New York Approves Extra-Contractual Damages for First-Party Bad Faith
In a 5-2 decision, New York’s high court holds that consequential damages resulting from delay in payment of business interruption losses are recoverable in an action for breach of a commercial property policy. In Bi-Economy Market, Inc. v. Harleysville Ins. Co. of New York (N.Y. Feb. 19, 2008), the court found that claims for consequential damages, including the demise of the insured’s business, were reasonably foreseeable and contemplated by the parties, and could not be dismissed on summary judgment. Resolving conflicting decisions among New York's appellate courts, the court opens the door to extra-contractual claims in the first-party context.
The claim arose from a fire loss, a result of which the insured meat market suffered a complete loss of its food inventory and structural damage to its building and equipment. The insured was covered for replacement cost on the building, as well as business property and contents. The policy also included business interruption for up to one year from the date of loss.
The insurer disputed claimed damages, advanced $163,161.92, and submitted the claim to arbitration. The insured was eventually awarded $407,181; however, in time it took to resolve the claim, the insurer had only offered to pay seven months of the business interruption loss, despite that the policy provided a full twelve months of coverage.
The insured commenced this 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." The insured alleged that the insurer improperly delayed payment for its building and contents and failed to timely pay the full amount of its lost business income, which caused its business to collapse.
The insurer argued that policy provisions expressly excluded coverage for consequential loss, and the lower courts agreed. The Court of Appeals reversed, however, holding that the consequential damages were recoverable. Careful to distinguish consequential from punitive damages, the court reasoned that in breach of contract actions, a non-breaching party may recover special or consequential damages if they were within contemplation of the parties as the probable result of a breach at the time of or prior to contracting, i.e., were foreseeable and probable. This is determined, said the court, by looking to the nature, purpose and particular circumstances of the contract, as well as the liability the parties fairly assumed when the contract was made.
The court observed that a reasonable insured would understand an insurer promises to investigate in good faith and pay covered claims. Included in the bargain is more than the mere monetary proceeds of a policy, but security, protection and peace of mind. Business interruption coverage in particular, the court explained, is intended to ensure the prompt financial support needed to sustain business operations in the event of disaster, and this purpose would have made the insurer aware that it would have to respond in damages for loss of the business resulting from its breach. Indeed, the court found the contract included an additional performance-based component “to evaluate a claim, and to do so honestly, adequately, and — most importantly — promptly.” Thus, “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 concluded that contractual provisions purporting to exclude coverage for consequential losses did not apply. The consequential losses referred to delay caused by third party actors or by the "[s]uspension, lapse or cancellation of any license, lease or contract," not consequential damages caused by a carrier's injurious conduct.
In a sharp dissent, two justices would adhere to the court’s precedent in Rocanova v Equitable Life Assur. Socy. of U.S., 83 NY2d 603 (1994) and New York Univ. v Continental Ins. Co., 87 NY2d 308 (1995), rejecting bad faith claims in the absence of egregious tortious conduct directed at the public generally. The dissent argues that, while styled “consequential,” such damages are in fact “punitive,” since they are not triggered simply by a breach, but only by a breach committed in bad faith, and are intended to punish wrongdoers and deter future wrongdoing. “This attempt to punish unscrupulous insurers,” argues the dissent, “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 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.”
The insurer disputed claimed damages, advanced $163,161.92, and submitted the claim to arbitration. The insured was eventually awarded $407,181; however, in time it took to resolve the claim, the insurer had only offered to pay seven months of the business interruption loss, despite that the policy provided a full twelve months of coverage.
The insured commenced this 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." The insured alleged that the insurer improperly delayed payment for its building and contents and failed to timely pay the full amount of its lost business income, which caused its business to collapse.
The insurer argued that policy provisions expressly excluded coverage for consequential loss, and the lower courts agreed. The Court of Appeals reversed, however, holding that the consequential damages were recoverable. Careful to distinguish consequential from punitive damages, the court reasoned that in breach of contract actions, a non-breaching party may recover special or consequential damages if they were within contemplation of the parties as the probable result of a breach at the time of or prior to contracting, i.e., were foreseeable and probable. This is determined, said the court, by looking to the nature, purpose and particular circumstances of the contract, as well as the liability the parties fairly assumed when the contract was made.
The court observed that a reasonable insured would understand an insurer promises to investigate in good faith and pay covered claims. Included in the bargain is more than the mere monetary proceeds of a policy, but security, protection and peace of mind. Business interruption coverage in particular, the court explained, is intended to ensure the prompt financial support needed to sustain business operations in the event of disaster, and this purpose would have made the insurer aware that it would have to respond in damages for loss of the business resulting from its breach. Indeed, the court found the contract included an additional performance-based component “to evaluate a claim, and to do so honestly, adequately, and — most importantly — promptly.” Thus, “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 concluded that contractual provisions purporting to exclude coverage for consequential losses did not apply. The consequential losses referred to delay caused by third party actors or by the "[s]uspension, lapse or cancellation of any license, lease or contract," not consequential damages caused by a carrier's injurious conduct.
In a sharp dissent, two justices would adhere to the court’s precedent in Rocanova v Equitable Life Assur. Socy. of U.S., 83 NY2d 603 (1994) and New York Univ. v Continental Ins. Co., 87 NY2d 308 (1995), rejecting bad faith claims in the absence of egregious tortious conduct directed at the public generally. The dissent argues that, while styled “consequential,” such damages are in fact “punitive,” since they are not triggered simply by a breach, but only by a breach committed in bad faith, and are intended to punish wrongdoers and deter future wrongdoing. “This attempt to punish unscrupulous insurers,” argues the dissent, “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 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.”
