N.Y. Court: Insureds Can Sue For Consequential Damages

February 20, 2008

A new ruling by the New York Court of Appeals could open the door for breach of contract suits against commercial property insurers – a move two dissenting judges warned could raise the price of insurance for everyone in the state.

In two decisions earlier this week, the state’s high court ruled that commercial property owners can assert “consequential damages” against their insurance companies if those insurers breach their contracts. Those damages can exceed an insurance policy’s limits if they are a “natural and probable consequence” of a broken contract.

Five of the court’s seven judges agree with that opinion. However two judges – Robert S. Smith and Susan Phillips Read – dissented, calling consequential damages little more than thinly disguised punitive damages. The dissenters predicted insurers will be forced to raise premiums for all New Yorkers, fearing unsympathetic juries will potentially expose them to unpredictable settlements.

The two cases were Bi-Economy Market, Inc. v. Harleysville Insurance Company of New York and Panasia Estates Inc. v. Hudson Insurance Company.

The Bi-Economy case centered on a Rochester, N.Y meat market whose owners contended that – following a 2002 fire – their insurer, Harleysville, advanced them far less than the sum they needed under their business interruption coverage. Harleysville paid them about $160,000; the market was eventually awarded over $400,000.

Bi-Economy, which blames the fallout from the fire for putting the firm out of business, also maintained that Harleysville failed to pay all of the lost business income the market owed to the market under its insurance policy.

The second decision centered on a Manhattan commercial property owner, Panasia Estates, which sought to recoup lost rents, damages and other coverage provided under its policy by issued by Hudson Insurance Co.

Hudson declined to pay all of the damages, arguing they were caused by wear and tear. Panasia Estates maintained the damage stemmed from faulty repairs.

In both cases, consequential damages were upheld.

In the Harleysville case, Judge Eugene F. Pigott Jr. wrote that, “when an insured…suffers additional damages as a result of an insurer’s excessive delay or improper denial, the insurance company should stand liable for these damages.”

Lawyer Eugene R. Anderson of Anderson Kill & Olick, which frequently represents plaintiffs in cases against insurance companies, said “The Court of Appeals has recognized that insurance companies should not be granted the power to insulate themselves from remedies for their breaches of contract. When insurance company bad faith causes the death of a company, they should pay the full consequences. The court upheld that basic principle.”

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