Friday, October 24, 2008

Fifth Citing of Bi-Economy

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.

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