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.

Twenty-One Floors of Wet -- New York Supreme Dismisses Subrogation Action Based on Anti-Subrogation Rule

BUILDER'S RISK – SUBROGATION – ANTISUBROGATION RULE – INSURABLE INTEREST
St. Paul Fire & Mar. Ins. Co. v. FD Sprinkler, Inc.
(Sup. Ct., New York Co., decided 8/31/2009)

St. Paul issued a builders risk policy to Chelsea 27th Streets Apartments, LLC for construction at 800 Sixth Avenue, New York, New York.  Subcontractors FD Sprinkler, Inc. and Woodworks Construction Company were named as additional insureds on that policy by the following provision:

All subcontractors as Additional Insureds, ATIMA. St. Paul does not waive its rights of subrogation. The insured is not permitted to release from liability any such subcontractor after a loss.

ATIMA is an underwriting acronym meaning "as their interests may appear". 

On December 24, 2003, a sprinkler head on the 21st floor accidently discharged, causing extensive water damage all all the way down to the lobby.  The door to a temporary bathroom had swung open and struck the sprinkler head, causing it to discharge.  FD Sprinkler has installed the sprinkler head, and Woodworks had framed and constructed the temporary bathroom.  St. Paul paid Chelsea $714,438 for the damages and commenced this subrogation action against FD Sprinkler, Woodworks and others to recover its payment.

FD Sprinkler and Woodworks moved for summary judgment dismissing the complaint on the ground that the antisubrogation rule barred St. Paul's action against them.   St. Paul opposed the motion by arguing that although FD Sprinkler and Woodworks were additional insureds on the policy, they were not insureds for the damages at issue, and therefore, were not protected by the antisubrogation rule. St. Paul asserted that these subcontractors enjoyed only limited property insurance protection under the policy, in that they were only covered for property damage "ATIMA", or to the extent of their respective financial interests in the insured property.

In GRANTING FD Sprinkler's and Woodworks' motions, New York County Supreme Court Justice Doris Ling-Cohan ruled that each had an insurable interest in the damaged property, and thus were insured under Chelsea's builder's risk policy with St. Paul because their trade subcontracts provided that “[a]ny Work performed by others that is damaged by this Subcontractor or its employees or agents shall be the sole responsibility of this Subcontractor to replace at no additional cost[.]”  Based on this finding, the court held that the antisubrogation rule applied to preclude this action against FD Sprinkler and Woodworks.

Designation of Risk on Declarations Page Controls

BUILDERS RISK POLICY – FIRE LOSS – OCCUPANCY PERCENTAGE – NOTATION ON DECLARATIONS PAGE – SCRIVENER'S ERROR – REFORMATION
Markotsis v. Zurich Ins. Co.
(Sup.Ct., Nassau Co., decided 4/15/2008)

Plaintiffs loaned Sirgany $330,000 to renovate a 10-unit apartment building. Sirgany obtained a builders risk policy from Zurich for the period May 2005-2006. On the policy's declarations, the box for "commercial structure" was checked, rather than the one for "1-12 Family dwelling". Consistent with the nature and purpose of builders risk coverage, the policy contained a condition that terminated coverage at certain percentages of occupancy: 50% if the property was a "multiple dwelling"; 75% if the property was a "commercial structure". Plaintiffs were listed as additional insureds.

In April, 2006, the building was destroyed by fire. During its investigation, Zurich learned that 60% (6 of 10) of the building's units had been leased, although the insured's public adjuster advised that was not the case. Zurich reserved its rights to deny coverage based on the policy's occupancy condition and continued its investigation. The insured reportedly lost the building in foreclosure in September 2006, the plaintiffs taking a deficiency judgment in excess of the $330,000 debt. Plaintiffs then commenced this action against Zurich in March 2007 for payment of the fire loss under the policy.

The court found that plaintiffs had demonstrated their entitlement to summary judgment by submitting: (1) the executed declarations page which unambiguously depicts the property as a "commercial structure"; (2) portions of the "Builders' Risk Coverage Form" section of the policy, which expressly incorporated into that section "the information contained in the Declarations" page; and (3) "Section E Additional Conditions" which provides that coverage would terminate in connection with a "commercial structure" - undefined in the policy - only "when 75% or more of the square footage space is leased or rented to others".

The court rejected Zurich's argument that the policy's actual coverage terms and provisions superseded the notation on the declarations page, and also rejected Zurich's contention that the "commercial structure" notation was just the "errant check mark" or "scrivener's error" of an underwriter. Notably, Zurich submitted no affidavit from an underwriter to that effect. Based on the lack of any proof that the "commercial structure" notation was a mutual mistake, the court denied Zurich's request for an equitable reformation (re-writing) of the policy. However, given that plaintiffs had not submitted proof of the building's actual occupancy percentage, the court limited its award of summary judgment to the plaintiffs and ordered that discovery proceed.