Insurance in the Courts (Formerly Recent Court Decisions)

By Maniloff, Randy; Mayerson, Marc et al. | Risk Management and Insurance Review, Spring 2009 | Go to article overview

Insurance in the Courts (Formerly Recent Court Decisions)


Maniloff, Randy, Mayerson, Marc, Stempel, Jeffrey W., Risk Management and Insurance Review


NEW YORK EMBRACES CONSEQUENTIAL DAMAGES AS A REMEDY IN INSURANCE BAD FAITH CLAIMS

Bi-Economy Market, Inc. v. Harleysville Insurance Co. of New York, 10 N.Y.3d 187, 886 N.E.2d 187, 856 N.Y.S.2d 505, 2008 N.Y. LEXIS 278 (N.Y., Feb. 19, 2008) and Panasia Estates, Inc. v. Hudson Ins. Co., 10 N.Y.3d 200, 886 N.E.2d 135, 856 N.Y.S.2d 513, 2008 N.Y. LEXIS 275 (N.Y. Feb. 19, 2008)

New York has historically been a friendly jurisdiction for insurers facing bad faith claims. It still is. But in a pair of late February 2008 decisions, the New York Court of Appeals, the state's highest court, added a significant weapon to the arsenal of policyholders making bad faith claims. Taken together, these decisions permit policyholders, upon a showing of bad faith in refusing or delaying payment, to seek consequential damages flowing from the insurer's failure to make timely, full payment under the policy.

Bi-Economy Market, Inc. v. Harleysville Insurance Co. of New York, 10 N.Y.3d 187, 886 N.E.2d 187, 856 N.Y.S.2d 505 (N.Y. 2008) and Panasia Estates, Inc. v. Hudson Ins. Co., 10 N.Y.3d 200, 886 N.E.2d 135, 856 N.Y.S.2d 513 (N.Y. 2008) are potentially pathbreaking decisions in that the Court permitted two policyholders claiming unreasonable insurer delay or resistance to payment to seek consequential damages. Prior to Bi-Economy and Panasia, the Court had never expressly endorsed these remedies for insurer bad faith, nor had there been much support for this form of policyholder remedy in the lower New York courts.

Although the full implications of the decisions will emerge only through subsequent adjudication, the battlefield between policyholders and insurers in New York, one historically tilted toward insurers, has moved significantly in the direction of policyholders. Reading the reaction of the two judges dissenting from the Court's two 5-2 majority opinions, one might mistakenly get the impression that the insurance world was coming to an abrupt end and that the Court had massively deviated from traditional contract principles. On balance, however, the Court majority opinions appear completely consistent with traditional noninsurance contract law and hardly spell doom for insurers.

What makes both Bi-Economy and Panasia noteworthy is that they are a significant expansion of New York insurance law that has arguably been too protective of insurers. Even after these decisions, New York law remains distinctly less favorable to policyholder than the bad faith law of most states, which treats bad faith breach of an insurance policy as tort that gives rise to the full array of tort damages, including potential punitive damages. By contrast, even after Bi-Economy and Panasia, New York appears to subject insurers to the risk of punitive damages only if they commit independent torts other than bad faith (e.g., fraud, conversion, defamation) against a policyholder. The emerging new regime in New York makes it look more like states that treat first-party insurance bad faith claims as a type of contract claim rather than a tort claim. See, e.g., Beck v. Farmers Ins. Exch., 701 P.2d 795 (Utah 1985) (however, Utah, like most states, treats bad faith by a third-party insurer as a tort).

If adhered to and applied logically in the future, the two decisions arguably presage a regime in which the economic playing field formerly tilted in favor of insurers in coverage litigation, will be closer to level for a wide range of insurance products but remains more protective of insurers than the law of most states. Insurers will undoubtedly attempt to turn back these decisions and their implicit tide. In response, policyholders will undoubtedly argue that the decisions are correct and that for too long, insurers in New York, who are supposed to have fiduciary-like duties beyond those of ordinary contracting parties, have largely been irnmunized in most bad faith cases from paying anything beyond the policy limits even where they have acted unreasonably in breaching the insurance contract. …

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