Can a policyholder under a business interruption policy, whose business collapses because of an insureraEUR(TM)s failure to timely pay covered business interruption losses, recover aEURoeconsequential damagesaEUR? 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.
, 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 policyholderaEUR(TM)s claim for damages, and ultimately offered to pay no more than seven months of the insurersaEUR(TM) 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 aEURoeconsequential damages for the complete demise of its business operation.aEUR? 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 aEURoebenefit of the bargainaEUR? that are recoverable in case of contract breach) are aEURoerecoverable in limited circumstances
.aEUR? Slip op. at 5. (Emphasis supplied).
Under established New York law, those aEURoesuch 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.aEUR? Id.
Thus, in the context of Bi-EconomyaEUR(TM)s
claim, the question was whether Bi-EconomyaEUR(TM)s
ultimate financial collapse was contemplated at the time of policy issuance aEURoeas the probable result of a breachaEUR? of the business-interruption policy.
A majority of the Court of Appeals found that the policyholderaEUR(TM)s financial collapse was with the contemplation of the contracting parties, and that consequential damages aEUR" beyond the policy proceeds aEUR" could be recovered. The majority reasoned that the purpose of business interruption coverage evidenced the insureraEUR(TM)s contemplation of the consequential damages claimed. The Court found that aEURoe[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.aEUR? Id. at 8.
This purpose, the majority concluded, went beyond merely providing the policyholder with the aEURoebenefit of the bargainaEUR? (i.e.: the insurance policy proceeds) in the event of a covered claim. The Court found that aEURoe[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.aEUR? 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 aEURoe[t]he whole idea of aEUR~consequential damagesaEUR(TM) is out of place in a suit against an insurer that has failed to pay a claim,aEUR? because aEURoein 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.aEUR? 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 andA?a,?aEUR?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.