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"Consequential damages" decision draws dissent.

ALBANY, N.Y., February 26, 2008--The New York State Court of Appeals has declared that Bi-Economy Market, Inc. could assert a claim for consequential damages against Harleyville Insurance Company in a breach of commercial property insurance contract. Bi-Economy Market, a wholesale and retail meat market in Rochester, New York was destroyed in an electrical fire.

At the time of the fire, Bi-Economy was insured by Harleyville under a "Deluxe Business Owner's" policy that provided replacement cost coverage on the building as well as business property or "contents." The policy also provided coverage for business interruption insurance for up to one year from the date of the fire. Specifically, the contract stated that Harleyville would "pay the actual loss of Business Income .... sustained due to the necessary suspension of operations during the restoration."

The Market sued Harleyville Insurance Company of New York and associated companies for breach of contract alleging the insurer's unfairly low offers and unreasonable delays in settling its fire loss claims ultimately caused the closing of its formerly successful business. Bi-Economy sought consequential damages for the loss of its business.

Harleyville moved for leave to amend its answer to raise the defense that the contract excluded consequential damages and for partial summary judgment dismissing Bi-Economy's breach of contract action. Harleyville cited several contractual provisions excluding coverage for "consequential loss."

Supreme Court granted the motion and the Appellate Division, Fourth Department, affirmed holding that "the insurance policy expressly exclude(d) coverage for consequential losses, and thus it cannot be said that (consequential) damages were contemplated by the parties when the contract was formed." Leave was granted to appeal and answer sought to the certified question "Was the order of this Court, entered February 2, 2007, properly made?"

Judge Eugene F. Pigott, Jr., in his opinion, concluded that it was not. "Bi-Economy contends that the courts erred in dismissing its breach of contract claim seeking consequential damages for the collapse of its business resulting from a failure to fulfill its obligations under the contract of insurance. We agree and therefore reverse the order of the Appellate Division and reinstate that cause of action."

He went on to say that "in light of the nature and purpose of the insurance contract at issue, as well as Bi-Economy's allegations that Harleyville breached its duty to act in good faith, we hold that Bi-Economy's claim for consequential damages, including the demise of the business, were reasonably foreseeable and contemplated by the parties, and thus cannot be dismissed in summary judgment. Accordingly, the order of the Appellate division.... should be reversed, with costs, defendant's motion for leave to amend their answer to raise the defense of contractual exclusion for consequential damages and partial judgment dismissing the plaintiff's second cause of action denied, ad the certified question answered in the negative.

In his dissent, Judge Robert S. Smith said that the majority abandoned a previous holding that punitive damages are not available for breach of an insurance contract unless the plaintiff shows both "egregious tortuous conduct" directed at the insured claimant and "a pattern of similar conduct directed at the public generally." Today the rule was abandoned without discussing it and without acknowledging that it has done so. The majority does this by simply changing labels." Punitive damages are now called "consequential" damages, and a bad faith failure to pay a claim is called a "breach of the covenant of good faith and fair dealing."

"The consequential damages authorized by the majority, though remedial in form, are obviously punitive in fact. They are not triggered, as true consequential damages are, simply by a breach of contract, but only by a breach committed in bad faith. The majority never explains why this should be true, but the explanation is self-evident. The purpose of the damages the majority authorizes can only be to punish wrongdoers and deter future wrongdoing. They have nothing to do with consequential damages, or with the covenant of good faith and fair dealing, as those terms are ordinarily understood."

Chief Judge Judith Kaye and Judges Carmen B. Ciparick, Victoria A. Graffeo and Theodore T. Jones, Jr. concur in the majority opinion. Judges Smith and Susan P. Read dissented.
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Title Annotation:COURTSIDE
Author:Gibbons, Muriel K.
Publication:Insurance Advocate
Date:Mar 10, 2008
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