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.

Questions of Fact on Insureds' Excuses for Late Notice Preclude Summary Judgment to Homeowners Liability Insurer

HOMEOWNERS – LATE NOTICE – LACK OF KNOWLEDGE OF INJURY
Hanover Ins. Co. v. Straus
(Sup. Ct., Suffolk Co., decided 5/23/2008)

O’Neil was allegedly injured by a dog owned by Richard and Maureen Straus on December 5, 2002. O’Neil and his wife sued the Strauses, and a default judgment was entered them on December 20,2005, in the amount of $250,000.

Hanover received first notice of the incident on February 12, 2006, approximately 2 1/2 months after the default judgment was entered. On March 6, 2006, Hanover disclaimed based on the insureds' late notice of the claim. It then brought this DJ action for validation of its disclaimer, while O'Neil brought a direct action against Hanover pursuant to Insurance Law § 3420(a)(2) for payment of the default judgment.

Brian Straus testified at his deposition that on the date of the alleged incident in 2002, he resided at the insured residence his wife and five children but he was not at home when Brian O’Neil, while allegedly delivering a package, was injured. He further testified that his daughter told him that there was an incident, that the individual fell in the street after the O’Neil’s dog barked and that this individual “ ran out to his truck in the street, and fell down and got up and took off and hit the pole.” He said that his daughter told him that O’Neil fell in the street and not on his property. Straus stated that he never discussed this matter with his wife. He further testified that the first time he was aware that an action had been commenced was when he received a copy of the default judgment at home. He stated that he did not remember when he received the judgment, but the other testimony and evidence in this case indicated that it was received early in 2006.

The police were never called to the house and the injured O’Neil allegedly drove off in his truck. Some of Brian Straus's statements were at odds with statements he had made to an investigator of Hanover, but he did tell the investigator that he never received a summons and complaint. Further, he was consistent with his testimony to the extent that he stated that he was not at the house when the incident occurred and that the dog never touched the delivery man.

Maureen Straus also testified she was not aware of the O'Neil action until the judgment came in the mail.

In denying Hanover's motion for summary judgment, Suffolk County Supreme Court Justice Sandra Sgroi held:

Here, the Defendants Richard Straus and Maureen Straus are alleging that they did not believe that anyone was injured in the occurrence. Their belief that only a “trivial incident” occurred is supported by the facts of this case because the police were not called to the scene of the accident, their dog allegedly was not vicious, it is alleged that the dog was on a leash, their children told them that no one was injured in the incident and the Brian Straus drove away in his vehicle.

Here * * * triable issues of fact exist as to the reasonableness of the actions of Richard Straus and Maureen Straus in failing to notify Hanover Insurance Company as to the incident (citations omitted).

While there may be strong factual basis supporting the reasonableness of the Strauses' actions in not notifying the insurance company of the incident after the accident occurred in 2002, separate fact issues exist as to the reasonableness of their actions in not notifying the insurance company after the action was commenced by service of process by the attorneys for Brian O’Neil and Terry O’Neil.

The Court recognizes that there is evidence in this record that would support a finding that Richard Straus and/or Maureen Straus may have received notice of both this accident and the negligence litigation when the summons and complaint was served, the Court cannot make that factual determination on these papers. Both Maureen Straus and Richard Straus have denied that they received notice that they were served with a summons and complaint in this action. If, eventually, there is a factual determination that either Maureen Straus or Richard Straus knew of the existence of the law suit, Hanover Insurance Company might be entitled to a declaratory judgment in its favor. However, if the trier of the facts determines that Maureen Straus and Richard Straus were reasonable in their belief that there was no incident that required them to notify Hanover Insurance Company of the accident in 2002, that neither Maureen nor Richard Straus were aware that an action was commenced against them in 2005 and that they did not get notice of that action until they were served with the default judgment in 2006 by mail, their delay in notifying the insurance company is explained.

The issue herein, whether notice to Hanover Insurance Company was timely, is a factual issue and therefore the motion for summary judgment by the Plaintiff Hanover Insurance Company against the Defendants is denied.

Hearing Ordered to Determine Whether Infant Claimant Was Resident Relative Living in Insured's Household

UM – RESIDENT RELATIVE – "HOUSEHOLD" – STAY OF ARBITRATION
Matter of Government Employees Ins. Co. v. Fudge
(Sup. Ct., Suffolk Co., decided 7/15/2008)

GEICO brought this special proceeding to stay arbitration of the uninsured motorist (UM) coverage claim filed by of its policyholder holder, Donna Fudge, as guardian of infant Miguel Cuevas. Fudge testified in an EUO and swore in an affidavit that Cuervas was her nephew through marriage and was living with his brother and her in her downstairs apartment of a two-apartment home when the accident occurred. Fudge also averred that she was Cuervas' de facto guardian and was providing financial support to him. Fudge's mother married Cuervas' grandfather, making Cuervas' mother Fudge's step-sister. In opposition to Geico's petition, Fudge also averred that Miguel’s mother was presently in a shelter and Miguel only saw his father on Sundays for three to four hours.

Geico's policy defined an "insured" under the SUM endorsement as "you, as the named insured and, while residents of the same household, your spouse and the relatives of either you or your spouse[.]" The policy further defined a “relative” as “a person related to you who resides in your household.” The term "related" was not defined or limited by the policy.

In finding there to be a triable issue of fact as to whether Miguel Cuevas resided in policyholder's "household”, Suffolk County Supreme Court Justice Sandra Sgroi ruled:

The Court notes that under the circumstances involved herein, even if Cuevas was living in the upstairs apartment and Fudge was not acting as the Respondent’s de facto guardian and providing financial support, it is possible that the circumstances involved in this living arrangement would require the Court to find that Cuevas was part of the “household” of Fudge.

* * * * *

It has been held, where the term relative was defined in the policy “a person who regularly resides in [the named insured‘s] household and is related to [the named insured] by blood, marriage or adoption”that the husband of the daughter of the policy holder was an insured (see, Matter of Nationwide Mut. Ins. Co. (Hodge), 224 A.D.2d 770,636 N.Y.S.2d 946) and that the step-daughter of the policy holder was an insured (see, Smith v. Pennsylvania Gen. Ins. Co., 32 A.D.2d 854, 300 N.Y.S.2d 975, afld 27 N.Y.2d 830, 316 N.Y.S.2d 436, 265 N.E.2d 258; see also, Matter of New York Cent. Mut. Fire Ins. Co. (Prehoda by Prehoda), 23 1 A.D.2d 829,830,647 N.Y.S.2d 66,67-foster child held to be an “insured”; Developments in Uninsured and Underinsured Motorist Coverage, 69-OCT N.Y. St. B.J. 18,20,1997). Here, the policy does not apparently even attempt to limit the definition of “related” to the extent that it was limited in Matter of Nationwide Mut. Ins. Co. (Hodge) (supra). While any ambiguity in the policy will be construed against the insurer for the benefit of the policy holder and in favor of the infant who is alleged to be the “relative” of Fudge(see, McGuinness v. Motor Vehicle Acc. Indemnification Corp., 18 A.D.2d 1 100,239 N.Y.S.2d 920), the Court will take evidence at the hearing on the issue both of whether the infant was a resident and whether the infant was a relative of Donna Fudge, as that term is used in the policy.