Barclay Damon
Barclay Damon

Legal Alert

Consequential Damage Claim Permitted Against Liability Insurer for Breach of Covenant of Good Faith

In Bi-Economy Mkt., Inc. v. Harleysville Ins. Co. of N.Y., 10 N.Y.3d 187 (2008), and its companion case, Panasia Estates, Inc. v. Hudson Ins. Co., 10 N.Y.3d 200 (2008), the Court of Appeals held that damages for claims against insurers for breach of the implied covenant of good faith may include consequential damages. Thus, an insured may recover additional costs incurred as a result of the insurer’s bad-faith denial of a claim.

In a recent decision, the Appellate Division, Second Department held that the additional costs incurred as a result of such claims may include damages for loss of earnings. See Mut. Assn. Adm'rs, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 2014 NY Slip Op 4470 (2d Dep’t June 18, 2014). In National Union, the insured sued for consequential damages, including lost income, based on the insurer’s alleged breach of the subject insurance policy in discontinuing a defense of the insured in an underlying ERISA lawsuit following the insured’s rejection of a settlement offer. The insured sought consequential damages for “‘the demise of [the insured] as an operating business’ and ‘loss of income by [the insured]’.”

The insurer moved for summary judgment based on an exclusion in the insurance policy for the recovery of consequential damages for loss of earnings. The Court, citing the Bi-Economy and Panasia decisions, denied the motion, holding that the exclusion applied only to loss of earnings caused by an event covered by the policy, not to a loss caused by the alleged breach of contract.

The Second Department’s decision is a reminder that where a claim for breach of the covenant of good faith and fair dealing is asserted, policy provisions may not protect the insurer from liability for consequential damages, including lost earnings or diminished business operations.

Should you have questions regarding the information presented in this alert, please contact Anthony J. Piazza, Chair of the firm’s Insurance Coverage & Regulation Practice Area, at (585) 295-4420 or apiazza@hblaw.com.