NY Court of Appeals Confirms Existence of Consequential Damages Against Insurers Who Deny Coverage or Delay Payment on Commercial Property Claims
By Meryl R. Lieberman -February 20, 2008
The New York Court of Appeals, the State's highest court, has recognized for the
first time in companion cases decided February 19, 2008 that consequential damages
are available against an insurer who improperly denies coverage or delays payment
under a commercial property insurance policy. In Bi-Economy Market, Inc. v.
Harleysville Insurance Company (2008 NY Slip Op 01418), Bi-Economy sustained a fire
loss along with lost business income. Harleysville disputed Bi-Economy's claim for
actual damages, and offered to pay only seven months of lost business income despite
the fact that the policy provided for 12 months. Bi-Economy never resumed business
operations, contending in the suit that the insurer's failure to pay the claim timely
and in full resulted in a complete demise of its business operations for which it
sought consequential damages "to be proved at trial.
In reversing the Appellate Division and reinstating the claim seeking consequential
damages for breach of contract, the Court found implicit in all contracts a covenant
of good faith and fair dealing such that a breach could give rise to consequential
damages in excess of the policy limit so long as they are proximately caused by the
breach and proven by the party seeking them.
The Court distinguished "punitive damages," which are ostensibly still unavailable
in New York, because by contrast, they are not quantifiable and are intended to
punish the wrongdoer rather than compensate the plaintiff.
The companion decision, Panasia Estates, Inc. v. Hudson Insurance Company (2008 NY
Slip Op 01419), involved builder's risk coverage under a commercial property
insurance policy. The insured suffered damage when the roof was opened during
construction. Panasia claimed that Hudson failed to investigate or adjust the claim
until weeks later, and then improperly denied the claim three months after that,
stating the loss was due to wear and tear rather than a covered risk.
On a certified question from the Appellate Division whether consequential damages
are available for breach of contract in an insurance case, the Court answered in the
affirmative merely citing to Bi-Economy.
In a scathing dissent, Judge Smith with Judge Read concurring, accused the majority
of abandoning the Court's rule in Rocanova v. Equitable Life Assur. Society of US,
83 NY2d 603 (1994), by simply changing the label from punitive damages to
consequential damages, and bad faith to breach of the covenant of good faith and
fair dealing without so much as a reference to what it has done in unraveling the
long standing rule. Finding sound policy judgments implicit in the Rocanova rule,
the dissent cautions that the majority rule in these cases will result in damages of
a punitive nature and will undoubtedly lead to the punishment of many honest
insurers. The dissent also found the majority's reasoning to be flawed because the
predicate for consequential damages is the same bad faith the Court refused to
recognize in Rocanova. It also criticized the majority for fundamentally
misunderstanding the purpose of business interruption coverage--to compensate for an
interruption that already has occurred, not to prevent one from occurring in the
future. In concluding that the majority's "bad policy choice" is more important
than the flaws in its reasoning, it found the real consequential damages to be the
increase in insurance premiums these decisions will generate.
Copies of both decisions are available for immediate download in PDF. To download Bi-Economy Market, Inc. v.
Harleysville Insurance Company, please click here. For a copy of Panasia Estates, Inc. v. Hudson Insurance Company, click here. And for more information on Ms. Lieberman, a Founding Partner with TLSS, please visit:
http://www.traublieberman.com/profiles/meryllieberman/
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