An insured can assert a claim against an insurer for certain additional losses when the insurer acts in bad faith and contributes to the policyholder's additional loss despite a policy exclusion of such damages from coverage, according to a New York State Court of Appeals decision.

In a 5-2 decision the court ruled that an insured can assert a claim for consequential damage for bad faith even though the insurance contract excludes such damages from coverage.

The majority opinion, written by Judge Eugene Pigott, stated that Bi-Economy Market, a wholesale and retail meat market in Rochester, N.Y., suffered structural damage and a complete loss of food inventory due to a fire in 2002. Harleysville Insurance Company insured Bi-Economy under a Deluxe Business Owner's policy that covered replacement costs on the building and contents. It also covered business interruption for up to one year from the date of the fire.

Judge Pigott explained that Harleysville disputed Bi-Economy's claim for actual damages, and paid a low sum that was eventually raised through an alternative dispute resolution. Furthermore, Harleysville offered to pay seven months of lost business income rather than the full 12 months provided under the policy. Bi-Economy never resumed business operations.

Bi-Economy later filed an action against Harleysville for bad faith claims handling and breach of contract. Bi-Economy sought consequential damages for "the complete demise of its business operation in an amount to be proved at trial."

The state Supreme Court and the state Appellate Division sided with Harleysville, noting that Bi-Economy's insurance policy, issued by Harleysville, "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."

Citing a previous ruling, Kenford Co. v. County of Erie, Judge Pigott declared in his decision, "It is well settled that in breach of contract actions 'the non-breaching party may recover general damages which are the natural and probable consequence of the breach.'"

To impose consequential damages, Judge Pigott said, "The party breaching the contract is liable for those risks foreseen or which should have been foreseen at the time the contract was made."

He added, "Here, the claim is that Harleysville failed to promptly adjust and pay the loss, resulting in the collapse of the business. When an insured in such a situation suffers additional damages as a result of an insurer's excessive delay or improper denial, the insurance company should stand liable for these damages."

Judge Pigott also dismissed Harleysville's contention of a contractual exclusion for consequential losses. The exclusion, Pigott said, does not demonstrate that the parties "contemplated and rejected the recoverability of consequential damages in the event of a contract breach." The consequential losses referred to in the contract, Judge Pigott asserted, "clearly refer to delay caused by third party actors or by the '[s]uspension, lapse or cancellation of any license, lease, or contract."

In his dissenting opinion, Judge Robert S. Smith contended that honest insurers may be unintentionally swept up in the consequences of the decision. He said that jurors who will likely know little of the insurer's or insured's business will now have to consider questions of conduct that are "nearly unanswerable." Judge Smith said, "The jurors will no doubt do their best, but it is not hard to predict where their sympathies will lie," Judge Smith wrote.

Special Reports /

N.Y. Says Insurer's Bad Faith Can Lead To Added Claims

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