New York University v. Continental Ins. Co.

• Decision Date: 27 December 1995
• Citation: 662 N.E.2d 763,87 N.Y.2d 308,639 N.Y.S.2d 283
• Parties: , 662 N.E.2d 763, 64 USLW 2448, 108 Ed. Law Rep. 342 NEW YORK UNIVERSITY, Respondent, v. CONTINENTAL INSURANCE COMPANY et al., Appellants.
• Court: New York Court of Appeals Court of Appeals

Page 283

639 N.Y.S.2d 283

87 N.Y.2d 308, 662 N.E.2d 763, 64

USLW 2448, 108 Ed. Law Rep. 342

NEW YORK UNIVERSITY, Respondent, v. CONTINENTAL INSURANCE COMPANY et al., Appellants.

Court of Appeals of New York.

Dec. 27, 1995.

[87 N.Y.2d 311] [662 N.E.2d 765] Hart & Hume, New York City (Mark S. Gamell, Lewis Stockman, Cecil Holland, Jr., and Steven H. Rittmaster, of counsel), for appellants.

Robert P. Walton, New York City, S. Andrew Schaffer, Howard S. Sussman, Eugene R. Anderson, Robert M. Horkovich and Steven J. Dolmanisth, for respondent.

[87 N.Y.2d 312] Windels, Marx, Davies & Ives, New York City (Craig P. Murphy, Arthur E. Hoffmann,

[662 N.E.2d 766] Jr., and Darrell M. Joseph, of counsel), for American Council of Life Insurance and another, amici curiae

[87 N.Y.2d 313] Salans Hertzfeld & Heilbronn (Charles Platto, of counsel), James Kimble, of the District of Columbia Bar, admitted pro hac vice, Richard Hefferan, of the Illinois Bar, admitted pro hac vice, and Rob Weldy, of the New Jersey Bar, admitted pro hac vice, for American Insurance Association and others, amici curiae.

OPINION OF THE COURT

SIMONS, Judge.

This appeal addresses the sufficiency of the complaint and the affirmative defenses contained in the pleadings in an action by an insured against its insurer who disclaimed coverage under a commercial crime insurance policy. The two principal issues are (1) whether the complaint states a cause of action for punitive damages under the standards set forth in Rocanova v. Equitable Life Assur. Socy., 83 N.Y.2d 603, 612 N.Y.S.2d 339, 634 N.E.2d 940 and (2) whether plaintiff has stated a cause of action under General Business Law § 349.

I

In April 1990, plaintiff New York University (NYU) discovered a substantial shortage of merchandise in the clothing department of one of the university book stores. Its internal investigation led it to determine that Dwight Johnson, the book store's general merchandise buyer, had falsified order forms, invoices, and shipping and receiving documents for imprinted apparel purchased from MHK, Inc., a clothing vendor. Plaintiff concluded that Johnson and MHK had acted together in a scheme to bill NYU for merchandise never received and calculated that Johnson's actions had cost the university more than $1.6 million.

In September of 1988, NYU had purchased a commercial crime liability insurance policy from defendant Continental Insurance which included an endorsement for losses resulting from "Employee Dishonesty." The endorsement, which was in effect when NYU discovered Johnson's defalcations, provided coverage of $10 million. Through its insurance agent, Johnson & Higgins, NYU submitted a claim to defendant Continental Guaranty & Credit Corp., the claims servicing agent for defendant Continental Insurance.

Defendants conducted an investigation of plaintiff's claim, including review of the documentation submitted by plaintiff and interviews with NYU's bookstore employees, Dwight Johnson, Michael Kaye (the principal of MHK), and, in addition, consulted with an FBI agent who was investigating possible criminal charges. Johnson and Kaye denied any wrongdoing. Kaye maintained that merchandise had been purchased under a "bill and hold" arrangement and that some $200,000 worth of merchandise was being stored for plaintiff in a Brooklyn warehouse. Defendants subsequently denied the claim advising plaintiff that Johnson and Kaye appeared truthful and that the claim was not supported by the documentation submitted.

Thereafter, Continental informed plaintiff that its open-ended policy would expire on its anniversary date, and would not be renewed for "underwriting reasons." Continental offered a successor policy that, according to plaintiff, included onerous terms unacceptable to the university.

In April 1992, plaintiff commenced this action. In its amended complaint, it made comprehensive factual allegations about Johnson's defalcation, defendants' "sham" investigation and denial of plaintiff's claim, the "vindictive" nonrenewal of the policy following plaintiff's submission of the claim and referred to numerous instances of Continental Insurance Company's bad-faith practices with respect to policyholders nationwide. Plaintiff alleged that defendants' conduct violated their obligations to deal with plaintiff fairly and in good faith, and were contrary to New York statutory provisions proscribing deceptive business acts and unfair claim settlement practices by insurance companies.

The amended complaint set forth five causes of action. The first sounded in breach of contract and demanded indemnification for the amount of the claim minus the deductible. The second asserted that defendants breached their obligations to act in good faith toward and deal fairly with plaintiff and demanded the same relief. The third cause of action alleged deceptive business practices in violation of General Business Law § 349, and demanded treble damages to the statutory cap of $1,000. The fourth and fifth causes of action alleged unlawful and fraudulent conduct, respectively, in support of plaintiff's demand for contract damages plus punitive damages in the amount of $10 million. The complaint also included a demand for attorneys' fees and other costs on each of the causes of action.

In their answer, defendants' first affirmative defense asserted that all causes of action except the first failed to state a cause of action. Their second affirmative defense invoked a policy exclusion for claims arising from "inventory computation."

Conceding the viability of the first cause of action for breach of contract, defendants moved pursuant to CPLR 3211(a)(7) to dismiss the remaining causes of action and the demand for attorneys' fees. Plaintiff cross-moved to dismiss the affirmative defenses. Supreme Court denied defendants' motion in its entirety, and granted plaintiff's cross motion and dismissed the affirmative defenses. The Appellate Division affirmed, granted defendants leave to appeal to this Court, and certified the following question: "Was the order of the Supreme Court, as affirmed by this Court, properly made?" For the reasons that follow, we conclude that it was not.

II

We first consider whether plaintiff's amended complaint supports its demand for punitive damages.

In Rocanova v. Equitable Life Assur. Socy., 83 N.Y.2d 603, 612 N.Y.S.2d 339, 634 N.E.2d 940, supra, we reiterated the principle that damages arising from the breach of a contract will ordinarily be limited to the contract damages necessary to redress the private wrong, but that punitive damages may be recoverable if necessary to vindicate a public right (id., at 613, 612 N.Y.S.2d 339, 634 N.E.2d 940; see also, Garrity v. Lyle Stuart, Inc., 40 N.Y.2d 354, 358, 386 N.Y.S.2d 831, 353 N.E.2d 793). Punitive damages are available only in those limited circumstances where it is necessary to deter defendant and others like it from engaging in conduct that may be characterized as "gross" and "morally reprehensible," and of " 'such wanton dishonesty as to imply a criminal indifference to civil obligations' " (Rocanova, 83 N.Y.2d, at 614, 612 N.Y.S.2d 339, 634 N.E.2d 940, supra, quoting, Walker v. Sheldon, 10 N.Y.2d 401, 223 N.Y.S.2d 488, 179 N.E.2d 497). We set forth in the decision the pleading elements required to state a claim for punitive damages as an additional and exemplary remedy when the claim arises from a breach of contract. They are: (1) defendant's conduct must be actionable as an independent tort; (2) the tortious conduct must be of the egregious nature set forth in Walker v. Sheldon, 10 N.Y.2d 401, 404-405, 223 N.Y.S.2d 488, 179 N.E.2d 497, supra; (3) the egregious conduct must be directed to plaintiff; and (4) it must be part of a pattern directed at the public generally (Rocanova, 83 N.Y.2d, at 613, 612 N.Y.S.2d 339, 634 N.E.2d 940, supra ). Where a lawsuit has its genesis in the contractual relationship between the parties, the threshold task for a court considering defendant's motion to dismiss a cause of action for punitive damages is to identify a tort independent of the contract.

A tort obligation is a duty imposed by law to avoid causing injury to others. It is "apart from and independent of promises made and therefore apart from the manifested intention of the parties" to a contract (Prosser and Keeton, Torts § 92, at 655 [5th ed.]. Thus, defendant may be liable in tort when it has breached a duty of reasonable care distinct from its contractual obligations, or when it has engaged in tortious conduct separate and apart from its failure to fulfill its contractual obligations. The very nature of a contractual obligation, and the public interest in seeing it performed with reasonable care, may give rise to a duty of reasonable care in performance of the contract obligations, and the breach of that independent duty will give rise to a tort claim (see, Sommer v. Federal Signal Corp., 79 N.Y.2d 540, 583 N.Y.S.2d 957, 593 N.E.2d 1365). Where a party has fraudulently induced the plaintiff to enter into a contract, it may be liable in tort (see, Channel Master Corp. v. Aluminium Ltd. Sales, 4 N.Y.2d 403, 406-407, 176 N.Y.S.2d 259, 151 N.E.2d 833; see also, Deerfield Communications Corp. v. Chesebrough-Ponds, Inc., 68 N.Y.2d 954, 510 N.Y.S.2d 88, 502 N.E.2d 1003), or where a party engages in conduct outside the contract but intended to defeat the contract, its extraneous conduct may support an independent tort claim (see, North Shore Bottling Co. v. Schmidt & Sons, 22 N.Y.2d 171, 179, 292 N.Y.S.2d 86, 239 N.E.2d 189; Rich v. New York Cent. & Hudson Riv. R.R. Co., 87 N.Y. 382). Conversely, where a party is merely seeking to enforce its bargain, a tort claim will not lie (see, Sommer v. Federal Signal Corp., 79 N.Y.2d, at 552, 583 N.Y.S.2d 957, 593 N.E.2d 1365, supra; Bellevue S. Assocs. v. HRH Constr. Corp., 78 N.Y.2d 282, 293-295, 574 N.Y.S.2d 165, 579 N.E.2d 195).

Plaintiff contends that its amended...