Following a severe fire at its wholesale and retail meat market, Bi-Economy sought coverage under its “Deluxe Business Owner’s” policy, which provided replacement cost coverage on the building as well as business property or “contents” loss coverage. Significantly, the policy also provided business interruption coverage for up to one year from the date of the fire. The insurer acknowledged coverage but disputed the insured’s computed damages. More than a year later, after the parties engaged in alternative dispute resolution, the insurer was ordered to pay an additional $407,181 to its insured for the structural and inventory damages caused by the fire. In the meantime, the insured’s business allegedly deteriorated and failed. The insured then filed suit against the insurer for bad faith and breach of contract, among other things, alleging that the insurer’s delay in payment of claims caused the demise of the insured’s business.
The insured’s complaint sought to recover consequential damages–i.e., damages for “the complete demise of its business operation in an amount to be proved at trial”–above and beyond the policy’s stated limits of liability. Based upon a policy exclusion for consequential “losses,” the trial court granted and the appellate court affirmed summary judgment in favor of the insurer and dismissed the insured’s claim for consequential damages, holding that “the insurance policy 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.”
On February 19, 2008, New York’s highest court reversed and, premised in large part on general contract law, held that the consequential damages sought were reasonably foreseeable under the circumstances, and therefore not subject to summary dismissal. The Court of Appeal’s majority opinion explained that the purpose of business interruption coverage is to ensure that the insured has the financial support necessary to sustain its business operation in the event disaster occurs. Noting that “[c]onsequential damages, designed to compensate a party for reasonably foreseeable damages, must be proximately caused by the breach,” the Court therefore held that “the very purpose of business interruption coverage would have made [the insurer] aware that if it breached its obligations under the contract to investigate in good faith and pay covered claims it would have to respond in damages to [the insured] for the loss of its business as a result of the breach.” The Court also dismissed the insurer’s reliance on the policy’s exclusion for consequential “loss,” finding that it referred to delay caused by third party actors, not those resulting from an insurer’s own wrongful conduct.
The Court’s majority opinion was followed by a dissent that stressed that “[t]he ‘consequential’ damages authorized by the majority, though remedial in form, are obviously punitive in fact. They are not triggered, as true consequential damages are, simply by a breach of contract, but only by a breach committed in bad faith.” The dissent added that the “majority’s bad policy choice is more important than the flaws in its reasoning. This attempt to punish unscrupulous insurers will undoubtedly lead to the punishment of many honest ones.” Finally, the dissent concluded that “[t]he result of the uncertainty and error that the majority’s opinions will generate can only be an increase in insurance premiums. That is the real ‘consequential damage’ flowing from today’s holdings.