Pleading Standards and Consequential Damages In Coverage Disputes

When a policyholder sues its carrier for breach of contract or bad faith, one question that arises is whether the policyholder should have to plead alleged damages with particularity, or whether the policyholder can sustain its claims with less specific allegations.  A New York appellate court recently declined to impose that higher, particularity standard.

In D.K. Prop., Inc. v. National Union Fire Ins. Co. of Pittsburgh, Pa., No. 650733/2017 (N.Y. App. Div. 1st Dep’t Jan. 17, 2019), the policyholder brought a claim under a commercial insurance policy, for alleged “direct physical loss or damage” to its building in downtown Manhattan.  When, after three years, the insurance carrier had not paid or denied the claim, the policyholder sued for breach of contract (for not acknowledging coverage) and breach of the implied covenant of good faith and fair dealing (for not settling the plaintiff’s property damage claim).  The policyholder sought consequential damages on both counts, as well as attorney fees on the bad faith count.

The insurer moved to dismiss the policyholder’s demand for consequential damages for failure to state a claim, and the trial granted the motion (excepting attorney fees).  59 Misc. 3d 714 (2018).  After explaining that the policyholder was required to “allege and prove that the type of consequential damages it seeks were reasonably contemplated by the parties prior to contracting,” the trial court found that the policyholder had not met this standard.  This was because the policyholder only alleged “in a general conclusory fashion that ‘consequential damages for bad faith breach of the Policy were reasonably contemplated by [the parties];’” and did not allege that the specific types of damages it sought “were a natural and probable result of [the insurer’s] breach of its duty of good faith.”  The trial court also found that the policyholder’s claims for certain alleged damages were deficient as a matter of law–for example, costs that the policyholder would have to incur in any event, to prove its insurance claim.

The appellate court reversed and reinstated the policyholder’s demand for consequential damages.  The court agreed that the policyholder could seek consequential damages that were foreseen or should have been foreseen when the contract was entered into, and that the policyholder would ultimately have to establish “what liability the insurer is found to have ‘assumed consciously.’” The court, however, rejected the notion that this determination should be made on a motion to dismiss, because “the inquiry is not whether plaintiff will be able to establish its claim, but whether plaintiff has stated a claim.”  In addition, the court indicated that whether a plaintiff would be able to establish a claim for consequential damages would have to “await a fully developed record.”

The court also rejected the insurer’s contention that the policyholder should be held to a “heightened pleading standard requiring plaintiff to explain or describe and why the ‘specific’ categories of consequential damages alleged were reasonable and foreseeable at the time of contract.”  As a result, the court found that the policyholder sufficiently stated a claim for consequential damages as to both the breach of contract and bad faith claims.

Ultimately, the appellate court refused to impose higher standards for pleading contract and bad faith damages in the context of insurance contracts.  Insurers faced with breach of contract and bad faith claims–in the First Judicial Department in New York, at least–will thus likely be required to proceed through discovery so that they can refute consequential damages claims on “fully developed records.”

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