Insurance contracts are contracts of good faith. Usually, this means that both parties to the contract will deal with each other honestly and fairly, fulfilling their obligations under the contract. Occasionally, allegations of bad faith on the part of insurance companies arise. Courts have sometimes struggled with all to handle the full extent of damages in these circumstances.
Where an insurance company breaches its duties under the contract in bad faith, insureds have a right to sue. A debate exists, however, as to whether insureds can recover consequential or special damages in these circumstances. A trend has emerged in favor of allowing them in most situations.
In New York, the case that opened the door to consequential damages was Bi-Economy Market, Inc. v. Harleysville Ins. Co. of New York. Bi-Economy Market involved an insurance claim for lost business income as part of the property insurance contract. The insurance company advanced an amount to the insured that it considered the undisputed amount of the loss and then engaged in a protracted investigation into the claim, withholding additional payment during that time. As a result (according to the business owner), the company was unable to recover from the loss and collapsed.
Bi-Economy Market sued Harleysville for both breach of contract and consequential damages. The trial court initially dismissed the claim. On appeal, New York’s highest court overturned precedent in the state to hold that consequential damages in the state were permitted where an insurance company breaches its good faith duty to investigate and pay claims in a timely fashion, provided that the consequential damages were reasonably foreseeable and proximately caused by the bad faith. When explicitly applied to the case at hand, the court considered the loss of Bi-Economy’s business as a reasonably foreseeable consequence of the failure to pay a business interruption claim in a timely fashion, since the whole purpose of business interruption coverage is to keep the business running in the aftermath of a loss.
Subsequent opinions in New York have only served to strengthen the decision in Bi-Economy Market, including two cases in the past six months involving property claims. In Tiffany Towers Condo., LLC v. Ins. Co. of the Greater N.Y., the Court overturned the dismissal of the consequential damages claim of a condo association whose building was damaged in Superstorm Sandy. The condo association claimed that the failure to pay a supplemental claim for additional damage discovered a few years after the storm caused even further deterioration in the building to occur in the time period between when the claim should have been paid and the resolution of the lawsuit.
In D.K. Prop., Inc. v. National Union Fire Insurance Company of Pittsburgh, Pa., the Court allowed a lawsuit to continue based on an allegation of bad faith in the handling of claim in response to damage caused by neighboring construction to a building owned by the plaintiffs. The insurance company allegedly made ongoing unreasonably investigative demands while not paying the claim, even after an engineer hired by the insurance company had inspected the building multiple times. During the period in which the insurance company did not respond to the claim, the building’s damage worsened by the failure to remedy the original damage. The actions of the insurance company in delaying the final result of its claim handling process looked even worse when the insurance company sought to intervene in a separate lawsuit under the principle of subrogation despite not having paid the initial claim.
These cases highlight the importance of managing the claims process effectively, efficiently, and promptly. Proactive claims management by insureds and their insurance broker can help move cases along quicker and avoid the additional damages that unreasonable delays can cause.