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Posted: March 13, 2014

No Separate Cause of Action For Insurance Carrier’s Bad Faith Claims Handling

On February 26, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Orient Overseas Associates v. XL Insurance America, Inc., 2014 NY Slip Op. 30488(U), dismissing a claim against a property insurance carrier for “bad faith claims handling” on the ground that no such cause of action exists under New York law, explaining:

It is not clearly decided whether there is a separate cause of action for bad faith claims handling in New York. While some courts have held yes (see, e.g., Orman v. GEICO Gen. Ins. Co., 964 NYS2d 61 [Sup Ct Kings Cty 2012]), many more have held to the contrary (see, e.g., Mutual Assoc. Adm’r, Inc. v. National Union Fire Ins. Co. of Pittsburgh. PA, 2012 NY Misc LEXIS 4657 [Sup Ct New York Cty 2012], Jackson v. AXA Equitable Life Ins. Co., 2011 NY Misc LEXIS 4466 [Sup Ct, New York Cty 2011), Handy & Harman American Int ‘t Grp., Inc., 2008 NY Misc LEXIS 7522 [Sup Ct, New York Cty 2008]).

This court determines that there is no separate cause of action for bad faith claims handling.

Justice Schweitzer noted that the Court of Appeals’ decisions in two companion cases (Bi-Economy Market, Inc. v. Harleysville Ins. Co. of New York, 10 N.Y.3d 187 (2008), and Panasia Estates, Inc. v. Hudson Ins. Co., 10 N.Y.3d 200) recognize the possibility of a claim for consequential damages against an insurance company for breach of the covenant of good faith and fair dealing, arising from “bad faith in the claims handling process.” To state such a claim, the insured must plead that it suffered damages (beyond the disputed coverage amount) that are “both quantifiable and identifiable.” The court held that the plaintiff had not made any such allegations:

Even with the potential availability of consequential damages, this claim must fail because the consequential damages being sought are not quantified nor identified, and it is not based upon different facts than the breach of contract claim. In order to recover consequential damages the harm that occurred beyond the breach of contract must be proven—thus identifying the consequential damages, and none has been shown. Further, the consequential damages must be quantified in some way, which here they are not. Had the plaintiff alleged specific loss beyond what is contractually disputed, there may be reason to allow for consequential damages. This is not the case, however. The court will entertain an amended complaint in this respect.

This decision shows the difficulty of pleading a claim damages against an insurance carrier beyond the disputed coverage amount. There is long-standing authority permitting a policyholder to recover attorneys’ fees incurred in a coverage action where the insurance company engages in “such bad faith in denying coverage that no reasonable carrier would, under the given facts, be expected to assert it.” Sukup v. State of New York, 19 N.Y.2d 519, 522 (1967). In practice, this is a hard standard to satisfy. If the insurer can demonstrate an “arguable basis” for disclaiming coverage, no fees are awarded, even if the insured prevails in the lawsuit. See, e.g., Greenberg Eleven Union Free School Dist. v. National Union Fire Ins. Co., 304 A.D.2d 334, 336-37 (1st Dep’t 2003).

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