Bi-Economy and Panasia: A Differing View

In 2001, an intermediary New York appellate court executed an end-run around this restriction by analyzing an insurer's alleged bad faith denial not as a tort, but as a breach of contract claim for consequential damages beyond the policy limits. See Acquista v. New York Life Ins. Co., 285 A.D.2d 72 (1^st Dep't 2001) ('[W]hile plaintiff's cause of action alleging bad faith conduct on the part of the insurer cannot stand as a distinct tort cause of action, we conclude that its allegations may be employed to interpose a claim for consequential damages beyond the limits of the policy for the claimed breach of contract.'). The court in Acquista reversed the trial court's dismissal of the plaintiff's bad faith claim explaining that contract remedies may be expanded to include foreseeable money damages beyond the policy limit and consequential damages for mental distress and inconvenience so long as such non-economic losses 'were a foreseeable result of a breach at the time the policy was entered into.' 285 A.D.2d at 80-81.

The Acquista case settled and was not reviewed by the Court of Appeals. However, in two recent decisions ' Bi-Economy Market, Inc. v. Harleysville Insurance Company, 2008 NY Slip Op. 1418 (Feb. 19, 2008), and Panasia Estates, Inc. v. Hudson Insurance Company, 2008 NY Slip Op. 1419 (Feb. 19, 2008) ' the Court of Appeals appears to have adopted the Acquista court's analytical framework for assessing first-party bad faith claims. Our discussion below focuses on the court's legal analysis and the ramifications for future proceedings.

The Majority Opinion in Bi-Economy

Bi-Economy Market, a meat market in Rochester, sued its business owners' insurer, Harleysville Insurance Company, for losses arising out of a fire that destroyed its building and inventory, for business interruption losses for a year after the fire, and for additional damages allegedly suffered as a result of Harleysville's delinquent and substandard claims handling. Bi-Economy asserted claims for bad faith claims handling, tortious interference with business relations, and breach of contract and sought consequential damages for the termination of its business. Harleysville argued that the policy excluded coverage for consequential damages and moved for partial summary judgment dismissing the breach of contract claim. The lower courts agreed with Harleysville, finding that the policy's exclusion for 'consequential loss' indicated that the parties never contemplated payment for consequential damages. The Court of Appeals reversed and reinstated the cause of action.

The majority opinion in Bi-Economy was authored by Judge Pigott and joined by Chief Judge Kaye and Judges Ciparick, Graffeo and Jones. Judge Pigott frames the issue as a straight breach of contract question, stating that consequential damages are recoverable in 'limited circumstances' for 'those risks foreseen or which should have been foreseen at the time the contract was made.' 2008 N.Y. Slip Op. 1418 at *3 (citing Kenford Co. v. County of Erie, 73 N.Y.2d 312, 319 (1989)). He states that the critical inquiry is not whether the breach itself or the particular way in which the loss occurred was foreseen, but instead whether 'loss from the breach is foreseeable and probable.' Id. This inquiry focuses on 'the nature, purpose and particular circumstances of the contract known by the parties ' as well as what liability the defendant fairly may be supposed to have assumed consciously, or to have warranted the plaintiff reasonably to suppose that it assumed, when the contract was made.' Id. (internal citations and quotations omitted).

According to Judge Pigott, permitting a claim for consequential damages does not run afoul of the Court's bad faith precedent for several reasons. First, he states that business interruption policies are not simply contracts to pay money (where the only recoverable damage for breach is the agreed upon amount plus interest) but rather contracts where the insured's reason for the money payment is 'at the very core of the contract itself.' Id. at *7. Therefore, the insured could have been seeking and expecting 'such intangibles as risk aversion, peace of mind, and certain and prompt payment of the policy proceeds upon submission of a valid claim.' Id. (quoting Andrew Jackson Life Ins. Co. v. Williams, 566 So. 2d 1172, 1179 n.2 (Miss 1990)). Second, insurance contracts contain an implied 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.' Id. at 4 (quoting NYU, 87 N.Y.2d at 318). Third, Judge Pigott distinguishes his contract analysis from a traditional tort analysis by differentiating consequential damages from punitive damages, explaining that '[c]onsequential damages, designed to compensate a party for reasonably foreseeable damages, must be proximately caused by the breach and must be proven by the party seeking them. Punitive damages, by contrast, are not measured by pecuniary loss or injury of the plaintiff as compensation but are assessed by way of punishment to the wrongdoer and example to others.' Id. at *4 (citations and internal quotations omitted).

Interestingly, Judge Pigott concluded that consequential damages were reasonably foreseeable and contemplated by the parties in the present case because the purpose of the business interruption policy was to provide Bi-Economy with the 'the financial support necessary to sustain its business operation in the event disaster occurred.' Id. at *5. Judge Pigott stated that this purpose 'would have made Harleysville 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 Bi-Economy for the loss of its business as a result of the breach.' Id. at *5. Furthermore, he reasons that the contract included an additional performance-based component to pay the claim 'promptly' and that Bi-Economy adequately alleged that Harleysville failed to promptly adjust and pay the loss, resulting in the collapse of the business. Id. at *5-6. Finally, Judge Pigott concludes that the policy's exclusion for 'consequential losses' does not bar recovery because the clause applies to losses that result from the actions of third parties, not 'consequential damages' that stem from the insurer's injurious conduct. Id. at *6.

How the policyholder's claim for consequential damages will fare on remand proceedings in Bi-Economy remains to be determined. Based on the court's contractual framework, a policyholder will be required to present evidence of at least two different elements: 1) that the parties intended that certain consequential damages were foreseeable and reasonably expected to be covered at the time of contracting; and 2) that the consequential damages claimed are provable with reasonable certainty and not the result of speculation or conjecture. Here, Bi-Economy will likely argue that the court already found that it has satisfied the first prong. But this is subject to challenge. The court found only that the plaintiff's claim survived dismissal at the summary judgment stage; it did not enter judgment in the policyholder's favor on the issue of liability. The policyholder will thus be put to its proof. While the court's opinion could be read to create a presumption of foreseeability in the context of a business interruption policy, individual litigants should nonetheless be able to rebut that presumption by offering specific evidence that the parties did not, in fact, contemplate coverage for consequential damages at the time of contracting. In Bi-Economy, Harleysville may not yet have had the opportunity to present such evidence because it moved for summary judgment on the ground of a policy exclusion. For other insurers in future cases, courts will likely afford them the opportunity to show that they did not in fact contemplate coverage for consequential damages. Moreover, Bi-Economy pertains on its face solely to a business interruption policy. We discuss next whether the holding can be extended to the first-party property damage context in Panasia. The court was hesitant to reach such a conclusion on a line of coverage basis.

The Majority Opinion in Panasia

Panasia involved a dispute between Panasia Estates, Inc., a company that owned commercial real estate in Manhattan, and its insurer, Hudson Insurance Company. Panasia's property damage coverage included 'Builders Risk Coverage' for damage to its property while undergoing renovation. According to Panasia, it suffered extensive rain damage while the roof of its building was open for construction work. Hudson denied the claim stating that Panasia's loss was due to repeated water infiltration over time and wear and tear rather than a covered risk.

Panasia sued Hudson alleging breach of contract for failure to properly investigate the claim and denying the loss and sought direct and consequential damages. Hudson moved for partial summary judgment dismissing Panasia's bad faith allegations and claims for contractual damages based on the policy's specific exclusion for all consequential losses. The trial court denied this part of Hudson's motion. The intermediate appellate court affirmed the denial citing to Acquista for the proposition that damages beyond the limits of the policy are recoverable as long as they were 'foreseeable' at the time of contracting.

In Panasia, Judge Pigott relied on his holding in Bi-Economy to find that the insurer was not entitled to judgment as a matter of law. The Court reasoned that a claim for consequential damages may be asserted in an insurance contract context so long as the damages were 'within the contemplation of the parties as the probable result of a breach at the time of or prior to contracting.' 2008 N.Y. Slip Op. 1419 at *2-*3 (quoting Kenford Co., 73 N.Y.2d at 319). He also reiterates the Bi-Economy holding that the policy's exclusion for 'consequential losses' does not bar the recovery of 'consequential damages.' Importantly, Judge Pigott draws no conclusions about the nature and purpose of first-party property coverage. Instead, he states that 'the courts below failed to consider whether the specific damages sought by Panasia were foreseeable damages as a result of Hudson's breach' and remanded for further consideration because 'the record before us is not fully developed.' Id. Accordingly, on remand, the policyholder should be required to sustain its full burden of proof without the aid of any presumptions in its favor.

Judge Pigott's unwillingness to engage in an analysis of the nature and purpose of first-part property coverage suggests that it is in a different class than the business interruption coverage discussed in Bi-Economy. This distinction further indicates that the analysis for each type of coverage is unique and should caution policyholders away from over-reading the two court decisions as a blanket ruling that all insurance policies are automatically imbued with the presumption
that a breach will give rise to a valid claim for consequential damages. Moreover, insurers may want to consider adding a provision to their policies, application or underwriting materials clearly stating that the insurers are unequivocally not contemplating coverage for consequential damages arising from a potential future breach. Such language would obviously present strong contemporaneous evidence that the insurer is not assuming such risk and dispel any expectations in the minds of the policyholder.

The Dissenting Opinions in
Bi-Economy and Panasia

Judge Smith authored a dissenting opinion joined by Judge Read that he filed in both Bi-Economy and Panasia. Citing to the Court's prior decisions in Rocanova and NYU, Judge Smith reiterates the traditional rule that a bad faith breach of an insurer's duty to pay a claim without more does not justify an award of punitive damages and observes that the majority overturns this rule sub silentio by relabeling punitive damages as consequential damages. According to Judge Smith, the majority's decision is faulty primarily because it misuses both the
terms 'consequential damages' and 'covenant of good faith.' Bi-Economy at *8.

As an initial matter, Judge Smith states that unlike traditional consequential damages, which are triggered by the breach of contract, the majority's formulation finds that consequential damages are triggered 'by a breach committed in bad faith.' Id. at *7. He also points out that consequential damages traditionally are used to measure the harm resulting from a non-monetary performance when there is 'no prior agreement on what money will be paid in the event of a breach.' Id. In such circumstances, the court is to determine the damages that the parties 'would have agreed to had they considered the question when the contract was signed. Id. (citing Kenford Co, 73 N.Y.2d at 320). Judge Smith believes that the majority departs from this traditional conception in two ways. First, contrary to the majority's pronouncement, an insurance policy is simply a contract to pay money and therefore does not include any non-monetary performance obligations. Second, he finds it implausible that the parties to an insurance policy would have agreed to damages for bad faith:

Can anyone seriously believe that the parties in these cases would, if they had 'considered the subject,' have contracted for the results reached here? Imagine the dialogue. Applicant for insurance: 'Suppose you refuse, in bad faith to pay a claim. Will you agree to be liable for the consequences, including lost business, without regard to the policy limits?' Insurance company: 'Oh, sure. Sorry, we forgot to put that in the policy.'

Id. at *8.

Judge Smith also criticizes the majority's application of the implied covenant of good faith and fair dealing by pointing out that ordinarily this covenant is breached where a party has complied with the express terms of a contract 'but has done so in a way that undermines the purpose of the contract and deprives the other party of the benefit of the bargain.' Id. (citing 511 232^nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144 (2002)). The majority departs from this traditional understanding by finding that the implied covenant of good faith and fair dealing is violated when a party, in bad faith, breaches the express terms of the policy by refusing to pay a covered claim. Id. According to Judge Smith, this interpretation is analytically suspect because it 'obscur[es] the fact that the predicate for 'consequential' damages here is exactly the same conduct, bad faith failure to pay claims, that we refused to make a predicate for punitive damages in Rocanova and NYU.' Id. Finally, Judge Smith warns of the consequences of the majority's 'bad policy choice' that will punish honest insurers and raise premiums for all New Yorkers. Id. at *9.

Conclusion

Despite the majority's pledged adherence to the precedent in Rocanova and NYU, the Bi-Economy and Panasia decisions signal a new receptiveness by New York's highest court to claims for consequential damages in the context of first-party insurance claims and specifically those involving business interruption coverage. It is too early, however, to tell how far this new openness will extend. The Court of Appeals appears to have taken a fairly cautious approach with its initial foray into the world of bad faith. By framing the issue as a breach of contract, rather than an independent tort, the Court is able to rely on principles of contract law to confine the reach of bad faith claims. For example, the majority opinion specifically pointed out that in contrast to punitive damages, consequential damages ”must be proximately caused by the breach' and must be proven by the party seeking them.' Bi-Economy at *4 (quoting 24 Lord, Williston on Contracts ' 64.12, at 124-125 [4^th ed]). The court's reference to the purpose of business interruption insurance may provide further grounds for limiting the scope of the decision. While policyholders may be able to argue that the use of business interruption payments have a 'foreseeable' non-monetary purpose (to keep the business operating immediately after a loss), similar arguments may not be as persuasive for claims relating to liability policies or more general claims regarding the policyholder's 'peace of mind'. If lower courts apply the majority's consequential damages analysis in ways that give credence to the dissent's warnings, the court can always decline to find that consequential damages were 'foreseeable' in other cases or with other types of insurance policies.

The majority's failure to mention the Aquista case is itself interesting. It suggests that the court is being cautious about the basis for and scope of relief for bad faith claims handling. Whereas the Aquista court signaled its concern for curtailing misbehavior by insurers ' noting that the 'problem of dilatory tactics by insurance companies seeking to delay and avoid payment' has become widespread and the need for appropriate damages is 'apparent' ' the Bi-Economy majority specifically stated that consequential damages were not meant to 'punish the insurer, but to give the insured its bargained for benefit.' Id. at *6.

While policyholders may attempt to read the decisions in Bi-Economy and Panasia as greatly expanding their rights to claim bad faith, the Court's reliance on a breach of contract framework for its analysis provides insurers with methods for limiting their exposure to such claims. As one example, insurers may reexamine their policies' exclusions for 'consequential losses' to account for the majority's comments that the exclusionary clause applies only to losses or delays caused by third parties. If insurers bargain for new language that unequivocally bars payments beyond policy limits (and accrued interest), then future courts strictly following Bi-Economy and Panasia should theoretically have no issue with enforcing this contractual language. Future cases will no doubt test whether the courts will adhere to the contract-based analysis adopted by the Court of Appeals or lapse into the kind of outcome-driven rulings that Judge Smith ominously predicts.

Policyholder counsel have heralded the recent New York Court of Appeals' decisions in Bi-Economy and Panasia as victories for insureds due to the court's recognition, in certain circumstances, of claims for consequential damages beyond the limits of an insurance policy. See Damages Beyond the Policy Limits, by Robin L. Cohen, Joseph D. Jean, Rachel Wrightson, and Jared Zola ('Policyholders Article'), The Insurance Coverage Law Bulletin, Vol. 7, no. 5 (June 2008). Some may even view these decisions as an invitation by the State's highest court to bring traditional bad faith claims against insurers. However, a close reading of the majority opinions in these cases demonstrates that the Court of Appeals has taken only a tentative step in the direction of allowing claims under New York law for damages beyond policy limits. Based on the analytical construct used by the court to address the policyholders' claims in these cases, insurers have several avenues to challenge the application of these holdings to future cases and may ultimately limit these decisions to the specific facts under which they were decided.

Background

New York courts have traditionally refused to recognize a tort cause of action for bad faith handling of insurance claims. See American Nat'l Fire Ins. Co. v. Murasco, Inc ., 143 F. Supp. 2d 372, 377 (S.D.N.Y. 2001) (stating that New York does not recognize a separate claim for bad faith denial of insurance claims). For example, in Rocanova v. Equitable Life Assurance Society of the United States , 83 N.Y.2d 603 (1994), and New York University v. Continental Insurance Company , 87 N.Y.2d 308 (1995), the New York Court of Appeals held that a bad faith failure by an insurer to pay a claim, without more, was insufficient to justify an award of punitive damages. Rather, punitive damages were only available for breach of an insurance contract if the plaintiff was able to demonstrate both 'egregious tortious conduct' directed at the insured as well as 'a pattern of similar conduct directed at the public generally[.]' Rocanova, 83 NY2d at 613; NYU, 87 NY2d at 316. Under this traditional analysis, insurance policies are viewed as contracts for the payment of money only and the damages available for an insurer's failure to pay or provide benefits are limited to the amount of the policy and interest.

In 2001, an intermediary New York appellate court executed an end-run around this restriction by analyzing an insurer's alleged bad faith denial not as a tort, but as a breach of contract claim for consequential damages beyond the policy limits. See Acquista v. New York Life Ins. Co ., 285 A.D.2d 72 (1 st Dep't 2001) ('[W]hile plaintiff's cause of action alleging bad faith conduct on the part of the insurer cannot stand as a distinct tort cause of action, we conclude that its allegations may be employed to interpose a claim for consequential damages beyond the limits of the policy for the claimed breach of contract.'). The court in Acquista reversed the trial court's dismissal of the plaintiff's bad faith claim explaining that contract remedies may be expanded to include foreseeable money damages beyond the policy limit and consequential damages for mental distress and inconvenience so long as such non-economic losses 'were a foreseeable result of a breach at the time the policy was entered into.' 285 A.D.2d at 80-81.

The Acquista case settled and was not reviewed by the Court of Appeals. However, in two recent decisions ' Bi-Economy Market, Inc. v. Harleysville Insurance Company , 2008 NY Slip Op. 1418 (Feb. 19, 2008), and Panasia Estates, Inc. v. Hudson Insurance Company , 2008 NY Slip Op. 1419 (Feb. 19, 2008) ' the Court of Appeals appears to have adopted the Acquista court's analytical framework for assessing first-party bad faith claims. Our discussion below focuses on the court's legal analysis and the ramifications for future proceedings.

The Majority Opinion in Bi-Economy

Bi-Economy Market, a meat market in Rochester, sued its business owners' insurer, Harleysville Insurance Company, for losses arising out of a fire that destroyed its building and inventory, for business interruption losses for a year after the fire, and for additional damages allegedly suffered as a result of Harleysville's delinquent and substandard claims handling. Bi-Economy asserted claims for bad faith claims handling, tortious interference with business relations, and breach of contract and sought consequential damages for the termination of its business. Harleysville argued that the policy excluded coverage for consequential damages and moved for partial summary judgment dismissing the breach of contract claim. The lower courts agreed with Harleysville, finding that the policy's exclusion for 'consequential loss' indicated that the parties never contemplated payment for consequential damages. The Court of Appeals reversed and reinstated the cause of action.

The majority opinion in Bi-Economy was authored by Judge Pigott and joined by Chief Judge Kaye and Judges Ciparick, Graffeo and Jones. Judge Pigott frames the issue as a straight breach of contract question, stating that consequential damages are recoverable in 'limited circumstances' for 'those risks foreseen or which should have been foreseen at the time the contract was made.' 2008 N.Y. Slip Op. 1418 at *3 ( citing Kenford Co. v. County of Erie , 73 N.Y.2d 312, 319 (1989)). He states that the critical inquiry is not whether the breach itself or the particular way in which the loss occurred was foreseen, but instead whether 'loss from the breach is foreseeable and probable.' Id. This inquiry focuses on 'the nature, purpose and particular circumstances of the contract known by the parties ' as well as what liability the defendant fairly may be supposed to have assumed consciously, or to have warranted the plaintiff reasonably to suppose that it assumed, when the contract was made.' Id. (internal citations and quotations omitted).

According to Judge Pigott, permitting a claim for consequential damages does not run afoul of the Court's bad faith precedent for several reasons. First, he states that business interruption policies are not simply contracts to pay money (where the only recoverable damage for breach is the agreed upon amount plus interest) but rather contracts where the insured's reason for the money payment is 'at the very core of the contract itself.' Id. at *7. Therefore, the insured could have been seeking and expecting 'such intangibles as risk aversion, peace of mind, and certain and prompt payment of the policy proceeds upon submission of a valid claim.' Id . (quoting Andrew Jackson Life Ins. Co. v. Williams , 566 So. 2d 1172, 1179 n.2 (Miss 1990)). Second, insurance contracts contain an implied 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.' Id. at 4 (quoting NYU, 87 N.Y.2d at 318). Third, Judge Pigott distinguishes his contract analysis from a traditional tort analysis by differentiating consequential damages from punitive damages, explaining that '[c]onsequential damages, designed to compensate a party for reasonably foreseeable damages, must be proximately caused by the breach and must be proven by the party seeking them. Punitive damages, by contrast, are not measured by pecuniary loss or injury of the plaintiff as compensation but are assessed by way of punishment to the wrongdoer and example to others.' Id. at *4 (citations and internal quotations omitted).

Interestingly, Judge Pigott concluded that consequential damages were reasonably foreseeable and contemplated by the parties in the present case because the purpose of the business interruption policy was to provide Bi-Economy with the 'the financial support necessary to sustain its business operation in the event disaster occurred.' Id. at *5. Judge Pigott stated that this purpose 'would have made Harleysville 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 Bi-Economy for the loss of its business as a result of the breach.' Id. at *5. Furthermore, he reasons that the contract included an additional performance-based component to pay the claim 'promptly' and that Bi-Economy adequately alleged that Harleysville failed to promptly adjust and pay the loss, resulting in the collapse of the business. Id. at *5-6. Finally, Judge Pigott concludes that the policy's exclusion for 'consequential losses' does not bar recovery because the clause applies to losses that result from the actions of third parties, not 'consequential damages' that stem from the insurer's injurious conduct. Id. at *6.

How the policyholder's claim for consequential damages will fare on remand proceedings in Bi-Economy remains to be determined. Based on the court's contractual framework, a policyholder will be required to present evidence of at least two different elements: 1) that the parties intended that certain consequential damages were foreseeable and reasonably expected to be covered at the time of contracting; and 2) that the consequential damages claimed are provable with reasonable certainty and not the result of speculation or conjecture. Here, Bi-Economy will likely argue that the court already found that it has satisfied the first prong. But this is subject to challenge. The court found only that the plaintiff's claim survived dismissal at the summary judgment stage; it did not enter judgment in the policyholder's favor on the issue of liability. The policyholder will thus be put to its proof. While the court's opinion could be read to create a presumption of foreseeability in the context of a business interruption policy, individual litigants should nonetheless be able to rebut that presumption by offering specific evidence that the parties did not, in fact, contemplate coverage for consequential damages at the time of contracting. In Bi-Economy, Harleysville may not yet have had the opportunity to present such evidence because it moved for summary judgment on the ground of a policy exclusion. For other insurers in future cases, courts will likely afford them the opportunity to show that they did not in fact contemplate coverage for consequential damages. Moreover, Bi-Economy pertains on its face solely to a business interruption policy. We discuss next whether the holding can be extended to the first-party property damage context in Panasia. The court was hesitant to reach such a conclusion on a line of coverage basis.

The Majority Opinion in Panasia

Panasia involved a dispute between Panasia Estates, Inc., a company that owned commercial real estate in Manhattan, and its insurer, Hudson Insurance Company. Panasia's property damage coverage included 'Builders Risk Coverage' for damage to its property while undergoing renovation. According to Panasia, it suffered extensive rain damage while the roof of its building was open for construction work. Hudson denied the claim stating that Panasia's loss was due to repeated water infiltration over time and wear and tear rather than a covered risk.

Panasia sued Hudson alleging breach of contract for failure to properly investigate the claim and denying the loss and sought direct and consequential damages. Hudson moved for partial summary judgment dismissing Panasia's bad faith allegations and claims for contractual damages based on the policy's specific exclusion for all consequential losses. The trial court denied this part of Hudson's motion. The intermediate appellate court affirmed the denial citing to Acquista for the proposition that damages beyond the limits of the policy are recoverable as long as they were 'foreseeable' at the time of contracting.

In Panasia, Judge Pigott relied on his holding in Bi-Economy to find that the insurer was not entitled to judgment as a matter of law. The Court reasoned that a claim for consequential damages may be asserted in an insurance contract context so long as the damages were 'within the contemplation of the parties as the probable result of a breach at the time of or prior to contracting.' 2008 N.Y. Slip Op. 1419 at *2-*3 (quoting Kenford Co., 73 N.Y.2d at 319). He also reiterates the Bi-Economy holding that the policy's exclusion for 'consequential losses' does not bar the recovery of 'consequential damages.' Importantly, Judge Pigott draws no conclusions about the nature and purpose of first-party property coverage. Instead, he states that 'the courts below failed to consider whether the specific damages sought by Panasia were foreseeable damages as a result of Hudson's breach' and remanded for further consideration because 'the record before us is not fully developed.' Id. Accordingly, on remand, the policyholder should be required to sustain its full burden of proof without the aid of any presumptions in its favor.

Judge Pigott's unwillingness to engage in an analysis of the nature and purpose of first-part property coverage suggests that it is in a different class than the business interruption coverage discussed in Bi-Economy. This distinction further indicates that the analysis for each type of coverage is unique and should caution policyholders away from over-reading the two court decisions as a blanket ruling that all insurance policies are automatically imbued with the presumption
that a breach will give rise to a valid claim for consequential damages. Moreover, insurers may want to consider adding a provision to their policies, application or underwriting materials clearly stating that the insurers are unequivocally not contemplating coverage for consequential damages arising from a potential future breach. Such language would obviously present strong contemporaneous evidence that the insurer is not assuming such risk and dispel any expectations in the minds of the policyholder.

The Dissenting Opinions in
Bi-Economy and Panasia

Judge Smith authored a dissenting opinion joined by Judge Read that he filed in both Bi-Economy and Panasia. Citing to the Court's prior decisions in Rocanova and NYU, Judge Smith reiterates the traditional rule that a bad faith breach of an insurer's duty to pay a claim without more does not justify an award of punitive damages and observes that the majority overturns this rule sub silentio by relabeling punitive damages as consequential damages. According to Judge Smith, the majority's decision is faulty primarily because it misuses both the
terms 'consequential damages' and 'covenant of good faith.' Bi-Economy at *8.

As an initial matter, Judge Smith states that unlike traditional consequential damages, which are triggered by the breach of contract, the majority's formulation finds that consequential damages are triggered 'by a breach committed in bad faith.' Id. at *7. He also points out that consequential damages traditionally are used to measure the harm resulting from a non-monetary performance when there is 'no prior agreement on what money will be paid in the event of a breach.' Id. In such circumstances, the court is to determine the damages that the parties 'would have agreed to had they considered the question when the contract was signed. Id. (citing Kenford Co, 73 N.Y.2d at 320). Judge Smith believes that the majority departs from this traditional conception in two ways. First, contrary to the majority's pronouncement, an insurance policy is simply a contract to pay money and therefore does not include any non-monetary performance obligations. Second, he finds it implausible that the parties to an insurance policy would have agreed to damages for bad faith:

Can anyone seriously believe that the parties in these cases would, if they had 'considered the subject,' have contracted for the results reached here? Imagine the dialogue. Applicant for insurance: 'Suppose you refuse, in bad faith to pay a claim. Will you agree to be liable for the consequences, including lost business, without regard to the policy limits?' Insurance company: 'Oh, sure. Sorry, we forgot to put that in the policy.'

Id. at *8.

Judge Smith also criticizes the majority's application of the implied covenant of good faith and fair dealing by pointing out that ordinarily this covenant is breached where a party has complied with the express terms of a contract 'but has done so in a way that undermines the purpose of the contract and deprives the other party of the benefit of the bargain.' Id . (citing 511 232 nd Owners Corp. v. Jennifer Realty Co ., 98 N.Y.2d 144 (2002)). The majority departs from this traditional understanding by finding that the implied covenant of good faith and fair dealing is violated when a party, in bad faith, breaches the express terms of the policy by refusing to pay a covered claim. Id. According to Judge Smith, this interpretation is analytically suspect because it 'obscur[es] the fact that the predicate for 'consequential' damages here is exactly the same conduct, bad faith failure to pay claims, that we refused to make a predicate for punitive damages in Rocanova and NYU.' Id. Finally, Judge Smith warns of the consequences of the majority's 'bad policy choice' that will punish honest insurers and raise premiums for all New Yorkers. Id. at *9.

Conclusion

Despite the majority's pledged adherence to the precedent in Rocanova and NYU, the Bi-Economy and Panasia decisions signal a new receptiveness by New York's highest court to claims for consequential damages in the context of first-party insurance claims and specifically those involving business interruption coverage. It is too early, however, to tell how far this new openness will extend. The Court of Appeals appears to have taken a fairly cautious approach with its initial foray into the world of bad faith. By framing the issue as a breach of contract, rather than an independent tort, the Court is able to rely on principles of contract law to confine the reach of bad faith claims. For example, the majority opinion specifically pointed out that in contrast to punitive damages, consequential damages ”must be proximately caused by the breach' and must be proven by the party seeking them.' Bi-Economy at *4 (quoting 24 Lord, Williston on Contracts ' 64.12, at 124-125 [4^th ed]). The court's reference to the purpose of business interruption insurance may provide further grounds for limiting the scope of the decision. While policyholders may be able to argue that the use of business interruption payments have a 'foreseeable' non-monetary purpose (to keep the business operating immediately after a loss), similar arguments may not be as persuasive for claims relating to liability policies or more general claims regarding the policyholder's 'peace of mind'. If lower courts apply the majority's consequential damages analysis in ways that give credence to the dissent's warnings, the court can always decline to find that consequential damages were 'foreseeable' in other cases or with other types of insurance policies.

The majority's failure to mention the Aquista case is itself interesting. It suggests that the court is being cautious about the basis for and scope of relief for bad faith claims handling. Whereas the Aquista court signaled its concern for curtailing misbehavior by insurers ' noting that the 'problem of dilatory tactics by insurance companies seeking to delay and avoid payment' has become widespread and the need for appropriate damages is 'apparent' ' the Bi-Economy majority specifically stated that consequential damages were not meant to 'punish the insurer, but to give the insured its bargained for benefit.' Id. at *6.

While policyholders may attempt to read the decisions in Bi-Economy and Panasia as greatly expanding their rights to claim bad faith, the Court's reliance on a breach of contract framework for its analysis provides insurers with methods for limiting their exposure to such claims. As one example, insurers may reexamine their policies' exclusions for 'consequential losses' to account for the majority's comments that the exclusionary clause applies only to losses or delays caused by third parties. If insurers bargain for new language that unequivocally bars payments beyond policy limits (and accrued interest), then future courts strictly following Bi-Economy and Panasia should theoretically have no issue with enforcing this contractual language. Future cases will no doubt test whether the courts will adhere to the contract-based analysis adopted by the Court of Appeals or lapse into the kind of outcome-driven rulings that Judge Smith ominously predicts.