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Viability Of Prior New York Insurance Bad Faith-Punitive Damages Precedents in Light Of Bi-Economy Market, Inc. v. Harleysville Insurance Company Of New York
By: Charles W. Benton, Esq.

Viability Of Prior New York Insurance Bad Faith-Punitive Damages Precedents in Light Of Bi-Economy Market, Inc. v. Harleysville Insurance Company Of New York

By: Charles W. Benton, Esq.
Bruno, Gerbino & Soriano, LLP
Melville, New York


In Bi-Economy Market, Inc., v. Harleysville Insurance Company of New York 10 N.Y. 3rd 187 (2008), reargument denied, 10 N.Y. 3rd 890 (2008), the New York Court of Appeals reversed the Appellate, Division, Fourth Department, and found that Bi-Economy was entitled to proceed in its action against an insurance company for a breach of contract claim seeking consequential damages from the collapse of its business. Bi-Economy had a policy of insurance with Harleysville for replacement cost coverage on its building as well as business property or contents loss coverage. Bi-Economy suffered a major fire which resulted in a complete loss of its food inventory and heavy structural damage to its building and business-related equipment. Bi-Economy’s policy with Harleysville also provided coverage for lost business income or business interruption insurance.

Following the fire, Bi-Economy submitted claims to Harleysville. Harleysville disputed Bi-Economy Market’s claim for actual damages, advancing it only $163,161.92. More than a year later, following submission of the dispute to alternative dispute resolution, Bi-Economy was awarded the additional sum of $407,181.00. During this time, Harleysville offered to pay only seven months of Bi-Economy’s claims for lost business income, despite the fact that the policy in question provided for a full twelve months of coverage. Bi-Economy never resumed business operations.

Bi-Economy then commenced an action against Harleysville, asserting causes of action for bad faith claims handling, tortuous interference with business relations and breach of contract seeking consequential damages for “the complete demise of its business operation in an amount to be proved at trial.” Bi-Economy alleged that Harleysville improperly delayed payment for its building and contents damages and failed to timely pay the full amount of its lost business income claim. Bi-Economy further alleged that, as a result of Harleysville’s breach of contract, its business collapsed, and that liability for such consequential damages could be reasonably foreseeable and contemplated by the parties at the time the insurance contract was issued. Harleysville countered that the contract excluded consequential damages and sought dismissal by means of partial summary judgment of Bi-Economy’s breach of contract cause of action.

The lower court granted the motion and the Appellate Division, Fourth Department, affirmed that holding, finding that the insurance policy excluded coverage for consequential losses and that consequential damages were not contemplated by the parties when the contract was formed. The New York Court of Appeals found that the lower courts erred in dismissing Bi-Economy’s breach of contract claim seeking consequential damages for the collapse of its business resulting from the failure of Harleysville to fulfill its obligations under the contract of insurance.

The Court of Appeals found that courts wishing to determine whether consequential damages were reasonably contemplated by the parties to an insurance contract must look to the nature, purpose and particular circumstances of the contract as well as to what liability an insurance company may fairly be supposed to have assumed consciously, or to have warranted an insured reasonably to suppose that it assumed, when the contract was made. The Court of Appeals further found that implicit in contracts of insurance is a covenant of good faith and fair dealing such that a reasonable insured would understand that an insurer promises to investigate in good faith and pay covered claims. The purpose served by business interruption coverage is to insure that an insured has the financial support necessary to sustain its business operation in the event disaster occurred. The Court of Appeals concluded that Bi-Economy’s claim for consequential damages included the demise of its business and that such claims were reasonably foreseeable and contemplated by the parties to an insurance contract.

In a scathing dissent, Justice Smith cited two prior decisions of the New York of Appeals, Rocanova v. Equitable Life Assur. Soc. of U.S., 83 N.Y. 2nd 603 (1994), and New York Univ. v. Continental Ins. Co., 87 N.Y. 2nd 308 (1995). Those cases, in Justice Smith’s words, “rejected the argument that a bad faith failure by an insurer to pay a claim could, without more, justify a punitive damages award.” 10 N.Y. 3rd 187, 196 Under the rationale of those cases, punitive damages were not available for breach of an insurance contract unless a plaintiff could show both egregious tortuous conduct directed at the insured claimant and a pattern of similar conduct directed at the public generally. Justice Smith in his dissent accused the majority of abandoning these rules without discussing them and without acknowledging that it had done so. Justice Smith argued that the majority achieved this result simply by changing labels: “punitive damages are now called ‘consequential damages’, and a bad faith failure to pay a claim is called a ‘breach of the convent of good faith and fair dealing’. 10 N.Y. 3rd 187, 196.

Justice Smith ended his dissent in Bi-Economy Market by opining that the result of the majority’s opinion in this case would be an increase in insurance premiums. Others analyzing the majority decision in Bi-Economy Market and Justice Smith’s dissent in that case have further prognosticated that the decision could “open the floodgates” with regard to increased extra-contractual damages litigation against insurance companies.

In a recent decision by the Appellate Division, Second Department in Tartaro v. Allstate Ind. Co., a/k/a Allstate Insurance Company, 56 A.D.3d 758 (2nd Dept. 2008), that court, post-Bi-Economy Market, reversed the lower court’s order and found that the second and third causes of action against Allstate seeking to recover punitive damages and damages for negligent and intentional infliction of emotional distress in the content of an insurance policy breach of contract action should have been dismissed. The Appellate Division, Second Department’s analysis in Tartaro is a succinct distillation of existing New York law prior to Bi-Economy which disfavors actions for extra-contractual damages in insurance cases. The Appellate Division, Second Department’s decision in Tartaro also serves as a reaffirmation of existing New York law on the subject in light of Justice Smith’s dire proclamation that such pre Bi-Economy Market holdings could be called into question.
Editors Note: Charles W. Benton is a graduate of Fordham University School of Law and an associate of the Appeals Division at Bruno, Gerbino & Soriano, LLP, located in Melville, New York.

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