Belco Petroleum Corp. v. AIG Oil Rig, Inc.

• Decision Date: 17 January 1991
• Citation: 164 A.D.2d 583,565 N.Y.S.2d 776
• Parties: , 59 USLW 2472 BELCO PETROLEUM CORPORATION and Enron Corp., Plaintiffs-Appellants, v. AIG OIL RIG, INC., et al., Defendants-Respondents. In the Matter of the Arbitration of Certain Controversies Between AIG SPECIALTY AGENCIES, INC., Petitioner-Respondent, v. BELCO PETROLEUM CORPORATION, a wholly-owned subsidiary of Enron Corporation and Enron Corporation (formerly known as Internorth Inc.) and/or In Holdings, Inc., Respondents-Appellants.
• Court: New York Supreme Court — Appellate Division

Page 776

565 N.Y.S.2d 776

164 A.D.2d 583, 59 USLW 2472

BELCO PETROLEUM CORPORATION and Enron Corp., Plaintiffs-Appellants, v. AIG OIL RIG, INC., et al., Defendants-Respondents.

In the Matter of the Arbitration of Certain Controversies

Between AIG SPECIALTY AGENCIES, INC., Petitioner-Respondent, v. BELCO PETROLEUM CORPORATION, a wholly-owned subsidiary of

Enron Corporation and Enron Corporation (formerly

known as Internorth Inc.) and/or In

Holdings, Inc., Respondents-Appellants.

Supreme Court, Appellate Division First Department.

Jan. 17, 1991.

David R. Hyde, of counsel (George Wailand and David B. Shontz with him on the brief; Cahill Gordon & Reindel, New York City, attorneys), for defendants-respondents.

Jack G. Stern, of counsel (John E. Hoffman, Jr., David J. Dykhouse, Henry Weisburg, Deborah R. Meshulam and Valorie K. Vojdik with him on the brief; Shearman & Sterling, New York City, attorneys), for plaintiffs-appellants.

Before KUPFERMAN, J.P., and WALLACH, SMITH and RUBIN, JJ.

WALLACH, Justice.

The appeal raises several issues, the most important being whether punitive damages can be awarded against an insurance company for conduct amounting to an unfair claim settlement practice as defined by Insurance Law section 2601. That issue--whether the common law right to punitive damages is "preempted" by Insurance Law § 2601--is a pure question of law, and we address it first.

PREEMPTION

Insurance Law section 2601 prohibits an insurance company from engaging in "unfair claim settlement practices". The term is defined to include certain acts "committed without just cause and performed with such frequency as to indicate a general business practice" ( § 2601[a]), the most embracive of which is "not attempting in good faith to effectuate prompt, fair and equitable settlements of claims submitted in which liability has become reasonably clear". ( § 2601[a][4].) ¹ The Superintendent of Insurance is authorized to determine whether an insurer has engaged in an unfair claim settlement practice, and to punish those who do with a fine not exceeding $500 for each instance of noncompliance (Insurance Law § 109[c][1]. Unlike violations of the Insurance Law generally (see, Insurance Law § 109[a], section 2601 provides that an unfair claim settlement practice "shall not be a misdemeanor" ( § 2601[c]).

Insureds have frequently invoked section 2601 against insurers as the basis for a claim of punitive damages. On each occasion that such has been considered by the Court of Appeals, the court assumed, arguendo, that section 2601 could be invoked by private litigants for that purpose, but nevertheless rejected the claim for failure to plead or prove a "general business practice" (Halpin v. Prudential Ins. Co. of Amer., 48 N.Y.2d 906, 908, 425 N.Y.S.2d 48, 401 N.E.2d 171 [claim for punitive damages under section 2601 dismissed because "the one instance of unfair settlement practice pleaded [does] not constitute a general business practice within the meaning of the statute"]; Hubbell v. Trans World Life Ins. Co. of New York, 50 N.Y.2d 899, 901, 430 N.Y.S.2d 589, 408 N.E.2d 918 ["nothing has been shown, either via records of the Insurance Department or records of other litigation involving the same carrier or by other means, to demonstrate that the conduct complained of by the plaintiff occurred in more than this isolated instance"]; Dano v. Royal Globe Ins. Co., 59 N.Y.2d 827, 829, 464 N.Y.S.2d 741, 451 N.E.2d 488 [plaintiff's papers bereft of evidentiary proof of a general business practice as required by the statute]. Turning as they do on the failure of the plaintiff-insured to plead or prove a general business practice, these cases do not serve to explain the meaning of "bad faith" as used in section 2601, or otherwise shed light on the nature and quality of the acts that constitute an unfair claim settlement practice, and, as such, would justify an award of punitive damages if committed with such frequency as to indicate a general business practice.

Despite the very limited extent of the monetary penalty authorized under section 2601, and notwithstanding that unfair claim settlement practices are expressly stated not to be crimes, we accept the premise of the defendant-insurers here, and indeed consider it to be virtually self-evident, that section 2601, with its references to "bad faith" and a "general business practice", was intended to prohibit the type of wrongdoing for which punitive damages have been traditionally awarded in a fraud case, ² as well as wrongdoing that is less egregious. The leading case setting forth the standard for an award of punitive damages in a fraud case is, of course, Walker v. Sheldon, 10 N.Y.2d 401, 223 N.Y.S.2d 488, 179 N.E.2d 497: the wrongdoing must be so "gross", evince such a "high degree of moral turpitude", and demonstrate "such wanton dishonesty as to imply a criminal indifference to civil obligations"; in addition, the wrongdoing must be "aimed at the public generally" (id., at 405, 223 N.Y.S.2d 488, 179 N.E.2d 497; but see, Borkowski v. Borkowski, 39 N.Y.2d 982, 983, 387 N.Y.S.2d 233, 355 N.E.2d 287 ["It is not essential, as the Appellate Division stated, that punitive damages be allowed in a fraud case only where the acts had been aimed at the public generally."]. ³

Recently, the Second Department, in Roldan v. Allstate Ins. Co., 149 A.D.2d 20, 544 N.Y.S.2d 359, explaining and reaffirming several of that court's earlier precedents (Kurrus v. CNA Ins. Co., 115 A.D.2d 593, 496 N.Y.S.2d 255; Mavroudis v. State Wide Ins. Co., 121 A.D.2d 433, 503 N.Y.S.2d 133; Kent Centre Assocs. v. Greater N.Y. Mut. Ins. Co., 139 A.D.2d 630, 527 N.Y.S.2d 269), citing authority from this court as well (Cohen v. New York Property Ins. Underwriting Assn., 65 A.D.2d 71, 410 N.Y.S.2d 597), and proceeding on the manifestly correct premise that section 2601 serves the "very same purpose as that which justifies the imposition of punitive damages in private actions, namely, the purpose of deterring conduct which is harmful to the public-at-large" (supra, 149 A.D.2d at 41, 544 N.Y.S.2d 359), has held that wrongdoing that might otherwise support a claim for punitive damages cannot avail as against an insurer, since the power to punish insurers for such wrongdoing is, by virtue of section 2601, exclusively with the Superintendent of Insurance--in other words, that section 2601 preempts the common law right to punitive damages (accord, Telemaque v. New York Property Ins. Underwriting Assn., 162 A.D.2d 444, 556 N.Y.S.2d 391 [2nd Dept]; Kapeleris v. Colonial Penn Ins. Co., 163 A.D.2d 918, 559 N.Y.S.2d 847 [4th Dept. deciding an appeal from the Supreme Court, Kings County]. Thus, under Roldan, an insurer who, for example, regularly bribes witnesses or destroys evidence (or, more akin to the alleged wrongdoing in this case, schemes to defraud [Penal Law § 190.60] in order to avoid payment of meritorious claims--conduct that surely would excite the interest of the District Attorney as well as the Superintendent of Insurance--would not be subject to a claim for punitive damages.

We respectfully disagree, and decline to follow Roldan, for reasons that go quite beyond our own recent precedents, which, while invariably rejecting claims for punitive damages against insurers for failure to plead or prove a public wrong, or, as it were, a general business practice, have continued to recognize, at least implicitly, the availability of punitive damages upon an appropriate showing of morally reprehensible conduct aimed at the general public ( see, e.g., Samovar of Russia Jewelry Antique Corp. v. Generali, The General Ins. Co. of Trieste and Venice, supra, 102 A.D.2d at 281, 476 N.Y.S.2d 869 ["It is well established in this State that a claim for punitive damages against an insurance company requires a showing of morally reprehensible conduct directed at the general public, i.e., a public wrong as opposed to a mere private wrong. The operative standard originated in Walker v. Sheldon (10 NY2d 401 (223 N.Y.S.2d 488, 179 N.E.2d 497)) a fraud action"]; Supreme Automotive Mfg. Corp. v. Continental Casualty Co., 126 A.D.2d 153, 156, 512 N.Y.S.2d 820, and cases cited therein [the wrongdoing alleged, consisting of bribery and destruction of evidence, "although legally and morally reprehensible", does not support a claim for punitive damages absent proof that it was of a continuous and systematic nature and aimed at the public generally]; see also, Riordan v. Nationwide Mutual Fire Ins. Co., 756 F.Supp. 732, 742 [Roldan "does not now appear to reflect the prevailing New York view" and "espous(es) a rule at variance with established precedent"].

Roldan's rationale is that "public officers or institutions are better suited than private litigants for the redress of essentially public, rather than private, wrongs, and that the imposition of those administrative or penal sanctions which are available to the State or its public agencies should displace the awarding of punitive damages in private lawsuits as the chief, if not exclusive, method of punishing and deterring misconduct which is aimed at the public in general." (supra, 149 A.D.2d at 42, 544 N.Y.S.2d 359). But if this be true--if courts, acting in the context of private lawsuits, really are not adequate to the task of adjudicating an allegation of wrongdoing "aimed at the public in general", and of then rationally admeasuring, by way of a monetary award, the "redress demanded by the public interest" (see, Walker v. Sheldon, supra, 10 N.Y.2d at 407, 223 N.Y.S.2d 488, 179 N.E.2d 497, Van Voorhis, J. dissenting, quoting, Dain v. Wycoff, 7 N.Y. 191, 194)--then it should be left to the Legislature, not the courts, or at least not an intermediate appellate court, to say so this because of the rule of statutory construction, not mentioned in Roldan, that " 'when the common law gives a remedy, and another remedy is provided by statute, the latter is cumulative, unless...