Monday, September 1, 2008

Fourth Citing of Bi-Economy

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.

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