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Contrary to Recent First Department Case Law, Federal Court Rules that Attorneys’ Fees Are Not Recoverable Consequential Damages on Claim for Insurers’ Breach of Covenant of Good Faith and Fair Dealing

On December 30, 2019, Judge Briccetti of the SDNY issued a decision in Ruiz v. Liberty Mut. Fire Ins. Co., 19 CV 4399 (VB), denying an insurer’s motion to dismiss an insured’s claim for breach of the covenant of good faith and fair dealing, but ruling (contrary to recent First Department case law) that the insured could not recover attorneys’ fees as consequential damages.

This case involves a claim under a homeowners insurance policy for damages sustained to a residence from burst water pipes.  The complaint contained a single cause of action for “breach of contract and implied covenant of good faith and fair dealing.” As previously discussed on this blog, unlike many other states, New York law does not recognize a separate tort claim for bad faith claims handling.  However, the courts—beginning with a pair of Court of Appeals decisions, Bi-Economy Market, Inc. v. Harleysville Ins. Co. of N.Y., 10 N.Y.3d 187 (2008) and Panasia Estates, Inc. v. Hudson Ins. Co., 10 N.Y.3d 200 (2008)—have permitted insureds to recover consequential damages (above the policy limits) on a theory that the insurer’s bad faith conduct violates the implied covenant of good faith and fair dealing.

Consistent with recent First Department case law taking a broad view of these claims, Judge Briccetti denied the insurer’s motion to dismiss the covenant of good faith and fair dealing claim for failure to state a claim, explaining:

Under New York law, courts do not recognize a distinct claim for breach of the implied covenant of good faith and fair dealing when it is premised upon the same facts as a breach of contract claim. Consequently, a claim that defendant has breached the duty of good faith can only survive a motion to dismiss if it is based on allegations that differ from those underlying an accompanying breach of contract claim.  Moreover, a claim for breach of the implied covenant of good faith cannot be sustained if the damages it seeks to recover are identical to those asserted in the breach of contract claim.

Accepting plaintiff’s allegations as true, the claim for breach of the implied covenant of good faith and fair dealing survives dismissal. Plaintiff alleges not only that defendant breached the policy by failing to remit appropriate coverage payments to plaintiff, but also that defendant acted with bad faith by failing properly to inspect and appraise the alleged damages. Indeed, plaintiff alleges defendant acted in bad faith by delaying, and then cancelling, an appraisal of damages caused by the first flood. Moreover, plaintiff seeks to recover “additional” damages—including remediation and living expenses—incurred as a result of defendant’s alleged dilatory claim assessments and conduct.

As an additional matter, defendant’s attempt to cabin plaintiff’s breach of contract and implied covenant claims as one and the same, because both claims appear under a single heading in the complaint, is of no moment.  Accordingly, the motion to dismiss plaintiff’s implied covenant claim must be denied.

Judge Briccetti did dismiss the insured’s demand for attorneys’ fees, holding that “to the extent plaintiff classifies the attorneys’ fees he seeks as consequential damages, New York courts have . . . explicitly rejected such arguments."  In support of that holding, the Court cited an earlier SDNY decision, Roman Catholic Diocese of Rockville Ctr. v. Gen. Reinsurance Corp., 2016 WL 5793996, at *5 (S.D.N.Y. Sept. 23, 2016), which in turn cited a pair of Second Department decisions rejecting insureds’ claims for attorneys’ fees. In a recent decision covered on this blog, however, the First Department held that, in the context of a claim for property damage and business interruption coverage, an insured could recover attorneys’ fees as a form of consequential damages. See Certain Underwriters at Lloyd’s v. BioEnergy Development Group, LLC, 178 A.D.3d 463, 464 (1st Dep’t 2019) (“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”). We will be closely following the case law in this area.  This may be an issue that will have to be resolved by the New York Court of Appeals.

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