In a recent unanimous decision, the Appellate Division First Department provided clarity on the pleading requirements for policyholders seeking special or consequential damages allowed under the landmark decision of Bi-Economy Market v. Harleysville Insurance Company of New York, 856 N.Y.S.2d 505 (N.Y., Feb. 19, 2008). Under Bi-Economy, policyholders may seek special or consequential damages resulting from an insurance company’s failure to provide coverage if such damages were foreseen or should have been foreseen when the insurance contract was made. Id. at 508. In its prior ruling in Panasia Estates v. Hudson Insurance Company, the First Department noted that the “reference to such damages as ‘special’ in Bi-Economy Mkt. … was not intended to establish a requirement of specificity in pleading.” 889 N.Y.S.2d 452, 453 (N.Y.A.D. 1 Dept., Dec. 15, 2009). The ruling, however, left open the question of what pleading requirements policyholders had to meet in order to state a claim for special damages, a question that it recently answered in D.K. Property v. National Union Fire Insurance Company of Pittsburgh, PA, 2019 WL 237454 (N.Y.A.D. 1 Dept., Jan. 17, 2019).
In D.K. Property, the court held that “there is no heightened pleading standard requiring plaintiff to explain or describe how and why the ‘specific’ categories of consequential damages alleged were reasonable and foreseeable at the time of contract.” Id. at *2. Following the well-established standard that on a motion to dismiss the court must only determine whether the facts as alleged fit within any cognizable legal theory, the D.K. Property court reasoned that “the inquiry is not whether plaintiff will be able to establish its claim, but whether plaintiff has stated a claim.” Id. Accordingly, the proof of foreseeable consequential damages “should not be decided on a motion to dismiss and must await a fully developed record.” Id. This is undoubtedly the correct result, as consequential damages from a breach of contract have been recognized simply as a part of the measure of contract damages since Hadley v. Baxendale, 156 Eng. Rep. 145, 9 Ex. 341 (1854).
The D.K. Property decision is important for policyholders because insurance companies may employ dilatory practices in dragging out their investigation of a claim, such as unreasonable and burdensome information demands, unnecessary monitoring, data collection, inspections, and reinspections. Yet during this possibly lengthy investigation, the insurance policy generally requires that the policyholder, often at great expense, take all reasonable steps to protect the covered property from further damage by a covered cause of loss. The D.K. Property decision provides policyholders assurance that they will have an opportunity to develop evidence to support their consequential damages claims rather than have them prematurely dismissed in the early stages of litigation.
Reed Smith’s insurance recovery lawyers can help policyholder resolve disputes with their insurance companies, including recovery of foreseeable consequential damages that policyholders may have suffered because of their insurance company’s failure to provide, or delay in providing, insurance coverage. Even if you do not have any pending insurance claims, now may be the time to evaluate your existing coverages to see if you are adequately protected for future events that might affect your business. Reed Smith can assist you in reviewing your existing coverages to assess whether you have any gaps that should be filled. Please contact the authors of this Alert, any Reed Smith Insurance Recovery Group attorney, or any Reed Smith attorney with whom you routinely work with any questions.