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Extra-Contractual Liability for Insurers in New York

            New York is one of the relatively few states that has declined to recognize a cause of action in tort for the bad faith denial of a first-party insurance claim.  However, New York courts have recognized the ability to recover consequential damages in such circumstances.  The leading case in this regard is Bi-Economy Mkt., Inc. v. Harleysville Ins. Co. of N.Y., 10 N.Y.3d 187, 856 N.Y.S.2d 505, 886 N.E.2d 127 (2008), which arose from a fire to an insured grocery store.  The store contended that its insurer acted in bad faith by delaying payment for covered property damage and failing to timely pay the full amount of the store’s business interruption claim.  Based upon these allegations, the store sought consequential damages for the business’s failure.  The insurer contended that it could not be held liable for consequential damages, as such damages were expressly excluded under the policy.

The New York Court of Appeals observed that contract law generally authorizes the recovery of consequential damages for a breach, if it was foreseeable to the parties at the time of contracting that such damages were the probable result of the breach.  The Court determined that as business interruption coverage was intended to allow a policyholder to maintain its business in the event of a covered loss, the insurer was aware that a failure to investigate and pay covered claims in good faith could result in the collapse of the business.  The Court therefore concluded that the insurer could be held liable for consequential damages as a result of its alleged breach of contract.

Courts have applied Bi-Economy in a variety of circumstances to recognize potential entitlements to consequential damages arising from bad faith claims handling.  For example, a New York federal court has observed that pursuant to Bi-Economy, a policyholder could demand additional living expenses in excess of the policy’s ALE coverage limits as consequential damages for bad faith claims handling.  See Woodworth v. Erie Ins. Co., 743 F. Supp. 2d 201, 217-18 (W.D.N.Y. 2010).  Similarly, a New York trial court has held that a policyholder may seek as consequential damages the car payments she had to make as a result of the insurer’s alleged bad-faith denial of her claim for a stolen vehicle.  See Rodriguez v. Allstate Ins. Co., 33 Misc. 3d 827, 832, 931 N.Y.S.2d 462, 466 (Sup. Ct. 2011).

The Bi-Economy court’s recognition of claims for consequential damages against insurers has not heralded the recognition of additional types of recoverable damage or new theories of extra-contractual liability against insurers in New York.  Courts have declined to interpret Bi-Economy as authorizing insurance bad faith tort claims.  See Orient Overseas Assoc. v. XL Ins. Am., 132 A.D.2d 574, 576-77, 18 N.Y.S.2d 381, 383 (1st Dep’t 2015).  New York courts have also continued to place strict limits upon the ability to recover punitive damages against insurers for improper claims handling.  Courts have consistently held that such damages may only be awarded when a breach of the policy not only reflects a “high degree of moral turpitude” and a “criminal indifference to civil obligations,” but also concerns conduct that “was aimed at the public generally.”  Rodriguez, 33 Misc. 2d at 833, 931 N.Y.S.2d at 467.

However, the recognition of consequential damage claims against insurers may alone lead to significant extra-contractual liability.  Insurers that are faced with coverage litigation in New York must carefully consider the potential consequential damages that could be awarded if a fact-finder determines that the insurer did not act in good faith.

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