Can a policyholder under a business interruption policy, whose business collapses because of an insurer’s failure to timely pay covered business interruption losses, recover “consequential damages” in excess of limits from the insurer that failed to promptly pay its claim? Yes, said a majority of the New York Court of Appeals in its February 19, 2008 decision in Bi-Economy Market, Inc. v. Harleysville Ins. Co., 2008 NY Slip. Op. 1418.
In Bi-Economy, the policyholder, a family-owned meat market, suffered a major fire that resulted in damage to its food inventory, destruction of business equipment and heavy structural damage to its building. The policyholder sought coverage for these losses under its business interruption insurance, which expressly provided coverage up to 1 year from the date of the fire. However, the insurer disputed the policyholder’s claim for damages, and ultimately offered to pay no more than seven months of the insurers’ lost business income. The policyholder, which was forced out of business by the fire, was unable to resume business operations. Accordingly, it commenced an action against the insurer charging the insurer, inter alia, with breach of contract and bad faith claims handling and seeking “consequential damages for the complete demise of its business operation.” The insurer answered the complaint and subsequently moved: (a) to amend its answer to assert a defense that the business interruption policy excluded consequential damages; and (b) for partial summary judgment dismissing the breach of contract count. The trial court and Appellate Division sided with the insurer. However, the Court of Appeals reversed.
In reversing, the Court of Appeals proceeded from well-settled law recognizing that special, or consequential damages (i.e.: damages above and beyond the “benefit of the bargain” that are recoverable in case of contract breach) are “recoverable in limited circumstances.” Slip op. at 5. (Emphasis supplied). Under established New York law, those “such unusual or extraordinary damages must have been brought within the contemplation as the probable result of a breach at the time of or prior to contracting.” Id.
Thus, in the context of Bi-Economy’s claim, the question was whether Bi-Economy’s ultimate financial collapse was contemplated at the time of policy issuance “as the probable result of a breach” of the business-interruption policy.
A majority of the Court of Appeals found that the policyholder’s financial collapse was with the contemplation of the contracting parties, and that consequential damages – beyond the policy proceeds – could be recovered. The majority reasoned that the purpose of business interruption coverage evidenced the insurer’s contemplation of the consequential damages claimed. The Court found that “[t]he very purpose of business interruption coverage would have made [the insurer] aware that if it breached its obligations under the contract to investigate in good faith and pay covered claims it would have to respond in damages to [the insured] for the loss of its business as a result of the breach.” Id. at 8.
This purpose, the majority concluded, went beyond merely providing the policyholder with the “benefit of the bargain” (i.e.: the insurance policy proceeds) in the event of a covered claim. The Court found that “[t]he purpose of the [business interruption insurance is] not just to receive money, but to receive it promptly so that in the aftermath of a calamitous event . . . the business could avoid collapse and get back on its feet as soon as possible.” Id. at 10.
In a strongly worded dissent, two justices argued that the majority had failed to recognize a well-established exception to the rule allowing consequential damages. That exception holds that consequential damages are not available whether the parties have already agreed to the amount of available damages. Thus, the dissent argued, inter alia, that “[t]he whole idea of ‘consequential damages’ is out of place in a suit against an insurer that has failed to pay a claim,” because “in insurance contracts . . . the parties have already told us what damages they contemplated . . . payment equal to the losses covered by the policy, up to the policy limits.” Id. Dissent at 3.
However, the majority countered, arguing that this exception did not apply here. The majority concluded that the insurance contract did not merely obligate the insurer to pay covered claims, but also imposed non-monetary obligations on the insurer. The majority concluded that:
Thus, this insurance contract included an additional performance-based component: the insurer agreed to evaluate a claim and to do so honestly, adequately andâ€”most importantly-promptly. The insurer certainly knew that the failure to perform would (a) undercut the very purpose of the agreement and (b) cause additional damages that the policy was purchased to protect against in the first place.
Id. (emphasis supplied). Accordingly, the majority held that the insurerâ€™s failure to promptly adjust and pay the loss, and the resulting collapse of the policyholderâ€™s business, warranted reversal of the lower courtsâ€™ decisions allowing dismissal of the policyholderâ€™s claim for consequential damages.
The Bi-Economy holding illustrates an important practical lesson. At least in the context of business interruption insurance, where a carrier breaches its obligation of good faith and fair dealing by failing to promptly pay a covered claim, a court may find that it is â€œreasonably foreseeableâ€ that the insurerâ€™s â€œinjurious conductâ€ will â€œcause additional damages that the policy was purchased to protect against in the first place.â€ In those limited circumstances, New York courts may hold the insurer liable, in excess of limits, for the insuredâ€™s â€œconsequential damages including the demise of its business.â€ Whether and to what extent this ruling may apply outside the context of business interruption insurance will have to await future decisions.
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