Hallelujah! It’s about time! Traditionally, N.Y. has been one of the few states in the United States that did NOT permit a “bad faith” claim against an insurance carrier except under VERY limited circumstances. A recent N.Y. Court of Appeals case (Bi-Economy Market Inc. v. Harleysville Insurance Company) changed all that in a decision that is a HUGE benefit to N.Y. consumers.
First, let’s talk about what is “bad faith”? That is when an insurance company puts its own interests above that of its own customers by failing to act reasonably in settling a claim that has been brought against its own customer. That’s why we buy insurance, right? We buy insurance so if someone sues us, our insurance company will take care of it so our personal assets (our house, cars, bank accounts, etc.) are not exposed to risk.
Here’s an example of a typical bad faith scenario: Joe Blow buys a car insurance policy that has liability limits of $300,000. Joe has too much to drink at an office Christmas party and causes a bad accident where a young woman is very badly injured. The lawyer for the injured woman says to Joe’s insurance company, “we will accept $300,000 in settlement of this claim”. By settling for this amount, Joe would be totally off the hook. But Joe’s insurance company thinks they can save some money so they refuse to settle for the policy limits of $300,000. The insurance company refuses even after being presented with tons of proof that the young woman’s claim is worth way more than $300,000. The insurance company refuses even though they know that by settling now, Joe would be totally off the hook. So the case goes to trial and a jury returns a verdict of $750,000. The insurance company pays their $300,000 and guess who is on the hook for the other $450,000? Yup, poor Joe. And all because the insurance company was trying to save their money rather than doing what was right for Joe.
Under the old law in NY, insurance companies could (and did!) get away with this all the time because N.Y. did not recognize a “bad faith” claim for Joe against his insurance. So insurance carriers could roll the dice for their customers and if they lost, oh well, it’s the customers problem. That’s because under the old law, insurance companies were NOT liable for any amounts that were above their policy limits.
However, with the recent Court of Appeals decision, NY will finally recognize a cause of action against an insurance company for it’s “breach of the covenant of good faith and fair dealing”. This means that if the insurance carrier fails to act in good faith (i.e. bad faith), their customer can now sue them and the carrier will be on the hook for any amounts over and above the customer’s insurance policy limits. It’s about time!!
Below is a very detailed description of the Court of Appeals case from the Rogak Report, a report for insurance company insider’s– it’s pretty dry reading but for anyone interested in the nitty gritty of what this case might mean, it’s worthwhile reading:
NEW YORK INSUREDS MAY NOW SUE FOR THOSE DAMAGES CAUSED BY INSURER’S BREACH OF INSURANCE CONTRACT, EVEN BEYOND POLICY LIMITS
|Bi-Economy Market Inc. v. Harleysville Insurance Company of New York
|2008 NY Slip Op 01418
|Decided on February 19, 2008
|Court of Appeals
|Edited by Lawrence N. Rogak
And when claims that like come in, watch out, insurers, because your typical no-fault defense attorneys will simply be swept away, lacking the knowledge or skills to deal with this new predator in the litigation jungle.Larry Rogak
In a break with long-standing precedent, the Court of Appeals has held that when an insurer’s refusal to pay a first-party claim causes further damage to the insured — as here, where the insurer’s refusal to pay business interruption benefits resulted in the failure of the insured’s business — the insured may sue for those “consequential damages,” even if they are excluded by policy language, and those damages can exceed policy limits.“In this action brought by an insured against an insurer for breach of a commercial property insurance contract,” wrote the Court, “the principal issue presented is whether the insured can assert a claim for consequential damages. Under the circumstances of this case, we hold that it can.[FN1] ““Bi-Economy Market, a family-owned wholesale and retail meat market located in Rochester, New York, suffered a major fire in October 2002, resulting in the complete loss of food inventory and heavy structural damage to the building and business-related equipment. At the time of the fire, Bi-Economy was insured by defendant Harleysville Insurance Company under a ‘Deluxe Business Owner’s’ policy that provided replacement cost coverage on the building as well as business property or ‘contents’ loss coverage.” “The policy also provided coverage for lost business income, what is commonly referred to as ‘business interruption insurance,’ for up to one year from the date of the fire. Specifically, the contract stated that Harleysville would ‘pay for the actual loss of Business Income . . . sustain[ed] due to the necessary suspension of [Bi-Economy's] ‘operations’ during the ‘period of restoration.‘ Business income is defined as the ‘(1) Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred; and (2) Continuing normal operating expenses incurred, including payroll.’ ‘ Period of restoration’ is defined as the period of time that ‘begins with the date of direct physical loss or damage’ and ‘ends on the date when the property . . . should be repaired, rebuilt or replaced with reasonable speed and similar quality.’” “Following the fire, Bi-Economy submitted a claim to Harleysville pursuant to the terms of the contract. Harleysville disputed Bi-Economy’s claim for actual damages, and advanced only the sum of $163,161.92. More than a year later, following submission of their dispute to alternative dispute resolution, Bi-Economy was awarded the sum of $407,181. During all this time, Harleysville offered to pay only seven months of Bi-Economy’s claim for lost business income, despite the fact that the policy provided for a full twelve months. Bi-Economy never resumed business operations.” “In October 2004, Bi-Economy commenced this action against Harleysville, asserting causes of action for bad faith claims handling, tortious interference with business relations and breach of contract, seeking consequential damages for ‘the complete demise of its business operation in an amount to be proved at trial.’ Bi-Economy alleged that Harleysville improperly delayed payment for its building and contents damage and failed to timely pay the full amount of its lost business income claim. Bi-Economy further alleged that, as a result of Harleysville’s breach of contract, its business collapsed, and that liability for such consequential damages was reasonably foreseeable and contemplated by the parties at the time of contracting.” “Harleysville answered, and subsequently moved for leave to amend its answer to raise the defense that the contract excluded consequential damages and for partial summary judgment dismissing Bi-Economy’s breach of contract cause of action. In support of its motion, Harleysville cited several contractual provisions excluding coverage for ‘consequential loss.’” “Supreme Court granted the motion and the Appellate Division affirmed, holding that ‘the insurance policy expressly excluded coverage for consequential losses, and thus it cannot be said that consequential damages were contemplated by the parties when the contract was formed.’ The Appellate Division granted Bi-Economy leave to appeal.” “Bi-Economy contends that the courts below erred in dismissing its breach of contract claim seeking consequential damages for the collapse of its business resulting from a failure to fulfill its obligations under the contract of insurance. We agree and therefore reverse the order of the Appellate Division and reinstate that cause of action.” “It is well settled that in breach of contract actions the nonbreaching party may recover general damages which are the natural and probable consequence of the breach. Special, or consequential damages, which do not so directly flow from the breach, are also recoverable in limited circumstances. In order to impose on the defaulting party a further liability than for damages which naturally and directly flow from the breach, i.e., in the ordinary course of things, arising from a breach of contract, 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. The party breaching the contract is liable for those risks foreseen or which should have been foreseen at the time the contract was made. It is not necessary for the breaching party to have foreseen the breach itself or the particular way the loss occurred, rather, it is only necessary that loss from a breach is foreseeable and probable.” “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. Of course, proof of consequential damages cannot be speculative or conjectural.” “With agreements to pay money — for example, an agreement to pay sales commissions or a contract to pay a lender $12 tomorrow for $10 given today, the sole purpose of the contract is to pay for something given in exchange. In such cases, what the payee plans to do with the money is external and irrelevant to the contract itself. In the present case, however, the purpose of the agreement — what the insured planned to do with its payment — was at the very core of the contract itself.” “The dissent… blurs the significant distinction between consequential and punitive damages. The two types of damages serve different purposes and are evidenced by different facts. Consequential damages, designed to compensate a party for reasonably foreseeable damages, must be proximately caused by the breach and must be proven by the party seeking them. Punitive damages, by contrast, are not measured by the pecuniary loss or injury of the plaintiff as a compensation but are assessed by way of punishment to the wrongdoer and example to others. Unlike consequential damages, which are quantifiable, there is no rigid formula by which the amount of punitive damages is fixed, although they should bear some reasonable relation to the harm done and the flagrancy of the conduct causing it.” “As in all contracts, implicit in contracts of insurance is a covenant of good faith and fair dealing, such that a reasonable insured would understand that the insurer promises to investigate in good faith and pay covered claims. An insured may also bargain for the peace of mind, or comfort, of knowing that it will be protected in the event of a catastrophe. It is axiomatic that insurance frequently is purchased not only to provide funds in case of loss, but to provide peace of mind for the insured or his beneficiaries.” ” The purpose served by business interruption coverage cannot be clearer — to ensure that Bi-Economy had the financial support necessary to sustain its 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. Certainly, many business policyholders, such as Bi-Economy, lack the resources to continue business operations without insurance proceeds. Accordingly, limiting an insured’s damages to the amount of the policy, i.e., money which should have been paid by the insurer in the first place, plus interest, does not place the insured in the position it would have been in had the contract been performed.” “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.” “Furthermore, contrary to the dissent’s view, the purpose of the contract was not just to receive money, but to receive it promptly so that in the aftermath of a calamitous event, as Bi-Economy experienced here, the business could avoid collapse and get back on its feet as soon as possible. Thus, this insurance contract included an additional performance-based component: the insurer agreed to evaluate a claim, and to do so honestly, adequately, and — most importantly — promptly. The insurer certainly knew that failure to perform would (a) undercut the very purpose of the agreement and (b) cause additional damages that the policy was purchased to protect against in the first place. Here, the claim is that Harleysville failed to promptly adjust and pay the loss, resulting in the collapse of the business. When an insured in such a situation suffers additional damages as a result of an insurer’s excessive delay or improper denial, the insurance company should stand liable for these damages. This is not to punish the insurer, but to give the insured its bargained-for-benefit.” “Nor do we read the contractual exclusions for certain consequential ‘losses’ as demonstrating that the parties contemplated, and rejected, the recoverability of consequential ‘damages’ in the event of a contract breach. The consequential ‘losses’ clearly refer to delay caused by third party actors or by the ‘suspension, lapse or cancellation of any license, lease or contract.’ Consequential damages, on the other hand, are in addition to the losses caused by a calamitous event (i.e., fire or rain), and include those additional damages caused by a carrier’s injurious conduct — in this case, the insurer’s failure to timely investigate, adjust and pay the claim.” “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, were reasonably foreseeable and contemplated by the parties, and thus cannot be dismissed on summary judgment.” “Accordingly, the order of the Appellate Division… should be reversed, with costs, defendants’ motion for leave to amend their answer to raise the defense of contractual exclusion for consequential damages and partial summary judgment dismissing the plaintiff’s second cause of action denied, and the certified question answered in the negative.“SMITH, J. (dissenting): “In Rocanova v Equitable Life Assur. Socy. of U.S. (83 NY2d 603 ) and New York Univ. v Continental Ins. Co. (87 NY2d 308 ), we rejected the argument that a bad faith failure by an insurer to pay a claim could, without more, justify a punitive damages award. We held that punitive damages are not available for breach of an insurance contract unless the plaintiff shows both ‘egregious tortious conduct’ directed at the insured claimant and ‘a pattern of similar conduct directed at the public generally’. Today, the majority abandons this rule, without discussing it and without acknowledging that it has done so. The majority achieves this simply by changing labels: Punitive damages are now called ‘consequential’ damages, and a bad faith failure to pay a claim is called a ‘breach of the covenant of good faith and fair dealing.’” “I think that Rocanova and NYU were correctly decided, and that the majority makes a mistake in largely nullifying their holdings.” “Underlying our refusal in Rocanova and NYU to open the door to awards of punitive damages was a recognition of the serious harm such awards can do. Punitive damages will sometimes serve to deter insurer wrongdoing and thus protect insureds from injustice, but they will do so at too great a cost. Insurers will fear that juries will view even legitimate claim denials unsympathetically, and that insurers will thus be exposed to damages without any predictable limit. This fear will inevitably lead insurers to increase their premiums — and so will inflict a burden on every New Yorker who buys insurance.” “This policy judgment was implicit in Rocanova and NYU. Not everyone agreed with it. The Appellate Division majority in Acquista v New York Life Ins. Co. (285 AD2d 73, 78 [1st Dept 2001]) hardly concealed its disagreement: ‘It is correct that, to date, this State has maintained the traditional view . . . [citing Rocanova and NYU]. Yet, for some time, courts and commentators around the country have increasingly acknowledged that a fundamental injustice may result . . . .’ The Acquista court found a way to avoid what it thought an injustice: award ‘consequential,‘ not punitive damages. Acquista adopted the rule of some sister-state decisions, notably Beck v Farmers Ins. Exch. (701 P.2d 795 [Utah 1985]), that an insurer that denies a claim in bad faith becomes liable for consequential damages beyond the policy limits (285 A2d at 80-81). With less frankness than the Acquista court — indeed, without even citing either Rocanova or Acquista — the majority here reaches the same result.” “The ‘consequential’ damages authorized by the majority, though remedial in form, are obviously punitive in fact. They are not triggered, as true consequential damages are, simply by a breach of contract, but only by a breach committed in bad faith. The majority never explains why this should be true, but the explanation is self-evident: the purpose of the damages the majority authorizes can only be to punish wrongdoers and deter future wrongdoing. They have nothing to do with consequential damages, or with the covenant of good faith and fair dealing, as those terms are ordinarily understood.” The whole idea of ‘consequential damages’ is out of place in a suit against an insurer that has failed to pay a claim — or, indeed, in any case where the obligation breached is merely one to pay money. Consequential damages are a means of measuring the harm done when a party fails in some non-monetary performance — say, the transportation of a broken mill shaft (Hadley v Baxendale, 9 Ex 341 ) or the construction of a football stadium (Kenford Co. v County of Erie, 73 NY2d 312 ). In such cases, where there is no agreement on what money will be paid in the event of a breach, a court must try to decide what damages the parties contemplated — what damages they would have agreed to had they considered the question when the contract was signed. But in insurance contracts or other contracts for the payment of money, the parties have already told us what damages they contemplated; in the case of insurance, it is payment equal to the losses covered by the policy, up to the policy limits.” “Under Kenford, the premise of consequential damages awards is that they effectuate the parties’ presumed intentions at the time of contracting: ‘the commonsense rule to apply is to consider what the parties would have concluded had they considered the subject’ (Kenford, 73 NY2d at 320 [emphasis in original]). Can anyone seriously believe that the parties in these cases would, if they had ‘considered the subject,’ have contracted for the results reached here? Imagine the dialogue. Applicant for insurance: ‘Suppose you refuse, in bad faith, to pay a claim. Will you agree to be liable for the consequences, including lost business, without regard to the policy limits?’ Insurance company: ‘Oh, sure. Sorry, we forgot to put that in the policy.’” “The majority also departs from the established understanding of the ‘covenant of good faith and fair dealing’ — thus obscuring the fact that the predicate for ‘consequential’ damages here is exactly the same conduct, bad faith failure to pay claims, that we refused to make a predicate for punitive damages in Rocanova and NYU. Ordinarily, the covenant of good faith and fair dealing is breached where a party has complied with the literal terms of the contract, but has done so in a way that undermines the purpose of the contract and deprives the other party of the benefit of the bargain. Here, plaintiffs allege that defendants breached, in bad faith, the express terms of the policies, by refusing to pay for the losses the policies covered. There is no need for resort to the implied covenant of good faith, and this is the first time, as far as I know, that we have relied on that implied covenant to condemn the bad faith breach of an express promise.” “These two conceptual errors — the misuse of the terms ‘consequential damages’ and ‘covenant of good faith’ — are not the only ones in the majority opinions. The Bi-Economy opinion seems fundamentally to misunderstand the purpose of business interruption insurance — which is to compensate the insured for a business interruption that has already occurred, not to prevent one from occurring. If the insured’s business is never interrupted, there can be no claim under a business interruption policy. This error seems unimportant, however, for the majority’s discussion of business interruption insurance is apparently extraneous to its holding. The Panasia case involves no business interruption coverage — yet the majority upholds the legal sufficiency of Panasia’s claim for consequential damages on the basis of a simple citation to Bi-Economy (Panasia majority op at 3-4). “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.”Comment: And, among other things, we will almost surely see plaintiffs in no-fault cases adding causes of action for consequential damages arising from insurer “bad faith” in denying no-fault claims. We will most likely see allegations that denials of no-fault claims caused financial hardship to MRI providers, chiropractors, etc., and we will see demands for damages that go far beyond policy limits.
Thanks for reading, Jim
James B. Reed, Esq.
Personal Injury & Malpractice Attorney
Ziff, Weiermiller, Hayden & Mustico, LLP
303 William St., Elmira, NY 14902
Tel. (607) 733-8866 Fax. (607) 732-6062
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