Bad-faith claims against an insurer are always of interest as they strike at the heart of the relationship between the insurer and the insured. In New York, an insured’s bad-faith claims typically allege that the insurer failed to live up to its obligations under the policy and wrongfully denied the benefits of the policy. Because New York finds an implied duty of good faith in every contract, there is no independent action for an alleged breach of good faith and fair dealing unless a plaintiff can plead facts that are separate and distinct from the facts supporting breach of contract.
In New York, recent cases have addressed the circumstance where an insured is alleging that the insurer not only breached the policy but also caused additional damages to the insured by its alleged breach. Are those additional damages compensable to insureds and, if so, under what circumstances may those damages be pled? The New York cases also address the pleading standards for both breach of contract and breach of the implied duty of good faith and fair dealing.
In 2019, the First Department, New York’s intermediate appellate court, issued an opinion in D.K. Property, Inc. v. National Union Fire Insurance Co. of Pittsburgh, Pa., addressing the availability of compensatory damages and the pleading standard for those insureds alleging bad-faith claims against insurers. In D.K. Property, Inc., the court cites and relies on prior decisions on these topics from the New York Court of Appeals.
Bi-Economy Market, Inc. v. Harleysville Insurance Co. of New York, 10 N.Y.3d 187 (2008). In 2008, the New York Court of Appeals issued its decision in Bi-Economy Market, Inc. v. Harleysville Insurance Co. of New York, addressing the issue of whether an insured can assert a claim for consequential damages against an insurer for breach of a commercial property insurance contract. Bi-Economy Market operated a wholesale and retail meat market in Rochester, New York, and suffered a fire in October 2002. Before the fire, it had obtained from Harleysville a “Deluxe Business Owners” policy, which “provided replacement cost coverage on the building as well as business property or ‘contents’ loss coverage,” and lost business income coverage. Following the fire, Bi-Economy received $163,161.92 and $244,019.88 for actual damages and was offered lost business income for seven months. In October 2004, Bi-Economy asserted an 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 proven at trial.” In the case, 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.
Ultimately, Harleysville moved for partial summary judgment on Bi-Economy’s breach of contract claim. The New York Supreme Court granted the motion and the Appellate Division 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.” On appeal, the New York Court of Appeals reversed both the Supreme Court and the Appellate Division.
The New York Court of Appeals began by noting:
We later explained that “[t]he party breaching the contract is liable for those risks foreseen on 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, “[i]t 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.
. . .
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. . . . 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.
. . .
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.
The Court of Appeals held that “Bi-Economy’s claim for consequential damages including the demise of its business, was reasonably foreseeable and contemplated by the parties, and thus cannot be dismissed on summary judgment.”
Simply put, when a breach causes additional damages, independent from the damages caused by the breach, and those damages are foreseeable based on the nature of the parties’ agreement, those additional damages are compensable.
Panasia Estates, Inc. v. Hudson Insurance Co., 10 N.Y.3d 200, 856 N.Y.S.2d 513 (2008). On the same day it issued its decision in Bi-Economy Market, Inc., the New York Court of Appeals issued a decision in Panasia Estates, Inc. v. Hudson Insurance Co. regarding consequential damages available to the insured based on an insurer’s alleged bad faith. Panasia Estates owned rental property, which suffered damage while the property was undergoing renovations. Hudson Insurance issued a commercial insurance policy to Panasia, which included “Builders’ Risk Coverage.” Ultimately, Hudson denied the claim, and the Supreme Court denied that part of Hudson’s motion to dismiss Panasia’s claim for consequential damages.The Appellate Division affirmed, stating,
[a]n insured may recover foreseeable damages, beyond the limits of its policy, for breach of a duty to investigate, bargain for, and settle claims in good faith. . . .
The courts below properly rejected Hudson’s contention that it was entitled to judgment as a matter of law because consequential damages are not recoverable in a claim for breach of an insurance contract. . . .
The Court of Appeals held as follows:
[T]he courts below failed to consider whether the specific damages sought by Panasia were foreseeable damages as the result of Hudson’s breach. Because the record before us is not fully developed on that issue, such claim must be considered. . . .
Cases Addressing the Pleading Standard for Breach of the Implied Covenant of Good Faith and Fair Dealing
D.K. Property, Inc. v. National Union Fire Insurance Co. of Pittsburgh, Pa., 168 A.D.3d 505, 92 N.Y.S.3d 231 (1st Dep’t 2019). In D.K. Property, Inc., the Supreme Court, applying the two cases discussed above, granted the defendant’s motion to dismiss plaintiff D.K. Property’s claims for consequential damages but allowed the general breach of contract claim and the collateral contract claim for breach of the implied covenant of good faith and fair dealing to proceed. “At issue is whether, at the pleading stage, a claim for consequential damages arising from defendant’s processing of plaintiff’s insurance claim requires a detailed, factual description or explanation for why such damages, which do not directly flow from the breach, are also recoverable.”
The First Department held:
We find that the motion court erred in dismissing the consequential damages claim, because plaintiff fulfilled its pleading requirement by specifying the types of consequential damages claimed and alleging that such damages were reasonably contemplated by the parties prior to contracting. . . .
Plaintiff contends defendant’s investigatory process has taken so long and become so attenuated that the structural damage to the building has worsened. Among the consequential damages alleged are engineering costs, painting, repairs, monitoring equipment, and moisture abatement to address water intrusion, loss of rents, and other expenses attributable to mitigating further damage to the property. . . .
Although proof of such consequential damages will ultimately rest on what liability the insurer is found to have “assumed consciously,” or from the plaintiff’s point of view, have warranted the plaintiff to reasonably suppose the insurer assumed when the insurance contract was made, a determination of whether such damages were, in fact, foreseeable should not be decided on a motion to dismiss and must await a fully developed record. . . .
Here, plaintiff’s allegations meet the pleading requirements of the CPLR with respect to consequential damages, whether in connection with the first cause of action or the second cause of action for breach of the covenant of good faith and fair dealing in the context of an insurance contract. . . .
Subsequent cases addressing D.K. Property, Inc. On January 30th, 2019, two weeks after the First Department issued its decision in D.K. Property, Inc., the U.S. District Court for the Northern District of New York issued a decision in Russell Bryant v. General Casualty Co. of Wisconsin. General Casualty Company of Wisconsin (General Casualty or GCCW) issued a commercial property and casualty insurance policy to Russell Bryant, the owner of a commercial building. General Casualty moved for pretrial dismissal of Bryant’s consequential damages claim. General Casualty argued that
plaintiff is seeking “nothing more than compensation for physical damage to the property and lost rental revenue,” two categories of damages that are specifically provided for in the policy’s terms. . . .
The court found as follows:
I]n addition to this foreseeability component, Panasia and Bi-Economy also require a plaintiff to plausibly allege an insurer’s bad faith in its handling of the claim.
. . .
Where, as here, the plaintiff’s claim involves a breach of a contract, most courts hold that “a breach of the implied covenant is not a separate cause of action, but is instead one way of establishing a breach. . . .
[H]owever, under certain limited circumstances, some courts in New York are willing to recognize an insurer’s bad faith as a standalone cause of action. . . .
The other facts alleged amount, at best, to an accusation that defendant did not satisfy the insurance claim in the amount, or on the precise timeline, that plaintiff believed to be appropriate under the circumstances. . . .
Those facts, accepted as true, plausibly amount to GCCW’s alleged non-performance of its obligations under the policy. They do not, however, amount to additional, bad faith behavior that would warrant compensation beyond the policy’s limits.
The court also denied General Casualty’s request to file a second amended complaint, and the case was allowed to proceed on the alleged damages within the policy’s limits.
Shortly thereafter, on March 12th, 2019, the U.S. District Court for the Western District of New York issued its decision in H&H Environmental Systems, Inc. v. Evanston Insurance Co. and Travelers Property Casualty Co. of America. Evanston Insurance Co. issued to H&H Environmental Systems, Inc., a Commercial Property Coverage Property Coverage Policy. Travelers Property Casualty Co. of America issued to H&H a Commercial Inland Marine Insurance Policy. After removal to federal court, Travelers moved to dismiss, and Evanston moved for judgment on the pleadings. In the complaint, the plaintiff alleged that both Evanston and Travelers breached their insurance obligations by failing to make a coverage determination. Evanston argued that because it has not yet issued a determination on the plaintiff’s claim, the breach of contract claim was premature. In addition, Evanston contended that the plaintiff had not adequately pleaded a breach of contract claim because the complaint failed to set forth the particular contractual provisions that Evanston allegedly breached.
The court held that “[t]he Complaint accordingly references the terms that Evanston allegedly breached: the Evanston Policy is an insurance policy for loss of business income, and if Plaintiff suffers such a loss, it is to submit a claim to Evanston, at which time Evanston must accept or disclaim Plaintiff’s claim.” The court also denied Evanston’s motion on the pleadings, finding that the motion was not premature. The court held that New York courts “allow a breach of contract claim to go forward when an insurer’s investigation is still pending.”
Further, both Evanston and Travelers moved to dismiss the plaintiff’s claim for breach of the covenant of good faith and fair dealing as duplicative of the plaintiff’s breach of contract claim. While the court denied the defendants’ motions, it clarified the extent to which a plaintiff may pursue a separate claim for breach of the covenant of good faith and fair dealing, as well as consequential damages. The court noted:
. . . Plaintiff has sufficiently alleged a claim for breach of the covenant of good faith and fair dealing in addition to a breach of contract claim. Plaintiff alleges that Defendants breached the covenant of good faith and fair dealing by, among other things, “delaying payment of the insurance proceeds due and owed Plaintiff under the policies. . . . [S]pecifically, Plaintiff alleges consequential damages in the form of “additional loss of business income, extra expenses, debt, and attorneys’ fees in suing to obtain coverage.” In other words, Plaintiff claims that Defendants’ delay in paying Plaintiff’s alleged losses has created additional losses which would not otherwise be remedied by a full payment of Plaintiff’s breach of contract claim. . . .
[T]o the extent that the breach of contract consequential damages overlap with the consequential damages alleged in the breach of the covenant of good faith and fair dealing claim, they may not be pursued separately.
Subsequently, on March 25th 2019, the U.S. District Court for the Northern District of New York issued its decision in Endemann v. Liberty Insurance Corp. The decision came on the defendant’s motion to dismiss the plaintiff’s amended complaint. The underlying dispute came before the court over property damage to the plaintiff’s home allegedly caused by his neighbor’s “illegally diverted” sump pump. The plaintiff’s third cause of action alleged a breach of the duty of good faith and fair dealing. The court noted:
[A] claim for breach of contract and one for bad faith handling of an insurance claim are not necessarily duplicative. The first and second causes of action plead different conduct by defendant and, in any event, defendant did not cross-appeal with respect to Supreme Court’s denial of its motion to dismiss the bad faith claim on the basis of duplication. . . . [T]he Third Cause of Action includes allegations of conduct different than underlie the breach of contract claim, and seeks damages in addition to those allowed on a breach of contract action. . . .
Because the breach of the implied covenant of good faith and fair dealing claim pleads conduct by Defendant different than alleged in the breach of contract claim, and because Plaintiff may be entitled to different relief than allowed under a breach of contract claim . . . , the claim is not duplicative of the breach of contract claim.
Recently, the U.S. District Court for the Southern District of New York issued its decision in Great Lakes Reinsurance (UK) SE v. Peter Herzig. Great Lakes filed a declaratory judgment action seeking a judgment that Great Lakes was obligated to pay only $175,000.00 in repairs to the insured vessel as opposed to the $450,000.00 demanded by the owner of the vessel, Peter Herzig. Despite entering into a settlement agreement, Herzig continued to demand payment of $450,000.00 from Great Lakes. In his answer, Herzig asserted claims for breach of contract, fraud, rescission, and breach of the covenant of good faith and fair dealing. Great Lakes filed a pre-motion letter to dismiss the good faith and fair dealing claim as redundant of the breach of contract claims, and Herzig sought to amend his counterclaims to add a counterclaim for breach of the covenant of good faith and fair dealing related to the manner in which Great Lakes handled his insurance claim. Great Lakes argued that Herzig’s amendment would be futile “because Herzig’s good faith and fair dealing claim would not survive a motion to dismiss.” The court noted that “a claim for breach of the implied covenant of good faith can survive a motion to dismiss only if it is based on allegations different from those underlying the accompanying breach of contract claim.” Using the court’s analysis in D.K. Property, Inc., the court held that Herzig’s proposed amendment would not survive a motion to dismiss.
Here, however, Herzig has not shown that his proposed good faith and fair dealing counterclaim is based on different allegations than his breach of contract counterclaims. Indeed, most of the factual allegations Herzig lists in support of his good faith and fair dealing claim relate to either (1) Great Lakes’s alleged failure to cover the reasonable cost of repairs to the Vessel; or (2) its unilateral decision to reduce the Policy value. . . . These same matters provide the basis for Herzig’s two breach of contract counterclaims. . . .
In sum, the allegations here are a far cry from those in D.K. Prop., Inc., where the carrier allegedly engaged in extensive bad faith conduct over a period of nearly two and a half years, and never made a coverage decision.
The cases discussed above were decided at the pleading stage, and the courts did not yet rule on whether any of the insurers acted in bad faith. When evaluating a bad faith claim, New York courts look, at least at the pleading stage, to whether the plaintiff can articulate additional facts, other than those underlying the breach of contract claim, to sustain a separate action for the breach of the implied covenant of good faith and fair dealing.
It is also worth noting that a plaintiff may recover consequential damages for either a claim for breach of contract or a claim for breach of the implied covenant of good faith and fair dealing. The court appears to be sensitive to the fact that when seeking consequential damages, a plaintiff is unable to recover consequential damages resulting from a breach of contract and separate consequential damages resulting from the breach of the implied covenant of good faith and fair dealing. The court in H&H Environmental Systems, Inc. seemed to clarify that a plaintiff either seeks consequential damages for the breach or seeks consequential damages from an independent cause of action for breach of the implied covenant of good faith and fair dealing. A plaintiff cannot be awarded both. Therefore, at the pleadings stage, a court may be inclined to allow a claim for consequential damages, regardless of whether it arises from a breach of contract claim or a claim for a breach of the implied covenant of good faith and fair dealing. If a plaintiff can articulate facts detailing additional damages outside of those damages alleged as a part of the breach, it may survive a motion to dismiss.
Bad faith is an ever-evolving topic in New York jurisprudence, and as these cases seem to indicate, courts evaluate these cases on a case-by-case, pleading-by-pleading basis. It will be worthwhile to follow these cases for a ruling on the merits from the respective courts as to whether any of the insurers acted in bad faith. We recommend charting the plaintiff’s allegations in support of its breach and consequential damages claims to see if the allegations are identical, separate, or somewhere in between.
