A New York federal district court recently held that an insured’s claim for consequential extra-contractual damages is properly part of its breach of contract claim against its carrier.

In Chaffee v. Farmers New Century Ins., No. 5:04-CV-1493 (N.D.N.Y., Sept. 24, 2008), the plaintiffs purchased homeowners’ insurance which provided coverage for losses to premises, personal belongings and loss of use arising from fire and smoke. When the plaintiffs suffered a fire at their residence and filed a claim with the insurer, the insurer neither accepted nor rejected the proof of loss.” The plaintiffs subsequently filed a lawsuit against the insurer for breach of contract and violation of New York General Business Law §349.

The court held that although the plaintiffs alleged that their insurer breached the covenant of good faith and fair dealing, they did not assert an independent bad faith claim; rather, it was part of their breach of contract claim. Significantly, in addition to the damages to their property, loss of use and cost of restoration, the plaintiffs also sought “consequential damages for distress, aggravation and inconvenience in an amount exceeding $150,000” as part of their breach of contract claim.

The insurer moved for judgment on the pleadings seeking, among other things, dismissal of plaintiffs’ claim for extra-contractual damages for consequential damages as not satisfying the standard. Citing the recent decisions by the New York Court of Appeals in Bi-Economy v. Harleysville Ins. Co. of N.Y., 10 N.Y.3d 187 (2008) and Panasia Estates v. Hudson Ins. Co., 10 N.Y.3d 2000 (2008), the court denied Farmers’ motion and held that the plaintiffs’ “claim for consequential, extra-contractual damages is properly part of their breach-of-contract claim and not a separate cause of action subject to dismissal on a Rule 12(c) motion.” The court, however, stated that it made “no findings as to whether [p]laintiffs are entitled to such damages and only notes that [p]laintiffs may seek to prove consequential damages as set out in Bi-Economy.”

With respect to the requisite elements in establishing consequential damages under New York law, the court found that consequential damages are available in a breach-of contract action where they are “brought within the contemplation of the parties as the probable result of a breach at the time of or prior to contracting.” The Chaffee court explained that whether consequential damages were reasonably contemplated by the parties depends on “the nature, purpose and particular circumstances of the contract known by the parties as well as what liability the defendant fairly may be supposed to have assumed consciously, or to have warranted the plaintiff reasonably to suppose that it assumed, when the contract was made.”

The court further clarified that a party “is liable for those risks foreseen or which should have been foreseen at the time the contract was made.

The court made no findings as to whether the plaintiffs were entitled to consequential damages, but only noted that plaintiffs may seek to prove their entitlement.

Click here to read the decision.