New York Court Of Appeals Allows Insured's Claim For Consequential Damages In Breach Of Contract Action Against Insurer

In two cases decided on the same day, New York’s highest court, New York Court of Appeals, ruled that commercial property owners may assert consequential damage claims against insurers who breached their policies by delaying payment or improperly denying coverage.  Bi-Economy Market, Inc. v. Harleysville Ins. Co. of New York, 2008 WL 423451 (N.Y. 2008) and Panasia Estates, Inc. v. Hudson Ins. Co., 2008 WL 420014 (N.Y. 2008).  In Bi-Economy, the Court held that commercial property insurers may be liable for consequential damage claims if such damages are “reasonably foreseeable and contemplated by the parties.”  Bi-Economy, 2008 WL 423451.  Similarly, in Panasia, the Court relied on the reasoning set forth in Bi-Economy in denying the Insurer’s motion to dismiss the Insured’s consequential damage claim.

Bi-Economy Market, Inc. (“Bi-Economy”) was a wholesale and retail meat market in Rochester, New York that suffered a fire resulting in inventory loss and structural damage to its building and equipment.  Bi-Economy was insured by Harleysville Insurance Co. of New York (“Harleysville”) under a “Deluxe Business Owner’s” policy providing coverage for property damage and lost business income for up to 12 months.  Bi-Economy submitted a claim, which Harleysville disputed and disbursed only $163,161.92.  Over a year later, an arbitrator awarded Bi-Economy $407,181.00.  Also during this time, Harleysville offered to pay only seven months of Bi-Economy’s lost business income.  Bi-Economy failed to resume its business operations.

Bi-Economy sued Harleysville seeking consequential damages resulting from the collapse of its business due to Harleysville’s breach.  The Appellate Division granted Harleysville’s motion for partial summary judgment, dismissing Bi-Economy’s claim for consequential damages, based on Policy exclusions for “consequential losses.”  The Court of Appeals reversed the Appellate Division, holding that “Bi-Economy’s claim for consequential damages were reasonably foreseeable and contemplated by the parties.”  Id.

The Bi-Economy Court began its reasoning with the principle that a non-breaching party to a contract can recover damages that “naturally and directly” flow from the breach.  Id. (quoting Kenford Co. v. County of Erie, 73 N.Y.2d 312, 319 (1989)).  The Court stated that such “consequential damages” are recoverable if they were contemplated and foreseeable by the parties at the time of contracting and are reasonably ascertainable.  Furthermore, the Court relied on the basic rule of contract law that the non-breaching party is entitled to be placed in the position it would have been in had the contract been performed.  

Next, the Court analyzed the Policy’s business interruption coverage.  The Court held that the purpose of this coverage was to “ensure that Bi-Economy had the financial support necessary to sustain its business operation in the event disaster occurred.”  Bi-Economy, 2008 WL 423451.  Furthermore, the Court held that the very purpose of business interruption coverage would have made Harleysville aware that if it breached the contract it would be required to pay Bi-Economy for its loss of business.  Since Harleysville breached the contract by failing to investigate in good faith and pay covered claims, and in light of the purpose of business interruption insurance, the Court held that Bi-Economy’s damages resulting from the demise of its business were reasonably foreseeable and contemplated by the parties at the time of contracting.  Therefore, Harleysville was liable for the consequential damages resulting from the collapse of Bi-Economy’s business.

Lastly, the Court addressed the Policy exclusions for consequential “losses.”  Specifically, the Court held that these exclusions refer to delay caused by third-parties or by any “[s]uspension, lapse or cancellation of any license, lease or contract.”  In contrast, consequential damages “are in addition to the losses caused by the calamitous event . . . and include those additional damages caused by a carrier’s injurious conduct - in this case, the Insurer’s failure to timely investigate, adjust, and pay the claim.”  Id.  Thus, the exclusions for consequential “losses” were inapplicable.  As such, the Court held that Bi-Economy was allowed to assert a claim for consequential damages against its Insurer.

In Panasia, the Court relied on the same reasoning set forth in Bi-Economy to determine that consequential damages could be awarded.  Here, the Insured, Panasia Estates, Inc. (“Panasia”), sought direct and consequential damages from its Insurer, Hudson Insurance Co. (“Hudson”), stemming from Hudson’s denial of Panasia’s claim for water damage to its commercial building.  Panasia sued Hudson for breach of contract, alleging failure to timely and properly investigate the claim.  The Court, recognizing the potential for a consequential damages claim, remanded the case to determine whether the damages sought by Panasia were indeed “consequential damages.”

It should be noted that Judge Smith drafted the dissent for both the Bi-Economy and Panasia decisions.  The dissent argued that allowing consequential damage claims is the equivalent of allowing punitive damages against insurers, thereby overturning the precedents set in Rocanova v. Equitable Life Assur. Soc’y of U.S. and New York Univ. v. Cont’l Ins. Co. These cases precluded awarding punitive damages for an insurer’s breach, unless the insured can show both “egregious tortious conduct” against the insured and “a pattern of similar conduct directed at the public generally.”  Bi-Economy, 2008 WL 423451 (citing Rocanova, 83 N.Y.2d at 613).   The majority dismissed this argument by distinguishing the two types of damages as follows:

Bi-Economy, 2008 WL 423451.

When a commercial property insurer fails to timely and properly investigate claims, it may be liable for consequential damages exceeding the limits of the policy.  Commercial carriers in New York should be aware that such consequential damages have been deemed foreseeable and a contemplated result of insurers’ improper or unreasonable handling of their insureds’ claims.