Eastern District of New York Dismisses Bad Faith Claims in Dispute Over Property Damage Caused by Hurricane Sandy

by Saul Ewing Arnstein & Lehr LLP
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433 Main St. Realty, LLC v. Darwin Nat’l Assurance Co., No. 14-cv-587 (NGG) (VMS) (E.D.N.Y. Apr. 22, 2014)

Eastern District of New York dismisses claims for breach of the covenant of good faith and fair dealing and violation of § 349 of the New York State General Business Law, regarding deceptive business practices, in dispute arising from property damage caused by Hurricane Sandy.

433 Main Street Realty, LLC and Cord Meyer Development Company (collectively, “433 Main”) are owners of a construction project for a residential building located in Port Washington, New York.  Darwin National Assurance Company issued a commercial inland marine insurance policy to 433 Main.  The policy contains a $10,000 deductible, except for loss caused by flood, which is subject to a $250,000 deductible.  433 Main claimed that, on October 29, 2012, high winds from Hurricane Sandy blew down or damaged fencing, formwork, and the waterproof membrane at the construction site, and water backed up in a nearby sewer, causing it to overflow and discharge water into the excavated foundation.  433 Main filed a claim for coverage of their loss.  Darwin agreed that the policy covers 433 Main’s loss, but insisted that the damage was caused by flood, and thus the $250,000 deductible applies.  433 Main argued that the standard $10,000 deductible applies because high winds and the overflow of a sewer system caused the damage.

For eight months following Hurricane Sandy, Darwin refused to issue payment to 433 Main.  433 Main threatened litigation, then met with Darwin’s claims adjuster, who requested additional documentation.  Darwin made subsequent requests for documents over the next four months, which 433 Main claims it satisfied.  433 Main believed Darwin was delaying and did not intend to honor the claim.  433 Main then commenced this action in the Supreme Court of New York, and Darwin removed to federal district court.  433 Main sought a declaratory judgment that the policy’s $10,000 general deductible applies to its claims and allege breach of contract, breach of the covenant of good faith and fair dealing, and violations of § 349 of the New York State General Business Law, which prohibits “deceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in [New York].”

The case was designated a “Hurricane Sandy Case” and subject to a case management order directing plaintiffs in Hurricane Sandy cases to voluntarily withdraw various state law claims, including those alleging bad faith, or submit a letter explaining the legal basis for continuing to pursue such claims.  433 Main submitted such a letter in support of its claims for breach of the implied covenant of good faith and fair dealing and violation of New York General Business Law § 349.  Darwin contended that 433 Main has not adequately pleaded these claims.  The District Court agreed and dismissed both claims without prejudice.

New York law implies into every express contract a duty of good faith and fair dealing.  New York law does not, however, recognize a separate cause of action for breach of the implied covenant of good faith and fair dealing when a breach of contract claim, based upon the same facts, is also pled.  433 Main labeled Darwin’s conduct as “mishand[ling]” or “unreasonable delay” but failed to substantiate these conclusions with facts showing bad faith that differed from the facts supporting their breach of contract claim.  The court therefore dismissed without prejudice 433 Main’s claim for breach of the covenant of good faith and fair dealing as redundant.

To state a claim under § 349 of the New York General Business Law, a plaintiff must allege that “(1) the act or practice was consumer-oriented; (2) the act or practice was misleading in a material respect; and (3) the plaintiff was injured as a result.”  Monetary loss may satisfy the injury requirement, but only if that loss is independent of the loss caused by the alleged breach of contract.  Here, the court found that 433 Main did not state any specific facts concerning loss or injury caused by Darwin’s allegedly deceptive acts, lacking most importantly any allegations of how the injury is independent from the loss caused by Darwin’s alleged breach of contract.  The court therefore also dismissed without prejudice 433 Main’s claim for violation of New York General Business Law § 349.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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