HNRK Coverage Corner

On August 22, 2018, the Second Department issued a decision in Tiffany Tower Condominium, LLC v. Insurance Co. of the Greater N.Y., 2018 NY Slip Op 05886, holding that insureds stated a cause of action against a property insurer for breach of the covenant of good faith and fair dealing based on the failure to pay a claim arising from damage suffered during Hurricane Sandy.

Unlike other states, New York does not recognize a separate cause of action against an insurance company for bad faith claims handling.  Section 2601 of the Insurance Law forbids certain specified “unfair claim settlement practices,” including “not attempting in good faith to effectuate prompt, fair and equitable settlements of claims submitted in which liability has become reasonably clear.”  But the Court of Appeals has held that there is no private cause of action for violations of this statute. See Rocanova v. Equitable Life Assurance Soc’y of the U.S., 83 N.Y.2d 603, 614 (1994). In certain circumstances, however, an insured can recover consequential damages above the policy limits based on a breach of the implied covenant of good faith and fair dealing.  In Tiffany Tower Condominium, the Second Department found that the insureds had properly alleged such a claim, explaining:

Contrary to the defendant's contention, the plaintiffs sufficiently stated a cause of action to recover consequential damages for breach of the implied covenant of good faith and fair dealing based upon the defendant's refusal to pay the plaintiff's supplemental claim. This cause of action is not duplicative of the breach of contract cause of action. As in all contracts, implicit in contracts of insurance is a covenant of good faith and fair dealing, such that a reasonable insured would understand that the insurer promises to investigate in good faith and pay covered claims. Breach of that duty can result in recoverable consequential damages, which may exceed the limits of the policy. Such a cause of action is not duplicative of a cause of action sounding in breach of contract to recover the amount of the claim.

Here, the plaintiffs stated a viable cause of action to recover consequential damages based on the defendant's refusal to pay the supplemental claim by alleging, among other things, that they did not have the financial resources to repair the damage to the building and that the defendant's delay in paying the supplemental claim caused the building to continue to deteriorate. Contrary to the defendant's contention, the plaintiffs, in an affidavit in opposition to the defendant's motion, specifically identified the consequential damages allegedly suffered, including damage to fireproofing and additional water damage. Accordingly, the Supreme Court correctly declined to direct the dismissal of the second cause of action to the extent that it is based on the defendant's failure to pay the supplemental claim.

As this decision shows, the key to alleging a claim against an insurer for breach of the implied covenant is identifying the consequential damages the insured suffered as a result of the insurance company’s failure to timely investigate and pay covered claims.  Here, the alleged deterioration of the insureds’ building was a sufficient basis to plead the claim.