Court Opinion

ID: 5827038
Source: CourtListenerOpinion
Date Created: 2022-01-12 21:26:28.730803+00
Date Added: 2024-06-11T08:43:19.458683
License: Public Domain

OPINION OF THE COURT
Sullivan, J.
At issue are the merits of a complaint seeking punitive damages from an insurer based on its conduct in the handling of a claim under the New York standard fire insurance policy. Plaintiffs insureds contend that the insurer’s unreasonable delay in the processing of their claim constituted a willful, wanton and malicious breach of its contractual obligations, causing them great mental anguish and distress. In addition to punitive damages, plaintiffs seek to recover compensatory damages under the policy for their actual loss. The matter is before us on an appeal from a grant of partial summary judgment striking the claim for punitive damages.
Defendant is an unincorporated underwriting association of insurers organized and existing under article 17-B of the Insurance Law. Subject to certain specified exceptions, membership consists of all insurers who on a direct basis write fire and extended coverage insurance in New York State. (Insurance Law, § 652.) Such an insurer must be a member of the association as a condition of transacting this type of insurance business in the State. The association was created by the Legislature to provide fire and extended coverage insurance to persons having an insurable interest in property for which they have been unable to obtain such insurance after diligent efforts in the normal insurance market. (Insurance Law, § 653, subd 1, par [a]; Brueckner v Superintendent of Ins., 39 AD2d 383, affd 33 NY2d 663.)
Plaintiffs owned an apartment house in The Bronx containing 25 occupied apartment units and 6 rented stores. It is *74alleged that the building is located in a depressed area. On October 15, 1973, defendant agreed to insure the premises against fire loss to a limit of $190,000 for a term of one year. The policy was in full force and effect on July 26, 1974, when a fire in the premises caused severe damage to the roof and certain apartments. The apartments underneath the damaged portions of the roof were left exposed to the elements. Before the fire there were no fire, housing or building department violations against the premises.
Thereafter, on or about July 27, 1974, plaintiffs retained a firm of public adjusters to act on their behalf with respect to the loss. These adjusters advised defendant’s representative about the condition of the roof and the necessity for immediate action to prevent further loss from rain entering through the open roof. It is alleged that defendant delayed its examination of the premises until on or about August 15, 1974, when its contractor met with the contractor retained by plaintiffs and agreed upon the figure of $14,938.25 as the cost of roof repair. It is clear, however, that defendant never agreed to this repair. Plaintiffs further allege that defendant refused to pay this amount, without prejudice, thus preventing them from making the necessary repairs to the roof, pending ultimate disposition of the claim.
On August 21, 1974, defendant was notified in writing by the public adjusters that, due to its delay in disposing of plaintiffs’ claim, substantial additional water damage was being sustained. On that same date the public adjusters submitted an estimate, prepared by plaintiffs’ contractor, of $165,-922 as the reasonable cost of repairing the premises.
Soon after the fire the Department of Rent and Housing Maintenance of the City of New York began serving notice of violations on the premises because of the damage caused by the fire. Defendant was advised of the existence of these violations.
On August 29, 1974, in an effort to expedite a settlement, especially in view of the continuing rain damage and the accrual of violations against the premises, Mrs. Cohen, the manager of the premises and one of the plaintiffs, met with Alexander Pirnie, Secretary of the Committee on Losses and Adjustments of the New York Board of Fire Underwriters, which was processing this claim for defendant. Among the various documents submitted to Pirnie at this meeting was a statement of income prepared by plaintiffs’ accountants show*75ing a profit in excess of $12,000 from the operation of the premises for the year ending December 31, 1973. Plaintiffs contend that both Pirnie and John Prout, defendant’s claims manager, ignored this undisputed statement of income, and relied instead upon an income estimate made by an appraiser appointed by defendant, showing a profit of only $5,000.
On or about September 18, 1974, after further water damage from heavy rains, a supplemental estimate was submitted, showing the cost of repair for this additional damage to be $17,424.
Plaintiffs claim that Pirnie delayed his recommendation of settlement to defendant until September 11, 1974, when he reported, in part:
"Frankly we must admit that the physical repair costs have only increased since the recent heavy rains. There was a substantial portion of the roof opened through this casualty and to the writers [sic] knowledge it was a sufficiently large opening to prevent temporary closure.
"Our recommendation is that we be granted authority up to $65,000 to dispose of this casualty.”
Plaintiffs complain that, in making this recommendation, Pirnie relied solely on the estimate prepared by defendant’s appraiser as to income.
The next day, September 12, 1974, defendant gave written notice that it was canceling plaintiffs’ fire insurance policy effective October 16, 1974, because of "[p]hysical changes in the property * * * which result in the property becoming uninsurable”. It is alleged that at the time this notice was sent, 17 of the apartments and all the stores were occupied.
Plaintiffs filed an appeal from this notice of cancellation with defendant’s appeals committee on September 20, 1974. They contend that although defendant held several meetings to consider appeals between September 20, 1974 and November 6, 1974, it delayed its review of their appeal until November 6, 1974.
Plaintiffs further aver that it was not until October 4, 1974, more than three weeks after defendant’s receipt of Pirnie’s report, that Prout authorized the New York Board of Fire Underwriters to make an offer of settlement in behalf of defendant. Plaintiffs argue that neither Pirnie nor Prout can offer any explanation for this three-week delay, although Prout admitted that on receipt of the September 11, 1974 *76report he had all the information necessary to determine the amount to be offered in settlement.
Plaintiffs also complain that on October 28, 1974, when Mrs. Cohen and a representative of the public adjusters met with Pirnie and Prout in an effort to obtain a better offer, Pirnie advised Mrs. Cohen to accept the $65,000 that had been offered and to abandon the building.
Finally, on November 6, 1974, at the meeting to consider plaintiffs’ appeal from the notice of cancellation, the appeals committee recommended that the loss department make an advance payment to plaintiffs against the outstanding loss "so as to enable the assured to properly secure the premises.” Plaintiffs claim that although this recommendation was communicated to the loss department, defendant refused to offer an advance to plaintiffs for such purpose.
It is conceded, however, that defendant paid plaintiffs $60,000, without prejudice, on December 16, 1974, towards a settlement of their claim.
On the basis of these allegations, plaintiffs contend that defendants engaged in a course of conduct which was part of a scheme to exert unfair economic pressure on them to settle their claim for less than a fair amount; that this conduct constituted a willful, wanton and malicious breach of defendant’s obligations under the policy and the statutes and regulations pertaining to the settlement of insurance claims and defining unfair settlement practices; and that by virtue of such conduct plaintiffs are entitled to punitive and exemplary damages in the sum of $500,000.
There is nothing novel about a dispute between an insurer and its insured over the dollar amount of compensable loss under a fire policy. It should be noted that defendant has never taken the position that plaintiffs are not entitled to a recovery under the policy. What defendant challenges, as it has throughout the pendency of this claim, is the quantum of loss, and consistent with that position it has paid $60,000, fully cognizant that plaintiffs would institute this action for the full amount of what they claim is due them.
Although plaintiffs rely heavily on defendant’s delay in making a settlement offer, it is obvious that from the outset the parties could not agree on a settlement figure, and that, measured by the standard set by case law, defendant’s conduct here fell palpably short of the mark in making out a claim for punitive damages. The standard for the allowance of punitive *77damages against an insurer was set by the Court of Appeals in Gordon v Nationwide Mutual Ins. Co. (30 NY2d 427, 436-437):
"For breach of contract based only on a failure to make reasonable settlement of a claim within the policy limits, damages are measured by the policy limits. For a breach of implied conditions of the contract to act in its performance in good faith in refusing to settle within the policy limits, the damages may exceed the policy limits.
"The punitive nature of damage for the bad faith breach of contract is a characteristic of the law of contracts generally, and is not a peculiarity alone of the contract of liability insurance. In every contract 'there exists an implied covenant of good faith and fair dealing’ [citation omitted]. * * *
"But a punitive measure of damages is not applied routinely for breach of contract; and bad faith requires an extraordinary showing of a disingenuous or dishonest failure to carry out a contract.”
Our courts have repeatedly held that absent a showing of bad faith no recovery for punitive damages may be obtained. Bad faith exists "where the wrong complained of is morally culpable, or is actuated by evil and reprehensible motives, not only to punish the defendant but to deter him, as well as others who might otherwise be so prompted, from indulging in similar conduct in the future. (Walker v Sheldon, 10 NY2d 401, 404; citing Toomey v Farley, 2 NY2d 71, 83; Krug v Pitass, 162 NY 154, 161; Hamilton v Third Ave. R. R. Co., 53 NY 25, 28; Oehlohf v Solomon, 73 App Div 329, 333-334; see, also, e.g., Buttignol Constr. Co. v Allstate Ins. Co., 22 AD2d 689; Sukup v State of New York, 19 NY2d 519.)
Defendant’s independent appraiser found that the annual net rental income from the building was $5,000, while plaintiffs claimed a net income of over $12,000 a year. By August 21, 1974, less than one month after the fire, plaintiffs were claiming damage to the property in the sum of $165,922. Thus, the parties were in dispute from the beginning as to the extent of the loss. When such significant differences exist as to the actual cash value of the property at the time of loss and the income derived from it, a hiatus of two months between loss and the first settlement offer can hardly be considered inordinate. Nor do we consider extraordinary the slightly more than three-week lapse between Pirnie’s letter recommending that defendant pay $65,000, and defendant’s first offer. It is indicative of defendant’s belief that the damage was *78not as costly as plaintiff claimed, that it offered $65,000, aware of Pirnie’s statement in the same September 11th letter that $75,000 was the lowest figure plaintiffs’ adjuster would consider. This statement is not contradicted in the record. In the commercial world, and particularly in the insurance industry, nominal delays where delicate negotiations are transpiring must be expected.
Furthermore, defendant was under no obligation to offer or make partial payment to plaintiffs pending settlement discussions. Although section 40-d of the Insurance Law prohibits insurers from engaging in unfair claims settlement practices, and enumerates specific proscribed acts, it does not impose on an insurer an affirmative duty to make a partial payment, simply because an insured claims that further damage will occur. Even if the insurer concedes, after a review of the claim and an investigation of the damaged premises, that additional casualty loss has been incurred, it is still not bound to make immediate payment, particularly when an honest dispute exists as to the amount of the loss.
Contractually, an insurer’s obligation to pay under the standard fire policy does not arise until "sixty days after proof of loss * * * is received by [the] Company and ascertainment of the loss is made * * * by agreement between the insured and [the] Company expressed in writing” (Insurance Law, § 168).
 Defendant’s answer denies plaintiffs’ allegations of due performance of all conditions precedent. There is no allegation by plaintiff, let alone documentation, that a proof of loss was ever submitted. Nor is there any allegation of a waiver of this policy requirement. Obviously, under a pleading of performance, plaintiffs are barred from proving a waiver (Allen v Dutchess County Mut. Ins. Co., 95 App Div 86). To allow a recovery for willful misconduct on an insurer’s part when an insured itself has not shown compliance with all its obligations under the policy would work an unconscionable result. Moreover, the policy provides that in the event of disagreement either party may demand the appointment of appraisers to determine the extent of the loss. Plaintiffs never availed themselves of this right.
Plaintiff further claims statutory violations by defendant. Section 40-d of the Insurance Law, although setting a standard by which insurers are to process claims, does not create a private right of action but rather affords a public *79right of redress by the Insurance Department for violations (Insurance Law, §§ 5, 280) after a hearing and determination. (Insurance Law, § 40-d, subd 3; § 278.) As was noted in Labrina Corp. v New York Prop. Ins. Underwriting Assn., NYLJ, April 18, 1974, p 2, col 1: "The Legislature has enacted legislation, section 40-d of the Insurance Law, which applies to unfair claims practices by insurers. The statute performs the very same disciplinary function, which the plaintiff would have us apply here, and obviates the necessity for the maintenance of causes of action for punitive damages in insurance cases.”
 Similarly, in Frizzy Hairstylists v Eagle Star Ins. Co. (93 Misc 2d 59) the court held: "punishment is more properly within the province and jurisdiction of the State Superintendent of Insurance [citations omitted].”
Defendant’s cancellation of the policy was an exercise of a contractual right also held by the plaintiff. Defendant’s only obligation before canceling was to give five days’ written notice to the insured. (Insurance Law, § 278.) Moreover, defendant provided an appellate process by which an insured could challenge its actions. In fact, plaintiffs did avail themselves of the right to appeal from the cancellation notice, and their appeal was denied on November 6, 1974, for the reason that "[r]einspection indicates that conditions as stated in cancellation notice have not been corrected.” While the appeals committee did recommend that the loss department consider an advance payment to enable the insured to secure the premises it did not do so out of any contractual duty, but because it recognized that the insured might be in a "catch-22” situation. As evidence of their good faith, the appeals committee also stated that "reinspection will be made upon notification that the building has been made secure.” Under the law, defendant was required to provide coverage only on insurable property. (Insurance Law, § 653, subd 1, par [b].) Indeed, defendant’s policy provides that it is the insured’s obligation to "protect the property from further damage”.
In summarily rejecting plaintiff’s damage claim for $500,000 in punitive damages we do not urge the proposition that an insurance company may not be found liable in a civil suit for such damages. Rather, we stress the fact that the test for awarding such damages is a strict one, and is not found in the Insurance Law but rather, as already noted, in case law. Our courts should be loathe to countenance such an action when, as is the case here, it is woefully deficient in showing the *80requisite facts to support the claim. There is no extraordinary showing here, based on the allegations in the complaint and supporting documents, that defendant exhibited "a disingenuous or dishonest failure” to carry out its contract. (Gordon v Nationwide Mut. Ins. Co., 30 NY2d 427, 437, supra.) When asked in her examination before trial for the factual support for her pleading allegations, Mrs. Cohen’s response was that "the facts speak for themselves.” In truth, they simply do not.
Those cases in which punitive damages have been allowed involved liability policies where an insured had become liable to a third party for damages in excess of policy limits, as a result of an insurer’s failure to settle for an amount within the policy limits when it had the opportunity. (See, e.g., Brassil v Maryland Cas. Co., 210 NY 235; Knobloch v Royal Globe Ins. Co., 38 NY2d 471; Brunswick Realty Co. v Frankfort Ins. Co., 99 Misc 639.) We are unaware of any case involving first-party coverage where an assured has been allowed recovery for injuries to his feelings, as these plaintiffs seek. If defendant’s actions in the handling of the claim are outside the scope of accepted settlement practice, be it statutory or otherwise, the Insurance Department is the public’s surrogate for appropriate sanction.
It should be noted that plaintiffs’ claim of actual damage to the property, after the additional expenses were incurred, amounts to $190,507.46, only $507.46 more than the policy limits. Thus, there is no danger that plaintiffs will suffer an out-of-pocket loss, since the policy will cover all damages unless they are awarded 100% of what they claim in their ad damnum clause, a prospect which hardly seems likely in the fact of the controversy.
Although plaintiffs argue that defendant’s actions were part of a calculated scheme to force the abandonment of their building, with a view toward decreasing its risks, we see no evidence of that in this particular case. Nor is there any showing that defendant engaged in such a practice as a regular course of conduct. Defendant was acting within its statutory and contractual rights at all times during the negotiations but particularly when it canceled the policy. Under the provisions of the FAIR PLAN, the name of the program under which this insurance was written, defendant was obliged to cancel once the building became uninsurable. At the same time, by dropping one damaged building from its *81rolls, it could not escape its duty to underwrite fire insurance on all other insurable structures in the area.
Finally, aside from the obvious advantages to the public when an insurer settles fairly and promptly, there are other considerations of public policy involved here. Defendant, as a condition for doing business in New York, is required by the State Insurance Department to join in a pool with other insurance companies to offer casualty insurance in depressed urban areas. Building owners in those areas are already faced with high operating costs for such items as insurance and repairs, without the imposition of additional expenses. The end result of a windfall award, such as is sought here, would be the charging of still higher premiums by insurance companies, causing greater expenditures for owners, and, more than likely, further abandonment of buildings by owners unable to realize a fair return. It would, in effect, foster the very ills that article 17-B of the Insurance Law was intended to cure. Courts should not be privy to a giveaway of policyholders’ premiums, simply because an insured seeks more money than an insurer offers.
Accordingly, the order, Supreme Court, New York County (M. Evans, J.), entered March 14, 1978, granting defendant’s motion to strike the claim for punitive damages in the amended complaint, should be affirmed, without costs or disbursements. The cross appeal from the order, entered November 30, 1977, should be dismissed as academic, without costs or disbursements.