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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Citing New York’s long-established precedent that an insurer’s obligation to defend an insured (or, as in this case, an additional insured) is broader than its obligation to indemnify them, the Court stated as follows:

“If the claims asserted, though frivolous, are within the policy coverage, the insurer must defend irrespective of the ultimate liability …  A declaration that an insurer is without obligation to defend a pending action could be made ‘only if it could be concluded as a matter of law that there is no possible factual or legal basis on which [the insurer] might eventually be held to be obligated to indemnify [the insured] under any provision of the insurance policy.’  Servidone Const Corp. v. Security Ins Co of Hartford, 64 NY2d 419, 423-424 (1985).”

Under the circumstances, Atlantic’s refusal to defend Cooper Square was clearly improper, and the plaintiff was entitled to recover from Atlantic the costs it incurred in defending the underlying personal injury action from the date that it tendered its defense of that case to Atlantic.

This case is further proof of why it may pay to fight an insurer’s disclaimer of coverage.

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In this case, the plaintiff claimed that the broker should be held liable because they failed to notify the plaintiff that the insurer was going to reduce their liability limits, leaving them without adequate insurance to defend a particular claim. In reversing the trial court, the Appellate Division held that a plaintiff is free to sue his insurance broker in either breach of contract or negligence (or both) if the broker failed to use due care in brokering an insurance agreement. (Although one of the judges on the Appellate Court dissented, and held that the negligence claim was properly dismissed, even he conceded that the breach of contract claim should stand.)

On the other hand, the Court unanimously held that under normal circumstances (like this case) a breach of fiduciary duty claim against an insurance broker cannot survive because the broker does not have a continuing responsibility to advise his client to obtain additional insurance coverage.

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Consequently, in order to properly evaluate whether you may have a potential breach of contract claim, it is worth investigating the general types of breach of contract claims. While a detailed discussion of these types of claims is well beyond the scope of this (or any) blog post, three (3) of the perhaps less-known, yet commonly litigated categories of breach of contract claims are the following:

• Breach of Express Warranty or Breach of Implied Warranty – these claims are usually raised when a consumer alleges that the product she purchased or used was defective, and suffered personal injuries as a direct result. For a more in depth discussion of this topic, please see our Free eBook, “Why There Are So Few Successful Defective Products Lawsuits“;
• Breach of Contract By an Insurance Company – as a general rule, this type of claim arises when they refuse to pay out on a claim, or to defend or indemnify their insured on a reported claim under the insurance policy (for more on this topic, please see “Why It May Pay to Fight An Insurer’s Disclaimer“; and,
• Anticipatory Repudiation or Breach of Contract – these claims often arise in the real estate context, where one side to the agreement demonstrates that either cannot, or will not, abide by its end of the agreement – before its time to fulfill its obligations under the contract have come due. For additional information on this important type of breach of contract claim, please see our blog article, “When It Becomes Clear That Your Small Business’ Partner Is Going To Breach Your Contract.”

As you can readily discern from this article, there are numerous types of breach of contract claims, and these 3 do not even begin to address what are likely the most common – and most famous (or infamous) breach of contract lawsuits, which involve breach of fiduciary duty or the improper performance (or outright failure to perform) under the terms of a contract.

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Although you would think that the answer to this question is probably “never,” you’d be mistaken; in Cassis v. Ohio Cas. Ins. Co.,  the Court of Appeals (New York’s highest court) held that since the landlord’s underlying contract with its tenant (the insured) obligated the tenant to procure proper insurance that named the landlord as an additional insured on its own commercial liability insurance policy, and the tenant’s policy expressly stated that coverage would be provided to anyone that the tenant was obligated to name as an additional insured on this policy pursuant to a written contract or agreement, the insurer must be held on the hook to cover the landlord.

At first blush, this decision would perhaps present a significant area of concern for insurers. However, a more careful reading of this decision suggests that the Court deemed the facts of this case somewhat unique (I, for one, do not recall ever seeing such language with regard to additional named insureds being employed in an insurance policy), and that this case is of limited precedential value. Time will tell.

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