What is the Law of Bad Faith in New York Two Years after Bi-Economy and Panasia -- Have The Questions Been Answered?
On February 19, 2008, the New York Court of Appeals issued decisions in Bi-Economy Market Inc. v. Harleysville Ins. Co. of New York, 10 N.Y.3d 187 (Ct. App. 2008) and Panasia Estates, Inc. v. Hudson Ins. Co., 10 N.Y.3d 200 (Ct. App. 2008), holding that in certain cases involving first party business interruption and property claims, insurers could be liable for consequential damages – without regard to policy limits – for breach of contractual obligations. These decisions were remarkable because they did not address decades of New York precedent that had established and shaped the law of "bad faith" and extra-contractual damages, based on "gross disregard" directed toward the insured.2 In articles we wrote shortly after the decisions were issued, we observed, "The rules were clear. Now, it's a whole new ball game and there aren't any rules."3 (Other articles have raised similar and additional questions.4)
Bi-Economy and Panasia involved the narrow question of whether policyholders could recover damages in excess of policy limits under first party business interruption and property policies. In both cases, the insurer delayed in investigating and processing the claim, and in making payments, and the insured incurred additional damages beyond policy limits. The Court found that the insurers breached their contractual obligations and that they were liable for the foreseeable consequential damages that resulted. However, these decisions left many questions unanswered. These included, first and foremost, is a finding of bad faith or a breach of the covenant of good faith and fair dealing necessary for damages in excess of policy limits to be recoverable by an insured? If so, what standards govern an insurer's conduct and any finding of bad faith? Do these apparently new principles (which may or may not require a finding of bad faith) apply to third party claims such as those resulting from failure to defend or settle, which have always required a finding of bad faith? Are the rules on punitive damages implicated or affected?