In early 2019, the First Department provided policyholders an arrow in the quiver for their oft-repeated battle to securing coverage from intransigent insurance companies. In D.K. Property v. National Union Fire Insurance Company of Pittsburgh, Pa., 168 A.D.3d 505 (1st Dept. 2019), the First Department issued a clear decision that policyholders may recover the consequential damages, including attorney fees, caused by the bad-faith dilatory practices all too often employed by insurance companies. In so doing, the First Department offered New York policyholders a roadmap for pleading such damages.

Court of Appeals Expressly Permitted Recovery of Consequential Damages in Insurance Actions. For over a decade, New York law recognized that aggrieved policyholders injured at the hands of their unscrupulous insurance company could pursue claims for consequential damages that were reasonably contemplated by the parties at the time of contracting. In the companion cases of Bi-Economy Market v. Harleysville Insurance, 10 N.Y.3d 187 (2008) and Panasia Estates v. Hudson Insurance, 10 N.Y.3d 200 (2008), the Court of Appeals expressly condoned the recovery of consequential damages in such situations.

The facts in Panasia likely sound familiar to many policyholders. The policyholder in Panasia owned a rental property in Manhattan, which Hudson Insurance insured. 10 N.Y.3d at 202. After damage to the property, the policyholder timely notified Hudson of the loss but, according to the policyholder, "Hudson failed to investigate or adjust the claim until several weeks later. Hudson then denied the claim three months after that … ." Id. The policyholder then commenced the coverage action seeking "both direct and consequential damages that it claimed stemmed from Hudson's breach." Id. The IAS Court in Panasia denied Hudson's motion to limit the damages, and the Appellate Division affirmed. The Court of Appeals also affirmed, holding that the "courts below properly rejected Hudson's contention that it was entitled to judgment as a matter of law because consequential damages are not recoverable in a claim for breach of an insurance contract." Id. at 203. As the Court of Appeals stated, "consequential damages resulting from a breach of the covenant of good faith and fair dealing may be asserted in an insurance contract context, so long as the damages were 'within the contemplation of the parties as the probable result of a breach at the time of or prior to contracting.'" Id. (citation omitted).

The First Department Rejected the Typical Ways Insurance Companies Looked To Avoid Claims for Consequential Damages. Since then, however, insurance companies have sought to chip away at Court of Appeals' pronouncement and avoid even having to defend bad-faith claims. In particular, insurance companies often have advanced two separate arguments as to why a policyholder should not be permitted to proceed with claims for consequential damages. The First Department soundly rejected both arguments.

First, insurance companies often argued that the policyholder's claim for consequential damages must be dismissed for want of allegations showing specific facts that the particular consequential damages were within the reasonable contemplations of the parties. See, e.g., Ripka v. Safeco Ins., No. 5:14-CV-1442, 2015 WL 3397961, at *6 (N.D.N.Y. May 26, 2015) ("Ripka has not pleaded specific facts capable of showing that consequential damages, beyond the limits of the Homeowner's Policy, were reasonably contemplated by the parties, or that they considered, at the time of contracting, that consequential damages would be available in the event of a delay in payment or other breach of the policy."). Indeed, this is what the IAS Court held in D.K. Property. See D.K. Property v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, 59 Misc.3d 714, 720 (Sup. Ct. N.Y. County 2018) (D.K. Property I). Insurance companies latched on to the Court of Appeals' statement in Bi-Economy, 10 N.Y.3d at 192, that "[s]pecial, or consequential damages … are also recoverable in limited circumstances," to argue that special damages require specific, stringent pleading requirements. The Appellate Division in D.K. Property made clear that there is no special pleading requirement regarding the specificity required to plead a claim of consequential damages.

Specifically, the First Department explained that "[a]lthough proof of such consequential damages will ultimately rest on what liability the insurer is found to have 'assumed consciously,' or from the plaintiff's point of view, have warranted the plaintiff to reasonably suppose the insurer assumed when the insurance contract was made, a determination of whether such damages were, in fact, foreseeable should not be decided on a motion to dismiss and must await a fully developed record." D.K. Property, 168 A.D.3d at 506-07. The Appellate Division further stated, in response to the typical insurance company argument, that "there is no heightened pleading standard requiring plaintiff to explain or describe how and why the 'specific' categories of consequential damages alleged were reasonable and foreseeable at the time of contract." Id. at 507.

The First Department's holding that there is no heightened pleading standard means that claims for consequential damages arising out of improper claims handling practices will not be prematurely dismissed if the policyholder can reasonably allege that such damages were foreseeable at the time they purchased the policy. The opportunity to develop evidence to support a consequential damages claim will undoubtedly impact insurance coverage cases in New York.

Second, insurance companies also seek immediate dismissal of bad faith consequential damages claims on the grounds that they are duplicative of a breach of contract claim. See, e.g., Orient Overseas Assocs. v. Xl Ins. Am., 132 A.D.3d 574, 577 (1st Dept. 2015) (stating "there is no compelling authority indicating that a separate, non-contractual claim exists for 'bad faith claims handling'"). The First Department made clear, however, that a bad faith claim may go forward where the allegations of bad faith were separate from the standard breach of contract claim.

Specifically, the First Department noted that "a claim for breach of contract and one for bad faith handling of an insurance claim are not necessarily duplicative," and that D.K. Property's "first and second causes of action plead different conduct by defendant," which permitted it to proceed with a bad-faith cause of action. See D.K. Property, 168 A.D.3d at 507. To get around the typical "duplicative" argument, the policyholder in D.K. Property made clear that the insurance company's unreasonable claims handling and damages went beyond the simple breach of contract and failure to pay the loss. Rather, the policyholder alleged that the insurer undertook unreasonable claims handling in bad faith, for the purpose of making the claim too expensive for plaintiff to pursue and inducing plaintiff to abandon its claim for coverage. See D.K. Property I, 59 Misc.3d at 717 (quoting Am. Cmplt. ¶ 19). These allegations included, among other things, that the insurance company's engineer "expressed agreement that the negligent renovation design and construction" of the neighboring building was the source of distress to plaintiff's building, but National Union "abandoned" the policyholder, forcing it to sue the tortfeasors in a separate action in this court. Id. (quoting Am. Cmplt. at ¶¶ 20, 31). In addition, the policyholder claimed that the insurance company's delay and unreasonable demands for information and inspections of the premises had caused plaintiff to incur certain other expenses. Id. The policyholder also specified the damages, including attorneys' fees, suffered by D.K. Property as a result of National Union's bad faith. Id. The teaching of D.K. Property is that a well-pled complaint alleging a separate claim for bad faith can proceed in New York.

At bottom, New York policyholders should consider the potential recovery of consequential damages as a result of D.K. Property; as the First Department has made clear, insurance companies may not easily escape litigation over the damages caused by improper claims handling.

Andrew Bourne and Joshua Blosveren are partners at Hoguet Newman Regal & Kenney. They represented D.K. Property in the matter discussed herein. They can be reached at [email protected] and [email protected], respectively.