[author: Unnati Gandhi]
Two seminal New York cases have brought that state, along with potentially many more, into line with California’s position on the recovery of consequential damages.
The effects of Bi-Economy Market v. Harleysville, 886 N. E. 2d 127 (N.Y. 2008) and Panasia Estates v. Hudson Insurance Company, 886 N. E. 2d 134 (N.Y. 2008) are beginning to take shape in New York and beyond. The court in both cases allowed for the recovery of consequential damages for the insurers’ breach of their respective contracts even without bad faith conduct, holding that consequential damages beyond policy proceeds were foreseeable as a matter of law. Courts in many states have taken notice, and at least nine states have followed suit. California courts, however, have long recognized such recovery – the infamous Hadley v. Baxendale rule states that if the damages are within the reasonable expectation of the parties at the time of contracting they are recoverable.
Bi-Economy Market was a meat market in Rochester, New York, that suffered a fire, resulting in inventory loss and structural damage to its building and equipment. Harleysville Insurance Company of New York had issued Bi-Economy a “Deluxe Business Owner’s” policy, which provided coverage for property damage and lost business income for up to 12 months. The insured submitted a claim, which the insurer disputed, and the insurer only paid $163,161.92. More than a year later, an arbitrator awarded the insured $407,181. Also during this time, the insurer offered to pay only seven months of the insured’s lost business income. The insured was not able to resume its business operations.
The insured sued the insurer seeking consequential damages resulting from the collapse of its business due to the insurer’s breach. The Appellate Division granted the insurer’s motion for partial summary judgment, dismissing Bi-Economy’s claim for consequential damages, based on policy exclusions for “consequential losses.” The Court of Appeals, however, reversed, holding that “Bi-Economy’s claim for consequential damages were reasonably foreseeable and contemplated by the parties.”
The Bi-Economy court began its reasoning with the principle that a non-breaching party to a contract can recover damages that “naturally and directly” flow from the breach. The court stated that such “consequential damages” are recoverable if they were contemplated and foreseeable by the parties at the time of contracting and are reasonably ascertainable. Furthermore, the court relied on the basic rule of contract law that the non-breaching party is entitled to be placed in the position it would have been in had the contract been performed.
Importantly, the court based its holding on Harleysville’s breach of the duty of good faith and fair dealing, likely because the payment provisions in the contract were not technically breached. The court recognized that the purpose of insurance is to provide the necessary resources in the event of a disaster.
In Panasia, the court relied on the same reasoning set forth in Bi-Economy to determine that consequential damages could be awarded. In this case, the insured sought direct and consequential damages from its insurer, stemming from Hudson’s denial of Panasia’s claim for water damage to its commercial building. Panasia sued Hudson for breach of contract, alleging failure to timely and properly investigate the claim. The court, recognizing the potential for a consequential damages claim, remanded the case to determine whether the damages sought by Panasia were indeed “consequential damages.”
Despite the firm stance that the New York Court of Appeals took in both of these cases, there is lack of clarity on how to apply these decisions to other types of insurance policy breaches: Do Bi-Economy and Panasia permit recovery of consequential damages for breach of any express policy provision? Or must there be a breach of the implied covenant of good faith and fair dealing? Policy holders argue that both cases permit recovery of consequential damages for breach of any express policy provision, and insurers argue that there must be a clear showing of the breach of implied covenant of good faith and fair dealing and certainty of damages.