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On February 19, 2008, the NewYork Court of Appeals issued opin-ions in Bi-Economy Market, Inc. v.Harleysville Insurance Co. of NewYork, 10 N.Y.3d 187, 886 N.E.2d127, 856 N.Y.S.2d 505 (2008), andPanasia Estates, Inc. v. HudsonInsurance Co., 10 N.Y.3d 200, 886N.E.2d 135, 856 N.Y.S.2d 513(2008). In these two cases, NewYork’s highest court held thatwhere an insurance company failsto timely pay amounts due under aproperty insurance policy it can beliable for consequential damagesthat are proximately caused by thatfailure over and above policy pro-ceeds plus interest.
In Bi-Economy, the court specif-ically held that when an insuredsuffers foreseeable damages,including collapse of the insured’sbusiness, as a result of an insurer’sexcessive delay or improper denialof coverage, the insurance compa-ny is liable for those damages, notas a punishment, but to give the
policyholder the benefit of its bar-gain. Panasia Estates relied on Bi-Economy Market and held that con-sequential damages resulting froman insurer’s breach of its covenantof good faith and fair dealing maybe recovered as long as they werewithin the contemplation of theparties as the probable result of thebreach at the time of or before con-tracting. Both cases also held thatpolicy exclusions for various typesof consequential loss did not pre-clude recovery of consequential
damages resulting from an insur-er’s breach of contract. Althoughthese cases were decided underNew York law, their underlying
Uniting Plaintiff, Defense, Insurance, and Corporate Counsel toAdvance the Civil Justice System
Property InsuranceLaw Committee
Continued on page 12
In This Issue:
Winter 2009
CommitteeNewsCommitteeNews
BI-ECONOMY MARKET AND PANASIA ESTATES: DO THEY REALLYCREATE A NEW CAUSE OF ACTION IN NEW YORK?
By: Jay M. Levin
Bi-Economy Market AndPanasia Estates: Do TheyReally Create A New CauseOf Action In New York? . . . 1Message From The Chair . . 3Florida Supreme Court’sReading Of Loose Statutory
Language Leaves SurplusLines Carriers In Doubt . . . 5Midwest Floods 2008:Potential Issues If PropertyClaims Pour In. . . . . . . . . . . 6Stepping Into ArbitrationAgreements. . . . . . . . . . . . . . 72009 TIPS Calendar . . . . . 15
{Before citing any case or legislative enactment that is mentioned or discussed in this Newsletter, be sure to make certain that the decisionhas not been overruled or modified, or that the statute has not been amended, subsequent to the time this summary was prepared.}
Property Insurance Law Committee Newsletter Winter 2009
2
ChairClark SchirleClausen Miller PC
Ste 160010 S LaSalle St
Chicago, IL 60603-1098(312) 606-7948
Fax: (312) [email protected]
Chair-ElectWilliam R LewisButler Pappas et al
Ste 500777 S Harbour Island BlvdTampa, FL 33602-5723(813) 281-1900
Fax: (813) [email protected]
Last Retiring ChairJay M LevinReed Smith
Philadelphia, PA 19103-7394(215) 851-8126
Fax: (215) [email protected]
MembershipCo-Vice-Chairs
Lon A BerkHunton & Williams LLP
Ste 17001751 Pinnacle Dr
Mc Lean, VA 22102-3836(703) 714-7400
Fax: (703) [email protected]
Francis J Maloney IIIBullivant Houser Bailey PC
Ste 300888 SW 5th Ave
Portland, OR 97204-2089(503) 228-6351
Fax: (503) [email protected]
Newsletter Vice-ChairKellyn J W MullerCozen O’Connor
Ste 300457 Haddonfield Rd
Cherry Hill, NJ 08002-2220(856) 910-5063
Fax: (215) [email protected]
Website Vice-ChairRebecca Levy-SachsRobinson & Cole LLP
Ste 4001343 Main St
Sarasota, FL 34236-5635(941) 330-0822
Fax: (941)[email protected]
Vice-ChairsToni Yvette Anders
Bullivant Houser Bailey PCSte 2300
1601 5th AveSeattle, WA 98101-1618
(206) 521-6458Fax: (206) 386-5130
[email protected] Callantine
Chapman Popik & White LLPFl 19
650 California StSan Francisco, CA 94108-2736
(415) 352-3000Fax: (415) [email protected]
Tonja De SlooverFulbright & Jaworski LLP
Ste 51001301 McKinney St
Houston, TX 77010-3095(713) 651-5339
Fax: (713) [email protected]
Ben EilenbergApt 627
5100 Quail Run RdRiverside, CA 92507-6073
(916) [email protected]
Elizabeth Friedenstein7517 NW 115th St
Oklahoma City, OK [email protected] Student Vice-ChairRichard D Gable Jr
Gibbons PCSte 17002 Logan Sq
Philadelphia, PA 19103-2741(215) 446-6210
Fax: (215) [email protected]
Brian Stephen KabateckKabateck Brown Kellner LLP
644 S Figueroa StLos Angeles, CA 90017-3411
(213) 217-5000Fax: (213) [email protected]
Janice A KellyBoehm Brown et al
Ste 375101 Southhall Ln
Maitland, FL 32751-7494(407) 660-0990
Fax: (407) [email protected]
Ann F KetchenRobins Kaplan Miller & Ciresi
Fl 25800 Boylston St
Boston, MA 02199-8032(617) 267-2300
Fax: (617) [email protected] C Lerner
Abraham Lerner & Arnold LLPFl 22
292 Madison AveNew York, NY 10017-6311
(212) [email protected]
Peter J LoughlinAssurant
260 Interstate North Cir SEAtlanta, GA 30339-2228
(770) 763-2490Fax: (770) 859-4366
[email protected] John RoccoClausen Miller PC1 Gatehall Dr
Parsippany, NJ 07054-4523(212) 504-6020
Fax: (212) [email protected]
William H StanhopeRobins Kaplan Miller & CiresiSte 2600 2600 One Atlanta Plaza950 E Paces Ferry Rd NEAtlanta, GA 30326-1180
(404) 233-1114Fax: (404) [email protected]
Douglas Richard WidinReed Smith
Ste 2500 1 Liberty Pl1650 Market St
Philadelphia, PA 19103-7301(215) 851-8100
Fax: (215) [email protected]
©2009 American Bar Association, Tort Trial & Insurance Practice Section, 321 N Clark St, Chicago, Illinois 60610; (312) 988-5607. Allrights reserved.
The opinions herein are the authors’ and do not necessarily represent the views or policies of the ABA, TIPS or the Property InsuranceLaw Committee. Articles should not be reproduced without written permission from the Tort Trial & Insurance Practice Section.
Editorial Policy: This Newsletter publishes information of interest to members of the Property Insurance Law Committee of the Tort Trial& Insurance Practice Section of the American Bar Association — including reports, personal opinions, practice news, developing law andpractice tips by the membership, as well as contributions of interest by nonmembers. Neither the ABA, the Section, the Committee, northe Editors endorse the content or accuracy of any specific legal, personal, or other opinion, proposal or authority.
Copies may be requested by contacting the ABA at the address and telephone number listed above.
Property Insurance Law Committee Newsletter Winter 2009
3
MESSAGE FROM THE CHAIRDear Committee Members:Greetings and welcome to the Property Insurance Law Committee. I am looking for-
ward to an outstanding year for the Committee, which I hope includes a record attendanceat our Spring Program in May 2009.
My thanks to Jay Levin and his leadership as Chair over the past year. Jay has done anexcellent job and I hope to continue to move the Committee forward during my tenure.
Bill Lewis of Butler Papas in Tampa is Chair-Elect this year. Please feel free to contactBill ([email protected]) or me if you would like to become more involved in the
Committee or have any questions or suggestions. Our mission is to serve the members of this Committee and wewelcome your input and involvement.
The highlight of the coming year will be our Spring Program to be held May 14-16, 2009, at the Hyatt RegencyLost Pines Resort & Spa, located outside of Austin, Texas. The program, titled “De-Constructing Builder’s RiskCoverage,” is being chaired by Bill Lewis and Paul Burke. Please plan on attending this program. I encourage youto invite your clients and colleagues to this program. The flyer for the program is included as part of this Newsletter.The final brochure for the program should be available sometime in January 2009.
We are planning at least two teleconferences this year, the first of which will take place in the Spring. Tim Pennis in charge of our teleconferences. Please contact Tim ([email protected]) if you are interested in assisting withplanning and/or managing teleconferences.
The ABAAnnual Meeting will be held in Chicago in August 2009. We have submitted a proposal for a programon “The Changing Climate of Insurance.” The program, which will be co-sponsored by other committees, willaddress the risks, challenges and opportunities that insurers face in the context of global climate change. The pro-gram will address the impact on property insurance and claims, excess and reinsurance, and directors and officersand liability insurers. Steve Rogers and Thomas Cook of Zelle, Hofman, Voelbel, Mason & Gette are in charge ofthe program.
We will have several publications in the coming year. Kellyn Muller is in charge of the Committee Newsletter.If you have any case summaries or articles you would like to submit, please contact Kellyn ([email protected]).We will continue to publish “Recent Developments in Property Insurance Law” as part of the Tort, Trial &Insurance Practice Law Journal. We are in the process of updating our Bad Faith Annotations. Bill Schreiner isour publications chair and is in charge of both of these projects. Also, I am pleased that many of our members havehad articles published in The Brief. The TIPS Law Journal is also interested in law review articles. If you are inter-ested in publishing an article in The Brief or the TIPS Law Journal, please let me know.
I look forward to working with you in the coming year and encourage your participation.Clark SchirleClausen Miller, PCChicago, [email protected]
http://www.abanet.org/tips/scholarship.html
Property Insurance Law Committee 2009 Spring Meeting
SAVE THE DATEMay 14-16, 2009
Hyatt Regency Lost Pines Resort & SpaLost Pines (Austin area), Texas
FOR MORE INFORMATION ABOUT THE PROPERTY INSURANCE LAW COMMITTEEVISIT:
www.abanet.org/tips/property/home.html
De-Constructing Builder’s Risk Coverage
Program Chairs: William R. Lewis Butler Pappas Tampa, Florida (813) 281-1900 [email protected]
Paul W. Burke Drew Eckl & Farnham Atlanta, Georgia (404) 885-6310 [email protected]
Committee Chair: K. Clark Schirle Clausen Miller P.C. Chicago, Illinois (312) 606-7948 [email protected]
For information about the Lost Pines Resort & Spa, visit: www.lostpines.hyatt.com
To make room reservations at a rate of $269.00 per night, please call 800/233-1234
Property Insurance Law Committee Newsletter Winter 2009
5
FLORIDA SUPREME COURT’S READING OF LOOSE STATUTORYLANGUAGE LEAVES SURPLUS LINES CARRIERS IN DOUBTBy: Anthony J. Russo
In Essex Insurance Co. v. Zota,985 So. 2d 1036 (Fla. 2008), theFlorida Supreme Court recentlyruled that dozens of regulatorystatutes that apply to Florida’shighly-regulated, admitted domes-tic insurers also apply to out-of-state, surplus lines carriers, leavingthose carriers wondering how toconduct business in the state ofFlorida.
Chapter 627, Florida Statutes,contains the bulk of Florida’s statu-tory regulation of insurers. ThisChapter is made up of multiple“parts,” where each statutory “part”contains a number of individualstatutes. One part deals with ratesand contracts, another with life poli-cies, others with property and dis-ability insurance, and so on. Someloose language in a prefatory sectionof Part 1 of the Chapter, entitled“scope of this part” left open a ques-tion concerning whether surpluslines carriers were exempt from Part1 of Chapter 627, or exempt fromChapter 627, as a whole.
This question came to the forein the Zota case, a dispute betweenEssex Insurance Company (a sur-plus lines carrier) and its insured asto whether some regulatory provi-sions within Chapter 627, regard-ing the delivery of insurance poli-cies and liability for attorney fees,did or did not apply to surplus linescarriers. The Florida Surplus LinesServices Office (“FSLSO”), astate-sponsored, voluntary organi-zation of surplus lines carriers,appeared as amicus on behalf ofEssex. FSLSO argued that no partof the domestic insurer regulationsin Chapter 627 should be applied tosurplus lines.
The Florida Supreme Courtrejected FSLSO’s arguments andruled that the “scope” provision,despite its express languageexempting surplus lines carriersfrom the provisions of “thisChapter,” really only exempted sur-plus lines carriers from the provi-sions of Part One, thereby conclud-ing that the rest of the Chapterapplied to surplus lines carriers.The Court reasoned that theLegislature made a scrivener’serror when it used the word“Chapter,” and that it really meantto use the word, “Part.” This rulingraises far more questions than itanswered.
The biggest question raised sofar seems to be whether and howsection 627.410, a statute found inChapter 627, applies to surpluslines carriers. Section 627.410 pro-hibits carriers from using any poli-cy form in a policy issued inFlorida “unless the form has beenfiled with the [O]ffice [of InsuranceRegulation] by or in behalf of theinsurer which proposes to use suchform and has been approved by theoffice.” This issue is pendinganalysis in CNL Hotels & Resorts,Inc. v. Twin City Fire InsuranceCo., etc., 2008 WL 3823898 (11thCir. Aug. 18, 2008).
In CNL Hotels, the insuredargued that an exclusion in its sur-plus lines policy was not enforce-able because it had not been filedwith and approved by Florida’sOffice of Insurance Regulation(“OIR”), pursuant to section627.410. The matter made its wayto the Eleventh Circuit Court ofAppeals. There, the Florida OIRfiled an amicus brief explaining
why section 627.410 did notrequire Twin City, the surplus linescarrier, to first file its forms withthe OIR and obtain the OIR’sapproval before using those formsin policies it sold in Florida. As theOIR explained, Florida’s surpluslines law only requires non-admitted or unauthorized carriersselling insurance in the state ofFlorida to be deemed “eligible” bythe OIR, and the insurance theyseek to sell deemed “eligible forexport.”
To qualify as an admitted andauthorized insurer, privileged tosell insurance in Florida, an insurermust comply with restrictions on itscorporate structure, meet capitaland surplus requirements, andguarantee the qualifications of itsmanagers, officers and directors.These highly regulated, domesticcarriers must also file specifiedannual financial reports. A failureto comply with these requirementsresults in revocation of their certifi-cate to do business in Florida.
Because domestic, admittedcarriers do not have the capacity tomeet all of Florida’s residential andcommercial insurance needs, out-of-state carriers, not otherwiseauthorized to conduct business inFlorida, may sell their policiesunder Florida’s surplus lines law.Florida’s surplus lines law, found inChapter 626, was created to pro-vide orderly access to insurancecoverage sold by unauthorized car-riers – coverage that would other-wise not be available to Floridabusinesses and residents. The lawwas also designed to protectauthorized, admitted insurers, who
Continued on page 11
Property Insurance Law Committee Newsletter Winter 2009
6
MIDWEST FLOODS 2008: POTENTIAL ISSUES IF PROPERTY CLAIMSPOUR INBy: James R. Swinehart and Bryan S. Chapman
From June 7 through July 1,2008, significant flooding occurredacross parts of the Midwest, caus-ing damage to homes, businesses,and infrastructure. Heavy raincaused numerous rivers to overflowtheir banks, along with multiplelevee breaches throughout theMidwest. Iowa, Missouri, Indiana,Wisconsin and Illinois were thestates most affected by the flood-ing. Damages have been estimatedto exceed $8 billion.1
In Iowa, the severe flooding ledto evacuations of many homes andbusinesses. In eastern Iowa, alongthe Iowa River and Cedar River,flooding exceeded that of the Floodof 1993.2 Major levees in DesMoines and Cedar Rapids werebreached, forcing evacuations andcausing extensive damage. InCedar Rapids, city wells wereflooded and water use was restrict-ed, as the Cedar River crested at31.3 feet.3 In Iowa City, reportsestimated that 16-20 buildings atthe University of Iowa were underwater.4
In Indiana, the Governor pro-jected damages from the floodingto exceed $1 billion.5 ColumbusRegional Hospital closed for anextended period of time due topower outages, generator failures,
and extensive flooddamage.6 The hospi-tal is expected toresume operationby December 2008.7
In Missour i ,flooding caused theMississippi River tocrest 10 feet aboveflood stage in thecity of Hannibal on June 10 andcontinued to be at or near floodstage for the rest of the month. Alevee along the Mississippi River inLincoln County breached at the endof June, forcing the evacuation ofaround 100 homes.8
The Midwest flood waters couldgive rise to many insurance cover-age claims. Here, some of thepotential first-party property cover-age issues are identified, as well asholdings from courts on similarissues.A. DAMAGE TO PROPERTYBY FLOOD WATERS
1. The Flood And SurfaceWater ExclusionsMany property policies contain
a “flood” exclusion. Though thelanguage may slightly vary frompolicy to policy, a “flood” exclu-sion in a homeowners policy oftendoes not cover “any damage due to
flood, surface water, waves, tidalwater or overflow of a body ofwater, whether or not driven bywind.”9 Courts have routinelyfound these provisions to beenforceable. If the term “flood” isnot defined in the policy, courtsusually apply a plain meaning tothe term.
For example, in an Illinois case,where a man-made watercourseoverflowed and inundated theinsured’s home, the court held thatthe plain meaning of “flood” was“water that escapes from a water-course in large volumes and flowsover adjoining property in no regu-lar channel, ending up in an areawhere it would not normally beexpected.”10 Another Illinois courthas defined “flood” as the “risingand overflowing of a body of waterthat covers land not usually underwater.”11 In defining “flood,”Illinois courts have refused to
Continued on page 9
1 http://www.ncdc.noaa.gov/oa/climate/research/2008/flood08.html#impacts.2 Iowa City Press-Citizen. “Officials: Flood of 2008 To Be Worse Than Flood of ‘93.” Iowa City Press-Citizen, June 6, 2008.3 Adam Belz, “Cedar River Dropping Faster Than Expected,” Cedar Rapids Gazette, June 15, 2008, p.1.4 Diane Heidt, “Hancher Joins List of Flooded Buildings at UI,” Cedar Rapids Gazette, June 16, 2008, p.15 http://www.insideindianabusiness.com/newsitem.asp?ID=29796.6 The Republic. “CRH Communications, Saturday Update.”7 Id.8 “Floodwaters breach Mississippi River levee.” CNN.com (2008-06-27).9 ISO Homeowners Policies HO 00 03 10 00.10 Wallis v. Country Mut. Ins. Co., 723 N.E. 2d 376, 383 (Ill. App. 2000).11 Industrial Enclosure Corp. v. Northern Ins. Co., 2000 U.S. Dist. LEXIS 11567 at *11 (N.D. Ill. 2000). See also Western Nat’l Mut. Ins. Co. v. Univ. of North Dakota, 643 N.W.2d4, 9 (N.D. 2002) (finding that the plain meaning of flood as found in Webster’s Dictionary and Black’s Law Dictionary is “an overflowing of water on an area normally dry”).
Property Insurance Law Committee Newsletter Winter 2009
7
STEPPING INTO ARBITRATION AGREEMENTSBy: Todd C. Harshman
Although it may claim to be thebirthplace of modern arbitration,when someone mentions NewYork, does arbitration leap tomind? If so, you’re probably theodd duck. More likely are thoughtsof the Empire State Building,Broadway, Wall Street, TimesSquare, or Fifth Avenue.Interestingly, even these images(especially Wall Street and FifthAvenue) are strongly connected tothe factors that led to the growthand establishment of modern arbi-tration in the early 1900s: thevibrant sense of finance and com-merce associated with both the Cityand the State of New York.
As business grew after WorldWar I and more commercial transac-tions took place, the courts foundthemselves overwhelmed by com-mercial disputes, and the businesscommunity faced increasingly bur-dened courts. Because commercialand financial centers like New Yorkfelt these pressures acutely, the NewYork Chamber of Commerce andthe New York State Bar Associationresponded by co-sponsoring legisla-tion designed to bolster the effec-tiveness of arbitration as an alterna-tive legal remedy. Their efforts weresuccessful, and after enactment in1920, New York became the firststate with a modern arbitrationstatute. Other states quickly fol-lowed suit. Much of the language ofthese early arbitration acts was evenincluded in the Uniform ArbitrationAct (UAA), initially promulgated in1955, and revised in 2000.
What made the NewYork statutea “modern” arbitration statute wasthat it provided not only for thelegality of agreements to arbitratebut also for their irrevocability andenforcement. Previously, parties
could obtain money damages forbreach of an arbitration agreement,but not specific performance.Agreements to arbitrate were con-sidered freely revocable under NewYork statutory and common law.The modern statutes’ enforcementschemas – specifically the threat ofcourt-imposed sanctions – are cred-ited with establishing arbitration asthe force it is today.
In insurance litigation, and espe-cially in subrogation actions, arbitra-tion is steadily becoming a moreprominent feature. Those inclined toavoid arbitration because of itsexpense, a perceived lack ofaccountability or neutrality, the lackof a precedential impact, or anyother reason may soon find theirhands tied by the increasing proce-dural and contractual preference forarbitration. Procedurally, litigants inCalifornia may well be subject to astate rule, like California’s Rules ofCourt §3.811, that mandates arbitra-tion if the amount in controversy isless than fifty thousand dollars.Contractually, many insurers haveprospectively agreed to arbitrate par-ticular types of claims. For example,a subrogation action for propertydamage where the claim is under ahundred thousand dollars will haveto be arbitrated if both the subrogat-ed plaintiff and the defendant’sinsurer are among the hundreds ofsignatories to Arbitration Forums,Inc.’s, property program.
This trend towards arbitration isfurther seen in a recent decision ofan Illinois state appellate court.Like New York, Illinois is home toone of this country’s commercialand financial centers: Chicago.Earlier this year, an Illinois courtwas faced with the specific issue ofwhether an insurer has standing as
a subrogee to invoke an agreementto arbitrate between its insured anda third party tortfeasor. EquistarChemicals, LP v. Hartford SteamBoiler Inspection & Insurance Co.of Conn. (“Equistar”), 883 N.E.2d740 (Ill.App. 4 Dist., 2008).
The dispute arose when asubrogee-insurer (Hartford), pur-suant to a contract between itsinsured and Equistar, sought toarbitrate the question of whetherdamage to a turbine generatorowned by Hartford’s insured wascaused by the negligence of one ofEquistar’s employees. Id. at 743.Equistar objected to the arbitrationand petitioned the courts for a stayof same in order to resolve severalissues, including whether a non-signatory such as Hartford hadstanding to compel arbitrationbased solely on its subrogee status.Id. The trial court declined toaddress this question, findinginstead that the issue of standingwas itself an arbitrable issue – onethat should be decided by the arbi-trators rather than the courts. Id.
Because of the UAA’s initialgrant of jurisdiction to the courts todetermine “whether the parties haveagreed to arbitrate a dispute”(adopted in Illinois as 710 ILCS5/2(a), (b)), because the issuebefore the court was one of subro-gation law rather than somethingrequiring the “special skill” of arbi-trators, and because of a desire toavoid unnecessary delay, theEquistar decision overruled the trialcourt and unequivocally held thatthe courts may properly determine asubrogated insurer’s standing toinvoke an arbitration agreement. Id.at 743-46. The court noted initiallythat this was a matter of firstimpression for Illinois courts and
Property Insurance Law Committee Newsletter Winter 2009
8
stated, “Nationally, no known casehas yet held that a subrogee mayinvoke an arbitration agreementsigned by others.” Id. at 748.
In fact, only one case wasknown to have squarely addressedthe question prior to Equistar: aCalifornia appellate decision,Valley Casework, Inc. v. ComfortConstruction, Inc., held that absentdecisional authority addressing theinterplay between equitable subro-gation and contractual arbitration,or without an applicable exceptionto the general rule preventing non-signatories from invoking arbitra-tion clauses, there was no basis forallowing a subrogated insurer to doso. 90 Cal.Rptr.2d 779, 784-87(Cal.App. 4 Dist., 1999); seeEquistar, 883 N.E.2d at 748. TheEquistar court, however, was notswayed by this argument, seeing init “a simple reluctance to expandthe established list of exceptions tothe rule…where there was noprecedent for doing so.” Equistar,886 N.E.2d at 749.
More persuasive, the Equistarcourt opined, was a New Yorkappellate decision addressing theflip side of the Valley question:whether an arbitration agreementcould be enforced against anon-signatory subrogated insurer.See Solomon v. ConsolidatedResistance Co. of America, Inc.,468 N.Y.S.2d 791 (1983). Solomonheld that because the insured couldbe compelled to arbitrate the dis-pute, “then plaintiffs’ insurer willbe similarly bound.” Id. Flowingfrom the equitable concept that asubrogated insurer is put in theplace of its insured (often referredto as “stepping into the shoes” ofthe insured), the Equistar courtagreed with the Solomon principle:because Hartford’s insured wouldhave been required to arbitrate thenegligence action, then Hartford
should be similarly bound.Equistar, 883 N.E.2d at 749.
In considering the general ques-tion of whether a subrogee-insurermay invoke its insured’s contractualright to arbitration; the Equistar andSolomon decisions sit better withthe principles behind equitable sub-rogation. The law indulges the fic-tion that a subrogated insurer is theinsured, thus the insurer’s right torecover is defined by its insured’srights. Further, defenses applicableto the insured’s cause of actionapply with equal force to the subro-gation claim. In this respect, it isunclear why the Valley court cites,but does not discuss, the rule allow-ing a non-signatory to enforce anarbitration agreement when there isa “sufficient identity” between thenon-signatory and a signatory, as inthe case of agency. Valley, 90Cal.Rptr.2d at 785. A subrogatedinsurer “stepping into the shoes” ofits insured at least arguably meetsthis standard. This is not to say thatValley was wrongly decided. Forreasons not discussed in this article,including assertions of claimsagainst multiple non-signatories tothe arbitration agreement, aninjunction staying arbitration seemsappropriate in Valley.
However, the holding of Valleymay not survive outside of the factsof that case. As stated above, theValley decision implied that itsresult might have been different ifthe parties had presented “authorityfor the application of the equitabledoctrine of subrogation in the con-tractual arbitration context.” Id. at
786. In light of federal and statepolicies strongly favoring arbitra-tion of claims and disputes,Equistarmay be exactly the kind ofcase law that persuades a futureCalifornia court – and for that mat-ter courts across the country – torule in favor of a subrogated insur-er’s right to compel arbitration.
As arbitration organizations,facilities, and officials continue todevelop size, expertise, and sophis-tication, arbitration may becomemore and more of a “go to” optionfor resolving disputes, whethercommercial, financial, subrogation-based, or otherwise. Also, as moreand more construction contracts,leases, indemnification agreements,etc., call for arbitration of disputes,it is in the subrogated insurers’ owninterests to be able to institute pro-ceedings in the proper forum fromthe start, rather than spending themoney, time, and energy establish-ing a lawsuit, only to dismiss itwhen the alleged tortfeasor invokesan arbitration agreement with theinsured. Saving your clients’moneyand your time by going straight toarbitration in the appropriate casemay not be as glamorous as aBroadway play or a hard-foughtWall Street deal, but the good newsis that you don’t have to be in NewYork, Chicago, or any other com-mercial or industrial center to thinkabout adding this tool to your sub-rogation arsenal. Todd Harshman is an associate with Grotefeld &Hoffmann, LLP, San Francisco, CA, [email protected]. His practice is predominantly insurancesubrogation.
“In considering the general question of whether a subrogee-insurer may invoke its insured’s contractual right to arbitration;the Equistar and Solomon decisions sit better with the principlesbehind equitable subrogation. The law indulges the fiction thata subrogated insurer is the insured, thus the insurer’s right to
recover is defined by its insured’s rights.”
Property Insurance Law Committee Newsletter Winter 2009
9
differentiate between a floodcaused by the overflow of a man-made watercourse and one causedby the overflow of a natural water-course.12
Another Illinois court furtherdefined “surface water” as “waterderived from natural precipitationthat flows over or accumulates onthe ground without forming a defi-nite body of water or following adefined watercourse.”13 Surfacewater was not limited to waterwhose flow had not been altered bypaved surfaces, buildings, or othersurfaces.14
Wisconsin courts have notdefined “flood,” but in a casewhere rainwater entered aninsured’s basement while con-struction work was taking place,a court found that a provisionexcluding water damage causedby “flood” or “surface water”was unambiguous.15 AnotherWisconsin court defined “surfacewater” as “natural water that hasnot penetrated much below thesurface of the ground.”16
Where excessive rainwaterinundated a drug store after a boatcrashed through the store’s frontdoor, a Missouri court found the
exclusions for “flood” and “surfacewater” to be unambiguous and notinconsistent, resulting in the insur-er’s dismissal from the case.172. Is A Levee Failure A“Flood?”Levees broke at various loca-
tions along rivers in Iowa,Missouri, and Illinois, resulting inthe inundation of water in variousareas. A question that may arise iswhether water inundation from alevee failure is a “flood,” therebyplacing any loss from the inunda-tion within a “flood” exclusion.Though not addressed by a court inone of the Midwest states, thisissue was addressed by the U.S.Court of Appeals for the FifthCircuit18 and by the LouisianaSupreme Court19 in litigation aris-ing out of Hurricane Katrina.Applying the plain, ordinary andgenerally prevailing meaning of theword “flood,” both Courts held thatwater inundation due to a leveefailure is still a “flood,” for purpos-es of a “flood” exclusion.20
B. WHEN FLOODINGAFFECTS PROPERTY OTHERTHAN THE INSURED’S
1. Civil Authority CoverageIssuesBecause of the flooding, manda-
tory evacuations were ordered by
various mayors.21 Given theseorders, insureds may claim a loss ofbusiness income and seek civilauthority coverage, if available.Civil authority coverage may applywhen access to an insured’s proper-ty is prevented or prohibited by anaction or order of civil authority,issued as a direct result of damageto premises not the insured’s, but inthe same proximity.22 While lan-guage may vary, a typical “civilauthority” provision may read:
We will pay for the actualloss of Business Income yousustain and necessary ExtraExpense caused by action ofcivil authority that prohibitsaccess to the describedpremises due to direct physi-cal loss of or damage toproperty, other than at thedescribed premises, causedby or resulting from anyCovered Cause of Loss.23When presented with a claim
for this type of coverage, oneinquiry is whether the policyrequires an “order” by the civilauthority24 or simply “action” bythe civil authority,25 prohibitingaccess to the insured property.
Another inquiry is how proxi-mate the damaged property must beto the insured property. Again, pol-icy language may vary. A court has
MIDWEST FLOODS...Continued from page 6
12 Wallis, 723 N.E.2d at 383.13 Smith v. Union Automobile Indem. Co., 752 N.E. 2d 1261, 1268 (Ill. App. 2001).14 Id. at 1267.15 Josephson v. Am. Family Ins. Group, 610 N.W. 2d 230 (Wis. App. 2000).16 Atlantic Mutual Ins. Co. v. Lotz, 384 F. Supp. 2d 1292, 1302 (E.D. Wis. 2005).17 Madison Block Pharmacy v. USF&G, 620 S.W.2d 343, 346 (Mo. 1981).18 In Re Katrina Canal Breaches Consolidated Litigation, 495 F.3d 191 (5th Cir. 2007).19 Sher v. Lafayette Ins. Co., 2008 La. LEXIS 796 (La. Apr. 8, 2008).20 In Re Katrina, 495 F.3d at 214; Sher, 2008 La. LEXIS 796 at *9-10.21 City of Waterloo, Iowa, June 11, 2008, Press Release; City of Iowa City, Iowa, June 25, 2008, Mayor’s Withdrawal of Proclamation of Civil Emergency, Order for Curfew, andHour Restrictions for Certain Areas; Ken Fuson, Molly Hottle and Juan Perez Jr., “Cedar River Blasts Records; Residents Flee; Rail Cars Fall,” Des Moines Register, June 12, 2008.22 See Penton Media, Inc., v. Affiliated FM Ins. Co., 2006 WL 2504907 (N.D. Ohio Aug. 29, 2006), aff’d, 2007 WL 2332323 (6th Cir. Aug. 15, 2007).23 ISO Businessowner’s Policy BP 00 03 01 06.24 Altru Health Sys. v. American Protection Ins. Co., 238 F.3d 961, 962 (8th Cir. N.D. 2001) (civil authority clause provided that access to the described premises be “prohibitedby order of civil authority.”)25 Narricot Indus. v. Fireman’s Fund Ins. Co., 2002 U.S. Dist. LEXIS 19074 (E.D. Pa. Sept. 30, 2002)(civil authority provision did not mention “order,” only “action” on the partof a civil authority.)
10
Property Insurance Law Committee Newsletter Winter 2009
held that, when a civil authorityclause required the damage tooccur “adjacent to” the insured’spremises, the term “adjacent” wasunambiguous, which, under an ordi-nary and popular reading denoted asense of physical proximity.26Accordingly, damage occurring inan unspecified area at least twoblocks away from the insured’sproperty was not adjacent.27
Another question is whethercomplete access to the insured’sproperty must be prohibited. If acivil authority provision uses theword “prohibits,” courts have foundthat complete denial of access to theproperty, by the civil order, isrequired before coverage applies.28In one case arising out of the 9/11attacks, the court held that civilauthority coverage was availablefor the three days after September11, when access to the insured’sproperty was prohibited, but cover-age was not available once pedestri-an access was restored, even thoughvehicular traffic was restricted.29Therefore, no coverage was afford-ed when access to the insured’sproperty was simply impaired.2. Ingress/Egress CoverageIssuesFlood waters could cut off
access to the insured property
though the water may not havedamaged the insured propertyitself. In such circumstances, con-sideration must be given to whethera policy provides “ingress/egress”coverage, that is, coverage whereaccess to the insured’s premiseswas prevented, even though theinsured property was not physicallydamaged.30
In an Illinois case stemmingfrom 9/11, the City of Chicagosought recovery under theIngress/Egress provision of its pol-icy for lost revenue at O’HareAirport.31 The City of Chicagoargued that the damage to theWorld Trade Center preventedingress to and egress fromO’Hare.32 The court granted theinsurer’s motion for summary judg-ment, finding that the direct causeof business interruption at O’Harewas the FAA orders shutting downair commerce after the attacks, notthe physical damage to the WorldTrade Center.333. Contingent BusinessInterruption IssuesThe flooding could have dam-
aged the property of an insured’ssupplier or customer, such that theinsured might not be able to receivegoods or services from a supplier orprovide goods or services to a
customer.34 This scenario couldgive rise to a claim for lost businessincome under a contingent businessinterruption provision, if available.Courts have defined contingentbusiness interruption as insurancethat “protects against the loss ofprospective earnings because of theinterruption of the insured’s busi-ness caused by an insured peril toproperty that the insured does notown, operate, or control.”35
There are not many reportedcases dealing with contingent busi-ness interruption coverage. Onecase that dealt with contingentbusiness interruption issues isnoteworthy because it arose fromthe flooding of the MississippiRiver in 1993.36 This case held thatan indirect supplier to an insuredcould be a “supplier” for purposesof contingent business interruptioncoverage.37
Mr. Swineha r t ( j swineha r [email protected]) is a member and Mr.Chapman ([email protected]) is anassociate with Clausen Miller, PC inChicago, IL. Both specialize in claims andlitigation involving first-party propertyinsurance.
26 Syufy Enters. v. Home Ins. Co., 1995 U.S. Dist. LEXIS 3771 at *5 (N.D. Cal. Mar. 20, 1995)27 Id.28 Id.; See also, 730 Bienville Partners, Inc. v. Assurance Co. of Am., 2002 U.S. Dist. LEXIS 18780 at *6 (E.D. La. Sept. 30, 2002).29 Royal Indem. Co. v. Retail Brand Alliance, Inc., 33 A.D.3d 392, 394 (N.Y. App. Div. 1st Dep’t 2006).30 Fountain Powerboat Indus. v. Reliance Ins. Co., 119 F. Supp. 2d 552, 555 (E.D.N.C. 2000).31 City of Chicago v. Factory Mut. Ins. Co., 2004 U.S. Dist. LEXIS 4266 (N.D. Ill. Mar. 11, 2004).32 Id. at *7.33 Id. at *10.34 For an example of contingent business interruption policy language, see Miller’s Standard Insurance Policies Annotated, CPBI, vol. I, p. 459.7.35 Penton Media, Inc. v. Affiliated FM Ins. Co., 245 Fed. Appx. 495, 499 (6th Cir. 2007) citing CII Carbon, LLC v. Nat’l Union Fire Ins. Co. of La., Inc., 918 So. 2d 1060, 1061n.1 (La. Ct. App. 2005).36 Archer-Daniels-Midland Co. v. Phoenix Assur. Co., 936 F. Supp. 534 (S.D. Ill. 1996).37 Id. at 543-44 (Midwest Farmers, which provided grain through dealers and not directly to the insured, were suppliers.) But see, Pentair, Inc. v. Am. Guar. & Liab. Ins. Co., 400F.3d 613, 615 (8th Cir. 2005) (electrical substation supplying power to factories was not a “supplier” to insured because it did not supply a product or service ultimately used byinsured.)
Property Insurance Law Committee Newsletter Winter 2009
11
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had agreed to comply with theState’s onerous regulatory scheme,from unwarranted competition byunauthorized insurers who are notsubject to similar requirements.
Surplus lines carriers sell theirproducts through managing generalagents. A policy from an otherwiseunauthorized, surplus lines insurermay be sold only if the agent con-firms under oath that it has contact-ed three admitted insurers who donot, or cannot provide the insur-ance product needed by the cus-tomer. These unauthorized, out-of-state insurers are then permitted to“export” into the state of Floridathe insurance products that they sellin their home states. Surplus linescarriers typically insure high-risk,difficult to insure properties, andrisks in Florida that are not other-wise insurable by domestic, author-ized insurers.
By way of example, surpluslines carriers provide property andbuilder’s risk insurance for water-front condominiums, governmentbuildings, cell phone towers, newsmall and medium sized business-es, and coastal construction. Theyoffer several lines of insurance andtheir business in Florida is substan-tial. The FSLSO reports that nearly650,000 commercial and personalpolicies were issued in 2006. Farand away the greatest amount ofcoverage, as a function of premi-ums collected, was for commercialgeneral liability, commercialproperty, commercial package,
commercial inland marine,builder’s risk, and excess generalliability policies. Most of thesepolicies were written in hard-to-insure coastal counties. Since theadmitted market will not insure theoperations of social service organi-zations, cargo transportation,organized public events, or profes-sional services, such activitieswould be stalled in the absence ofsurplus lines insurance.
In the CNL case, the OIR’s ami-cus brief analyzed the legislationthat created the FSLSO. The leg-islative history plainly states thatsurplus lines insurance “is not sub-ject to Florida regulation of rates orforms and there is no insuranceguarantee fund protection if aninsurer becomes insolvent.” Basedon this analysis, and the legislativehistory, the OIR argued to theEleventh Circuit that despite theFlorida Supreme Court’s statementin the Zota case, nothing in the lawrequired surplus lines forms to befiled with and/or approved by theOIR before their forms could beused in policies issued in Florida.
With no mention made of theOIR’s analysis, the EleventhCircuit ruled that the SupremeCourt’s decision in Zota requiredthe case to be remanded to the fed-eral District Court for a determina-tion of whether an exclusion foundin Twin City’s surplus lines policy,found on a form that was neitherfiled with nor approved by the OIRwas void and, therefore, unenforce-able. A decision is pending.
The end result is the arrival of aperfect storm for surplus lines
carriers conducting business inFlorida. Chapter 627’s loose statu-tory language has been construedby the Florida Supreme Court in adecision containing sweeping lan-guage and no safe-harbor periodgranting the Legislature the time itneeds to correct the scrivener’serror. Florida insurance regulatorsnow find themselves at odds withtheir own state’s Supreme Courtand the federal district courts with-in the state, and no mechanismexists for surplus lines companiesor regulators to comply with theZota ruling. To say that all of thiscreates an uncertain business envi-ronment for surplus lines carriers isa gross understatement.
Ultimately a legislative fix willbe required to make clear exactlywhich regulations found in Chapter627 apply to surplus lines carriers.Until then, disgruntled surplus linesinsureds can be expected to seizeon the opening created by theSupreme Court’s ruling, and theLegislature’s slow action to correctit. All of this has heightened anxi-ety among surplus lines carriers onhow to comply with a law that wasnever intended to apply to theirbusiness, which will ultimatelyforce surplus carriers to decidewhether it is worthwhile to conductbusiness in Florida while the stateof the law is in such disarray.
Anthony J . Russo (a [email protected]) is a partner with ButlerPappas Weihmuller Katz Craig, LLP,Tampa, FL. He heads the firm’s AppellateDepartment, where he has gained extensiveappellate experience involving insurancecoverage matters.
FLORIDA...Continued from page 5
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rationale and the result they reachare powerful and should have influ-ence across the country.
Much has already been writtenabout these two cases, with mostcommentators focusing on whetherthey signal that the New York Courtof Appeals has now recognized, ormay soon recognize, a cause ofaction for bad faith failure to pay aclaim. It is not clear whether Bi-Economy created a new tort of “badfaith” in New York. However, it isclear that the Court in Bi-Economyapplied basic contract law to insur-ance contracts, in the same way thatcourts around the country purport toapply basic principles of contractconstruction to policyholder-insurerdisputes. However, when one consid-ers some unnecessary language in theopinion along with what was appar-ently written as a “follow-along”opinion in Panasia Estates, it seemsthat New York law may now recog-nize, or at least be closer to recogniz-ing, a separate action for “bad faith.”
The Bi-Economy opinion is farmore detailed and more interestingthan the opinion in Panasia Estates.The facts are fairly simple. The Bi-Economy Market lost its entireinventory and suffered heavy dam-age to its building and business per-sonal property in an October 2002fire. Harleysville provided bothproperty and business interruptioncoverage. Harleysville disputed theamount of loss and paid only$163,161.92 towards the propertyloss and only seven months of thebusiness interruption loss, despitethe fact that the policy provided for12 months of BI coverage. Bi-Economy never resumed operations.A year later, after what the courtcharacterized as an “alternativedispute resolution” proceeding (most
likely appraisal), Bi-Economy wasawarded an additional $244,019.88.Bi-Economy then sued Harleysvilleclaiming, inter alia, consequentialdamages resulting from the loss ofits business because Harleysvilleimproperly delayed paying the prop-erty claim and failed to timely paythe full amount of the BI claim. Bi-Economy also claimed that liabilityfor these consequential damages wasreasonably foreseeable and contem-plated by the parties at the time ofcontracting. Harleysville moved forpartial summary judgment on theconsequential damages claim andthe trial court granted the motion.The Appellate Division affirmed,holding that the policy specificallyexcluded coverage for consequentiallosses and, therefore, the claimedconsequential damages were notcontemplated by the parties whenthe contract was formed. The Courtof Appeals reversed.
New York’s high court relied onthe general contract law of conse-quential damages in holding that abreaching party is liable for thoserisks actually foreseen, or whichshould have been foreseen, at thetime the contract was made. Todetermine whether consequentialdamages were reasonably contem-plated by the parties, courts look tothe nature, purpose and particularcircumstances of the contract.Consequential damages, which aredesigned to compensate the non-breaching party for reasonably fore-seeable damages, must be proxi-mately caused by the breach. TheCourt noted that every insurancecontract contains an implicit cov-enant of good faith and fair dealing,including an understanding that theinsurer promises to investigate andpay covered claims in good faith.The court cited various cases for thenon-controversial proposition thatpolicyholders buy insurance not only
for the money to be paid in case ofloss, but for peace of mind and pro-tection against calamity.
The most important part of theBi-Economy holding is that theclear purpose of BI coverage is toensure that policyholders have thefinancial support necessary to sus-tain business operations in theevent of a loss. Therefore, accord-ing to the Court of Appeals, limit-ing a policyholder’s damages in theevent of a breach by the insurer topolicy proceeds plus interest doesnot place the policyholder in theposition it would have been in hadthe insurer properly performed thecontract. According to the Court:
Thus, the very purpose ofbusiness interruption cover-age would have madeHarleysville aware that if itbreached its obligationsunder the contract to investi-gate in good faith and paycovered claims it would haveto respond in damages to Bi-Economy for the loss of itsbusiness as a result of thebreach. [Citation omitted].10 N.Y.3d at 195. The purpose
of the contract of an insurance pol-icy is not just to receive money, butto receive it promptly to enable abusiness to get up and runningagain as quickly as possible.Therefore, according to the Courtof Appeals, the policy “included anadditional performance-based com-ponent: the insurer agreed to evalu-ate a claim, and to do so honestly,adequately and - most importantly -promptly.” Id. Finally, the Courtheld that an insurance company isliable for consequential damageswhere they are proximately causedby the insurer’s “excessive delay orimproper denial” of coverage. Id.
The Court of Appeals alsorejected the carrier’s argument that
BI-ECONOMY...Continued from page 1
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the policy’s exclusions for conse-quential loss show that the partiescontemplated and rejected the pos-sibility of consequential damagesin the event the carrier breached itsobligations under the policy. Theopinion makes clear that the poli-cy’s exclusion for consequentialloss applies to outside factorswhich increase the amount of cov-ered loss, not consequential dam-ages caused by an insurer’s failureto live up to its obligations. Thishas been almost lost in the shuffleof articles, blogs and commen-taries on the case. However, it is avery important holding and onecrucial to the result. It is also worthnoting that Harleysville’s argumentis not a new one as it has beenraised by insurers for years.However, any court which under-stands the Bi-Economy opinionshould be able to draw the sameline dis t inguishing betweenexcluded loss and damages avail-able for breach of contract.
The Panasia Estates opinion isfar more limited and contains farfewer facts. That case involvedHudson Insurance Company’sdenial of a claim for rain damageunder a builder’s risk policy. In theexact reverse of the situation in Bi-Economy, both the trial court andthe Appellate Division rejectedHudson’s attempt to have PanasiaEstate’s claims for consequentialdamages dismissed on preliminarymotion. Relying on its holding inBi-Economy, the Court of Appealsheld that consequential damagesmay be recovered under the factsas alleged, which included allega-tions that the insurer breached itsduty of good faith and fair dealingby failing to timely investigate andpay a covered claim. The Courtremanded for a determination ofwhether the specific damagessought by Panasia Estates were
fo reseeab le consequen t i a ldamages.
The Bi-Economy opinion hasalready been cited in several casesand the courts seem to have focusedon the Court of Appeals’ discussionof an insurer’s breach of the duty ofgood faith and fair dealing. Thus, inUnited States Fire Insurance Co. v.Bunge North America, 2008 WL3077074 (D.Kan. Aug. 4, 2008), thedistrict court applied New York lawand, relying on Bi-Economy andPanasia Estates, held that the poli-cyholder’s claim for consequentialdamages based on allegations ofbreach of the duty of good faith andfair dealing under environmentalliability policies could proceed. Thesame result was reached by the NewYork Supreme Court in Handy &Harman v. American InternationalGroup, 2008 WL 3999964 (N.Y.Sup. Aug. 25, 2008), where theCourt, relying on Bi-Economy, andPanasia Estates, held that an envi-ronmental pollution policy wasdesigned to pay for pollution reme-diation and to make sure the insuredhad the financial ability to finish theremediation. Therefore, AIG shouldhave assumed when it entered intothe policy that, if it breached itsobligations under the contract “totimely investigate in good faith andpay covered claims,” it would haveto respond for any consequentialdamages to the policyholder’s busi-ness. Finally, in Hoffman v.UnionMutual Stock Life InsuranceCo. of New York, 51 A.D.3d 633,857 N.Y.S.2d 680 (2008), theAppellate Division went even fur-ther, and affirmed the trial court’sdecision to allow an actual “badfaith” claim to proceed.
It is apparent that both lawyersand courts have read Bi-Economyand Panasia Estates as requiring thatpolicyholders allege that the insur-ance company breached the duty ofgood faith and fair dealing in orderto recover consequential damages.Many of those same people equatebreach of the duty of good faith andfair dealing with “bad faith” con-duct. This is an understandable, butincorrect, reading of Bi-Economy.While Bi-Economy may haveopened the door to policyholdersbringing “bad faith” claims underNew York law, it is more properlyread and applied as a straight for-ward application of traditional con-tract law to insurance policies.
In Bi-Economy, the Court ofAppeals based its decision on threebasic principles: (1) implicit inevery insurance contract is the car-rier’s duty to timely investigate andpay covered claims; (2) insurersknow and understand that policy-holders buy property insurance notonly to fund the cost to repair orreplace damaged property, but tokeep their businesses afloat whilerepairs take place; and (3) damagesarising out of an insurance compa-ny’s failure to timely pay the fullamount it owes are foreseeableconsequential damages under stan-dard contract law. None of thesethree principles is controversial.They stand up without reference toeither the insurance company’sduty of good faith and fair dealingor “bad faith.” While the breach ofthe duty of good faith and fair deal-ing constitutes a breach of theinsurance contract which allows therecovery of consequential dam-ages, under the reasoning of
“While Bi-Economy may have opened the door to policyholdersbringing “bad faith” claims under New York law, it is more
properly read and applied as a straight forward application oftraditional contract law to insurance policies.”
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Bi-Economy it is equally clear thatany other breach of the insurancecontract by the insurer will alsoallow the policyholder to recoverconsequential damages. The Courtof Appeals created unnecessaryconfusion by relying on the conceptof the duty of good faith and fairdealing to support the first princi-ple, i.e., that implicit in every insur-ance policy is the carrier’s duty toinvestigate and pay in a timelyfashion. That was an unnecessarystep in the analysis. The Court cre-ated additional confusion by rely-ing almost entirely on the allegedbreach of the duty of good faith andfair dealing in its far less analyticalopinion in Panasia Estates.
As a result, lawyers and courtshave focused on the Court ofAppeals’ reference to breach of theduty of good faith and fair dealingand given it a life of its own. Courtsrelying on Bi-Economy have viewedthe breach of duty as an element ofthe claim for consequential damages(so far the cases have all addressedthe issue only at the preliminarymotion or summary judgmentstage). Insurance companies will no
doubt use the language to argue that,absent a showing of something morethan mere failure to pay on time,consequential damages are notallowed. As discussed above, this isnot a correct reading of the case.
The Court of Appeals’ focus onthe timeliness and completeness ofthe insurance carrier’s conduct andits discussion of the duty of goodfaith and fair dealing to supportclaims for consequential damagesleaves many open questions. Whileit is clear how to plead a claim forconsequential damages under Bi-Economy and Panasia Estates,some of the questions practitionerswill now have to address include:(1) the scope of discovery policy-holders will be allowed as they try toprove that the insurer’s investigationwas incomplete and its paymentinadequate and untimely; (2) thestandard to which insurance compa-nies will be held, i.e., whether, as Bi-Economy implies, they are strictlyliable for consequential damages ifthey breach the contract by failing topay in full and on time, or are thereany special “insurance related”defenses such as advice of counsel
or a good faith analysis of coverageor damages; (3) what types of proofmust a policyholder present to showthat the consequential damages wereor should have been reasonablyforeseeable at the time of contract-ing; (4) whether foreseeability is anissue of law to be decided on motionor an issue of fact to be presented tothe jury; and (5) when are theclaimed consequential damages toospeculative to be allowed. These arejust some of the issues that will befleshed out over time as more andmore New York state and federalcourts are faced with claims for con-sequential damages.
At all events, it is clear that theremedies available to policyholderswhen an insurer does not pay havebeen significantly enhanced, thestakes for all parties have now goneup, and the cost of denying propertyinsurance coverage cases in NewYork will increase substantially.
Jay M. Levin is a member of theInsurance Recovery Group of Reed SmithLLP, in Philadelphia, PA, [email protected]. He is the immediate past Chairof the Property Insurance Law Committee.
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NOMINATIONS FOR THE 2009 AWARD MUST BESUBMITTED ONLINE BY FEBRUARY 15, 2009 AT:
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Special thanks to The Edmund S. Muskie Archives and Special CollectionsLibrary for their use of the Edmund S. Muskie photograph.
THE TORT TRIAL & INSURANCE PRACTICE SECTION COUNCILWILL SELECT ONE RECIPIENT WHO WILL RECEIVE THE AWARDAT THE AUGUST 2009 ABA ANNUAL MEETING IN CHICAGO, IL.
Property Insurance Law Committee Newsletter Winter 2009
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