New York appellate court sets new precedent for bad faith claims

Decision clarifies what’s needed from plaintiffs

New York appellate court sets new precedent for bad faith claims

Insurance News

By Bethan Moorcraft

A New York appellate court has issued a significant decision for New York policyholders, which sets out in clear terms the minimal standard needed to plead a bad faith claim.

On January 17, the First Department appellate division reversed a Supreme Court decision which dismissed plaintiff D.K. Property’s claim for consequential damages for breach of the implied covenant of good faith and fair dealing against the National Union Fire Insurance Company of Pittsburgh, Pa. – an AIG company.

The case stems back to 2014 when D.K. Property filed an insurance claim for “direct physical loss or damage” to their property in 40 Prince Street, Manhattan. According to court documents: “after certain construction work began in an adjoining building, [the] plaintiff’s building began to shift and exhibit structural damage, including cracks.” However, despite D.K. Property filing a timely claim, National Union did not pay the claim or disclaim coverage with any urgency.

Rather, the plaintiff alleged that National Union “made unreasonable and increasingly burdensome information demands throughout the three-year period since the property damage occurred [in order to] make the claim so expensive to pursue that [the] plaintiff would abandon it altogether.” As a result, D.K. Property filed suits for breach of contract for failure to pay covered losses under the policy, and for breach of the implied covenant of good faith and fair dealing, through which the firm also asked for consequential damages.

According to court documents, “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.” Furthermore, the suit alleges that D.K. Property incurred “significant, unnecessary legal fees” after AIG sought to intervene as subrogor under the policy when D.K. Property sued the owner of the adjoining property.

The Supreme Court initially dismissed D.K. Property’s claim for consequential damages for bad faith claims handling on a technical pleading ground, stating that D.K. Property did not specify exactly how the consequential damages were foreseen or should have been foreseen when the contract was made. The plaintiff appealed and the First Department appellate court reversed the decision, while also rejecting AIG’s attempt to impose a heightened standard of pleading of bad faith claims—an argument often made by insurance companies and accepted by courts.

Josh Blosveren, partner at New York litigation boutique Hoguet Newman Regal & Kenney, LLP, commented: “The appellate division essentially said all the plaintiff has to do is allege the specific types of consequential damages and that they were reasonably foreseeable. The court rejects the insurer’s suggestion that an insured/policyholder needs to explain in some detail why those particular consequential damages were reasonably foreseeable.

“I think [the defendant] pushed the barrier further here than other insurers have pushed it in the past. We don’t believe [the court’s decision] creates new laws; really it just clarifies how we always read the Court of Appeal’s decisions in Panasia Estates Inc. v Hudson Ins. Co. and Bi Economy Mkt, Inc. v Harleysville Ins. Co. of N.Y., […] whereby a plaintiff just has to plead the types of damages they’re seeking and that they’re reasonably foreseeable at the time of the contract.”

In addition to clarifying the minimal pleading standard that’s required for bad faith claims and recognizing that consequential damages for bad faith claims handling are recoverable in New York, the First Department also rejected AIG’s attempt to dismiss D.K. Property’s claim for affirmative attorney fees through a backdoor “duplicative” argument on the grounds that AIG did not appeal that portion of the Supreme Court’s decision. 

“Insurance companies often make the argument that these types of claims are duplicative of breach of contract,” said Andrew Bourne, partner at Hoguet Newman Regal & Kenney, LLP, and representative of D.K. Property. “They’ve had some success in the past of getting [bad faith] dismissed, which presumably limits the scope of the lawsuit, taking out the bad faith allegation and focusing on the damages.

“The opinion the court made clear is that New York does recognize that a claim for breach of contract and one for bad faith handling of an insurance claim are not necessarily duplicative, which enunciates clearly that two types of claims can be put forward.”

Blosveren added: “What’s precedential about this is that it’s the first decision that clarifies what the Court of Appeals mean in Bi-Economy and Panasia with regard to the [bad faith] pleading standard, while also identifying or recognizing certain types of consequential losses that I don’t think the court has specifically recognized before, and among those consequential damages are attorney’s fees. I think that’s all of interest to policyholders and insurance companies alike.”

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