On February 19, 2008, the New York Court of Appeals, in two separate cases, acknowledged for the first time, an insured's right to sue its property insurance carrier for extra-contractual consequential damages arising from the insurer's alleged breach of the insurance contract and failure to timely pay the claims.
In the first case, BI-Economy Market, Inc. v Harleysville Insurance Company of New York, the plaintiff, BI-Economy Market, Inc. was a family-owned wholesale and retail meat market located in Rochester, New York, which suffered a major fire loss in October, 2002. BI-Economy was insured by Harleysville under a "Deluxe Business Owner's" policy which provided replacement cost coverage for the building, business property and also provided business interruption coverage for a period up to one year from the date of the fire.
Following the submission of the insured's claim, Harleysville "disputed BI-Economy's claim for actual damages, and advanced only the sum of $163,161.92." Subsequently, the company and the insured submitted the dispute to alternate dispute resolution which resulted in an award in favor of BI-Economy in the sum of $407,181. The Court noted that during this period of time (over one year) Harleysville offered to pay only seven months of the business interruption claim despite the fact that the policy provided twelve months of coverage.
In October, 2004, BI-Economy commenced an action against Harleysville seeking damages for bad faith claims handling, tortious interference with business relations and breach of contract, including consequential damages for "the complete demise of its business operation***", upon the grounds that Harleysville improperly delayed payment for the building and contents damage, and failed to timely pay the full amount of the business interruption coverage. BI-Economy alleged that as a result of the insurer's breach of contract, its business collapsed, and that its consequential damages were reasonably foreseeable and contemplated by the parties at the time of the issuance of the insurance policy.
Harleysville sought to amend its answer to raise the defense that the insurance contract specifically excluded consequential damages based upon contractual provisions in the policy excluding coverage for "consequential loss" and for partial summary judgment dismissing the breach of contract cause of action.
The Supreme Court granted the insurer's motion, and the Appellate Division, Fourth Department, affirmed, holding that "the insurance policy expressly exclude[d] coverage for consequential losses, and thus, it cannot be said that [consequential] damages were contemplated by the parties when the contract was formed". 37 A.D.3d 1184, 1185. The Appellate Division granted BI-Economy's motion for leave to appeal to the Court of Appeals.
The Court of Appeals reversed and reinstated the plaintiff's claim for consequential damages arising from the alleged breach of contract. The Court acknowledged that proof of consequential damages may not be speculative or conjectural and must have been contemplated by the parties at the time the contract was made. The Court pointed out 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'"¦"
The Court cited New York University v Continental Insurance Company, 87 N.Y.2d 308 (1995) for the proposition that implicit in contracts of insurance, as in all contracts, 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"¦[T]he 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***. 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 peformed***. 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***. 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.*** 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.
Finally, the Court rejected the insurer's argument that the contractual exclusions for consequential "losses" under the policy precluded the claim for consequential damages, holding that the consequential losses referred to in the policy, did not refer to the consequential "damages" sought by the insured for "the insurer's failure to timely investigate, adjust and pay the claim." The Court concluded that BI-Economy's claim for consequential damages, including the loss of its business," were reasonably foreseeable and contemplated by the parties, and thus cannot be dismissed on summary judgment".
In the second case before the Court, Panasia Estates v Hudson Insurance Company, Panasia Estates was the owner of rental property in Manhattan. Hudson Insurance Company issued a builder's risk policy covering the premises. During the course of the construction work, including opening the roof of the building, inclement weather resulted in extensive damage to the property.
Following the loss, Panasia claimed that Hudson failed to investigate or adjust the claim for several weeks and then denied the claim three months after that on the grounds that the loss was the result of repeated water infiltration and wear and tear and not covered under the policy. Panasia commenced suit alleging both direct and consequential damages stemming from Hudson's breach of contract. Significantly, Panasia's policy did not provide any coverage for business interruption.
Hudson moved for partial summary judgment seeking dismissal of the plaintiff's allegations of bad faith, and claims for consequential, extra-contractual and incidental damages and attorneys' fees relying upon an exclusion in the policy for "[a]ny other consequential loss". The lower court denied Hudson's motion to dismiss the claim for consequential damage. The Appellate Division, First Department, affirmed holding that the contractual exclusion for consequential loss did not preclude a claim for consequential damages since these terms were not synonymous. The Appellate Division granted leave to appeal to the Court of Appeals.
The Court of Appeals cited its decision, issued the same day in BI-Economy Market v Harleysville Insurance, and affirmed the order of the Appellate Division. However, the Court noted that the lower court failed to consider whether the specific damages sought by Panasia were foreseeable damages as the result of Hudson's breach, and remanded the case to the lower court for further consideration of that issue. Finally, the Court affirmed the Appellate Division's holding that "the contractual exclusion for consequential loss does not bar the recovery of consequential damages***."
In a vigorous dissent, Judges Smith and Read criticized both the BI-Economy and Panasia Estates decisions for abandoning the Court of Appeals prior holdings in New York University v Continental Insurance Company, 87 N.Y.2d 308 (1995) and Rocanova v Equitable Life Assurance Society, 83 N.Y.2d 603 (1994) which held that a failure by an insurer to pay a claim could not justify a punitive damages award and that punitive damages are not available for breach of an insurance contract without a showing of egregious, tortious conduct directed at the public generally, in addition to the insured. The dissent characterized the majority's holdings as follows:
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 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.***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***.
The Court of Appeals decisions in the BI-Economy and Panasia cases are significant changes with respect to first party property insurance law which may have an impact on the issuance of policies and adjustment of losses in New York. It is not clear from the Court's opinion whether a revision to the policies to exclude all "consequential damages" would be sufficient to satisfy the Court of Appeals. There are obviously many reasons why an insurer may delay making payment, i.e., an investigation into the cause of the loss to determine if it is covered or not, and a legitimate dispute as to the amount owed under the policy. The Court's decisions do not address those issues.
If you require further information regarding the information presented in this Legal Alert and its impact on your organization, please contact any of the members of the Practice Area.