Mut. Ins. Co.
(4th Dept., decided 6/11/2010)

New York's third-party bad faith failure to settle within policy limits standard is:

"To prevail in . . . an action [seeking damages for an insurer's bad faith refusal to settle an underlying action], a plaintiff must establish that the insured lost an actual opportunity to settle the . . . [action] . . . at a time when all serious doubts about [his or her] liability were removed . . ., and that defendant insurer [acted with gross disregard for the insured's interests, i.e., it] engaged in a pattern of behavior evincing a conscious or knowing indifference to the probability that [the] insured would be held personally accountable for a large judgment if a settlement offer within the policy limits were not accepted." Kumar v American Tr. Ins. Co., 57 AD3d 1449, 1450 [internal quotation marks omitted]; see Pavia v State Farm Mut. Auto. Ins. Co., 82 NY2d 445, 453-454, rearg denied 83 NY2d 779).

Merchants' insured, Fitzpatrick, rear-ended Doherty, allegedly injuring her.  Doherty sued Fitzpatrick, who had a $300,000 personal auto policy with Merchants, for her injuries and, according to the three-justice majority's and two-justice dissent's memorandum opinions:

• Doherty and her husband presented medical testimony and opinion that she had sustained a significant shoulder injury in addition to permanent injuries at multiple levels of her cervical spine and a disc injury in her lumbar spine at the L5-S1 level;
• Merchants investigated Doherty's claim and arranged for a physical examination of her to determine the extent of her alleged injuries and whether they constituted a "serious injury";
• although the expert retained by Merchants and plaintiff's treating physician had differing views of the extent of plaintiff's injuries, Merchants' expert determined that Doherty sustained cervical, thoracic and lumbar strains that resulted in a "moderate, partial, temporary disability for recreational activities and activities of daily living in the home"; 
• Merchants did not attempt to obtain an IME related to Doherty's shoulder and, in fact, relied upon the limited examination of a neurologist who admitted that she was not qualified to offer an opinion regarding Doherty's shoulder and that accident biomechanics was "a weak point in her expertise";
• prior to the trial of Doherty's personal injury action, attorneys for both Doherty and Fitzpatrick requested that Merchants settle for the policy limit of $300,000; 
• prior to trial, Merchants' settlement offer was $10,000;
• the record was silent as to whether Merchants had evaluated and actually assigned a potential jury verdict value, as compared to a settlement value, to Doherty's personal injury claim;
• Merchants' claim representative admitted that she never assigned a value or even a value range to the claim and could not recall how she arrived at Merchants' $10,000 pre-trial settlement offer;
• 20 months before trial, Merchants determined that Fitzpatrick's proportionate share of fault for liability in this rear-end accident was "100%"; 
• 16 months before trial, Merchants concluded that Fitzpatrick had "no legal defenses" to Doherty's negligence claim;  
• 10 months before trial, Merchants' claim representative advised Fitzpatrick's defense counsel that a motion for summary judgment on the serious injury threshold was not authorized because Merchants' own "IME indicate[d] [Doherty] is disabled" and that such a motion would not be granted since defendant's "IME was completed on 11/4/03 (1 year and 2 mos after the [date of loss]) indicating [Doherty] is still disabled";
• one month before trial, Supreme Court denied a motion for summary judgment by Fitzpatrick on the issue of the serious injury threshold;
• on the first day of trial, Fitzpatrick's defense counsel advised that he needed to revise his exposure opinion and that, if the jury believed that Doherty needed surgery, the potential exposure was above $250,000, in response to which Merchants increased its settlement offer to $25,000;
• Merchants' investigation included videotaped surveillance of Doherty engaged in activities without apparent difficulty, despite her alleged injuries;
• Merchants participated in settlement negotiations prior to and during the trial and the trial judge (Erie Supreme Court Justice John Curran) was actively engaged in the settlement negotiation process;
• prior to trial, Doherty and her husband reduced their settlement demand to $250,000 and, four days into trial, they further reduced their demand to $240,000;
• in response to plaintiffs' reduced settlement demand, Merchants increased its settlement offer from $25,000 to $55,000, but plaintiffs' counsel declined to negotiate further;
• after the trial commenced, Merchants made a "high-low" settlement offer that was "not well received" and was rejected; 
• the videotape surveillance showed Doherty, stay-at-home mother of two children ages 5 and 7, engaging in "activities without apparent difficulty," including carrying her children; the jury included four women who, according to the dissent, "might understand and sympathize with Doherty's lack of choice in engaging in those activities while Doherty's husband worked at two jobs";
• Merchants was never prepared to offer the policy limits in that the claim manager's settlement authority was limited to $150,000, Merchants' claim manager testified that he never spoke with his supervisor concerning authorization to offer a greater amount;  and
• the jury returned a verdict against Fitzpatrick for $740,000, $500,000 of which was for future pain and suffering; of the $300,000 limit of Fitzpatrick's insurance policy with Merchants, the sum of $289,489 was available after other claims had been paid.

Fitzpatrick assigned his cause of action for Merchants' alleged third-party bad faith failure to settle within policy limits to Doherty, and she commenced this action directly against Merchants.  Merchants successfully moved for summary judgment dismissing plaintiffs' complaint, and plaintiffs appealed.

In AFFIRMING the order appealed from, the three-justice majority held:

We conclude that defendant established that Fitzpatrick did not lose an actual opportunity to settle the claim at a time when all serious doubts about his liability were removed and it was clear that the potential recovery far exceeded the insurance coverage (see id.), and thus that it did not act with gross disregard for Fitzpatrick's interests (see id. at 453). We therefore conclude that defendant established its entitlement to summary judgment dismissing the complaint, and that plaintiffs failed to raise a triable issue of fact in opposition (see generally Zuckerman v City of New York, 49 NY2d 557, 562). 

The two-justice dissent disagreed, believing that there was sufficient evidence of Merchants' alleged bad faith to submit that issue to a jury for determination:

Necessarily inherent in an insurer's duty to its insured is a well-reasoned and thorough analysis leading to the establishment of a predicted jury verdict value in the event of a verdict in favor of the injured claimant (see PJI 4:67). The record is devoid of any assertion by defendant that it had evaluated and actually assigned a potential jury verdict value, as compared to a settlement value, to Doherty's personal injury claim. Indeed, defendant's claim representative admitted that she never assigned a value or even a value range to the claim and could not recall how she arrived at the $10,000 settlement offer that remained in place until the first day of trial, when it was increased to $25,000. The record does not contain evidence of any analysis by defendant of the potential for high-end jury verdicts in the trial venue or any examination of jury verdict reports in cases with similar injuries in similar venues. Thus, in our view, on this record, defendant utterly failed to satisfy one of the most fundamental factors essential to a finding of good faith.

Although the majority concludes that defendant "investigated the claim in the underlying action," we submit that the quality and thoroughness of that investigation should be the subject of careful review. It is for the jury to decide if "[a] reasonable investigation of the facts . . . would indicate that the chances of successfully defending the [underlying] action were very remote" (State of New York v Merchant's Ins. Co. of N.H., 109 AD2d 935, 936).

* * * * *

We disagree with the majority's conclusion that defendant's participation in settlement negotiations is indicative of its good faith. Even the ultimate tender of full policy limits on the eve of trial cannot insulate an insurer from liability for bad faith failure to settle within policy limits (see Knobloch v Royal Globe Ins. Co., 38 NY2d 471, 478). Here, on the first day of trial, defendant's counsel advised that he needed to revise his exposure opinion and that, if the jury believed that Doherty needed surgery, the potential exposure was above $250,000. Although defendant had no expert to rebut Doherty's need for shoulder surgery, its settlement offer remained at $25,000. Four days into trial, defendant's settlement offer was increased to $55,000. The settlement demand of Doherty and her husband was $240,000—well within the policy limits and below the potential exposure indicated by defendant's counsel. Their counsel thereafter declined to continue negotiations and an opportunity to settle within the policy limits had been lost. To the extent that defendant contends that Doherty and her husband cut off settlement discussion or denied defendant an opportunity to settle, the jury could reasonably conclude that their decision to do so "was the direct result of defendant's own conduct" because "[d]efendant never indicated that it would make a fair and reasonable offer and, by failing to do so, defendant suppressed negotiations" (State of New York v Merchants Ins. Co. of N.H., 109 AD2d 935, 937).

We also recognize that opportunities to settle the claim within the policy limits can be lost at various points in the evolving continuum of the litigation and claim management process. In our view, an opportunity to settle the claim may be lost early in the process and may not be recovered or the bad faith cured by subsequent conduct. In other words, we do not believe that an insurer's bad faith is measured at the moment before the jury returns a verdict. Instead, conduct by the insurer weeks or months before the jury verdict may have entrenched the parties or foreclosed the opportunity for settlement long before a jury is empaneled. Thus, in our view, the fact that defendant made a "high-low" offer four days after the trial commenced is not dispositive. Even assuming, arguendo, that the "high-low" offer was meaningful, which, in our view, it was not, such "a belated tender [does not] operate without more to exonerate a carrier from a pre-existing liability for bad-faith failure to settle within policy limits" (Knobloch, 38 NY2d at 478 [emphasis added]). Our own precedent establishes that the delayed unconditional making of a settlement offer of the full policy limits does not automatically relieve the carrier of liability (see Reifenstein v Allstate Ins. Co., 92 AD2d 715, 716). It is not the mere fact that a "high-low" offer was made, but also the timing of that offer that must be evaluated in light of all the circumstances. Therefore, we cannot agree with the majority that defendant's "high-low" offer conclusively demonstrates that defendant met its good faith obligation. Instead, it is "but a factor for the jury to consider on the question of bad faith" (id. at 716).

Lastly, in our view, the contention of defendant that its reliance upon the trial court's discussions during settlement conferences provides some form of absolution from a bad faith claim is misplaced. We conclude that, had the trial court recommended a settlement figure more favorable to Doherty, such as $700,000, defendant would have summarily rejected the trial court's view. In any event, we are well aware that, during settlement conferences, a trial court is not provided full access to the files and investigative materials of the parties. In our view, defendant's good faith is measured by what it knew and had in its files—not by a trial court's view of the case based upon limited information provided during a settlement conference.

Therefore, we conclude that there are issues of fact whether defendant "engaged in a pattern of behavior evincing a conscious or knowing indifference to the probability that [its] insured would be held personally accountable for a large judgment if a settlement offer within the policy limits were not accepted" (Pavia, 82 NY2d at 453-454; see Kumar v American Tr. Ins. Co., 57 AD3d 1449).

Absent a Pre-Litigation Settlement Demand Within Policy Limits, Liability Insurer Cannot Be Held Liable for Bad Faith Failure to Enter into Pre-Litigation Settlement Discussions

MEDICAL MALPRACTICE COVERAGE – BAD FAITH – FAILURE TO ENGAGE IN PRE-LITIGATION SETTLEMENT NEGOTIATIONS
CBLPath, Inc. v. Lexington Ins. Co.
(2nd Dept., decided 5/11/2010)

When the insured's liability is not in doubt and the nature of injuries it caused are such that a recovery will likely exceed the policy limit, is it actionable bad faith for a liability insurer to refuse or fail to enter into pre-litigation settlement discussions and negotiations?  In the opinion of the Second Department, Appellate Division, no, not if there's been no pre-litigation settlement demand within policy limits, it isn't. 

Lexington insured CBLPath, a medical diagnostic laboratory, under a $1,000,000 per medical incident medical malpractice liability policy. In March 2006, CBL negligently switched Darrie Eason's biopsy specimen with a biopsy specimen from another individual, which resulted in Eason being erroneously diagnosed with breast cancer, and subsequently undergoing an unnecessary double mastectomy.

From February 2007 through September 2007, Eason's counsel made several attempts to open settlement discussions, but Lexington, which in February 2007 had exercised its right as the sole authority to handle the Eason claim, never made a substantive response to those inquiries. Eason commenced a personal injury action against CBL in October 2007, and her counsel made her first settlement demand of $5,000,000 in December 2007.  That action was settled several months later for the sum of $2,500,000, with Lexington paying the policy limit in the sum of $1,000,000 and CBL paying the balance.

CBL thereafter commenced this action against Lexington, asserting a single cause of action for breach of the covenant of good faith and fair dealing implied in the insurance contract. The gravamen of CBL's complaint was that Lexington, which had asserted sole control over the Eason claim, acted in bad faith by refusing to enter into pre-litigation settlement discussions with Eason's counsel. CBL sought actual and consequential damages, including, inter alia, injury to its business reputation, lost sales, increased sale expenses, lost profits, and lost business opportunities caused by the negative publicity that resulted from the commencement of the underlying action. After answering, Lexington moved for summary judgment dismissing the complaint, and CBL cross-moved to dismiss Lexington's affirmative defenses. The Supreme Court granted Lexington's motion and denied CBL's cross motion. CBL appealed, and the Second Department unanimously affirmed:

An insurer "may be held liable for the breach of its duty of good faith' in defending and settling claims over which it exercises exclusive control on behalf of its insured" (Pavia v State Farm Mut. Auto. Ins. Co., 82 NY2d 445, 452). The root of this doctrine is that, typically, an insurer exercises "complete control over the settlement and defense of claims against their insureds, and, thus, under established agency principles may fairly be required to act in the insured's best interests" (id.). However, since courts are understandably reluctant to expose insurers to liability exceeding the policy limits, the bad faith must be for conduct that is clearly more than ordinary negligence, i.e., more than merely poor judgment (id. at 453).

"Naturally, proof that a demand for settlement was made is a prerequisite to a bad-faith action for failure to settle. [Additionally,] the plaintiff in a bad-faith action must show that the insured lost an actual opportunity to settle the . . . claim at a time when all serious doubts about the insured's liability were removed.

"Bad faith is established only where the liability is clear and the potential recovery far exceeds the insurance coverage" (id. at 454 [internal quotations marks and citations omitted]; see also Smith v General Acc. Ins. Co., 91 NY2d 648, 653; Soto v State Farm Ins. Co., 83 NY2d 718, 723; Vecchione v Amica Mut. Ins. Co., 274 AD2d 576, 578; cf. United States Fid. & Guar. Co. v Copfer, 48 NY2d 871, 873).

Here, Lexington met its prima facie burden of establishing its entitlement to judgment as a matter of law (see Alvarez v Prospect Hosp., 68 NY2d 320, 324; Zuckerman v City of New York, 49 NY2d 557, 562) by submitting, inter alia, an affirmation of an AIGDC attorney who had handled the Eason claim. In that affirmation, the attorney stated that Eason's counsel did not issue the first settlement demand until after commencement of the underlying action, and that once such demand was made, negotiations ensued, and a settlement was reached, with Lexington paying the policy limit in the sum of $1,000,000, and CBL responsible for the balance in the sum of $1,500,000. Thus, Lexington established that CBL's bad faith claim could not stand, as there was no pre-litigation settlement demand made within the policy limits (see Smith v General Acc. Ins. Co., 91 NY2d at 653; Soto v State Farm Ins. Co., 83 NY2d at 723; Pavia v State Farm Mut. Auto. Ins. Co., 82 NY2d at 454).

In opposition, CBL failed to raise a triable issue of fact. CBL submitted, inter alia, an affidavit of its vice president and corporate controller, who indicated that after AIGDC asserted exclusive control over the Eason claim in February 2007, it thereafter refused to contact Eason's counsel to settle her claim and avoid negative publicity to CBL. Notably, however, CBL's opposition did not raise a triable issue of fact as to whether Eason's counsel had made a pre-litigation settlement demand within the policy limits. As such, while it may arguably be some evidence of bad faith that AIGDC failed to enter into pre-litigation settlement discussions with Eason's counsel at a time when CBL's liability was not in doubt and the nature of Eason's injuries indicated that her recovery would exceed the policy limit, we are constrained to find that Lexington was entitled to summary judgment because CBL failed to raise a triable issue of fact as to whether Eason made a pre-litigation settlement demand within the policy limit (see Pavia v State Farm Mut. Auto. Ins. Co., 82 NY2d at 453; see also Smith v General Acc. Ins. Co., 91 NY2d at 653; Soto v State Farm Ins. Co., 83 NY2d at 723; Vecchione v Amica Mut. Ins. Co., 274 AD2d at 578). Under the circumstances, CBL cannot show that, because of AIGDC's conduct, it lost an actual opportunity to settle and, thus, any damages it asserts are based on mere speculation (see United States Fid. & Guar. Co. v Copfer, 48 NY2d at 873).

What is sometimes called "third-party" insurer bad faith depends on there having been an opportunity to settle within policy limits after the insured's liability becomes clear and the value of the plaintiff's injuries or damages will likely far exceed the policy limit.  In cases where there is no pre-litigation settlement demand within policy limits, the liability insurer cannot be held liable under a bad faith theory for having failed or refused to enter into pre-litigation settlement discussions.

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

COMMERCIAL PROPERTY – CONSEQUENTIAL DAMAGES – BAD FAITH – BI-ECONOMY – MOTION TO AMEND COMPLAINT
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.

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.

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.

Negligence, Slander and Punitive Damages Claims Dismissed Against Property Insurer and Its Special Investigator -- Continuation of EUO Ordered

COMMERCIAL PROPERTY – NONCOOPERATION – EUO – SPOUSAL PRIVILEGE – NEGLIGENCE CAUSE OF ACTION AGAINST PROPERTY INSURER – DEFAMATION CLAIM AGAINST SPECIAL INVESTIGATOR – PUNITIVE DAMAGES
LeBaron v. Erie Ins. Co.
(4th Dept., decided 2/6/2009)

If you had read just the Fourth Department's "ORDERED that the order so appealed from is unanimously affirmed without costs for reasons stated in the decision at Supreme Court" memorandum of February 6, 2009, you might have passed right over this case.  What caught my eye, however, was the court's description of the order appealed from, viz, one granting "those parts of the motion of defendants seeking dismissal of the negligence and slander causes of action and the punitive damages claim."

The term "slip ops" refers to court decisions that may or may not later be published officially in the New York State Reporter.  Written decisions from the New York Court of Appeals and four departments of the Appellate Division are always published officially.  Less than 6% of the decisions received from the Appellate Term and trial-level courts get published officially in the Miscellaneous Reports.  Under a program approved by the Court of Appeals, however, most of the remainder are selected for publication electronically in the New York Slip Opinion Service.  These opinions are classified by subject to the Official Reports Digest-Index and are assigned a unique Slip Opinion citation (e.g., 2007 NY Slip Op 52588[U]) and pagination to permit point-page citations. Some opinions are published in image (PDF) format.

The statutory criteria used to select a lower court decision for publication in the Miscellaneous Reports (the books, not just online),  are:  precedential significance; novelty; public importance; practical significance;subject matter diversity; geographical diversity; author diversity; and literary quality.  Both judges and lawyers can and do submit lower court decisions to the New York Law Reporting Bureau for consideration and possible publication in the Miscellaneous Reports. 

There are several ways of searching for an "unpublished" lower court decision other than by using a paid legal research service such as LexisNexis or Westlaw.  I found the motion court's decision in this case by checking the New York Official Reports and using its Advanced Search tab or feature.  Searching "LeBaron" produced several results, including Stueben County Supreme Court Justice Peter Bradstreet's decision of December 12, 2007, which formed the basis of the parties' appeal and cross appeal to the Fourth Department.  Another way of searching for written decisions that may not get published electronically as a slip opinion is through the eCourts portal of the New York State Unified Court System.  Written decisions are sometimes saved as PDF files to the court's electronic files and can be found by searching with an index number, party's name, judge's name, and or venue.

Which brings us back to this case. It's the trial-level decision that provides the procedural and substantive information, and plenty of it.  

On July 29, 2006, a fire in plaintiff LeBaron's van damaged many of the tools and machinery plaintiff used in his business. After plaintiff reported the loss, defendant Erie Insurance Company began an investigation into the claim.  In August 2006, after Erie had reviewed the list of items plaintiff claimed were damaged in the fire, Erie's special investigator Piontkowski met with representatives of the Corning Police and Fire Departments. According to a Corning Police Department report, Piontkowski told the police and fire investigators that there were inconsistencies between the items listed on plaintiff's claim and the items that were actually damaged in the fire. The police report further indicated that Piontkowski was going to re-interview plaintiff and then forward the matter to the New York State Insurance Frauds Bureau.

In September 2006, the parties attempted to schedule an examination under oath (EUO) of plaintiff. Conflicts between counsel for the parties developed immediately thereafter when plaintiff, prior to the EUO, refused to release a jet washer, one of the items allegedly damaged in the fire, without receiving adequate assurances that the item would be protected. After more than two months of correspondences between counsel, in which the parties argued about Erie's right to inspect and test the disputed item, Erie finally was able to inspect the jet washer in December 2006 after which its expert found that the item was not damaged by the van fire.

On April 12, 2007, counsel for Erie finally conducted the EUO of plaintiff. After some introductory questions, counsel for Erie asked plaintiff whether he had spoken with anyone other than his attorney about the testimony he was to give at the EUO. Plaintiff responded that he had discussed the matter with his wife. When Erie's counsel for inquired about the nature of the discussions with his wife, plaintiff's counsel refused to allow plaintiff to answer the question, citing a spousal privilege. Plaintiff's counsel indicated that Erie's counsel for could ask plaintiff any other questions, but that plaintiff would not answer any questions concerning conversations plaintiff may have had with his wife. Based upon plaintiff's refusal, Erie's counsel declined to ask any further questions and the EUO ended.

Ultimately Erie denied plaintiff's claim, presumably based in part on plaintiff's noncooperation and refusal to answer questions during his EUO.  Plaintiff sued Erie and Piontkowski, asserting causes of action sounding in breach of contract, negligence, slander and punitive damages.  Erie moved to dismiss the action as premature, based on plaintiff's asserted noncooperation with Erie's investigation, including his delay in providing the jet washer for inspection and refusal to answer questions during his EUO.  Erie aslo sought dismissal of the slander claim against Piontkowksi based on qualified privilege, and the negligence claim based on the absence of any duty independent of the insurance contract.

Plaintiff cross-moved for leave to serve an amended complaint specifying his causes of action sounding in negligence, slander and punitive damages.  In opposition to defedants' motion to dismiss, plaintiff argued that defendants had not shown sufficiently willful noncompliance with the insurance contract to warrant dismissal of the action since plaintiff acted reasonably in insisting that proper safeguards be established before he submitted the jet washer for testing and inspection. Plaintiff also contended that he correctly asserted a spousal privilege during the EUO, that he was not required to adhere to Erie's "almost Godlike stance that he who represents an insurance company must be obeyed", and that Erie's position that plaintiff and his wife were involved in a conspiracy to obtain insurance proceeds was "preposterous".

As for his slander claim, plaintiff argued that his allegations did raise questions as to whether defendant Piontowski acted with malice in discussing the insurance claim with the police. As to his negligence claim, plaintiff contended that a separate tort action is allowable because defendants breached their duty of good faith which is independent of the insurance contract. Finally, plaintiff asserted that the complaint's allegation that Piontowski's statements to the police were willful, wanton and reckless supported an award of punitive damages.

Steuben County Supreme Court Justice Peter Bradstreet: (1) conditionally granted defendants' motion to dismiss the complaint unless plainitiff submitted to another EUO within 60 days of the court's decsion and answered "all material and relevant questions, consistent with this Decision and Order"; (2) granted defendants' motion dismissing the negligence, slander and punitive damages claims; and (3) denied plaintiff's cross motion to serve an amended complaint on those causes of action.

In declining to dismiss the entire action based on defendants' noncooperation defense, the court found that plaintiff's delay in providing the jet washer for testing did not, in and of itself, constitute the type of willful noncooperation necessary to warrant a dismissal of the action. "Plaintiff's actions, while not particularly reasonable, did not rise to the level of 'willful and avowed obstruction'".

With respect to plaintiff's assertion of the spousal privilege at his EUO, the court found this to be "more problematic."  In reviewing this issue, the court noted that the purpose of a policy's EUO condition is to enable the insurer to obtain all knowledge and facts concerning the cause of the fire and the loss involved while the information is still fresh in order to protect itself from false and fraudulent claims; that the right to examine under the cooperation clause of an insurance policy is much broader than the right of discovery under the CPLR; that an insurer is permitted to ask, and an insured is required to answer, any material and relevant questions concerning the claim; and that an insured risks the loss of coverage under a fire insurance policy even when refusing to answer questions at an EUO or provide information to the insurer upon the advice of counsel.

Based on these principles, the court held that plaintiff had no basis to refuse to answer questions at the EUO concerning conversations he had with his wife prior to testifying. 

While the Court recognizes the importance of protecting confidential communications between a husband and a wife, if an insured is not permitted to invoke at an EUO a basic Constitutional right, it certainly cannot be said that Plaintiff can refuse to answer questions at an EUO based upon a spousal privilege. 

Although having found that plaintiff improperly refused to answer questions during his EUO regarding his conversations with his wife, the court declined to dismiss the action, instead finding that a conditional order of dismissal was the appropriate remedy in this case because counsel for Erie had terminated rather than continued the EUO when plaintiff invoked the spousal privilege:

While, as noted above, Plaintiff improperly asserted a spousal privilege during the EUO, the record demonstrates that it was counsel for Erie who stopped the EUO and refused to ask any further questions. Cf, Davis v. Allstate Insurance Company, 204 AD2d 592; Evans v. International Insurance Company, 168 AD2d 374; Pizzirusso v. Allstate Insurance Company, 143 AD2d 340. Had counsel continued with the EUO, the record may have revealed that questions concerning conversations Plaintiff had with his wife would, indeed, be information material and relevant to the subject claim. As such, Defendants have, at this point, failed to establish that they acted diligently in seeking Plaintiff's cooperation (Blinco v. Preferred Mutual Insurance Company, 11 AD3d 924) and, notwithstanding Plaintiff's breach of his contractual obligation by failing to answer certain questions at the EUO, and his delay in submitting to Defendants the jet washer, Plaintiff's noncompliance was not so willful or extreme as to warrant dismissal of the action without giving him one last chance to answer the questions. Marmorato v. Allstate Insurance Company, 226 AD2d 156 (1st Dept, 1996).

On plantiff's negligence and bad faith claims, the court agreed with defendants that no such separate claims had been stated:

It is a well established principle that a simple breach of contract is not to be considered a tort unless a legal duty independent of the contract itself has been violated. Bristol-Myers Squibb, Industrial Division v. Delta Star, Inc., 206 AD2d 177 (4th Dept, 1994); City of Watertown v. Stebbins Engineering and Manufacturing Company, 206 AD2d 828 (4th Dept, 1994). Because a tort obligation is apart from and independent of promises made in a contract, a defendant may be liable in tort only when it has breached a duty of reasonable care distinct from its contractual obligations, or when it has engaged in tortious conduct separate and apart from its failure to fulfill its contractual obligations. New York University v. Continental Insurance Company, 87 NY2d 308 (1995). 

In the instant case, the essence of Plaintiff's negligence cause of action is Erie's breach of the insurance policy by failing to timely provide him with the benefits to which Plaintiff contends he is entitled due to damages he sustained in the van fire. The Complaint does not allege the creation of a relationship between Plaintiff and Defendants separate from their contractual relationship (Alexander v. Geico Insurance Company, 35 AD3d 989) and there is no separate tort for the bad faith refusal to comply with an insurance contract. New York University v. Continental Insurance Company, 87 NY2d 308; Paterra v. Nationwide Mutual Fire Insurance Co., 38 AD3d 511 (2nd Dept, 2007); Johnson v. Allstate Insurance Company, 33 AD3d 665 (2nd Dept, 2006); Alexander v. Geico Insurance Company, 35 AD3d 989.

On plaintiff's slander claim, the court agreed with defendants that Erie's special investigator was protected by the doctrine of qualified privilege:

A communication is subject to a qualified privilege where it is made (1) in good faith by a person in the discharge of some public or private duty, legal or moral, or in the conduct of his or her own affairs, in a matter where his or her interest is concerned (Toker v. Pollak, 44 NY2d 211 (1978); or (2) by one person to another upon a subject in which both have a common interest. Liberman v. Gelstein, 80 NY2d 429 (1992); East Point Collision Works, Inc., v. Liberty Mutual Insurance Company, 271 AD2d 471 (2nd Dept, 2000); Herlihy v. Metropolitan Museum of Art, 214 AD2d 250 (1st Dept, 1995). The defense of qualified privilege will be defeated by demonstrating that the party spoke with malice, i.e., where it is shown that the motivation for making such statements was spite or ill will (common law malice), or that the statements were made with a high degree of awareness of their probable falsity (constitutional malice). Foster v. Churchill, 87 NY2d 744 (1996); Liberman v. Gelstein, 80 NY2d 429; Kondo-Dresser v. Buffalo Public Schools, 17 AD3d 1114 (4th Dept, 2005); Fregoe v. Fregoe, 33 AD3d 1182 (3rd Dept, 2006). 

In the instant case, Defendant Piontkowski is protected by a qualified privilege in that the statements he gave were part of his duties to report possible false insurance claims to the police. Chapo v. Premier Liquor Corporation, 259 AD2d 1050 (4th Dept, 1999). There can be no liability for merely giving information to legal authorities who are left entirely free to use their own judgment in proceeding any further with respect to that information. Lowmack v. Eckerd Corporation, 303 AD2d 998 (4th Dept, 2003); Cobb v. Willis, 208 AD2d 1155 (4th Dept, 1994). Moreover, Defendants and the police certainly have a common interest in the investigation of potentially false insurance claims. Liberman v. Gelstein, 80 NY2d 429; Herlihy v. Metropolitan Museum of Art, 214 AD2d 250.

The Court further finds that both the original and Amended Complaints fail to raise sufficient allegations that Defendant Piontkowski acted with malice in speaking with the police. According to the police report provided by Plaintiff, Defendant Piontkowski's discussion with the police dealt only with possible inconsistencies between the items Plaintiff claimed were damaged by the fire and the photographs taken by the police. While the papers submitted in support of Plaintiff's cross-motion make repeated suggestions that Defendants had falsely accused Plaintiff of arson, the Amended Complaint alleges only that Defendant Piontkowski "did wrongfully advise" the police about the insurance claim. Construing the Amended Complaint in the light most favorable to Plaintiff, the Court finds Defendant Piontkowski's qualified privilege is not overcome by the vague and conclusory allegations set forth in the Amended Complaint that the statements to the police were made with ill will or with a high degree of awareness of their probable falsity. Doherty v. New York Telephone Company, 202 AD2d 627 (2nd Dept, 1994); East Point Collision Works, Inc., v. Liberty Mutual Insurance Company, 271 AD2d 471; cf, Labarge v. Holmes, 30 AD3d 1087 (4th Dept, 2006); Kondo-Dresser v. Buffalo Public Schools, 17 AD3d 1114.

Finally, in dismissing the plantiff's punitive damages claim,  Justice Bradstreet held:

First, inasmuch as the Court is dismissing Plaintiff's negligence and slander claims, there is no independent tort action upon which a punitive damages claim can lie. Even if the negligence and slander claims were to survive, and affording the original and Amended Complaints every possible inference, the Court finds Plaintiff's allegations fail to rise to the level of willful or wanton negligence, recklessness, or moral culpability. Hunter v. Galland, 37 AD3d 1048. Plaintiff's claims that Defendants' behavior "may also be possibly tied to a pattern" of similar behavior towards other claimants is wholly conclusory and completed unsupported in the Complaint. In sum, the acts alleged by Plaintiff constitute private wrongs for which punitive damages may not recovered. Westinghouse Electric Supply Company v. Pyramid Champlain Company, 193 AD2d 928. 

Lots and lots of good stuff in the motion court's decision, which the Fourth Department affirmed wholesale.  Take a look.