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Insured Properly Pleads Claim for Consequential Damages Resulting from Insurer's Refusal to Advance Business Interruption Coverage

On December 5, 2019, the First Department issued a decision in Certain Underwriters at Lloyd’s v. BioEnergy Development Group, LLC, 2019 NY Slip Op 08779, reversing a trial court’s dismissal of a claim based on the insurer’s bad faith delay in providing business interruption coverage, explaining:

The breach of the implied duty part of the counterclaim is based on allegations that plaintiffs refused to advance more than $6,806,725 in business interruption coverage until an appraisal panel awarded more than double that amount, and refused to pay the full amount of the property damage claim as determined by the appraisal panel. This part of the counterclaim seeks consequential damages to account for the delayed reconstruction of defendants' plant and for the attorneys' fees caused by plaintiffs' delayed interim payments or denial of payments. It may proceed, 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.

As previously discussed on this blog, 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.  Thus, where an insurance company’s delay in processing a claim causes the insured to incur additional damages, the insured may have a recourse to recover those damages notwithstanding the absence of a separate tort claim under New York law. BioEnergy Development is the second time this year the First Department has taken a broad view of these claims.  In D.K. Prop., Inc. v National Union Fire Ins. Co. of Pittsburgh, Pa., 168 A.D.3d 505 (1st Dep’t 2019), the First Department held that an insured need not satisfy a “heightened pleading standard” in alleging consequential damages arising from an insurer’s bad faith claims handling.  Of note in the BioEnergy Development decision is the Court’s statement that the recoverable consequential damages can include “attorneys’ fees necessary to recover” for the damages caused by the insurer’s bad faith.  This appears to be another exception to the general rule that insureds are not entitled to recover attorneys’ fees incurred in a coverage action.

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