New York continues to face significant challenges in recovering from the extensive losses caused by Superstorm Sandy. The storm caused unprecedented damage to coastal areas, tidal surges that inundated Lower Manhattan, severe flood damage to airports, subways, and tunnels, and damage to electrical systems supplying numerous businesses. As New York businesses and property owners attempt to pursue claims under their insurance policies, they should be aware that state law protects them against bad-faith claims handling by insurers. In such circumstances, policyholders may be entitled to recover the consequential damages they have suffered as a result of the insurer’s delayed or improperly denied payment.

Loss of customers, interest and penalty payments, and loss of goodwill are just some potentially recoverable damages.  

In 2008, New York’s highest court adopted a new standard with respect to first-party bad-faith claims. The New York Court of Appeals held that a policyholder may recover consequential damages for an insurer’s breach of good faith handling of a first-party property insurance claim. See Bi-Economy Mkt., Inc. v. Harleysville Ins. Co. of N.Y., [10 N.Y.3d 187, 886 N.E.2d 127] (2008). In Bi-Economy, a wholesale and retail meat market sought coverage under its deluxe business owners insurance policy (which included replacement cost, business property loss, and business interruption coverage) after suffering major damage in a fire. When the meat market submitted its claim, the insurance company disputed the claim for actual damages and advanced only a portion of the payment. The insurer did not pay the remaining sum until more than one year later.  

The meat market brought an action against the insurer for consequential damages based on bad-faith claims handling, contending that the insurer improperly delayed payment for the business’ property damage and failed to timely pay the full amount of its lost business income claim, causing the business to collapse. The Court held that an insurer’s breach of its duty to act in good faith in adjusting its insured’s claim, or its improper denial of the claim, may subject the insurer to liability for the consequential damages resulting from that bad faith: 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” (internal citations omitted). An insured may also bargain for the peace of mind, or comfort, of knowing that it will be protected in the event of a catastrophe…

…the purpose of the contract was not just to receive money, but to receive it promptly so that in the aftermath of a calamitous event, as [the insured] experienced here, the business could avoid collapse and get back on its feet as soon as possible … Here, the claim is that [the insurer] failed to promptly adjust and pay the loss, resulting in the collapse of the business. When an insured in such a situation suffers additional damages as a result of an insurer’s excessive delay or improper denial, the insurance company should stand liable for these damages. This is not to punish the insurer, but to give the insured its bargained-for benefit…(Id. at 130-33.)

In a companion ruling, Panasia Estates, Inc. v. Hudson Ins. Co., [10 N.Y.3d 200, 886 N.E.2d 135 (2008)], the New York Court of Appeals recognized a policyholder’s right to pursue an action for bad-faith claims handling. In that case, the insured sought coverage under its property insurance policy after its building was damaged by inclement weather. After failing to investigate or adjust the claim for several weeks, the insurance company denied the claim. The insured brought an action for consequential damages based on the insurer’s breach of the insurance contract by failing to properly investigate and denying the insured’s loss. The Court held that an insured may recover foreseeable damages, beyond the limits of its policy, for breach of a duty to investigate, bargain-for and settle claims in good faith:

[C]onsequential damages resulting from a breach of the covenant of good faith and fair dealing may be asserted in an insurance contract context, so long as the damages were ‘within the contemplation of the parties as the probable result of a breach at the time of or prior to contracting’ [citation omitted]. Here, the courts below failed to consider whether the specific damages sought by Panasia were foreseeable damages as the result of [the insurer’s] breach. (Id. at 136-37.)

Policyholders should carefully review their policies and ensure that they are preserving their right to pursue bad-faith actions by timely reporting their claims to their insurers and complying with all policy requirements. At the same time, policyholders should hold insurers and their adjusters to reasonable timetables and to promises made. Among the various practices that a policyholder should reasonably expect from its insurer or adjuster are: (a) prompt responses to requests for an advance or partial payment; (b) prompt statement of insurer’s coverage position on any issue potentially in dispute, including sub-limits and deductibles; (c) mutual cooperation and prompt action in investigation and adjustment of the claim; and (d) prompt payment. Policyholders may take comfort in knowing that they have legal tools at their disposal to ensure that their rights are protected.