Having been down a similar road with respect to my own house several years ago, I found myself cheering when I read this decision, which was handed down on December 10.

In Carden v. Allstate, the plaintiffs were forced to rent another place to live when their home sustained serious fire damage. When they put in a claim under their homeowner’s policy, however, Allstate engaged in a modified version of the standard 3 “D”‘s – deny, delay and defend. (For an interesting expose on this topic, see Anderson Cooper’s report on insurance companies’ tactics, click on the link under the 3 “D”‘s.)

As the Court noted in its opinion, after first offering a low-ball offer that clearly did not cover the plaintiff’s losses that were required to be covered under the homeowner’s policy, they increased their offer – but it was still woefully inadequate, and forced plaintiffs to seek an independent evaluation, and for the appointment of an umpire to properly determine the appropriate payment they were entitled to under the policy. This umpire found that Allstate’s last offer was nearly $300,000 too low (and roughly $200,000 less than Allstate’s own independent adjuster’s estimate). And, despite an express provision in the policy entitling the plaintiffs to Additional Living Expense (“ALE”) for a maximum of 12 months during the reconstruction, Allstate refused to do so.

Left with no choice, the plaintiffs sued for breach of their insurance agreement. And won.

In finding Allstate guilty of bad faith, the Court stated as follows:

“As in all contracts, implicit in contracts of insurance is a covenant of good faith and fair dealing, such that a reasonable insured would understand that the insurer promises to investigate in good faith and pay covered claims (Bi-County Market, Inc. v. Harleysville Ins. Co. of New York, 10 NY3d 187, 193 [2008]). While New York does not recognize an independent tort cause of action for an insurer’s failure to perform its contractual obligations under an insurance policy (New York Univ. v. Continental Ins. Co., 87 NY2d 308 [1995]; Roconova v. Equitable Life Assur. Socy., 83 NY2d 603 [1994]), where an insurer breaches its duty to investigate, bargain and settle claims in good faith, consequential damages for breach of contract may be recovered not limited by the amount specified in the insurance policy (Acquista v. New York Life Ins. Co., 285 AD2d 73, 77 [1st Dept 2001]; see Bi-County Market, Inc. v. Harlysville Ins. Co. of New York, 10 NY3d 187, 192-93 [2008]) …

“[D]ue to the delay in the settlement process and consequent delay in reconstruction, Plaintiffs were forced to remain out of the dwelling for 18 months. Under the Policy, Plaintiffs were entitled to Additional Living Expense (“ALE”) for a maximum of 12 months which Defendant refused to extend .. Here, the Plaintiffs have submitted evidence in admissible form that Defendant offered Plaintiffs $265,000 and then $575,000 on a claim ultimately determined to be, and paid, in the amount of $832,982, and that Plaintiffs suffered damage due to the delay in reconstruction of their Dwelling due to Defendant’s bad faith delay in settling the claim. This makes out a prima facie claim for breach of the covenant of good faith.”

Make no mistake; an award of bad faith against an insurer in New York is extremely rare. In fact, New York’s appellate courts usually dismiss bad faith claims against insurers. That’s why an appeal of this decision is a near-certainty.

That said, I hope these plaintiff’s enjoy the moment.

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In a recent decision, New York’s Appellate Division, Second Department showed once again just how powerful New York’s insurance lobby is, and how, under the current structure of the law in New York, an insurer has almost no incentive to protect its clients – the insureds – by negotiating claims in good faith. Quite the contrary, in New York, insurers have every incentive to ignore their insureds’ interests, and to put their own economic self-interest first. (For more on this topic, please see “Bad Faith Claims in New York“.)

In CBL Path, Inc. v. Lexington Insurance Co., the plaintiff was confronted with an obvious negligence situation – their laboratory mixed up test results, causing a woman to undergo what was otherwise an unnecessary double mastectomy. Although their malpractice policy carried limits of $1 million, the defendant, a subsidiary of AIG, apparently never contacted the claimant to conduct any pre-litigation settlement negotiations, and as a result, the claimant ultimately filed suit, which brought a great deal of negative publicity to CBL.

CBL then sued its insurer for damage to its business reputation, lost profits, as well as the lost business opportunities that were directly caused by the negative publicity that it suffered due to the filing of the underlying negligence action.

Ultimately, and predictably, the Court was constrained to dismiss the action, following New York’s legal precedent, which the Court summarized as follows:

“Since an award of damages exceeding the policy limits is punitive in nature, it “is not applied routinely for breach of contract; and bad faith requires an extraordinary showing of a disingenuous or dishonest failure to carry out a contract …

“Since courts are understandably reluctant to expose insurers to liability exceeding the policy limits, the bad faith must be for conduct that is clearly more than ordinary negligence, i.e., more than merely poor judgment.”

The Court then articulated the rare circumstance under which an insurer can be held liable in bad faith in New York:

“Naturally, proof that a demand for settlement was made is a prerequisite to a bad-faith action for failure to settle. [Additionally,] the plaintiff in a bad-faith action must show that the insured lost an actual opportunity to settle the . . . claim at a time when all serious doubts about the insured’s liability were removed.

“Bad faith is established only where the liability is clear and the potential recovery far exceeds the insurance coverage” (id. at 454 [internal quotations marks and citations omitted]; see also Smith v General Acc. Ins. Co., 91 NY2d 648, 653; Soto v State Farm Ins. Co., 83 NY2d 718, 723; Vecchione v Amica Mut. Ins. Co., 274 AD2d 576, 578; cf. United States Fid. & Guar. Co. v Copfer, 48 NY2d 871, 873).”

Needless to say, I find this rule disturbing, because it tacitly allows insurers to ignore their fiduciary duties to their insureds – without any fear of adverse consequence. To borrow an old phrase, “There ought to be a law …”

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As you may know, under New York law, every contract carries an implied covenant (i.e., promise) of “good faith and fair dealing.” 511 West 232nd Owners Corp. v Jennifer Realty Co., 98 NY2d 144, 746 NYS2d 131, 773 NE2d 496.

But what on earth does that mean?

It’s actually rather tricky; in fact, New York’s courts have expressly acknowledged that there is an inherent conflict between the implied good faith in a contract on the one hand, and not allowing plaintiffs to use this implied promise as a sword to create new contractual responsibilities that completely negate the rights that were specifically established by the contract itself.

Perhaps the simplest way to explain this concept – which is concededly more than a bit vague – is that the implied covenant of good faith and fair dealing is breached when the defendant acts to prevent the plaintiff’s ability to perform his end of the contract, or to assure that the benefits of the contract are withheld from the plaintiff. To better illustrate the application of this concept, here’s a few examples from actual cases that were litigated in New York’s courts:

Case #1:         Where a landlord interfered with its tenant’s ability to meet its lease obligation to make repairs, a New York court properly held that the landlord has breached the implied covenant of good faith and fair dealing in their lease agreement. Chemical Bank v. Stahl, 272 AD2d 1, 712 NYS2d 452.

Case #2:           Likewise, in a wrongful termination and breach of contract case, where a consultant who performed work for a corporation in exchange for the option to purchase shares that were exercisable in installments and intrinsically linked to specific events and was then fired without cause, which caused her to forfeit her option (meaning she was not paid at all for her work), her breach of implied covenant of fair dealing was allowed to survive dismissal. Zuckerwise v. Sorceron Inc., 289 AD2d 114, 735 NYS2d 100.

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If you are a Nassau County resident and think back, I’m pretty sure you will remember that torrential storm that occurred back in October of 2005, which resulted in flooding that was referred to as a once-in-a-century type storm. As it was reported on the news, lots of people suffered significant property damage. And the plaintiff in Wilner v. Allstate Ins. Co. was one of these people.

And the plaintiff considered himself lucky when all this transpired, because, after all, he had purchased Allstate’s Deluxe Plus Homeowner’s policy, and figured that his losses would be covered. How wrong he was.

Allstate didn’t even have the decency to formally deny his claim; and, since his insurance policy (like all other Deluxe Plus policy holders) required him to protect Allstate’s interests in recovering compensation for the property damage that may have been caused through the fault of a third party (in this case the Village), he independently hired an attorney, and paid him out of his own pocket, to prosecute the claim in order to assure that the statute of limitations against the Village did not expire.

Reading between the lines of this decision, it is fairly clear to me that the Appellate court, like the trial court before it, found Allstate’s conduct rather troubling, as they both ruled that a jury should be free to consider whether Allstate deliberately withheld its determination on this claim so that the plaintiff (rather than Allstate) would have to bear the cost of hiring an attorney (which otherwise would and/or should have been Allstate’s obligation). If a jury sides with plaintiff on this issue, and finds that Allstate engaged in deceptive business practices (this law is codified at sections 349 and 350 of the General Business Law), Allstate faces the specter of not only compensatory damages for their alleged breach of contract, but also treble and punitive damages as well.

This should prove interesting.

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