New York is a tricky forum for policyholders pursuing insurance coverage claims. In particular, New York jurisprudence has long failed to recognize and address causes of action for bad faith. Historically, insureds seeking to impose extracontractual liability have been required to meet the high bar of showing “egregious tortious conduct” and “a pattern of similar conduct directed at the public generally.” Contract-based claims invoking good faith and fair dealing often fared no better, with courts routinely dismissing insureds’ bad faith claims because they viewed them as “duplicative” of the policyholders’ underlying claims for breach of the insurance contract.

In 2008, a glimmer of hope emerged from New York’s highest court. In Bi-Economy Market, Inc. v. Harleysville Insurance Co., the court recognized a policyholder’s right to recover consequential damages in excess of policy limits where (1) the damages were the direct result of improper claims handling, and (2) the damages were foreseeable by the parties at the time of contracting. Although this decision did not create a bad faith cause of action, it did provide policyholders with a potential avenue to recoup consequential damages where the insurer violated its implicit contract-based covenant of good faith and fair dealing.

The recent decision by the New York Supreme Court Appellate Division, Second Department in Bay Terrace Associates, L.P. v. Public Service Mutual Insurance Company may have reshuffled the deck in favor of policyholders. Bay Terrace enhances the Bi-Economy holding by allowing policyholders to pursue a contract-based cause of action for breach of the implied covenant of good faith and fair dealing.

In Bay Terrace, the policyholder owned an apartment building located in Staten Island, which sustained damage during Hurricane Irene that caused water to seep into 28 apartment units in the building. The policyholder’s estimated loss was in excess of $500,000 in repairs and loss of rental income, but the insurer only offered $5,186.26 in “satisfaction” of the claim.

The policyholder filed suit, seeking damages for breach of the insurance policy and, “in effect, for breach of the implied covenant of good faith and fair dealing.” The policyholder alleged that the insurer “refused to provide coverage after initially verbally representing that the loss would be covered in full,” and refused to reconsider its disclaimer of coverage after being presented “with proof that the disclaimer was without merit.” The policyholder sought punitive damages and attorney’s fees.

In determining whether the policyholder had properly stated a claim for bad faith, the court looked to its recent decision in Gutierrez v. Gov’t Employees Ins. Co., which held, in the context of a tort claim for damages for an insurer’s alleged breach of its duty to act in good faith, that “[s]uch a cause of action is not necessarily duplicative of a cause of action alleging breach of contract.”

The court also considered affidavits submitted by the policyholder from numerous parties supporting its contentions that the insurer had “verbally assured them that the loss was completely covered under the policy.” Thus, the policyholder could point to an independent act—the insurer’s false assurances—to propel its claim for bad faith standing apart from the contract.

Applying the rule in Gutierrez and according the policyholder the benefit of every possible favorable inference, the Bay Terrace court held that “the allegations of the complaint, the affidavits, and the evidence submitted by the [policyholder] in opposition to the motion demonstrate that the [policyholder] adequately pleaded a cause of action alleging breach of the implied covenant of good faith and fair dealing.”

By allowing this contract-based claim to move into discovery, the Appellate Division has signaled to policyholders and their counsel that New York’s high bar for bad faith claims may be lowering. Only time will tell if this is the beginning of a total shift in New York jurisprudence. But at a minimum, Bay Terrace arms policyholders with concrete authority that, where post-contractual misconduct exists, a contract-based bad faith claim is not necessarily duplicative of a claim for breach of the insurance contract. Policyholders who pay close attention to this case—and, where necessary, pursue this cause of action against insurers who act in bad faith—may well take the last trick.