The insurance market has a strong
interest in minimizing extra-contractual claims against it. These issues are
often decided summarily at the pre-answer motion to dismiss stage or after
discovery on summary judgment. Notably, however, since 2018, New York courts have articulated varying standards in
evaluating a policyholder’s claim for breach of the implied covenant of good
faith seeking consequential damages against its insurer in the context of these
Insurers have traditionally defended
themselves against these extra-contractual claims by advancing two main
- They are duplicative of other claims asserted such as claims
for breach of contract
- The policyholder cannot establish the alleged consequential
damages were reasonably foreseeable at the time of contracting
The majority of courts in New York
determine these issues consistent with the Northern District of New York’s
approach in Young Men’s Christian Ass’n
of Plattsburgh v. Philadelphia Indem. Ins. Co.
In that case, an insured’s employee failed to correctly implement its employee
benefits program for certain employees, so the insured made a claim for the
missing funds. The insurer largely denied coverage under the Employee Benefits
Administrations Errors and Omissions Insurance Endorsement of its Commercial
Lines Policy, and the plaintiff filed a lawsuit seeking a declaration of
coverage and alleging bad faith. The court ultimately dismissed the policyholder’s
bad faith claims, and the accompanying demand for consequential damages. The court
explained that New York law permits recovery of consequential damages for bad
faith in addition to the loss recoverable under the policy only if the damages
were “within the contemplation of the parties as the probable result of a
breach at the time of or prior to contracting” but do not flow directly
from the contract’s breach.
The court concluded that because the insured failed to allege the parties’ contemplated
recovery of such consequential damages at the time of contracting and because
the policy contains language limiting the insurers’ liability, the insured
failed to state a claim for bad faith seeking consequential damages.
Earlier this year, New York’s First
Department Appellate Court applied a differing standard in D.K. Prop., Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh.
In D.K., an insurer filed a pre-answer motion to dismiss the policyholder’s bad
faith claims, which included a demand for consequential damages. The
policyholder alleged the insurer conducted an unreasonable and burdensome
three-year investigation during which time nearby construction allegedly caused
additional structural damage to the policyholder’s building.
The first department explained that an insured could seek consequential damages
if an insurer improperly failed to provide coverage if the consequential
damages were “foreseen or should have been foreseen” at the time of
contracting. In deciding
whether the insured stated a claim and if it could survive a motion to dismiss,
the court determined that there was no heightened standard requiring the
insured to state how or why the consequential damages were foreseeable, and to
survive a motion to dismiss, must include only the fundamental allegations that
the consequential damages were foreseen or should have been foreseen at the
time of contracting, with the accompanying supporting factual allegations.
In applying the foregoing standard, the first department held the insured’s
allegations describing the types of consequences and alleging they were reasonably
contemplated by the parties prior to contracting fulfilled the insured’s
At least one federal court in New York has
suggested that the decision in D.K.is
an outlier and based on the particular facts at issue there. In Great Lakes Reinsurance (UK) SE v. Herzig,
the Southern District of New York rejected the insured’s position that he
should be allowed to amend his counterclaims and add a claim for breach of the
covenant of good faith and fair dealing and contrasted the facts in D.K. with
those at issue in the Herzig case. The court explained that the factual
allegations the insured asserted in support of his bad faith claims were the
same as those asserted in support of his breach of contract claim and therefore
denied the insured’s motion to amend.
However, other recent New York state court opinions suggest some courts are applying a more lenient standard similar to the first department’s decision in D.K. Prop.
when examining bad faith claims seeking consequential damages, particularly in the context of a pre-answer motion to dismiss or motion to amend the pleadings. A further analysis is included in our recently published article, which can be found here
. In sum, whether an insured may be able to survive dispositive motions continues to be an extremely fact-specific inquiry and may ultimately depend on the venue of the litigation.
 Young Men’s Christian Ass’n of Plattsburgh v. Philadelphia
Indem. Ins. Co., No. 818CV0565LEKDJS, 2018 WL 6267923
(N.D.N.Y. Nov. 30, 2018).
 D.K. Prop., Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh,
168 A.D.3d 505 (1st Dept. 2019).