The New York Court of Appeals recently held that consequential damages are a permissible remedy for an insurer's breach of the covenant of good faith and fair dealing. Panasia Estates, Inc. v. Hudson Insurance Company, No. 1-15(N.Y. Feb. 19, 2008).
In Panasia, the New York high court rejected an insurer's contention that, as a matter of law, consequential damages were not recoverable on a claim for breach of an insurance contract. Instead, the court held that such a remedy is permissible "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." The case, involving coverage for weather damage to an exposed construction site under a property insurance policy, was remanded to the trial court for resolution of forseeability issues.
Although the Panasia majority never explicitly mentioned the possibility of permitting punitive damages, the dissenting opinion of Judge Robert S. Smith suggested that such would be the precise result of the majority’s ruling. Joined by Judge Susan Phillips Read, the lengthy dissent characterized the majority's opinion as an abandonment of prior precedents making punitive damages unavailable in bad faith actions against insurers. By permitting juries to ultimately decide the extent of an insured’s forseeable “consequential” injuries based on an insured’s bad faith, Judge Smith warned that predictable juror sympathies might eventually lead to, in essence, punitive damages awards. In addition to abandoning prior precedent, Judge Smith suggested that the majority’s ruling would lead to an increase in premiums as a result of insurers seeking to shield themselves from unpredictable damages awards, ultimately hurting consumers more than insurers.