HNRK Coverage Corner

On January 17, 2019, the First Department issued a decision in D.K. Prop., Inc. v National Union Fire Ins. Co. of Pittsburgh, Pa., 2019 NY Slip Op 00347, holding that an insured need not satisfy a “heightened pleading standard” in alleging consequential damages arising from an insurer’s bad faith claim handling.

 (N.B. HNRK represents the insured in this matter.)

This case involved a claim under a commercial insurance policy for damage to the plaintiff’s office building caused by construction work at an adjoining building. The plaintiff alleged that “rather than pay the claim,” the insurer “made unreasonable and increasingly burdensome information demands throughout the three year period since the property damage occurred,” and the delay caused the structural damage to the building to worsen.  Further, despite its failure to pay the claim, the insurer sought to intervene as subrogor in the insured’s lawsuit against the owner of the adjacent building, causing the insured “to incur significant, unnecessary legal fees.” As we have noted in prior posts (see here and here), New York law does not recognize a separate tort claim for bad faith claims handling.  But the courts 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. 

Here, the trial court granted a motion to dismiss the insured’s claim for consequential damages (except the claim for attorneys’ fees), concluding that the complaint did not allege, except in a “general conclusory fashion” that the claimed consequential damages “were reasonably contemplated” by the insured and the insurer when they entered into the policy.  The First Department disagreed, explaining:

A plaintiff may sue for consequential damages resulting from an insurer’s failure to provide coverage if such damages (“risks”) were foreseen or should have been foreseen when the contract was made.  Although proof of such consequential damages will ultimately rest on what liability the insurer is found to have “assumed consciously,” or from the plaintiff’s point of view, have warranted the plaintiff to reasonably suppose the insurer assumed when the insurance contract was made, a determination of whether such damages were, in fact, foreseeable should not be decided on a motion to dismiss and must await a fully developed record.  In other words, the inquiry is not whether plaintiff will be able to establish its claim, but whether plaintiff has stated a claim.

Here, plaintiff’s allegations meet the pleading requirements of the CPLR with respect to consequential damages, whether in connection with the first cause of action or the second cause of action for breach of the covenant of good faith and fair dealing in the context of an insurance contract.  Contrary to defendant’s claim, there is no heightened pleading standard requiring plaintiff to explain or describe how and why the “specific” categories of consequential damages alleged were reasonable and foreseeable at the time of contract.  There is no heightened pleading requirement for consequential damages.

The Court of Appeals first recognized a claim for consequential damages based on bad faith claims handling in a pair of 2008 cases—Bi-Economy Mkt., Inc. v. Harleysville Ins. Co. of N.Y., 10 N.Y.3d 187, 192 (2008) and Panasia Estates, Inc. v. Hudson Ins. Co., 10 N.Y.3d 200, 203 (2008).  This decision provides important guidance on the pleading standard for such a claim and clarifies that a complaint need not provide detailed allegations as to the foreseeability of each category of alleged damage.