Bi-Economy Market v. Harleysville Ins. Co.

• Decision Date: 19 February 2008
• Docket Number: 14.
• Citation: Bi-Economy Market v. Harleysville Ins. Co., 886 N.E.2d 127, 10 N.Y.3d 187, 856 N.Y.S.2d 505 (N.Y. 2008)
• Parties: BI-ECONOMY MARKET, INC., Appellant, v. HARLEYSVILLE INSURANCE COMPANY OF NEW YORK et al., Respondents.
• Court: New York Court of Appeals Court of Appeals

886 N.E.2d 127

10 N.Y.3d 187

BI-ECONOMY MARKET, INC., Appellant, v. HARLEYSVILLE INSURANCE COMPANY OF NEW YORK et al., Respondents.

14.

Court of Appeals of New York.

February 19, 2008.

Lipsitz & Ponterio, LLC, Buffalo (Kathleen A. Burr and John Ned Lipsitz of counsel), for appellant.

Chelus, Herdzik, Speyer & Monte, PC, Buffalo (Michael F. Chelus and Christopher R. Poole of counsel), for respondents.

Wilkofsky, Friedman, Karel & Cummins, New York City (Mark L. Friedman of counsel), for New York Public Adjusters Association, amicus curiae.

Anderson Kill & Olick, PC, New York City (Eugene R. Anderson and Richard P. Lewis of counsel), and Amy Bach, Mill Valley, California, for United Policyholders, amicus curiae.

Rivkin Radler LLP, Uniondale (Evan H. Krinick, Michael A. Troisi and Michael P. Versichelli of counsel), for New York Insurance Association and others, amici curiae.

OPINION OF THE COURT

PIGOTT, J.

In this action brought by an insured against an insurer for breach of a commercial property insurance contract, the principal issue presented is whether the insured can assert a claim for consequential damages. Under the circumstances of this case, we hold that it can.^*

I.

Bi-Economy Market, a family-owned wholesale and retail meat market located in Rochester, New York, suffered a major fire in October 2002, resulting in the complete loss of food inventory and heavy structural damage to the building and business-related equipment. At the time of the fire, Bi-Economy was insured by defendant Harleysville Insurance Company under a "Deluxe Business Owners" policy that provided replacement cost coverage on the building as well as business property or "contents" loss coverage.

The policy also provided coverage for lost business income, what is commonly referred to as "business interruption insurance," for up to one year from the date of the fire. Specifically, the contract stated that Harleysville would "pay for the actual loss of Business Income ... sustain[ed] due to ... the necessary suspension of [Bi-Economy's] `operations' during the `period of restoration.'" Business income is defined as the "(1) Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred; and (2) Continuing normal operating expenses incurred, including payroll." "Period of restoration" is defined as the period of time that "[b]egins with the date of direct physical loss or damage" and "[e]nds on the date when the property ... should be repaired, rebuilt or replaced with reasonable speed and similar quality."

Following the fire, Bi-Economy submitted a claim to Harleysville pursuant to the terms of the contract. Harleysville disputed Bi-Economy's claim for actual damages, and advanced only the sum of $163,161.92. More than a year later, following submission of their dispute to alternative dispute resolution, Bi-Economy was awarded the additional sum of $244,019.88. During all this time, Harleysville offered to pay only seven months of Bi-Economy's claim for lost business income, despite the fact that the policy provided for a full 12 months. Bi-Economy never resumed business operations.

In October 2004, Bi-Economy commenced this action against Harleysville, asserting causes of action for bad faith claims handling, tortious interference with business relations and breach of contract, seeking consequential damages for "the complete demise of its business operation in an amount to be proved at trial." Bi-Economy alleged that Harleysville improperly delayed payment for its building and contents damage and failed to timely pay the full amount of its lost business income claim. Bi-Economy further alleged that, as a result of Harleysville's breach of contract, its business collapsed, and that liability for such consequential damages was reasonably foreseeable and contemplated by the parties at the time of contracting.

Harleysville answered, and subsequently moved for leave to amend its answer to raise the defense that the contract excluded consequential damages and for partial summary judgment dismissing Bi-Economy's breach of contract cause of action. In support of its motion, Harleysville cited several contractual provisions excluding coverage for "consequential loss."

Supreme Court granted the motion and the Appellate Division affirmed, holding that "the insurance policy expressly exclude[d] coverage for consequential losses, and thus it cannot be said that [consequential] damages were contemplated by the parties when the contract was formed" (37 A.D.3d 1184, 1185, 829 N.Y.S.2d 795 [2007] [internal quotation marks and citations omitted]). The Appellate Division granted Bi-Economy leave to appeal and certified the following question: "Was the order of this Court, entered February 2, 2007, properly made?" We conclude that it was not.

II.

Bi-Economy contends that the courts below erred in dismissing its breach of contract claim seeking consequential damages for the collapse of its business resulting from Harleysville's failure to fulfill its obligations under the contract of insurance. We agree and therefore reverse the order of the Appellate Division and reinstate that cause of action.

It is well settled that in breach of contract actions "the nonbreaching party may recover general damages which are the natural and probable consequence of the breach" (Kenford Co. v. County of Erie, 73 N.Y.2d 312, 319, 540 N.Y.S.2d 1, 537 N.E.2d 176 [1989]). Special, or consequential damages, which "do not so directly flow from the breach," are also recoverable in limited circumstances (American List Corp. v. U.S. News & World Report, 75 N.Y.2d 38, 43, 550 N.Y.S.2d 590, 549 N.E.2d 1161 [1989]). In Kenford, we stated that

"[i]n order to impose on the defaulting party a further liability than for damages [which] naturally and directly [flow from the breach], i.e., in the ordinary course of things, arising from a breach of contract, such unusual or extraordinary damages must have been brought within the contemplation of the parties as the probable result of a breach at the time of or prior to contracting" (73 N.Y.2d at 319, 540 N.Y.S.2d 1, 537 N.E.2d 176 [internal quotation marks and citations omitted]). We later explained that "[t]he party breaching the contract is li able for those risks foreseen or which should have been foreseen at the time the contract was made" (Ashland Mgt. v. Janien, 82 N.Y.2d 395, 403, 604 N.Y.S.2d 912, 624 N.E.2d 1007 [1993]). It is not necessary for the breaching party to have foreseen the breach itself or the particular way the loss occurred, rather, "[i]t is only necessary that loss from a breach is foreseeable and probable" (id., citing Restatement [Second] of Contracts § 351; 3 Farnsworth, Contracts § 12.14 [2d ed 1990]).

To determine whether consequential damages were reasonably contemplated by the parties, courts must look to "the nature, purpose and particular circumstances of the contract known by the parties ... as well as `what liability the defendant fairly may be supposed to have assumed consciously, or to have warranted the plaintiff reasonably to suppose that it assumed, when the contract was made'" (Kenford, 73 N.Y.2d at 319, 540 N.Y.S.2d 1, 537 N.E.2d 176, quoting Globe Refining Co. v. Landa Cotton Oil Co., 190 U.S. 540, 544, 23 S.Ct. 754, 47 L.Ed. 1171 [1903]). Of course, proof of consequential damages cannot be speculative or conjectural (see Ashland Mgt., 82 N.Y.2d at 403, 604 N.Y.S.2d 912, 624 N.E.2d 1007 [damages for the loss of future profits must be proven with reasonable certainty and "be capable of measurement based upon known reliable factors without undue speculation"]; see also Kenford Co. v. County of Erie, 67 N.Y.2d 257, 261, 502 N.Y.S.2d 131, 493 N.E.2d 234 [1986]).

The dissent seeks to distinguish this case from the Kenford line of reasoning by grouping it with that separate class of contract actions involving pure "agreements to pay"—contracts for money only—where the only recoverable damage for breach is interest. This distinction is without basis. With agreements to pay money—for example, an agreement to pay sales commissions or a contract to pay a lender $12 tomorrow for $10 given today, the sole purpose of the contract is to pay for something given in exchange. In such cases, what the payee plans to do with the money is external and irrelevant to the contract itself. In the present case, however, the purpose of the agreement—what the insured planned to do with its payment — was at the very core of the contract itself.

The dissent also blurs the significant distinction between consequential and punitive damages. The two types of damages serve different purposes and are evidenced by different facts. Consequential damages, designed to compensate a party for reasonably foreseeable damages, "must be proximately caused by the breach" and must be proven by the party seeking them (24 Lord, Williston on Contracts § 64:12, at 125 [4th ed.]). Punitive damages, by contrast, "are not measured by the pecuniary loss or injury of the plaintiff as a compensation" but are "assessed by way of punishment to the wrongdoer and example to others" (11 Perillo, Corbin on Contracts § 59.2, at 550 [rev.ed.]). Unlike consequential damages, which are quantifiable, "[t]here is no rigid formula by which the amount of punitive damages is fixed, although they should bear some reasonable relation to the harm done and the flagrancy of the conduct causing it" (I.H.P. Corp. v. 210 Cent. Park S. Corp., 16 A.D.2d 461, 467, 228 N.Y.S.2d 883 [1st Dept.1962], affd. 12 N.Y.2d 329, 239 N.Y.S.2d 547, 189 N.E.2d 812 [1963]).

As in all contracts, implicit in contracts of insurance is a covenant of good faith and fair dealing, such that "a reasonable insured would understand that the insurer promises to investigate in good faith and pay covered claims" (New York Univ. v. Continental Ins. Co., 87 N.Y.2d 308, 318, 639 N.Y.S.2d 283, 662 N.E.2d 763 [1995]). An insured may also bargain for the...