Causes of Action over Property Insurance Coverage

Rarely do lawyers have the benefit of a decision that is a primer on permissible causes of action arising from property insurance coverage disputes. Kings Infiniti v. Zurich American Ins., 43 Misc.3d 1207(A) (Sup. Ct. Kings Cty. April 3, 2014), is one of those decisions. Justice Carolyn Demarest clearly and concisely addressed each issue raised by the defendants (collectively, Zurich) who successfully obtained a dismissal on a CPLR 3211 motion of several of the causes of action in the plaintiffs' amended complaint. However, a Court of Appeals decision, decided while the Infiniti motion was under submission, may allow the plaintiff to revive its case.

Hurricane Sandy Damage

The plaintiffs were three commonly owned car dealerships and service centers, all of which in October 2012 suffered extensive damages, alleged to be in the seven figures, from Hurricane Sandy. They had served an amended complaint containing 10 causes of action against the two Zurich defendants arising from what was essentially a breach of an insurance contract claim.

Prior to the loss, the Infiniti car dealer plaintiffs had had a relatively long relationship with Zurich. The latter first underwrote the properties in 2004, and had sent its employees to inspect the properties at the time of the underwriting. The plaintiffs alleged that Zurich would annually review coverage and make recommendations to the plaintiffs.

Most of the plaintiffs' dealership properties were in an area of Brooklyn that the New York City Office of Emergency Management listed in a category as having the highest risk of flooding. The plaintiffs alleged that in February 2012, Zurich conducted its annual review, but did not recommend the purchase of flood insurance for the dealerships and service centers, even though Zurich had been insuring the plaintiffs'automobile inventory, stored at a location apparently outside of the designated flood zone, under a separate policy from the one at issue in the Infiniti case. This separate policy did contain flood coverage. Most property insurance policies exclude from coverage damage and loss caused by flooding. The federal government has a national flood insurance program and is considered the sole provider of flood insurance coverage.

Two weeks after the Oct. 29, 2012 hurricane, the plaintiffs contacted Zurich and requested a copy of the policy. The amended complaint alleged that the copy of the policy Zurich faxed to them in response did not include the pages containing the flood exclusion language. Nevertheless, Zurich claimed that its policy excluded coverage for losses caused “directly or indirectly” by flooding. When Zurich ultimately denied coverage, relying on the flood exclusion, the certified copy of the policy it sent the plaintiffs with its denial letter contained the exclusionary language. The plaintiffs asserted in their complaint that Zurich, even before the loss, had never provided them with a copy of the policy containing the flood exclusion.

Declaratory Judgment

The first cause of action of the amended complaint sought a declaratory judgment as to which version of the policy controlled: the version Zurich had faxed to the plaintiffs, or the defendant's certified copy. Zurich moved to dismiss the declaratory judgment cause of action, asserting that it was essentially duplicative of the plaintiffs' breach of contract claims.

The court stated the general rule that when a declaratory judgment action merely asks for the same determination as a breach of contract cause of action, a court may appropriately dismiss the declaratory judgment action. However, Justice Demarest determined that because an insurer can bring a declaratory judgment action against its insured on a coverage question, an insured ought to be able to bring one against its insurer.

Moreover, because the declaratory judgment cause of action asked for a specific determination of whether the exclusion applies, and, unlike the breach of contract claims, did not seek damages, the declaratory judgment action was not merely duplicative or redundant of the contract breach claims. Therefore, it would survive the motion to dismiss.

Zurich may have thrown in its request for the dismissal of the declaratory judgment cause of action, or perhaps there was a strategy behind it. If the Infiniti case went to trial, judicial economy would provide a compelling reason for a bifurcated trial to try the issue of coverage first. It would take days of court time and tens of thousands of dollars of attorney fees and valuation proof to establish property and business losses. Before incurring such expense, the Infiniti plaintiffs would want to know whether they were, at the outset, in or out of court because of the one-paragraph policy flood exclusion. Likewise, one would think Zurich's interest would be the same, but perhaps not.

Assembling and presenting proof of property and business losses takes countless hours and often involves mind-numbing tedium. Proof of damages is frequently controlled by multiple insurance policy provisions. The opportunities for defense counsel to punch holes in a plaintiff's damage presentation are many, and defense counsel doubtless knows that a plaintiff who must prove both coverage and covered damages is frequently more agreeable to settlement.

The plaintiffs' victory on their declaratory judgment cause of action was fleeting, as the remainder of the court's decision involved dismissing their claims. There is no separate cause of action for a “breach of the implied covenant of good faith and fair dealings.” To say it differently: In New York, there is no independent, extra-contractual, tort cause of action for an insurance company's bad-faith behavior in refusing to pay a claim. Nevertheless, an insurer's breach of the implied covenant of good faith and fair dealings in handling a claim may give rise to a claim for consequential damages beyond the policy limits.

The New York Court of Appeals determined this significant extension of an insurer's liability in Bi-Economy Mkt. v. Harleysville Ins. Co of New York, 10 N.Y.3d (2008). In Panasia Estates v. Hudson Ins., 10 N.Y.3d 200 (2008), the court held that even policy language excluding payment of consequential losses would not preclude a claim for consequential damages if the insurer acted in bad faith when settling a claim.

The Infiniti plaintiffs could have alleged bad faith within its breach of contract causes of action and claimed resulting consequential damages. However, as pointed out by Judge Demarest, the amended complaint contained no allegations of consequential damages beyond those covered under the insurance contract, and therefore the Infiniti plaintiffs' cause of action for bad faith should properly be dismissed.

Unfair Practices Claim

The next cause of action to fall was the claim under ' 2601(a) of the Insurance Law, which prohibits insurers from engaging in a general business practice of “unfair claim settlement practices.” One of the specifically enumerated unfair practices in ' 2601(a) was “knowingly misrepresenting to claimants pertinent facts or policy provisions relating to coverages at issue.” Insurance Law section 2601(a)(1). The Infiniti plaintiffs claimed Zurich had misrepresented that they had flood insurance. However, the court quickly dispatched this statutory cause of action because New York does not recognize a private cause of action under Insurance Law ' 2601. Enforcement of ' 2601 is reserved to what used to be the Insurance Department and what is now the Department of Financial Services.

The plaintiffs attempted to keep the ' 2601 cause of action alive by relying on legislation introduced in the Assembly which would, if enacted, have created a private cause of action under ' 2601 in circumstances of a natural disaster such as Sandy. The proposed law would have allowed for the award of attorney fees and punitive damages. Of course many bills are proposed in Albany and many never see the light of day. Recognizing this, the court rejected proposed legislation as the basis for allowing the ' 2601 cause of action to remain in the complaint. Moreover, as Zurich pointed out, even if such legislation were enacted in 2014, there was a question whether it would apply retroactively to a 2013 lawsuit.

The Infiniti plaintiffs also alleged causes of action for fraud and breach of fiduciary duty, both of which sought punitive damages in the prayer for relief. The purported fraud was that Zurich falsely represented that it was an expert in insurance coverage and would “procure insurance coverage to protect” the plaintiffs. The alleged fiduciary duty breach was Zurich's failure to advise the plaintiffs of insurance coverage they would need to protect themselves. The court said the plaintiffs, significantly, had omitted any allegation that they had asked Zurich to provide flood coverage, and that Zurich had failed to follow through on the request. The Infiniti court found these general allegations insufficient to sustain either cause of action.

The fraud, the fiduciary duty breach, the breach of the implied covenant of good faith, and the alleged violation of ' 2601 all were the plaintiffs' basis for requesting punitive damages and an award of attorney fees. The court pointed out that punitive damages are not recoverable in New York absent an allegation of “a high degree of moral turpitude or such wanton dishonesty as to imply a criminal indifference to civil obligations. ' ” Moreover this conduct must be aimed at the public as a whole and not just at the individual insured. The complaint failed to make these allegations against Zurich.

Attorney Fees

The Infiniti court dismissed the claim for attorney fees, stating the well-established principle that absent a statute, rule, or contractual provision allowing for the award of attorney fees, such an award cannot be had in New York. Although an insurer that seeks a declaratory judgment to relieve itself improperly of its coverage obligation will be required to pay the insured's attorney fees incurred in defending such an action, the same rule does not apply in a declaratory judgment action brought by an insured seeking a determination of coverage.

When the dust settled on the motion to dismiss, the Infiniti plaintiffs were left with what they probably should have started with ' a breach of contract claim with alleged damages to real estate, inventory, personal property, and business income. The big issue will be to determine the parties' insurance contract when the renewal policy was issued effective July 1, 2013. If the prior policies issued by Zurich to the plaintiffs had contained the flood exclusionary language that the plaintiffs alleged was absent from the renewal policy, it would be reasonable to assume that the plaintiffs' insurance premiums would have increased substantially for the 2013 renewal policy because of the greatly increased coverage. If the prior policies had not excluded flood damage, then Infiniti has a better argument about the 2013 renewal policy. It does not appear that the complaint alleged that the prior Zurich policies contained flood damage coverage.

Insurance Broker Decision

The Feb. 25, 2014, Court of Appeals case of Voss v. The Netherlands Ins., _NY3_ (2014), decided while the Infiniti motion was under submission, may provide some hope to the Infiniti plaintiffs. In Voss, the Court of Appeals, in a 4-3 decision, held that there may be a “special relationship” created between an insurance broker and an insured if there is proof of an extended course of dealings that would put an insurance agent on notice that his/her advice was being sought and relied upon. In Voss , the insured alleged that her broker had negligently secured inadequate business interruption insurance. The Court of Appeals reversed the appellate division and determined that the Voss plaintiff had provided sufficient proof of a special relationship to avoid the broker's summary judgment motion.

If a special relationship can be created between a broker and an insured client, the Infiniti plaintiffs could allege a special relationship with their own insurer, which held itself out to plaintiffs as knowledgeable about the coverage required and upon whom the plaintiffs relied over the years. To make such a claim, the Infiniti plaintiffs will now have to seek leave to serve a second amended complaint, this time alleging a special relationship and a claim of negligence against Zurich.

Jason L. Shaw is a partner in the Albany, NY, firm of Whiteman Osterman & Hanna. This article also appeared in the New York Law Journal, an ALM sister publication of this newsletter.

Rarely do lawyers have the benefit of a decision that is a primer on permissible causes of action arising from property insurance coverage disputes. Kings Infiniti v. Zurich American Ins ., 43 Misc.3d 1207(A) (Sup. Ct. Kings Cty. April 3, 2014), is one of those decisions. Justice Carolyn Demarest clearly and concisely addressed each issue raised by the defendants (collectively, Zurich) who successfully obtained a dismissal on a CPLR 3211 motion of several of the causes of action in the plaintiffs' amended complaint. However, a Court of Appeals decision, decided while the Infiniti motion was under submission, may allow the plaintiff to revive its case.

Hurricane Sandy Damage

The plaintiffs were three commonly owned car dealerships and service centers, all of which in October 2012 suffered extensive damages, alleged to be in the seven figures, from Hurricane Sandy. They had served an amended complaint containing 10 causes of action against the two Zurich defendants arising from what was essentially a breach of an insurance contract claim.

Prior to the loss, the Infiniti car dealer plaintiffs had had a relatively long relationship with Zurich. The latter first underwrote the properties in 2004, and had sent its employees to inspect the properties at the time of the underwriting. The plaintiffs alleged that Zurich would annually review coverage and make recommendations to the plaintiffs.

Most of the plaintiffs' dealership properties were in an area of Brooklyn that the New York City Office of Emergency Management listed in a category as having the highest risk of flooding. The plaintiffs alleged that in February 2012, Zurich conducted its annual review, but did not recommend the purchase of flood insurance for the dealerships and service centers, even though Zurich had been insuring the plaintiffs'automobile inventory, stored at a location apparently outside of the designated flood zone, under a separate policy from the one at issue in the Infiniti case. This separate policy did contain flood coverage. Most property insurance policies exclude from coverage damage and loss caused by flooding. The federal government has a national flood insurance program and is considered the sole provider of flood insurance coverage.

Two weeks after the Oct. 29, 2012 hurricane, the plaintiffs contacted Zurich and requested a copy of the policy. The amended complaint alleged that the copy of the policy Zurich faxed to them in response did not include the pages containing the flood exclusion language. Nevertheless, Zurich claimed that its policy excluded coverage for losses caused “directly or indirectly” by flooding. When Zurich ultimately denied coverage, relying on the flood exclusion, the certified copy of the policy it sent the plaintiffs with its denial letter contained the exclusionary language. The plaintiffs asserted in their complaint that Zurich, even before the loss, had never provided them with a copy of the policy containing the flood exclusion.

Declaratory Judgment

The first cause of action of the amended complaint sought a declaratory judgment as to which version of the policy controlled: the version Zurich had faxed to the plaintiffs, or the defendant's certified copy. Zurich moved to dismiss the declaratory judgment cause of action, asserting that it was essentially duplicative of the plaintiffs' breach of contract claims.

The court stated the general rule that when a declaratory judgment action merely asks for the same determination as a breach of contract cause of action, a court may appropriately dismiss the declaratory judgment action. However, Justice Demarest determined that because an insurer can bring a declaratory judgment action against its insured on a coverage question, an insured ought to be able to bring one against its insurer.

Moreover, because the declaratory judgment cause of action asked for a specific determination of whether the exclusion applies, and, unlike the breach of contract claims, did not seek damages, the declaratory judgment action was not merely duplicative or redundant of the contract breach claims. Therefore, it would survive the motion to dismiss.

Zurich may have thrown in its request for the dismissal of the declaratory judgment cause of action, or perhaps there was a strategy behind it. If the Infiniti case went to trial, judicial economy would provide a compelling reason for a bifurcated trial to try the issue of coverage first. It would take days of court time and tens of thousands of dollars of attorney fees and valuation proof to establish property and business losses. Before incurring such expense, the Infiniti plaintiffs would want to know whether they were, at the outset, in or out of court because of the one-paragraph policy flood exclusion. Likewise, one would think Zurich's interest would be the same, but perhaps not.

Assembling and presenting proof of property and business losses takes countless hours and often involves mind-numbing tedium. Proof of damages is frequently controlled by multiple insurance policy provisions. The opportunities for defense counsel to punch holes in a plaintiff's damage presentation are many, and defense counsel doubtless knows that a plaintiff who must prove both coverage and covered damages is frequently more agreeable to settlement.

The plaintiffs' victory on their declaratory judgment cause of action was fleeting, as the remainder of the court's decision involved dismissing their claims. There is no separate cause of action for a “breach of the implied covenant of good faith and fair dealings.” To say it differently: In New York, there is no independent, extra-contractual, tort cause of action for an insurance company's bad-faith behavior in refusing to pay a claim. Nevertheless, an insurer's breach of the implied covenant of good faith and fair dealings in handling a claim may give rise to a claim for consequential damages beyond the policy limits.

The New York Court of Appeals determined this significant extension of an insurer's liability in Bi-Economy Mkt. v. Harleysville Ins. Co of New York, 10 N.Y.3d (2008). In Panasia Estates v. Hudson Ins. , 10 N.Y.3d 200 (2008), the court held that even policy language excluding payment of consequential losses would not preclude a claim for consequential damages if the insurer acted in bad faith when settling a claim.

The Infiniti plaintiffs could have alleged bad faith within its breach of contract causes of action and claimed resulting consequential damages. However, as pointed out by Judge Demarest, the amended complaint contained no allegations of consequential damages beyond those covered under the insurance contract, and therefore the Infiniti plaintiffs' cause of action for bad faith should properly be dismissed.

Unfair Practices Claim

The next cause of action to fall was the claim under ' 2601(a) of the Insurance Law, which prohibits insurers from engaging in a general business practice of “unfair claim settlement practices.” One of the specifically enumerated unfair practices in ' 2601(a) was “knowingly misrepresenting to claimants pertinent facts or policy provisions relating to coverages at issue.” Insurance Law section 2601(a)(1). The Infiniti plaintiffs claimed Zurich had misrepresented that they had flood insurance. However, the court quickly dispatched this statutory cause of action because New York does not recognize a private cause of action under Insurance Law ' 2601. Enforcement of ' 2601 is reserved to what used to be the Insurance Department and what is now the Department of Financial Services.

The plaintiffs attempted to keep the ' 2601 cause of action alive by relying on legislation introduced in the Assembly which would, if enacted, have created a private cause of action under ' 2601 in circumstances of a natural disaster such as Sandy. The proposed law would have allowed for the award of attorney fees and punitive damages. Of course many bills are proposed in Albany and many never see the light of day. Recognizing this, the court rejected proposed legislation as the basis for allowing the ' 2601 cause of action to remain in the complaint. Moreover, as Zurich pointed out, even if such legislation were enacted in 2014, there was a question whether it would apply retroactively to a 2013 lawsuit.

The Infiniti plaintiffs also alleged causes of action for fraud and breach of fiduciary duty, both of which sought punitive damages in the prayer for relief. The purported fraud was that Zurich falsely represented that it was an expert in insurance coverage and would “procure insurance coverage to protect” the plaintiffs. The alleged fiduciary duty breach was Zurich's failure to advise the plaintiffs of insurance coverage they would need to protect themselves. The court said the plaintiffs, significantly, had omitted any allegation that they had asked Zurich to provide flood coverage, and that Zurich had failed to follow through on the request. The Infiniti court found these general allegations insufficient to sustain either cause of action.

The fraud, the fiduciary duty breach, the breach of the implied covenant of good faith, and the alleged violation of ' 2601 all were the plaintiffs' basis for requesting punitive damages and an award of attorney fees. The court pointed out that punitive damages are not recoverable in New York absent an allegation of “a high degree of moral turpitude or such wanton dishonesty as to imply a criminal indifference to civil obligations. ' ” Moreover this conduct must be aimed at the public as a whole and not just at the individual insured. The complaint failed to make these allegations against Zurich.

Attorney Fees

The Infiniti court dismissed the claim for attorney fees, stating the well-established principle that absent a statute, rule, or contractual provision allowing for the award of attorney fees, such an award cannot be had in New York. Although an insurer that seeks a declaratory judgment to relieve itself improperly of its coverage obligation will be required to pay the insured's attorney fees incurred in defending such an action, the same rule does not apply in a declaratory judgment action brought by an insured seeking a determination of coverage.

When the dust settled on the motion to dismiss, the Infiniti plaintiffs were left with what they probably should have started with ' a breach of contract claim with alleged damages to real estate, inventory, personal property, and business income. The big issue will be to determine the parties' insurance contract when the renewal policy was issued effective July 1, 2013. If the prior policies issued by Zurich to the plaintiffs had contained the flood exclusionary language that the plaintiffs alleged was absent from the renewal policy, it would be reasonable to assume that the plaintiffs' insurance premiums would have increased substantially for the 2013 renewal policy because of the greatly increased coverage. If the prior policies had not excluded flood damage, then Infiniti has a better argument about the 2013 renewal policy. It does not appear that the complaint alleged that the prior Zurich policies contained flood damage coverage.

Insurance Broker Decision

The Feb. 25, 2014, Court of Appeals case of Voss v. The Netherlands Ins., _NY3_ (2014), decided while the Infiniti motion was under submission, may provide some hope to the Infiniti plaintiffs. In Voss, the Court of Appeals, in a 4-3 decision, held that there may be a “special relationship” created between an insurance broker and an insured if there is proof of an extended course of dealings that would put an insurance agent on notice that his/her advice was being sought and relied upon. In Voss , the insured alleged that her broker had negligently secured inadequate business interruption insurance. The Court of Appeals reversed the appellate division and determined that the Voss plaintiff had provided sufficient proof of a special relationship to avoid the broker's summary judgment motion.

If a special relationship can be created between a broker and an insured client, the Infiniti plaintiffs could allege a special relationship with their own insurer, which held itself out to plaintiffs as knowledgeable about the coverage required and upon whom the plaintiffs relied over the years. To make such a claim, the Infiniti plaintiffs will now have to seek leave to serve a second amended complaint, this time alleging a special relationship and a claim of negligence against Zurich.

Jason L. Shaw is a partner in the Albany, NY, firm of Whiteman Osterman & Hanna. This article also appeared in the New York Law Journal, an ALM sister publication of this newsletter.