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Law360 (April 10, 2020, 2:57 PM EDT )
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| Greg Van Houten |
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| Ernest Martin |
The latter group should tread lightly, however, as New York courts have made clear that insurers are liable for any consequential damages they cause by improperly denying or delaying payment under property damage and business interruption policies, even in the absence of bad faith. Thus, insurers must carefully analyze each and every situation, consider deciding close calls in favor of their policyholders, and do whatever they can to get covered dollars in their policyholder's hands as soon as possible.
New York law on consequential damages has been crystal clear since the 2008 New York Court of Appeals decision in Bi-Economy Market Inc. v. Harleysville Insurance Co. of New York — such damages are recoverable if they were foreseeable at the time of contracting.[1]
In Bi-Economy, a policyholder alleged that it was entitled to consequential damages because its insurer improperly delayed coverage under its property damage and business interruption coverage after a fire damaged its facility.[2] The policyholder further alleged that its insurer's inaction ultimately led to the collapse of its business.[3]
The trial court dismissed the claim and the Fourth Department affirmed, because "the insurance policy expressly excluded coverage for consequential losses, and thus it cannot be said that consequential damages were contemplated by the parties when the contract was formed."[4]
The Court of Appeals reversed. Taking a cue from the 1854 decision in Hadley v. Baxendale, the court held that the insurer, the breaching party, "is liable for those risks foreseen or which should have been foreseen at the time the contract was made."[5] The court found that the policy's consequential loss exclusion precluded coverage of consequential loss under the policy, but did not bar consequential loss claims against the insurer for breaching the policy.[6]
The court went on to remark that the key element, and perhaps the only element, is foreseeability — not bad faith.[7] And, that with property damage and business interruption policies, consequential damages are inherently foreseeable because, as the Bi-Economy court noted, the very nature and purpose of those policies — to receive coverage promptly in the wake of a covered event so that businesses can "get back on [their] feet as soon as possible" — is enough to satisfy the foreseeability element.[8]
In the past two years, the First Department has twice cited Bi-Economy for the proposition that consequential damages are recoverable "if such damages (or risks) were foreseen or should have been foreseen when the contract was made."[9]
In BioEnergy, the more recent of the two cases, the First Department again reiterated the fact that the very nature and purpose of a property damage and business interruption policy satisfies the foreseeability element, holding that the policyholder "may proceed [with its claim] because, given the purpose and particular circumstances of the property damage and business interruption policies, it was foreseeable that excessive delay would cause defendants to incur, as alleged, tens of millions of dollars in uncovered business interruption losses and attorneys' fees necessary to recover therefor."[10]
Now more than ever, insurers and their claims handlers must be mindful of Bi-Economy, D.K. Property and BioEnergy.
Most (if not all) COVID-19 claims involve a policyholder who critically needs prompt funding to keep their business afloat, just like the policyholders in those cases. Many policyholders are tendering COVID-19 under their property damage and business interruption policies, the same policies at issue in those cases.
As emphasized in BioEnergy, given the "purpose and particular circumstances of [those] policies, it [is] foreseeable that excessive delay [will] cause [policyholders] to incur [significant] uncovered business interruption losses and attorneys' fees."[11]
To reduce their risk of owing extracontractual damages (including attorney fees), insurers and their claims handlers must scrutinize each individual situation, searching for where and how coverage may be available, while deciding close calls in favor of their policyholders. In short, they must do whatever they can to get covered dollars in their policyholders' hands as soon as possible.
That is even more so the case given the New York State Department of Financial Services' recent directive that each New York property and casualty insurer "examine the policies it has issued and explain the coverage each policy offers in regard to COVID-19."
Against that backdrop, coverage denials and delays are unlikely to be taken lightly, and given Bi-Economy and its progeny, may result in significant extracontractual exposure, even in the absence of bad faith. To avoid all that, insurers should consider paying covered claims, and doing so promptly.
Greg Van Houten is an associate and Ernest Martin is a partner at Haynes and Boone LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] 10 N.Y.3d at 187-90.
[2] 10 N.Y.3d at 187-90.
[3] Id.
[4] Id. at 192.
[5] 10 N.Y.3d at 192-93.
[6] Id.
[7] Id.
[8] Id. at 195.
[9] D.K. Property v. National Union Fire Insurance Company of Pittsburgh, Pa.
, 92 N.Y.S.3d 231, 233 (1st Dep't 2019); Certain Underwriters at Lloyd's v. BioEnergy Development Group, LLC , 115 N.Y.S.3d 240, 240–41 (1st Dep't 2019) (holding that consequential damages are recoverable where they are "foreseeable").[10] 115 N.Y.S.3d 240 at 241 (internal citations and quotations omitted).
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