Jeffrey W. Stempel on the Bi Economy Market and Panasia Estates cases: New York Embraces Consequential Damages as a Remedy in Insurance Bad Faith Claims
William S. Boyd Professor of Law at the William S. Boyd School of Law, University of Nevada, Las Vegas
In a pair of recent decisions, the New York Court of Appeals, normally a court embraced by insurers (New York law is frequently the choice of insurers in drafting dispute resolution and choice-of-law clauses in policies), ruled that under apt circumstances, policyholders may seek not only payment of policy proceeds from insurers but also pursue consequential damages in cases where the insurer has acted in bad faith toward the policyholder.
In this commentary, Jeffrey W. Stempel, Doris S. & Theodore B. Lee Professor of Law, William S. Boyd School of Law – UNLV discusses these cases--Bi-Economy Market, Inc. v. Harleysville Insurance Co. of New York and Panasia Estates, Inc. v. Hudson Ins. Co. The author writes: “Reading the reaction of the two judges dissenting from the Court’s two 5-2 majority opinions, one might mistakenly get the impression that the insurance world was coming to an abrupt end and that the Court had massively deviated from traditional contract principles. On the contrary, the Court majority opinions are completely consistent with traditional non-insurance contract law and hardly spell doom for insurers.”
In Stempel’s view, “What makes both Bi-Economy and Panasia noteworthy is that they are a significant expansion of New York insurance law that has arguably been too protective of insurers. Even after these decisions, New York law remains distinctly less favorable to policyholder than the bad faith law of most states, which treats bad faith breach of an insurance policy as tort that gives rises to the full array of tort damages, including potential punitive damages. By contrast, even after Bi-Economy and Panasia, New York appears to subject insurers to the risk of punitive damages only if they commit independent torts other than bad faith (e.g., fraud, conversion, defamation) against a policyholder. The emerging new regime in New York makes it look more like states that treat first-party insurance bad faith claims as a type of contract claim rather than a tort claim.”
The author also states: “To the extent these decisions usher in a new era in New York, there is a silver lining for insurers: a sufficiently compensatory regime of consequential damages, prejudgment interest, and attorney fee awards may as a practical matter supplant the efforts of aggrieved policyholders to style matters as punitive damages claims, reducing some of the pressure insurers undoubtedly feel from these types of claims notwithstanding the punitive-damage dampening effects of State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408 (2003), which set a presumptive cap of nine times compensatory damages in cases with substantial harm to policyholders.”
In stating what is perhaps obvious to everyone but the dissenters, the author also states: “consequential damages are different than punitive damages. Consequential damages are calculated based on actual losses a policyholder suffers as a proximate result of the insurer’s breach – and in New York only a bad faith breach will give the policyholder a right to seek consequential damages. For example, the Bi-Economy meat market alleged that it failed because its capacity to operate was destroyed by fire and it was unable to rebuild, keep continuity, and retain business without the promised full insurance coverage that never came. It not only suffered the physical damage of the fire but also the consequential damage of lost business and failure. Panasia alleged that it not only suffered physical injury to its building as a result of contractor negligence and water intrusion but also that the insurer’s failure to provide coverage lengthened the time the building was out of service and unable to bring in rental revenue. These are classic consequential damages and bear no relation to punitive damages.”
The author comes down squarely on the side of the majority. Stempel writes: “Which planet is more habitable for both insurers and policyholders? My vote is with the Bi-Economy and Panasia majorities. Non-breaching parties in plain, vanilla contract litigation may seek consequential damages. Why should policyholders, who are owed a higher duty of care, have any fewer rights? Whether a policyholder should also be able to receive punitive damages is a separate question turning on separate facts and based on separate criteria.”
The author concludes: “Left undecided by these cases and awaiting further examination is the degree to which consequential damages will be available as a practical matter in different insurance contexts. There also remains the question of whether New York might eventually conclude that consequential damages should be available even in the absence of insurer bad faith. The bad faith prerequisite is at odds with basic contract law and makes even less sense for insurance matters because of the insurer’s heightened duties to policyholders as compared to those of ordinary contracting parties.
The bad faith prerequisite to consequential damages against insurers is completely understandable, however, in view of the historical evolution of insurance litigation and remedies. Oliver Wendell Holmes famously observed that a page of history is worth a volume of logic. Despite the protests of the dissenters in Bi-Economy and Panasia, New York law still remains historically and illogically more protective of insurers than it is of other contracting parties, although it has now moved a step closer to consistency and rationality.”