HNRK Coverage Corner

On September 17, 2019, Judge Hurd of the NDNY issued a decision in Lohnes v. Liberty Mut. Ins. Co., Case No. 19-cv-00068, dismissing a claim for bad faith claims handling for failure to plead “specific conduct” by the insurer distinct from the underlying breach of the policy.

As previously discussed on this blog (see here, here, and here), New York law does not recognize a separate tort claim for bad faith claims handling.  However, the courts—beginning with a pair of Court of Appeals decisions, Bi-Economy Market, Inc. v. Harleysville Ins. Co. of N.Y., 10 N.Y.3d 187 (2008) and Panasia Estates, Inc. v. Hudson Ins. Co., 10 N.Y.3d 200 (2008)—have permitted insureds to recover consequential damages (above the policy limits) on a theory that the insurer’s bad faith conduct violates the implied covenant of good faith and fair dealing.  (An example would be a property insurer that stalls the claims handling process following a house fire, as a result of which the house collapses, compounding the insured’s damages.)

In Lohnes, the Court concluded that the complaint failed to plead such a claim, explaining:

Under New York law, there is a covenant of good faith and fair dealing implied in all contracts.  This covenant embraces a pledge that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.  Generally, under New York law, parties to an express contract are bound by an implied duty of good faith, but breach of that duty is merely a breach of the underlying contract.  To successfully plead a breach of contract under a theory of breach of the implied covenant of good faith and fair dealing, a plaintiff must allege that defendant, in bad faith, engaged in behavior that effectually destroyed or injured the plaintiff’s right to receive the fruits of the contract.  Further, plaintiffs are required to plead specific factual allegations of a party’s bad faith, as conclusory allegations of a party’s failure to act in good faith are insufficient.

Because a breach of this duty is merely a breach of the underlying contract, New York law does not recognize a separate cause of action for breach of the implied covenant of good faith and fair dealing when a breach of contract claim, based upon the same facts, is also pled. A breaching party’s bad faith in connection with a breach of contract does not provide an independent basis for recovery.  Thus, a claim premised on a breach of the implied covenant should be dismissed as duplicative if it is based upon the same facts underpinning an express breach of contract claim.

Here, as Plaintiff represents in her memorandum of law, the facts underpinning the bad faith claim are the same as those underpinning her express breach of contract claim. Namely, that Liberty refused to defend and indemnify Mr. Terrance. While Plaintiff asserts that this refusal to comply with the terms of the Policy constituted breaches of Liberty’s duties under the contract and amounted to “bad faith insurance practices,” she has not plead specific conduct by Liberty that is different from that underpinning the breach of contract claim. Further, Plaintiff’s assessment in her memorandum of law that this conduct was deliberate and reckless, and amounted to a gross disregard for the interests of Mr. Terrance, does not make out a claim different from the breach of contract claim.  Accordingly, Liberty’s motion is granted to the extent it seeks to dismiss the bad faith claim asserted in the Amended Complaint.

Pleading rules are a procedural matter, and thus may differ in certain respects in state and federal court.  Notably, however, the First Department ruled earlier this year (in a decision covered on this blog) that an insured need not satisfy a “heightened pleading standard” in alleging consequential damages arising from an insurer’s bad faith claims handling.