An insured can assert a claim against an insurer for certainadditional losses when the insurer acts in bad faith andcontributes to the policyholder's additional loss despite a policyexclusion of such damages from coverage, according to a New YorkState Court of Appeals decision.

In a 5-2 decision the court ruled that an insured can assert aclaim for consequential damage for bad faith even though theinsurance contract excludes such damages from coverage.

The majority opinion, written by Judge Eugene Pigott, statedthat Bi-Economy Market, a wholesale and retail meat market inRochester, N.Y., suffered structural damage and a complete loss offood inventory due to a fire in 2002. Harleysville InsuranceCompany insured Bi-Economy under a Deluxe Business Owner's policythat covered replacement costs on the building and contents. Italso covered business interruption for up to one year from the dateof the fire.

Judge Pigott explained that Harleysville disputed Bi-Economy'sclaim for actual damages, and paid a low sum that was eventuallyraised through an alternative dispute resolution. Furthermore,Harleysville offered to pay seven months of lost business incomerather than the full 12 months provided under the policy.Bi-Economy never resumed business operations.

Bi-Economy later filed an action against Harleysville for badfaith claims handling and breach of contract. Bi-Economy soughtconsequential damages for "the complete demise of its businessoperation in an amount to be proved at trial."

The state Supreme Court and the state Appellate Division sidedwith Harleysville, noting that Bi-Economy's insurance policy,issued by Harleysville, "expressly exclude[d] coverage forconsequential losses, and thus it cannot be said that[consequential] damages were contemplated by the parties when thecontract was formed."

Citing a previous ruling, Kenford Co. v. County of Erie, JudgePigott declared in his decision, "It is well settled that in breachof contract actions 'the non-breaching party may recover generaldamages which are the natural and probable consequence of thebreach.'"

To impose consequential damages, Judge Pigott said, "The partybreaching the contract is liable for those risks foreseen or whichshould have been foreseen at the time the contract was made."

He added, "Here, the claim is that Harleysville failed topromptly adjust and pay the loss, resulting in the collapse of thebusiness. When an insured in such a situation suffers additionaldamages as a result of an insurer's excessive delay or improperdenial, the insurance company should stand liable for thesedamages."

Judge Pigott also dismissed Harleysville's contention of acontractual exclusion for consequential losses. The exclusion,Pigott said, does not demonstrate that the parties "contemplatedand rejected the recoverability of consequential damages in theevent of a contract breach." The consequential losses referred toin the contract, Judge Pigott asserted, "clearly refer to delaycaused by third party actors or by the '[s]uspension, lapse orcancellation of any license, lease, or contract."

In his dissenting opinion, Judge Robert S. Smith contended thathonest insurers may be unintentionally swept up in the consequencesof the decision. He said that jurors who will likely know little ofthe insurer's or insured's business will now have to considerquestions of conduct that are "nearly unanswerable." Judge Smithsaid, "The jurors will no doubt do their best, but it is not hardto predict where their sympathies will lie," Judge Smith wrote.