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Timestamp: 2019-04-21 11:19:05+00:00

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June 17, 2008 | Publication| Consequential Damages Under the Insurance Contract -- The New "Bad Faith?"
Consequential Damages Under the Insurance Contract - The New "Bad Faith"?
Recent opinions of the New York Court of Appeals have added to the controversy. The opinions are clearly contrary to previous rulings by New York courts and essentially allow the insured to recover "extra-contractual" damages in a pure breach of contract action. The dissenting opinions underscore this concern. This commentary will review the recent opinions in light of previous holdings of New York courts.
IV. Bi-Economy and Panasia - The New Trend or an Aberration?
Following Bi-Economy and Panasia, the consequential damages now potentially recoverable in New York under an insurance contract include all those "additional damages" caused by an insurer's "injurious conduct" regardless of whether a specific provision in the policy authorizes same. Discovery into the extent and nature of the insurer's "injurious conduct" which allegedly resulted in such "additional damages" will be allowed and further obfuscate the fact-finder's determination as to whether the insurer actually breached the insurance contract.
In a traditional breach of contract action, the defendant's motive or state of mind is irrelevant. The inquiry is limited simply to "what was the agreement between the parties" and "was that agreement breached." Adding the concept of "reasonably foreseeable damages" to the inquiry has unfortunately been used to go beyond the agreed-upon terms of the contract to find a result that the plain language of the contract clearly would not support.44 An insurer plainly does not contemplate the type of damages authorized by the Bi-Economy and Panasia opinions by virtue of entering into an insurance contract which includes coverage for business interruption. If courts are going to award "punitive" damages in the context of a breach of an insurance contract, at least call it what it is rather than presume fantastical negotiations that obviously have no place in reality.
The majority's bad policy choice is more important than the flaws in its reasoning. This attempt to punish unscrupulous insurers 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 jurors will no doubt do their best, but it is not hard to predict where their sympathies will lie.
After more than 200 years of being the protector of contract and a bulwark against the expansion of extra-contractual claims, the Bi-Economy and Panasia opinions reflect New York's foray into the increasingly muddy waters of quasi-contract law. New York's strained interpretation of contract law, and states that choose to follow, will only serve to increase the economic burdens of consumers and businesses who contract with them.
Burleson v. Illinois Farmers Ins. Co., 725 F. Supp. 1489 (S.D. In. 1989) citing Annot., Insurer's Liability for Consequential or Punitive Damages for Wrongful Delay or Refusal to Make Payments Due Under Contracts, 47 A.L.R.3d 314, 317-318 (1973).
10 N.Y. 3d 187 (N.Y. February 19, 2008).
The Supreme Court in New York is the trial court and a court of original, unlimited and unqualified jurisdiction unless its jurisdiction has been specifically prescribed. See generally Fry v. Village of Tarrytown, 680 N.E.2d 578 (N.Y. 1997). The Appellate Division was established by the Legislature in the Constitution of 1894. New York is unusual in that it permits the appeal of virtually all interlocutory orders to the Appellate Division. See David Scheffe, Comment, Interlocutory Appeals in New York – Time Has Come for a More Efficient Approach, 16 Pace L. Rev. 607 (1996). The New York Court of Appeals is New York's highest state court. See http://www.courts.state.ny.us.
Id. at 192, citing Kenford Co. v. County of Erie, 73 N.Y.2d 312, 319 (1989).
Id. at 194, citing New York Univ. v. Continental Ins. Co., 87 N.Y.2d 308, 318 (1995). For a discussion of the history of the implied contractual duty of good faith, see, Alan J. Nisberg, "The Implied Covenant of Good Faith and Fair Dealing," Mealey's Litigation: Insurance Bad Faith, Vol. 19, #20, FN27 (February 21, 2006) citing New York Univ. v. Continental Ins. Co. (holding that bad faith allegations amount to nothing more than a claim that the implied contractual obligation of good faith and fair dealing has been breached, which is "duplicative" of the breach of contract action); Cont'l Info Sys. Corp. v. Federal Ins. Co., No. 02 Civ. 468 (NRB), 2003 WL 145561 (S.D.N.Y. 2003)(holding that New York does not recognize a claim for extra-contractual damages predicated solely on bad faith denial of insurance coverage).
Bi-Economy, 10 N.Y.3d at 194, citing to courts in Utah, Hawaii, Arizona, Mississippi, and Nevada.
Id. at 193, citing Kenford, supra n.10 and Ashland Mgt. v. Janien, 82 N.Y.2d 395, 403 (1993).
Id. citing Rocanova v. Equitable Life Assur. Socy. of U.S., 83 N.Y.2d 603 (1994) and New York Univ. v. Continental Ins. Co., 87 N.Y.2d 308 (1995).
10 N.Y. 3d 200 (N.Y. App. February 19, 2008).
Id., citing Acquista v. New York Life Ins. Co., 285 A.D.2d 73 (1st Dept. 2001).
Id. at 203-204. The dissent in Panasia adopted the dissenting opinion in Bi-Economy.
Bi-Economy, 10 N.Y.3d at 197.
Globecon Group, LLC v. Hartford Fire Ins. Co., 2003 WL 22144316 (S.D.N.Y. 2003), aff'd 434 F.3d 165 (2d. Cir. 2006) citing Harris v. Provident Life & Accident Ins. Co., 310 F.3d 73, 80 n.3 (2d Cir. 2002); Kenford Co. v. County of Erie, 73 N.Y.2d 312, 319, (1989); Zurich Am. Ins. Co. v. ABM Indus., Inc., 01 Civ. 11200 (JSR), 2003 U.S. Dist. LEXIS 8973 at 15-16 (S.D.N.Y. May 29, 2003); Continental Information Systems Corp. v. Federal Ins. Co., 02 Civ. 4168 (NRB), 2003 U.S. dist. LEXIS 682 (S.D.N.Y. January 17, 2003).
Id. citing Streamline Capital L.L.C. v. Hartford Cas. Ins. Co., 02 Civ. 8123 (NRB), 2003 U.S. Dist. LEXIS 14677 (S.D.N.Y. Aug. 25, 20030; Brody Truck Rental, Inc. v. Country Wide Ins. Co., 277 A.D.2d 125 (1st Dept. 2000)(dismissing defendant's claim for consequential damages and specifically noting that "the insurance policy contains no provision or language indicating that recovery of consequential damages was within the contemplation of the parties"); High Fashions Hair Cutters v. Commercial Union Ins. Co., 145 A.D.2d 465, 467 (2d Dept. 1998)(holding that "plaintiff was not entitled to consequential or indirect damages since the policy did not contain a specific provision permitting recovery for such loss."); Martin v. Metro. Prop. & Cas. Ins. Co., 238 A.D.2d 389 (2d Dept. 1997)(dismissing the claim for consequential damages and explaining that "the contract of insurance does [not] contain any language which permits recovery for consequential damages."); Sweazey v. Merchants Mut. Ins. Co., 169 A.D.2d 43, 45 (3d Dept. 1991)(reversing trial court's refusal to strike claim for consequential damages and stating that consequential damages "must have been brought within the contemplation of the parties as a probable result of a breach at the time of or prior to contracting" and finding that "the insurance policy in this case contains neither provisions nor language which demonstrates that recovery of consequential damages was within the contemplation of the parties").
The District Court cites to the same cases cited by the majority in Bi-Economy but explains why the cases are inapposite or inconsistent with the weight of authority in New York. Id. at *4 citing Ashland Management Inc. V. Jamien, 82 N.Y.2d 395 (1993) noting Plaintiff's citation to Ashland was inapposite as the case concerned neither insurance contracts nor consequential damages, and thus does not affect the specific law the New York courts have developed in this area. See also Id. citing Acquista v. N.Y. Life Ins., 285 A.D.2d 73 (1st Dept. 2001) noting that Acquista was inconsistent with two New York Court of Appeals decisions, New York University v. Fed. Ins. Co., 87 N.Y.2d 308 (1995) and Rocanova v. Equitable Life Assur. Soc. of U.S., 83 N.Y.2d 603 (1994).
New York courts have consistently applied New York's Economic Loss Rule to bar tort actions seeking recovery of purely economic losses. Crown Castle USA Inc. v. Fred A. Nudd Corp., 2008 WL 163685 (W.D.N.Y. January 16, 2008)(It is a well-established principle that a simple breach of contract is not to be considered a tort unless a legal duty independent of the contract itself has been violated. . . The economic loss rule is predicated on the recognition that relying solely on foreseeability to define the extent of liability in cases involving economic loss, while generally effective, could result in some instances in liability so great that, as a matter of policy, courts would be reluctant to impose it). New York also does not recognize an action for negligent performance of a contract except in very limited circumstances. Niagara Mohawk Power Corp. v. Stone & Webster Engineering Corp., 725 F. Supp. 656 (N.D.N.Y. 1989). The limitations of recovery of economic losses in the tort context imposed by New York courts stand in stark contrast with the Bi-Economy and Panasia opinions which serve to greatly expand the recovery of economic losses not specifically agreed to by the parties under the contract based upon the amorphous concept of "reasonably foreseeable damages."
See Machan v. Unum Life Ins. Co. of America, 116 P.3d 342, 344 (Ut. 2005)(finding consequential damages available for breach of either the express or implied terms of an insurance contract).
Bi-Economy, 10 N.Y.3d at 199.

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