On Tuesday, February 19, 2008, the Court of Appeals decided the matter of Bi-Economy Market v. Harleysville Insurance Company, ---N.E.2d----, 2008 WL 423451 (2008). In Bi-Economy, the insured- plaintiff was a meat market that suffered a major fire resulting in a complete loss of food inventory and heavy structural damage. At the time of the loss, the insured had a policy with the defendant, Harleysville, which provided replacement cost coverage on the building, "contents" loss coverage, as well as "business interruption insurance." Following the fire, the insured submitted a claim to Harleysville pursuant to the contract. Harleysville disputed Bi- Economy's claim for actual damages and paid Bi- Economy $163,161 for the loss. Bi-Economy, contending that the payment was insufficient, pursued the matter until the claim was eventually submitted to alternate dispute resolution where Bi-Economy was awarded $407,181.00.

The insured then commenced litigation asserting causes of action for bad faith claims handling, tortious interference with business relations and breach of contract. The insured alleged that the insufficient payment and delay, forced it out of business and, as a result, sought consequential damages for "the complete demise of its business operation..." It further alleged that, as a result of Harleysville's breach of contract, its business collapsed and that liability for such consequential damages was reasonably foreseeable and contemplated by the parties at the time of contracting.

In response, Harleysville raised the defense that the insurance contract excluded consequential damages and moved for partial summary judgment dismissing Bi-Economy's breach of contract cause of action. In support of its motion, Harleysville cited several contractual provisions excluding coverage for "consequential loss."

The trial court and Appellate Division ruled in favor of Harleysville holding that "the insurance policy expressly excluded coverage for consequential losses, and thus it cannot be said that consequential damages were contemplated by the parties when the contract was formed."

The Court of Appeals reversed the lower courts and held that commercial property owners can seek "consequential damages" against their insurance companies if those insurers breach the insurance contract. The Court ruled that such consequential damages can exceed a policy's limits if they are a "natural and probable consequence" of a broken contract. In its ruling the Court explained, "When an insured . . . suffers additional damages as a result of an insurer's excessive delay or improper denial, the insurance company should stand liable for these damages." The Court reasoned that it "cannot be clearer" that the purpose of Bi- Economy's business interruption coverage was to provide it with economic sustenance in the event that a catastrophe occurred and that many businesses lack the resources to continue business operations without insurance proceeds. As such, according to the Court, "limiting an insured's damages to the amount of the policy . . . does not place the insured in the position it would have been in had the contract been performed."

The dissenting judges (Smith and Read) accused the majority of overturning the precedents set by Rocanova v. Equitable Life Assur. Socy. of U.S. (83 N.Y.2d 603 [1994] ) and New York Univ. v. Continental Ins. Co. (87 N.Y.2d 308 [1995] ) without specifically citing either case. Both Rocanova and New York Univ. prohibit punitive damage claims for breach of an insurance contract except where the plaintiffs can establish that the insurer engaged in "egregious tortious conduct" and a "pattern of similar conduct directed at the public generally." The dissenters accused the majority of renaming "punitive" damages as "consequential" damages and further warned that this "bad policy choice" will come at "too great a cost" to the insurance system in New York.

In return, the majority charged the dissenters with blurring the "significant distinction" between consequential and punitive damages, and how that distinction effected the decisions reached in Rocanova and New York Univ. The Court reiterated that punitive damages are assessed to punish wrongdoers and serve as an example to others who would engage in the same behavior. Distinctly, consequential damages are "designed to compensate a party for reasonably foreseeable damages."

The Court's majority concluded its opinion by stating that its decision does not punish Harleysville, but rather gives Bi-Economy its bargained-for- benefit.

Prepared by Nicholas L. Mineo