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?  

New York Supreme Grants Plaintiff Leave to Assert Consequential Damages in Amended Complaint and Denies Insurer's Motion to Compel Appraisal

COMMERCIAL PROPERTY – BI-ECONOMY – CONSEQUENTIAL DAMAGES – ATTORNEY'S FEES – DISCOVERY – ATTORNEY-CLIENT AND ATTORNEY WORK PRODUCT PRIVILEGES – APPRAISAL
De Martino v. Harleysville Worcester Ins. Co.
(Sup. Ct., New York Co., decided 1/21/2010)

On June 20, 2006, plaintiff's building allegedly suffered substantial damage due to the demolition, excavation and construction work plaintiff's neighbor was performing on property adjacent to plaintiff's building.  Plaintiff made a claim to her commercial property insurer, Harleysville Worcester Insurance Company, and a dispute arose over the value of plaintiff's covered loss.  Plaintiff's initial complaint, filed on October 1, 2008, alleged that Harleysville both failed to respond to plaintiff's claims in a timely manner and undervalued plaintiff's loss.

Three motions were at issue in this matter:  (1) by plaintiff to amend her complaint to assert a claim for consequential damages; (2) by plaintiff to compel the disclosure of certain email and fax communications between Harleysville and its contractor, and its attorneys and the contractor, withheld as privileged; and (3) by Harleysville to compel an appraisal of plaintiff's building loss. 

By memorandum decision and order dated September 9, 2009, New York Supreme Court Justice Marilyn Shafer granted plaintiff's motion to amend her complaint to assert a claim for consequential damages allegedly caused by Harleysville's delay in adjusting and paying her building loss claim:

Recent decisions of the Court of Appeals hold that a claim for consequential damages against an insurer may be asserted “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 [internal quotation marks and citation omitted]."  Panasia Estates, Inc. v Hudson Insurance Company, 10 NY3d 200, 203 (2008). The fact that the parties contemplated that plaintiff would be insured for losses sustained by a delay in payment and repair to her premises is found in the policy's business interruption clauses.

"The purpose served by business interruption coverage cannot be clearer-to insure that [plaintiff] had the financial support necessary to sustain [her] business operation in the event disaster occurred. The purpose of business interruption insurance is to indemnify the insured against losses arising from inability to continue normal business operation and functions due to the damage sustained as a result of the hazard insured against [internal quotation marks and citations omitted] ."

Bi-Economy Market, Inc. v Harleysville Insurance Company of New York, 10 NY3d 187, 194 (2008).

Because the proposed amendment is not palpably insufficient or patently devoid of merit, as supported by the reasoning in the above-quoted Court of Appeals cases, and the motion for leave to amend was made less than one year after the action commenced, there is no evidence that granting plaintiff's motion would prejudice or surprise defendant.  

With respect to plaintiff's motion to compel disclosure of the pre-suit communications with Harleysville's damage-estimating contractor, the court held that motion in abeyance and directed that Harleysville submit the withheld documents for the court's in camera review.  This decision followed that inspection and addressed Harleysville's motion to compel appraisal.

On plaintiff's request for clarification of the court's September 2009 decision and order, New York Supreme Court Justice Joan Kenney ruled that plaintiff's complaint "may be amended to include consequential damages for attorney’s fees and costs."  Citing the Court of Appeals' decision in Panasia Estates, Justice Kenney held:

Defendant only argued against inclusion of consequential damages because it asserted that plaintiff could not support the claim. In the instant matter, there are conflicting facts as to the manner in which the claim was handled, so that it cannot be determined at this juncture whether or not any alleged delays were reasonable under the circumstances, or which party caused such delays. However, the allegations are sufficient to place the matter before the trier of fact.

The decision of this court dated September 9, 2009, ordered that the complaint be amended in the proposed form annexed to the moving papers, which included the consequential damages plaintiff seeks. The discussion in that decision was directed only to plaintiff's claim for loss of business, because that was all that was argued by the parties in their papers at that time.

The decision does not specify whether the attorney's fees plaintiff sought were for other than the prosecution of this action.  If they were not, the court's most recent decision in this case on attorney's fees ostensibly conflicts with the courts' rulings in Panasia Estates, especially  New York County Supreme Court Justice Karen Smith's initial decision and order in that case, which granted Hudson's motion only to the extent of precluding plaintiff Panasia Estates from asserting any claims for legal fees incurred in the prosecution of its action.  See, also, Authelet v Nationwide Mut. Ins. Co., 2008 NY Slip Op 32929(U) (Sup. Ct., Suffolk Co., decided 10/24/2008)("The Court further notes, to the extent that the plaintiff seeks consequential damages for 'having been compelled to * * * retain legal counsel to seek redress,' that an insured may not recover attorney’s fees or other legal expenses incurred in bringing an action against an insurer, as here, to determine its rights under a policy (citations omitted). Hence, any consequential damages to which the plaintiff may ultimately be entitled shall be exclusive of such expenses."); and Grinshpun v. Travelers Cas. Co. of Conn., 23 Misc 3d 1111(A) (Sup. Ct., Kings Co., decided 3/11/2009)("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.")

After having reviewed the communications submitted for an in camera review, the court ruled that Harleysville's attorneys' pre-suit fax to Harleysville's damage-estimating contractor regarding building estimates, the attorneys' pre-suit email on this same subject, and the contractor's pre-suit email response to Harleysville's attorneys were not immune from disclosure based on the attorney-client and attorney work-product privileges, ostensibly finding that those communications were not made for the purpose of facilitating the rendition of legal advice or services, and were not prepared by counsel acting as such and did not otherwise uniquely reflect a lawyer's learning and professional skills.

In denying Harleysville's motion to compel an appraisal of plaintiff's building loss, Justice Kenney ruled, in effect, that Harleysville had waited too long to demand an appraisal under the policy, not having formally done so until nearly three years after the reported loss date and eight months after plaintiff had commenced this suit:

In the case at bar, the court agrees with plaintiff that the first written demand for an appraisal, as mandated by the provisions of the policy, was not made until May 29, 2009, several years after the occurrence and more than nine months after the initiation of the lawsuit. Defendant's letter of May 2 , 2008, only references the appraisal provision of the policy, which is non-obligatory and is only triggered by a written demand. The May 2, 2008, letter does not indicate that, at that time, defendant is demanding an appraisal; the letter merely implies that it may demand an appraisal if the parties cannot reach agreement.

Defendant's instant motion was made only after the lawsuit was filed and some discovery had taken placed. The plaintiff in this action is a 79-year old woman whose only source of income, allegedly, is revenue from the subject building. At this point, halting these proceedings for an appraisal would unduly delay a determination of the matter, and, therefore, is denied.

I'd hazard a guess that 79-year-old insureds on an allegedly fixed or limited income win more often than their insurers on motions such as these.  Although there are several reported decisions relating to the 9/11 World Trade Center tragedy in which insurers successfully invoked their right of appraisal after suit was commenced, the better practice, from an enforceability standpoint, would be to invoke the appraisal option or mechanism as soon as possible and prior to the insured's commencement of suit. 

Neither the September 2009 decision nor this one indicates whether:  (1) there were or are any coverage disputes affecting the parties' respective positions; (2) Harleysville issued any partial declinations of coverage; or (3) Harleysville made any payment of what it believed it owed for the loss to plaintiff.  What these decisions underscore, however, is that the Court of Appeals' February 2008 decisions in Bi-Economy Market and Panasia Estates will continue to be cited in support of insureds' claims of consequential damages against their property insurers whenever there is a denial of coverage or delay in paying a claim, and regardless of whether the insurance contract at issue contemplated such consequential damages.  As we approach the two-year anniversary of those decisions, the state of the case law in New York on the issue of consequential damages against insurers is:

1. consequential damages have not been limited only to claims arising under commercial property policies; 
2. they have not been limited only to policies that afford business interruption or business income loss coverage; 
3. an allegation of "bad faith" conduct by the insurer is not needed to state a claim for consequential damages; and 
4. in all but one reported decision since Bi-Economy and Panasia Estates were decided, New York courts have granted plaintiffs leave to amend their complaints to state claims for consequential damages against their insurers.
   

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.

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.

Bi-Economy Redux -- Fourth Department Reinstates Consequential Damages Claim

COMMERCIAL PROPERTY – CONSEQUENTIAL DAMAGES – CONSEQUENTIAL LOSS EXCLUSION – BI-ECONOMY
Stern v. Charter Oak Fire Ins. Co.
(4th Dept., decided 2/6/2009)

There are do-overs in many things -- playground games, movie making, golf drives, and even presidential oath taking. Streetplay.com recalls the time-honored method of childhood conflict resolution:

Sometimes, passions were too strong, convictions too deep, perspectives too contrasting to reach agreement on a call. Still, it was understood that unless the opposing team was being absolutely unreasonable or cheating, preserving friendships and, even more importantly, continuing the game took precedence over a specific play. After the proper amount of heated discussion had taken place, one of the player would finally extend the proverbial fig-leaf by offering his opponent a "do-over", as in "you can do it again."

The do-over was one of childhood's most powerful rites, for it exerted our dominion over the laws of space and time. The clock was rolled back, the game was restored to its exact status as before before the contested event and play was resumed. If the original play was particularly important and the second attempt was dramatically different (e.g. the player striking out instead of hitting a multi-base shot as in the original play), the do-over might be invoked again. This second invocation would give the team another chance thereby insuring that the universal forces of fair play were being righteously maintained.

Yes, it is with fond memories that we recall the do-over a divine method of resolution, and contemplate the untold blessings it could bring if it were somehow extended into our contemporary lives.

There are do-overs in the law. Motions to reargue. Motions to renew. Even an appeal, in a sense, can be a do-over. The plaintiff in this case was granted a do-over based on a material change in appellate decisional law.

Plaintiff sued her commercial property insurer, alleging that it breached her contract of insurance by failing to pay certain claims for losses arising from an armed robbery at plaintiff's jewelry store. In addition to claiming contractual damages (policy coverage benefits), plaintiff's complaint alleged and sought to recover consequential damages, including future lost profits and future sale value of the business. Initially, Charter Oak Fire Insurance Company, a Travelers company, successfully moved to dismiss plaintiff's consequential damages claim, and the Fourth Department affirmed that order in March 2007, based, in part, on its decision of one month earlier in Bi-Economy Mkt., Inc. v Harleysville Ins. Co. of N.Y., 37 AD3d 1184 (4th Dept. 2007).

In February 2008, the New York Court of Appeals reversed the Fourth Department's decision in Bi-Economy and ruled that consequential damages may be recoverable under a commercial property insurance policy. Based on that reversal and change in the law, plaintiff then moved to renew her opposition to Charter Oak's original motion to dismiss her consequential damages claim. Based on the doctrine of "law of the case", Onondaga County Supreme denied plaintiff's motion, and plaintiff once again appealed to the Fourth Department, Appellate Division.

The Fourth Department MODIFIED the order appealed from to grant plaintiff's motion to renew and reinstate her consequential damages claim:

Following our decision in the prior appeal, the Court of Appeals reversed the order in Bi-Economy Mkt., Inc., concluding under circumstances similar to those present in this case that a contractual exclusion for consequential losses in the insurance policy issued to the plaintiff business did not bar its claim for consequential damages caused by the defendant insurer's alleged breach of the terms of the policy (Bi-Economy Mkt., Inc. v Harleysville Ins. Co. of N.Y., 10 NY3d 187, 194-196; see Panasia Estates, Inc. v Hudson Ins. Co., 10 NY3d 200, 203).

While the instant action remained pending, plaintiff moved, inter alia, for leave to renew her opposition to Charter Oak's motion to dismiss her claim for consequential damages, based upon the decisions of the Court of Appeals in Bi-Economy Mkt., Inc. and Panasia Estates, Inc. Supreme Court erred in denying that part of plaintiff's motion for leave to renew with respect to consequential damages based upon the doctrine of law of the case and instead should have granted leave to renew and, upon renewal, denied Charter Oak's motion. "[A] court of original jurisdiction may entertain a motion to renew or [to] vacate a prior order or judgment even after an appellate court has rendered a decision on that order or judgment" (Tishman Constr. Corp. of N.Y. v City of New York, 280 AD2d 374, 377). Furthermore, we conclude that, because "the analysis employed by this [C]ourt in the prior appeal no longer reflects the current state of the law, the doctrine of law of the case should not be invoked to preclude reconsideration of" Charter Oak's motion to dismiss plaintiff's claim for compensatory damages (Szajna v Rand, 131 AD2d 840, 840; see Foley v Roche, 86 AD2d 887, lv denied 56 NY2d 507).

The reference to "compensatory damages" in the last sentence should probably have been "consequential damages", and this decision portends similar motions to renew previously successful motions to dismiss consequential damage claims. When a court of higher authority has made a material change in the law, and even where the aggrieved party unsuccessfully prosecuted an appeal, the law of the case doctrine will not preclude that party from seeking to renew its opposition to the original motion.

Do-over to plaintiff on her consequential damages claim.

Fifth Citing of Bi-Economy

HOMEOWNERS – CGL – PUNITIVE DAMAGES – REGULATION 64 CAUSE OF ACTION – CONSEQUENTIAL DAMAGES
Silverman v. State Farm Fire & Casualty Co.
(Sup. Ct., Nassau Co., decided 10/8/2008)

We now have our fifth citing of the Court of Appeals' February 2008 Bi-Economy Market v. Harleysville holding, this time in a New York state court homeowners and general liability coverage case.

Plaintiffs commenced this declaratory judgment (DJ) action for liability insurance coverage in relation to an underlying personal injury action brought against them for damages flowing from an alleged sexual assault committed by plaintiff Barry J. Silverman, DMD, on Elizabeth Ceparano. It was alleged that the incident took place on September 10, 2006 at the premises of defendants' dental practice in Bayside, New York. In an affirmation in opposition to the defendant insurers' motions to dismiss, plaintiffs' attorney contended that there was no assault, but only a consensual sexual encounter initiated by Ceparano when she was plaintiffs ' employee, the purpose of which was to later extort money from the plaintiffs.

Plaintiffs sought defense and indemnification coverage under: a homeowners policy issued by State Farm to Silverman and his wife for a premises located in Merrick, New York; a businessowners liability policy issued by Travelers/Charter Oak to University Dental, PC; and a CGL policy issued by Fireman's Fund/American to plaintiffs. In addition to seeking declaratory relief, plaintiffs' complaint also sought "punitive damages and statutorily mandated damages", based on defendants' alleged failure to settle the plaintiffs' insurance claims fairly and quickly, in violation of Insurance Law § 2601. State Farm, Charter Oak and American moved to dismiss the punitive damages and "statutorily mandated" damages claims, and State Farm also moved to dismiss the entire DJ complaint based on plaintiffs' alleged failure to name Ceprano and her husband as necessary and interested parties.

In granting the defendants' motions to dismiss the plaintiffs' claims for punitive damages and "statutorily mandated" damages, Nassau County Supreme Court Justice Daniel Palmieri held:

Under New York law, punitive damages would be available in this case only where the plaintiffs could demonstrate that they were victims of a tort independent of the insurance contract - even if denial of benefits under that contract could be deemed made in bad faith. New York University Continental Ins. Co., 87 NY2d 308 (1995); Rocanova Equitable Life Assurance Soc. of U.S., 83 NY2d 603 (1994). An independent tort is not alleged here. At best, the Court has before it a breach of contract that might be characterized as egregious, but that is not a tort. Moreover, punitive damages in the current context would require that the insurer's acts be those "evincing a high degree of moral turpitude and demonstrating such wanton dishonesty as to imply a criminal indifference to civil obligations." Rocanova, supra at 613. Again, the allegations, and even the statement of plaintiffs ' attorney, do not indicate behavior that rises to that level. See also, Fabiano v Philip Morris, Inc., __AD3d__, 862 NYS2d 487 (1 Dept. 2008) ("the courts of this State have been so adamant that punitive damages are ' a social exemplary remedy (and) not a private compensatory remedy ' that the imposition of such damages for private purposes has been held to violate public policy" [citation omitted]).

Plaintiffs do not dispute the foregoing law. Rather, citing recent decisions of the Court of Appeals, they contend that they may sue for consequential damages resulting from the failure to provide coverage. Such a failure may indeed support such a claim if it flows from a breach of the covenant of good faith and fair dealing, which the courts will read into all insurance contracts. Bi-Economy Mkt., Inc. v Harleysvile Ins. Co. of N.Y., 10 NY3d 187 (2008); Panasia Estates, Inc. v Hudson Ins. Co., 100 NY3d 200 (2008). However, as a claim for consequential damages is not the subject of the instant motions the Court need not address it as a basis for denying those motions, except to note that it does not serve to bolster a claim for punitive damages. Indeed, the Court of Appeals itself expressly distinguished the two and indicated no change to the law in that regard. Bi-Economy Mk., Inc., supra, at 193-194. "When an insured... suffers additional damages as a result of an insurer's excessive delay or improper denial, the insurance company should stand liable for those damages. This is not to punish the insurer but to give the insured its bargained-for benefit." Id., at 195 (emphasis added).

Accordingly, the Court agrees with the defendants that a claim for punitive damages does not lie and the same is dismissed as to all defendants.

Further, to the extent the "statutory" claim is premised on the alleged failure to settle fairly and quickly the insurance claims made, the reference is deemed to be to Insurance Law § 2601(c), which prohibits unfair claims settlement practices, but New York does not curently recognize a private right of action thereunder. Kantrowitz v Allstate Indem. Co., 48 AD3d 753 (2d Dept. 2008). Accordingly, it too is dismissed as to all defendants.

Without any analysis of whether consequential damages were within the contemplation of the parties when they entered into the particular insurance contracts at issue, Justice Palmieri ruled:

However, in view of the recent Court of Appeals [sic] decisions cited above, and the very early stage of the instant litigation, the plaintiffs may serve an amended complaint seeking consequential damages, as sought in counsel' s request to replead. * * * As noted, this case is in the very early stages, and the law on the subject has at least arguably been changed to allow for a consequential damages claim here.

In a footnote to that last statement, the court added:

This is not to say that the Court has determined that a claim for consequential damages is in fact viable in this case, and the defendants are not barred from moving to dismiss this claim after sufficient discovery has been had.

I'm not sure whether the court is inviting another CPLR 3211 motion to dismiss or a 3212 motion for summary judgment following discovery. Either way, the lack of any legal analysis of whether the homeowners and commercial liability policies contemplated consequential damages yet to be alleged in this case is both troubling and illustrative of what some feared would be New York courts' misapplication of the Bi-Economy ruling to any and all insurance coverage disputes. In decisions like this one, the courts are ignoring these words from Judge Piggott in Bi-Economy:

To determine whether consequential damages were reasonably contemplated by the parties, courts must look to "the nature, purpose and particular circumstances of the contract known by the parties . . . as well as 'what liability the defendant fairly may be supposed to have assumed consciously, or to have warranted the plaintiff reasonably to suppose that it assumed, when the contract was made[.]'"

* * * * *

Thus, the very purpose of business interruption coverage would have made Harleysville aware that if it breached its obligations under the contract to investigate in good faith and pay covered claims it would have to respond in damages to Bi-Economy for the loss of its business as a result of the breach[.]

* * * * *

Therefore, in light of the nature and purpose of the insurance contract at issue, as well as Bi-Economy's allegations that Harleysville breached its duty to act in good faith, we hold that Bi-Economy's claim for consequential damages including the demise of its business, was reasonably foreseeable and contemplated by the parties, and thus cannot be dismissed on summary judgment.

What damages consequential to an alleged breach of a homeowners or general liability insurer's obligation to defend and indemnify an insured could there be other than defense and indemnification costs? Since the nature and purpose of a liability insurance contract is to provide defense and indemnification protection for covered losses and claims, what other damages consequential to an alleged breach of such a contract were reasonably foreseeable and contemplated by the parties at the policy's inception?

The Court of Appeals implicitly recognized in Bi-Economy that not every insurance contract can or will support a claim for consequential damages. If this weren't the case, there would have been no need for the court's analysis and determination of the "nature and purpose" of the commercial property policy at issue, with its business income loss coverage, in that case.

Fourth Citing of Bi-Economy

ENVIRONMENTAL LIABILITY – CONSEQUENTIAL DAMAGES – BREACH OF COVENANT OF GOOD FAITH & FAIR DEALING
Handy & Harman v. American International Group, Inc.
(Sup. Ct., New York Co., decided 8/25/2008)

We now have our fourth citing of the Court of Appeals' February 2008 Bi-Economy holding, this time in a New York state court environmental contamination liability coverage case.

Plaintiff operated a large precious metals manufacturing facility in Fairfield, Connecticut. In 2003, it ceased operations and sought to sell the property. Under the terms of the sale agreement, plaintiff was responsible for demolishing the existing structures and performing an environmental remediation. In April 2004, plaintiff purchased a "Pollution Legal Liability Select Clean-Up Cost Cap Insurance" policy from American International Specialty Insurance Company (AISLIC), to insure certain risks associated with the remediation at the site.

Plaintiff's environmental consultants, Roux Associates, Inc., developed a remedial action work plan, which identified certain pollutants on the site, including petroleum-related compounds and metals. Plaintiff commenced remediation at the site under the work plan, with defendants’ knowledge. It incurred costs in excess of the policy's $4,739,030 self-insured retention and AIG accepted coverage under the policy's Coverage K, and paid the cost overruns up to the Coverage K policy limit of $2,000,000.

n December 2004, contractors from Roux discovered underground conditions, including a previously unknown layer of materials beneath clean fill, and a previously unknown underground storage tank filled with debris. Roux also discovered a previously unknown foundation, beneath which were pollutants unknown at the time of the creation of the remedial action work plan, and which were later identified as containing petroleum-related compounds and metals. The discoveries were brought to the attention of the Connecticut Department of Environmental Protection (CTDEP), which, directed that the newly discovered areas of contamination be remediated. Plaintiff sent the CTDEP letter to AIG as notice of its claim.

By a variety of letters and for a variety of reasons, AIG denied coverage under the policy's $10,000,000 Coverage A. Plaintiff then commenced this action seeking recovery for breach of the contract of insurance and breach of the covenant of good faith and fair dealing. In the first cause of action, plaintiff sought recovery for the substantial sums it allegedly expended in the clean-up and remediation of its property and for consequential damages stemming from the insurers' delay, failure to investigate, and bad faith denial of its claim. In the second cause of action, plaintiff alleged that the insurers breached their covenant of good faith by failing to fully investigate plaintiff's claims for coverage under Coverage A, and sought damages including amounts incurred in the prosecution of the claim.

AIG moved to dismiss the complaint's second cause of action for failure to state a claim, and to dismiss plaintiff's request for extra-contractual or consequential damages.

In granting the motion to the extent of dismissing the complaint's "breach of covenant of good faith and fair dealing" cause of action, New York County Supreme Court Justice Herman Cahn held:

Plaintiff's allegations here, that defendants delayed, failed to investigate and denied plaintiff's claim in bad faith, simply allege a breach of the insurance contract and any covenants implied in that contract. These allegations do not allege conduct giving rise to an independent tort duty of care flowing to plaintiff' insured separate and apart from the insurance contract.

Justice Cahn declined, however, to dismiss the complaint's claim for "consequential damages", relying on the Court of Appeals' decisions in Bi-Economy Market and Panasia Estates:

Plaintiff has sufficiently alleged a basis for seeking consequential damages beyond the policy limits for such breach (see Panasia Estates, Inc. v Hudson Ins. Co., 10 NY3d 200, 203-04 [2008] [consequential damages available for failure to properly investigate insured's loss]; Bi-Economy Mkt., Inc. v Harleysville Ins. Co. of N.Y., 10 NY3d at 192-95 [consequential damages resulting from breach of covenant of good faith may be asserted in insurance contract context]; Hoffman v Unionmutual Stock Life Ins. Co. of N.Y., 51 AD3d 633, 633 [2d Dept 2008] [allegations of insurer's bad faith may be incorporated into breach of contract claim]; Acquista v New York Life Ins. Co., 285 AD2d 73, 79-82 [1st Dept 2001] [bad faith allegations may he incorporated into contract claim, and insured may seek consequential damages). While ordinarily damages arising from a breach of contract will be limited to the contract damages necessary to redress the wrong (see New York Univ. v Continental Ins. Co., 87 NY2d at 315), in the insurance contract context, an insured may pursue a claim for consequential damages, as plaintiff does here, based on defendants' claimed breach of the covenant of good faith.

* * * * *

Here, as in both Panasia Estates, Inc. v Hudson Ins. Co. and Bi-Economy Mkt., Inc. v Harleysvillc Ins. Co. of N.Y., plaintiff’s claim is based on allegations that defendants breached their duty to investigate, bargain for, and settle its claim in good faith. Contrary to defendants’ contention, plaintiff has sufficiently pled, at this early stage in the litigation, that consequential damages were within the contemplation of the parties as a probable result of the breach at the time of, or prior to, contracting. The purpose of this environmental pollution liability policy was to ensure that the business paying for and conducting the pollution remediation, the insured, had the financial support to conduct and finish the remediation when the costs went beyond the self-insured retention amount for pollution conditions identified in the remedial plan, and to pay third-party claims for clean-up costs of the pollution conditions. Plaintiff purchased the insurance so that it could avoid financial pressure on its business upon funding the costs of a pollution remediation. An insurer in these circumstances fairly may be supposed to have assumed, when the insurance contract was made, that if it breached its obligations under the contract to timely investigate in good faith and pay covered claims it would have to respond in damages for damages to plaintiff's business (see Bi-Economy Mkt., lnc. v Harleysville Ins. Co.of N.Y., 10 NY3d at 193).

As the Court of Appeals found in Bi-Economy Mkt., Inc. v Harleysville Ins. Co. of N.Y., plaintiff here asserts that this was not a pure agreement to pay or a contract for money only (10 NY3d at 193). Rather, it is claimed that the purpose of this insurance policy - what plaintiff planned to do with the payment - was at the very core of the contract. Plaintiff bargained for this policy not only so that it could be paid the policy amount, but so that it also could have “the peace of mind, or comfort, of knowing that it will be protected in the event of a catastrophe” (id. at 194 [internal citations omitted]). It was purchased by plaintiff to protect it from the calamity of unforeseen and monumental environmental clean-up costs, and avert risk with regard to such costs and liabilities. Moreover, the particular circumstances of this insurance contract known by the parties at or prior to contracting, point to the foreseeability of consequential damages. For example, the site was being dug up and pollution conditions being remediated, with the purpose that the site was to be redeveloped. By delaying and failing to investigate, plaintiff contends that the site is further on the road to redevelopment [sic] and no longer open or easily inspected, resulting in further foreseeable harm in the form of increased costs and difficulty of proof. It is therefore claimed that, in light of the nature and purpose of this pollution liability policy and the circumstances of the policy, the claim for consequential damages was within the contemplation of the parties as a probable result of a breach at the time of or prior to contracting. Thus, plaintiff has sufficiently alleged a claim for consequential damages for breach of the covenant of good faith, all of which are incorporated into the first cause of action for breach of contract.

Editor's Note: This case represents a noteworthy and potentially troublesome extension of the holdings of Bi-Economy Market and Panasia Estates by a New York state court. The policy at issue was not a commercial property policy, but a pollution legal liability policy, such as in United States Fire Ins. Co. v. Bunge North America, Inc. Imprecise parenthetical comments such as "consequential damages [are] available for failure to properly investigate insured's loss" in this decision demonstrate the ease with which courts will liberally read or misread the holdings of Bi-Economy Market and Panasia Estates to deny motions to dismiss consequential damages claims. Perhaps the unique nature of the policy and coverage at issue in this case -- pollution legal liability select clean-up cost cap insurance -- will limit its holding. But perhaps not.

Third Citing of Bi-Economy

It's been a while, but we have our third citing of the Court of Appeals' February 2008 Bi-Economy holding, this time in a Kansas federal court case.

In United States Fire Ins. Co. v. Bunge North America, Inc., Case No. 05-2192-JWL (USDC Kansas, decided 8/4/2008), an environmental pollution coverage case decided under New York law, US District Court Judge John Lungstrum held:

Bunge insists that it may pursue a claim for consequential damages under New York law based on Travelers's breach of good faith. Indeed, only this year, in Bi-Economy Market, Inc. v. Harleysville Insurance Company of New York, 10 N.Y.3d 187, 886 N.E.2d 127 (N.Y. 2008), the New York Court of Appeals permitted an insured to pursue a claim for consequential damages, including the demise of its business, based on the insurer's breach of its implied contractual duty of good faith and fair dealing in light of evidence that such a claim was reasonably foreseeable and within the contemplation of the parties at the time of contracting. See 10 N.Y.3d at 196; see also Panasia Estates, Inc. v. Hudson Ins. Co., 10 N.Y.3d 200, 203, 886 N.E.2d 135 (N.Y. 2008) (companion case to Bi-Economy). In its summary judgment briefing, Travelers did not argue that a claim for consequential damages was not reasonably foreseeable or within the contemplation of the parties when the policies were issued. Accordingly, Travelers has not shown at this stage as a matter of law that Bunge may not pursue a claim for consequential damages based on the allegation (litigated within the context of its primary breach-of-contract claim) that Travelers breached its implied duty of good faith and fair dealing.FN 13

FN 13 In its response brief, Bunge pointed to various acts by which Travelers allegedly breached its duty of good faith. Bunge's allegations concerning Travelers's failure to pay its coverage claims and its failure to investigate adequately provide proper bases for the claim recognized in Bi-Economy as well as Bunge's claim for attorney fees. Travelers's alleged conduct in breaching separate agreements with Bunge concerning defense costs are properly litigated only in a separate action for breach of those agreements, and Bunge's breach-of-good-faith claim in this case may not rest on such allegations. Similarly, Bunge's allegations concerning Travelers's litigation tactics in this case do not provide a proper basis for a claim that Travelers breach its duty of good faith in performing its obligations under the policies. See Fed. R. Civ. P. 56(d)(1).

Not sure this adds anything to the progeny of Bi-Economy. It appears that Travelers did not vigorously oppose Bunge's claim for consequential damages based on Bi-Economy and Travelers' alleged breach of its good faith duty to investigate and pay covered claims. What is somewhat notable, or at least interesting, is the citation to Bi-Economy in a commercial liability coverage case.

Another Bi-Economy Sighting, Sort Of

Yesterday's Buffalo Law Journal contained a story about the Court of Appeals' June 5th denial of Harleysville's motion to reargue. Not a reaffirmance, as the story reports, but Bi-Economy's attorney, Kathy Burr, is quoted on her assessment of the import of the Court's February decision, allowing her client's consequential damages claim to remain in the lawsuit against Harleysville. Coverage Coverage was contacted and quoted for an alternative and somewhat opposing viewpoint.

For all postings from this blawg on Bi-Economy, click here.

Reargument of Bi-Economy Market v. Harleysville Denied

COMMERCIAL PROPERTY – CONSEQUENTIAL DAMAGES
Bi-Economy Mkt., Inc. v. Harleysville Ins. Co. of N. Y.
(Ct. Apps., decided 6/5/2008)

With no fanfare, the Court Appeals today DENIED Harleysville's motion to reargue this appeal, with $100 costs and necessary reproduction disbursements.

The original decision is here.

Postings in this blawg about Bi-Economy are here.

And Another Bi-Economy Citing

Our election inspectors have just completed their examination of some hanging chads, and we must now declare a new second citing of the Bi-Economy holding. Hoffman (post below) falls to #3.

In Prince Seating Corp. v. QBE Ins. Co., (Sup.Ct., Kings Co., decided 5/2/2008), Justice Laura Lee Jacobson twice cited Bi-Economy in this DJ and breach of contract action. Prince Seating brought this action against its insurer, QBE Insurance Company, and insurance broker, Century Coverage Corp., after QBE disclaimed coverage for an underlying personal injury claim based on Prince Seating's alleged late notice of that occurrence. Prince Seating provided notice of the underlying occurrence to Century in August 2001, which in turn allegedly failed to timely pass along that notice to QBE. Prince Seating asserted that Century had instructed it to report all potential claims to it, and that Century would then forward the claims to QBE. For reasons not explained in the court's decision, the underlying personal injury claim went into suit in Virginia in April 2003 and resulted in a $1.4 million default judgment against Prince Seating in early 2005.

In seeking dismissal of the fourth cause of action of Prince Seating's complaint, Century argued that the gravamen of plaintiff's sole cause of action against it was actually a negligence claim, rather than a breach of contract claim, and thus was subject to a 3-year, not 6-year, statute of limitations. In support of its argument, Century asserted that plaintiff was seeking consequential damages that were not within the contemplanion of the parties as the probable result of a breach at the time of or prior to contracting. Century argued that the damages of a judgment for $1,400,000 in the Virginia action due to its failure to carry out an alleged agreement to inform QBE of the claim at issue could not have been contemplated by the parties at the time of their entry into such alleged agreement.

In disagreeing with Century's argument, the court held:

contrary to Century’s argument, the cost of the replacement of this service could not be a proper measure of contractual damages, and could not be the damages contemplated by the parties at the time of their entry into the alleged agreement. Instead, the recovery of the loss sustained by plaintiff in the Virginia action, as a direct result of an alleged breach of Century’s contractual obligation, is the proper measure of damages. These damages, which are the damages sought by plaintiff herein, were foreseeable and the natural and probable result of Century’s alleged breach and directly flow from such breach (see Bi-Economy Mkt., Inc. v Harleysville Ins. Co. of N.Y., 10 NY3d 187, 192-193 [2008]; (other citations omitted)).

In the same vein, the court rejected Century's argument that plaintiff's fourth cause of action was deficient because it failed to plead contractual damages which were contemplated at the time the contract was executed:

This argument by Century must fail. Plaintiff seeks damages, which it alleges, were a direct and foreseeable result of Century’s breach of the agreement, namely, that if QBE is found not to have a duty to defend and indemnify it for the judgment in the Virginia action under the QBE policy, Century is liable to it and obligated to indemnify it for all damages arising out of the Virginia action. While Century asserts that it did not contemplate the default judgment rendered, this judgment was the natural consequence of the lack of a defense from QBE, which was allegedly caused by Century’s failure to notify QBE of the claim, resulting in QBE's disclaimer (see generally Bi-Economy Mkt., Inc. v Harleysville Ins. Co. of N.Y., 10 NY3d 187, 192-193 [2008]; (other citations omitted)).

Notably, the words "bad faith" do not appear in this decision, and a careful reading of it reveals that the court cited Bi-Economy for the generally accepted and relatively longstanding proposition that consequential damages must have been foreseeable or within the contemplation of the parties at the time of contracting in order to be recoverable in a breach of contract action. Thus, these citations in this case add nothing particularly new to New York law and provide no indication of the future course or scope of the Bi-Economy and Panasia holdings in actions against insurers.

Second Citing of Bi-Economy

We have our second citing of the Bi-Economy holding. This one is a bit more intriguing than the first.

Hoffman v. Unionmutual Stock Life Ins. Co. of NY, (2nd Dept., decided 5/6/2008) appears to be a breach of contract action for denied disability insurance benefits. On defendant First Unum's separate motions, the lower court: (1) denied summary judgment based on First Unum's SOL defense; (2) granted that branch of First Unum's motion to dismiss the second and third causes of action of plaintiff's complaint insofar as they were premised on First Unum's alleged bad faith handling of the plaintiff's claim for disability insurance benefits; (3) granted the plaintiff leave to serve an amended complaint incorporating the allegations of bad faith into the first cause of action, premised on breach of contract; and (4) denied First Unum's motion to strike the portions of the amended complaint that alleged "bad faith".

In AFFIRMING the lower court's rulings in all respects, and without commenting on whether the "bad faith" allegations were added to support a claim for consequential damages, the Second Department somewhat cryptically stated:

Supreme Court was correct in allowing the allegations of bad faith to be incorporated in an amended complaint and in denying that branch of the appellant's motion which [sic] to strike those portions of the amended complaint (see Bi-Economy Mkt., Inc. v Harleysville Ins. Co. of New York, 10 NY3d 187; Panasia Estates v Hudson Ins. Co., 10 NY3d 200).

Although the Second Department does not cite to it, in 2001 the First Department in Acquista v. New York Life Ins. Co. held that a plaintiff insured could claim consequential damages from the defendant disability insurer for its alleged breach of its duty to investigate, bargain, and settle the plaintiff's claim in good faith to the amount specified in the insurance policy. To the extent that Acquista was the first decision in New York to court to recognize the recoverability of consequential damages for what some characterize as insurer "bad faith", the court's reasoning in Acquista is worthy of another look:

Plaintiff's fifth and sixth causes of action allege a pattern of bad faith conduct and unfair practices on the part of defendant insurer, and claim resulting emotional distress as well as economic and non-economic injury. The claim that defendant insurance company acted in bad faith is founded upon allegations that it undertook a conscious campaign calculated to delay and avoid payment on his claims, while having determined at the outset that it would deny coverage. He sets forth defendant's ongoing pattern of avoiding the claim, by which it would make multiple requests for additional documentation, upon receipt of which further documents would be demanded, after which plaintiff's claims file would then be transferred to a new examiner, who in turn would make more requests. Plaintiff adds that defendant waited more than two years to request or schedule an independent medical examination.

In seeking dismissal of the bad faith claim, defendant asserts that New York law does not recognize an independent tort cause of action for an insurer's alleged failure to perform its contractual obligations under an insurance policy, relying upon Rocanova v Equitable Life Assur. Socy. (83 NY2d 603) and New York Univ. v Continental Ins. Co. (87 NY2d 308).

It is correct that, to date, this State has maintained the traditional view that an insurer's failure to make payments or provide benefits in accordance with a policy of insurance constitutes merely a breach of contract, which is remedied by contract damages (citations omitted). Yet, for some time, courts and commentators around the country have increasingly acknowledged that a fundamental injustice may result when a traditional contract analysis is applied to circumstances where insurance claims were denied despite the insurers' lack of a reasonable basis to deny them (citations omitted).

Under the traditional analysis, because insurance policies are viewed as contracts for the payment of money only, the damages available for an insurer's failure to pay or provide benefits have been limited to the amount of the policy plus interest (citation omitted). Yet, an award, at the conclusion of litigation, of money damages equal to what the insurer should have paid in the first place, may not actually achieve the goal of contract damages, which is to place the plaintiff in the position he would have been in had the contract been performed (citation omitted).

Among other things, this concept of damages presumes that a plaintiff has access to an alternative source of funds from which to pay that which the insurer refuses to pay. This is frequently an inaccurate assumption. Additionally, an insured's inability to pay that which the insurer should be covering may result in further damages to the insured. Of course, limiting the potential damages to the policy amount also fails to address the potential for emotional distress or even further physical injury that may result where a plaintiff under the strain of serious medical problems is forced to also undertake the stress of extended litigation. What is more, if statutory interest is lower than that which the insurer can earn on the sums payable, the insurer has a financial incentive to decline to cover or pay on a claim (citation omitted).

In view of the inadequacy of contract remedies where an insurer purposefully declines or avoids a claim without a reasonable basis for doing so, a majority of states have responded to this need for a more suitable remedy by adopting a tort cause of action applicable to circumstances where an insurer has used bad faith in handling a policyholder's claim (citations omitted).

This cause of action is generally stated as a breach of the insurer's duty of good faith. Under this approach, where an insured demonstrates more than merely a denial of benefits promised under a policy of insurance, but instead, that the insurer's denial of the claim was deliberately made in bad faith, with knowledge of the lack of a reasonable basis for the denial, the insured may be entitled to compensatory tort damages. Other states, troubled by imposing upon insurance companies a tort duty in such circumstances, have instead expanded the scope of contract remedies to encompass more than just the policy limits. These courts have instead held that the contract damages available, where an insurer fails to pay benefits to which the insured was entitled, may include foreseeable money damages beyond the policy limit (citations omitted). While some states would exclude compensation for mental or emotional distress unrelated to physical injury, caused by the denial of a claim (citations omitted), others include the possibility of consequential damages for mental distress or aggravation and inconvenience (citations omitted). Of course, such non-economic losses would be compensable only in circumstances where they were a foreseeable result of a breach at the time the policy was entered into (emphasis added).

We are unwilling to adopt the widely accepted tort cause of action for "bad faith" in the context of a first-party claim, because we recognize that to do so would constitute an extreme change in the law of this State. (Emphasis added.) Essentially, we accept the more conservative approach adopted by the minority of jurisdictions that "the duties and obligations of the parties [to an insurance policy] are contractual rather than fiduciary" (citation omitted). However, as this Court has recently acknowledged, "an insured should have an adequate remedy to redress an insurer's bad faith refusal of benefits under its policy" (citation omitted). Providing such a remedy cannot be accomplished where a policyholder who makes out a claim of bad faith avoidance of a valid insurance claim may only obtain a judgment for the face amount of the policy.

Therefore, in order to ensure the availability of an appropriate and sufficient remedy, we adopt the reasoning of the Beck court that "there is no reason to limit damages recoverable for breach of a duty to investigate, bargain, and settle claims in good faith to the amount specified in the insurance policy. Nothing inherent in the contract law approach mandates this narrow definition of recoverable damages. Although the policy limits define the amount for which the insurer may be held responsible in performing the contract, they do not define the amount for which it may be liable upon a breach." (citation omitted)

We consider the need for this form of damages to be apparent. The problem of dilatory tactics by insurance companies seeking to delay and avoid payment of proper claims has apparently become widespread enough to prompt most states to respond with some sort of remedy for aggrieved policyholders. To term such a claim "unique to these parties" as the dissent does, and therefore not warranting a remedy beyond that traditionally available for an insurer's failure to pay on a claim, is to utterly ignore this fact.

As to the dissent's suggestion that the claim of bad faith is undermined by our finding that an issue of fact exists as to whether plaintiff is entitled to coverage at all, we must recall that we have before us a dismissal motion under CPLR 3211. Just as it may ultimately be found that plaintiff was entitled to coverage, it may also be found, as he alleges, that the insurer's delay, avoidance and ultimate rejection of the claim was based not upon a reasonable assessment of the situation but rather, solely upon its own financial self-interest. For this Court to say, in the context of a motion under CPLR 3211, that the denial of benefits was reasonable as a matter of law, is to reject out of hand plaintiff's factual assertions and to accept the facts as defendant insurer alleges them to be.

By the same token, the dissent's conclusion that plaintiff is partially to blame for the delay in the processing of his claim is inappropriate in the context of this motion, in which we are required to accept the facts as plaintiff alleges them to be. For all the foregoing reasons, while plaintiff's cause of action alleging bad faith conduct on the part of the insurer cannot stand as a distinct tort cause of action, we conclude that its allegations may be employed to interpose a claim for consequential damages beyond the limits of the policy for the claimed breach of contract.

The Second Department's decision in Hoffman will undoubtedly be heralded as the strongest signal yet that New York courts will permit insureds to assert "bad faith" claims or causes of action against their insurers. My professional colleague Kathy Burr, who argued Bi-Economy's position to the Court of Appeals, also believes Hoffman may be a sign that Bi-Economy is not going to be read as being limited to commercial fire insurance with business interruption coverage. I'm not so sure, and certainly won't and can't concede that interpretation just yet based solely on the Second Department's one-liner citation to Bi-Econony and Panasia in Hoffman.

To me, Hoffman is understandable in light of Acquista, in that both cases involved claims for disability insurance benefits. Not to be overlooked, as well, is the fact that the lower granted that branch of First Unum's motion to dismiss the second and third causes of action of plaintiff's complaint insofar as they were premised on First Unum's alleged bad faith handling of the plaintiff's claim for disability insurance benefits, i.e., the "bad faith" causes of action.

My reading of Bi-Economy, Panasia and Hoffman is that they do not create a new cause of action of insurer "bad faith" but merely permit insureds to assert claims for consequential damages that were foreseeable at the time of the policy's inception, where it can be and is alleged that the insurer breached its duty to act in good faith vis-a-vis the insured and her claim. In other words, these cases are not so much about an expanded theory of imposable liability as they are about an expanded theory of recoverable damages.

First Citing of Bi-Economy

We have our first citing of the Bi-Economy holding. Only a passing sighting, but one nonetheless.

Fershtadt v. Verizon Communications, Inc., (SDNY decided 4/24/2008) involved a "series of alleged machinations" by Verizon and its employee benefits plan that resulted in the underpayment of disability benefits to the plaintiff. The defendants moved to dismiss all but one cause of action of the complaint based on the preemption of federal ERISA laws.

In granting defendants' motion dismissing the plaintiff's consequential damages claim that was based on New York case law, the federal court noted that the insurance contract in Bi-Economy did not "relate to" employee benefit plans. The court also noted that "[t]he Bi-Economy rule is not a law that 'regulates insurance.' Bi-Economy held that, as a general rule of contract law, reasonably foreseeable consequential damages are available in certain circumstances, and that this general rule of contract law applies to any contract to pay a sum of money - including an insurance contract."

The court's passing citation to and brief summary of the "rule" of Bi-Economy in this case does little to clarify or predict the scope of its holding. Commentators continue to speculate whether Bi-Economy will support new causes of action for "bad faith" and extracontractual damages in a no-fault context. See, No-Fault Insurance Wrap-Up, Barshay and Lakin Shatz, New York Law Journal, April 30, 2008.

Consequential Damages

COMMERCIAL PROPERTY -- BUSINESS INCOME LOSS COVERAGE -- CONSEQUENTIAL DAMAGES

Bi-Economy Market, Inc. v. Harleysville Ins. Co. of NY
10 N.Y.3d 187 (Ct. Apps. decided 2/19/2008)

Extracontractual damages aren't what they used to be.

On February 19, 2008, the New York Court of Appeals decided a pair of first-party property insurance cases that some have since touted as portending expanding vistas of "bad faith" litigation against insurers in New York.

In Bi-Economy Market, Inc. v. Harleysville Ins. Co. of NY, the 5-2 majority reversed the lower courts' dismissal of the insured's claim for consequential damages allegedly due to the insurer's delay in paying policy benefits. Relying on pre-existing but mostly non-insurance case law, the Court of Appeals held that

in light of the nature and purpose of the insurance contract at issue, as well as Bi-Economy's allegations that Harleysville breached its duty to act in good faith, we hold that Bi-Economy's claim for consequential damages including the demise of its business, was reasonably foreseeable and contemplated by the parties, and thus cannot be dismissed on summary judgment.

To the majority, "the very purpose of business interruption coverage would have made Harleysville aware that if it breached its obligations under the contract to investigate in good faith and pay covered claims it would have to respond in damages to Bi-Economy for the loss of its business as a result of the breach." The Court rejected the insurer's argument that the policy's "consequential loss" exclusion applied to negate coverage for the insured's alleged consequential damages.

In his dissent, Judge Smith opined that the majority's ruling effectively and erroneously re-labels punitive damages as consequential damages, and a "bad faith" failure to pay a claim as a "breach of the covenant of good faith and fair dealing." Judge Smith 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.

In the companion case of Panasia Estates, Inc. v. Hudson Ins. Co., the same 5-2 majority affirmed the lower courts' denial of the insurer's motion for partial summary judgment dismissing the plaintiff's claims for consequential damages. Relying on its decision in the Bi-Economy Market case, the majority noted that "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[.]'" Unlike in the Bi-Economy Market case, however, the Panasia Estates water damage claim was denied in its entirety due to the asserted applicability of one or more policy exclusions. In remanding the case back to Supreme Court, however, the Court of Appeals observed that the lower courts "failed to consider whether the specific damages sought by Panasia were foreseeable damages as the result of Hudson's breach", suggesting that there was not enough information in the record before the Court of Appeals to determine whether the consequential damages Panasia was alleging to have suffered were within the contemplation of the parties when the particular insurance policy at issue incepted.

Some commentators, including this one, believe that the Bi-Economy ruling allowing claims for consequential damages to proceed to triers-of-fact must be limited to insurance claims under commercial property policies that afford business interruption or business income loss coverage. However, Judge Smith's dissent in Bi-Economy pointed out that the Panasia Estates case involved no business interruption coverage.

Numerous signals in Bi-Economy -- including the majority's explicit reference to "the very purpose of business interruption coverage" -- would seem to indicate that its holding will support consequential damage claims only under commercial property insurance policies that afford business interruption or business income loss coverage. In his opinion for the majority, Judge Piggot explained that in "determin[ing] whether consequential damages were reasonably contemplated by the parties [and thus recoverable in a subsequent breach of contract action], courts must look to 'the nature, purpose and particular circumstances of the contract known by the parties[.]'" Having recognized that the nature and purpose of business interruption coverage in a commercial property insurance policy contemplates and is to protect against the loss of business, it is somewhat understandable that the majority concluded that Bi-Economy's claim for the "complete demise of its business" was within the contemplation of the parties at the time the insurance policy incepted.

It remains to be seen whether the Bi-Economy Market and Panasia Estates rulings will be extended to losses and claims arising under other than commercial property insurance policies. In my office we have already seen insureds' counsel seek to assert consequential damage claims in: (1) a late notice declaratory judgment action; (2) no-fault benefits recovery suits; and (3) a homeowners' policy first-party breach of contract suit. If and when we obtain or learn of written decisions addressing the scope of Bi-Economy Market and Panasia Estates, we will re-publish them here.

Meanwhile, to avoid the potential sting of consequential damages -- which by their nature are extracontractual -- in all first-party losses insurers should:

1. ask and document whether and, if so, the insured is taking steps to mitigate the loss and return as quickly as possible to pre-loss status;
2. use advance payment on condition of reservation of rights forms in offering and making advance payments; and
3. pay what you believe you owe, as soon as you determine such amount is owed, and regardless of whether there is yet an agreement or settlement on numbers in place with the insured.

Coverage Counsel has learned that Harleysville has filed a motion to reargue this case to the Court of Appeals. It won't be until late May or early June that we'll know the outcome of that motion.