A homeowner’s insurance policy is a contract between the homeowner and the insurance company to fairly pay damage claims as they arise. It is a contract in which the insured pays a premium for the peace of mind, or comfort, of knowing that he or she will be protected in the event of a catastrophe.
Under New York law, implicit in the contract is the insurance carrier’s promise that it will deal with its insured fairly and settle claims in good faith. What happens, however, when the insurance carrier breaks the contract, refuses to pay claims, or unfairly minimizes the damages, as has been alleged in the many litigations arising after Superstorm Sandy? What are the homeowner’s rights and what damages is the homeowner entitled to from the insurance carrier?
At the outset, it should be clear that the homeowner is entitled to the benefit of the contract and should recover the reasonable value of the provable losses or the reasonable value to repair the damage, as long as the damage is covered under the terms of the policy. For example, if the homeowner’s policy provides for coverage for water damage from roof leaks, the homeowner is entitled to the reasonable costs associated with repairing the damage from the leak. These losses are called actual losses.
The more interesting and difficult question, however, is whether the homeowner can recover damages beyond the terms of the policy, for losses, which might be termed consequential damages. For example, can the homeowner claim damages for his or her aggravation and upset due to the carrier’s bad faith failure to honor the policy, or recover the lost wages caused by the inability to work because of the insurance carrier’s failure to promptly resolve the claim?
New York’s highest court has opened the door at least a crack to such claims. In two important cases in the field of insurance law damages, the Court of Appeals noted that, under New York law, consequential damages could be available in a breach-of contract action against an insurance carrier where those damages are the type that the parties’ reasonably contemplated when the insurance was written. The rationale is that a party to a contract is liable for those risks foreseen, as well as those risks, which should have been foreseen at the time the contract was made. The consequential damages, however, must be specific, and not speculative or conjectural. So, for example, if the claim for consequential damages was for loss of future profits from a business venture which was shut down by virtue of the insurance carrier’s bad faith delay in paying claims, the loss would have to be capable of proof by known and accepted measures of assessing that type of loss.
The decision in Chafee v. Farmers New Century Insurance Company, 2008 WL 4426620, represents an example of the possibility of raising consequential damage claims in a homeowner’s insurance context. In Chafee, a homeowner sued his insurer following a fire, which burned the house and its contents. The homeowner claimed the insurance carrier failed to pay the damages incurred, unreasonably delayed review of the claim and misrepresented the benefits of the policy. The homeowner sued for the damages caused by the fire and sought additional damages caused by the insurance carrier’s frustration of the homeowner’s own attempt to lessen or mitigate the damage caused by the fire. The insurance company asked the Court to dismiss those additional claims as outside of the scope of the contract. The Court refused, however, finding that the claims were properly part of the homeowner’s breach of contract case and the claims could go to trial.
New York courts have also held that, although rare, there can be circumstances in which an insurance company’s conduct is so outrageous it can give rise to a claim for negligent or intentional infliction of emotional distress. In Ural v. Encompass Ins. Co. of America, 97 A.D.3d 562 (2d Dep’t 2012), the Court indicated that to support such a claim, the insurance carrier’s conduct would have to “so transcend the bounds of decency as to be regarded as atrocious and intolerable in civilized society.” In that case the claims did not rise to such a level and the claim was dismissed.
In summary, then, when the insurance carrier fails to fulfill the promises in its insurance contract, the homeowner can assert a claim for breach of contract, and within that claim demand reimbursement of actual damages. In addition, the homeowner can seek “consequential damages” that are reasonably foreseeable, specifically identified and within the contemplation of the parties at the time the insurance contract was entered into. Nonetheless, it is equally clear that the bar to proving consequential damages is high and it will be the rare claimant whose proof has strong enough legs to clear the bar.