It is well-settled law in New York that there can be no separate cause of action for an insurer’s purported bad faith failure to perform its obligations under a first-party insurance policy. This is because a bad faith claim is duplicative of a standard breach of contract cause of action. As the New York Court of Appeals has stated, a tort claim for bad faith is “available only in those limited circumstances where it is necessary to deter defendant and others like it from engaging in conduct that may be characterized as ‘gross’ and ‘morally reprehensible,’ and of such wanton dishonesty as to imply a criminal indifference to civil obligations.”1 Where a policyholder is seeking only enforcement of its insurance policy and alleging the insurer failed to pay benefits due, the appropriate cause of action is breach of contract and not bad faith.2 Consequential damages flowing from that breach of contract may be sought, but only if such damages were reasonably foreseeable by the parties at the time the policy was issued.3
In a January 17, 2019, decision, the Appellate Division, First Department examined whether, at the pleading stage, a claim for consequential damages must include a detailed, factual description or explanation. The court held that there was no heightened pleading standard requiring the policyholder to explain or describe the consequential damages in the complaint. Importantly, this case did not disrupt or modify the overall bad faith landscape in New York.
In D.K. Prop., Inc. v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA.,4 the plaintiff owned a Manhattan building damaged by a neighboring construction project. National Union issued a property policy covering direct physical loss of damage to the building and the plaintiff claimed it intentionally failed to pay the claim in a timely fashion. In the lawsuit that followed, plaintiff asserted two causes of action: breach of contract and breach of the covenant of good faith and fair dealing. Plaintiff sought consequential damages in connection with each cause of action.
National Union argued, and the trial court agreed, that plaintiff could not seek any consequential damages because they only generally pled that those damages were reasonably contemplated by the parties at the time they entered into the policy. The plaintiff had alleged it suffered consequential damages in the form of: engineering costs, painting, repairs, monitoring equipment, moisture abatement to address water intrusion, loss of rents, and other expenses attributable to mitigating further damage to the property. National Union argued, and the trial court agreed, that plaintiff failed to explain how these damages were a natural and probable result of the breach of contract or the duty of good faith.
On appeal, the First Department held that the trial court had erred in dismissing the consequential damages because plaintiff had fulfilled its pleading requirement by “specifying the types of consequential damages claimed and alleging that such damages were reasonably contemplated by the parties prior to contracting.” It further stated that “there is no heightened pleading standard requiring plaintiff to explain or describe how and why the ‘specific’ categories of consequential damages alleged were reasonable and foreseeable at the time of contract.” The fact that plaintiff had alleged consequential damages was sufficient at the pleading stage to survive a motion to dismiss.
This decision does not state that plaintiff is automatically entitled to recover extracontractual damages nor does it state that the damages alleged were reasonably foreseeable as a matter of law. Rather, the First Department cited to Panasia and Bi-Economy in holding that “the inquiry is not whether plaintiff will be able to establish its claim, but whether plaintiff has stated a claim.” At the motion to dismiss stage, general pleading is sufficient to state a cause of action.
In sum, while this decision resulted in a favorable outcome for the policyholder under these particular facts, there has been no shift in New York bad faith law. The same facts cannot support a breach of contract and a bad faith tort claim, and consequential damages sought must be reasonably foreseeable at the time the parties entered into the insurance contract. While a policyholder need not meet a heightened pleading standard with respect to consequential damages, it must still plead (and ultimately prove) that it suffered consequential damages that were reasonably foreseeable at the time the policy was issued.