New York has traditionally been a hospitable jurisdction for insurers. However, consistent with an alarming trend for the insurance industry , the New York Court of Appeals recently ruled that an insurer may be liable for consequential damages –including the collapse of a business—if it fails to “timely investigate, adjust and pay [a] claim.”
Bi-Economy Market, Inc. v. Harleysville, involved a garden variety fire loss that resulted in the complete loss of a meat market’s inventory along with structural damage. Not unexpectedly, the insured put in a claim for buildings, contents and business interruption loss. The claim appears to have been disputed solely on the issue of the quantum of the loss. The dispute was submitted to alternate dispute resolution that resulted in an award in favor of the insured. However, the insured claimed that the delay and inadequacy of the insurer’s initial payment led to the destruction of its business, which never reopened after the loss. It filed suit against Harleysville seeking, among other things, consequential damages including those associated with the demise of its business.
Breaking new legal ground in New York, the Court of Appeals recognized a cause of action for the bad faith denial of an insurance claim. More significantly, such a failure to act in good faith exposes an insurer to damages in excess of its policy limits, which in Bi-Economy Market included the destruction of the insured’s business. The Court did not explain what acts constituted “bad faith” on the part insurer but inferred that an insurer’s failure to proceed “honestly, adequately, and –most importantly—promptly” could support such a finding.
Under Bi-Economy Market, insurers writing first party coverage in New York are now subject to extra contractual claims for consequential damages where they deny a claim in bad faith. We foresee that allegations of bad faith, particularly in the business interruption arena, will be pressed by those acting on behalf of insureds to force premature and inflated resolutions of first party claims. At WCM, we urge insurers to respond quickly when notified of a first party loss and be prepared to demonstrate that any dispute was the result of a good faith difference of opinion rather than one of indifference or worse.