Royal Globe Ins. Co. v. Chock Full O'Nuts Corp.

• Court: New York Supreme Court — Appellate Division
• Writing for the Court: FEIN
• Citation: Royal Globe Ins. Co. v. Chock Full O'Nuts Corp., 449 N.Y.S.2d 740, 86 A.D.2d 315 (N.Y. App. Div. 1982)
• Decision Date: 06 May 1982
• Parties: ROYAL GLOBE INSURANCE COMPANY, Plaintiff-Appellant-Respondent, v. CHOCK FULL O'NUTS CORPORATION, Defendant-Respondent-Appellant.

Page 740

449 N.Y.S.2d 740

86 A.D.2d 315

ROYAL GLOBE INSURANCE COMPANY, Plaintiff-Appellant-Respondent, v. CHOCK FULL O'NUTS CORPORATION, Defendant-Respondent-Appellant.

Supreme Court, Appellate Division First Department.

May 6, 1982.

Eugene Wollan, New York City, of counsel (Lawrence S. Greengrass, New York City, with him on the brief, Rein, Mound & Cotton, New York City, attorneys), for plaintiff-appellant-respondent.

Adam B. Gilbert, New York City, of counsel (Martin I. Shelton, New York City, with him on the brief, Shea & Gould, New York City, attorneys), for defendant-respondent-appellant.

Before MURPHY, P. J., and KUPFERMAN, CARRO, MARKEWICH and FEIN, JJ.

FEIN, Justice.

Plaintiff sued its insured for over $3.3 million in insurance premiums and service charges allegedly due. Defendant counterclaimed for $5 million, asserting, inter alia, damage from unfair claim settlement practices under Insurance Law § 40-d. In addition, defendant sought attorneys' fees and $5 million in punitive damages.

Special Term was correct in dismissing the fourth counterclaim. We have held that § 40-d of the Insurance Law does not create a private right of action for an insured against its insurer, and have concluded that the statute was intended to afford only a public right of redress to a state agency respecting the elimination of unfair claims practices by insurers (Cohen v. New York Property Insurance Underwriting Association, 65 A.D.2d 71, 78-79, 410 N.Y.S.2d 597). As defendant submits, more recent opinions in the Court of Appeals (Hubbell v. Trans World Life Insurance Co. of New York, 50 N.Y.2d 899, 430 N.Y.S.2d 589, 408 N.E.2d 918; Halpin v. Prudential Insurance Co. of America, 48 N.Y.2d 906, 425 N.Y.S.2d 48, 401 N.E.2d 171, rearg. den., 49 N.Y.2d 801, 426 N.Y.S.2d 1029, 403 N.E.2d 466) have left the door open to the possibility of private damage actions under § 40-d. However, the circumstances of those cases were held not to warrant such remedy, even if otherwise available. We find nothing in the case now before us inviting a different response.

The policies of insurance issued by plaintiff to defendant included a workers' compensation and employer's liability policy and a service agreement. In part, at least, the insurer agreed to provide a claims service and attorney's services in defense of claims asserted against the plaintiff. The first three counterclaims allege that: (1) plaintiff (Royal) breached its contractual obligation under the service agreement resulting in gross overpayments to claimants and requiring excessive reserves for losses; (2) Royal breached its fiduciary duty to defendant Chock Full O'Nuts Corporation (Chock); and (3) Chock was induced to enter into the agreements based upon misrepresentations by Royal.

The fourth counterclaim, here in issue, realleges the allegations of the first three counterclaims, and then in substance paraphrases portions of Insurance Law § 40-d alleging that plaintiff (1) failed to respond to defendant's communications concerning the status of claims and Chock's offer of assistance in the investigation and disposition of claims; (2) failed to adopt and implement reasonable standards for the prompt investigation of claims arising under the policies; and (3) did not attempt in good faith to effectuate fair and equitable settlements of claims submitted in which liability was reasonably clear, all said to be without good faith or just cause and with such frequency as to indicate "a general business practice at least as to Chock".

In essence, the claim is that Royal acted in violation of Insurance Law § 40-d in such a grievous manner as to warrant punitive damages.

In opposition to plaintiff's motion to dismiss, Chock submitted an affidavit asserting that Royal had no regular investigative procedure for interview of claimants, failed to obtain hospital reports and interview claimants' physicians, failed to pursue opportunities for reimbursement or apportionment, and instead billed Chock for the loss. The affidavit further asserted that as a consequence reserves were required to be too high and to be maintained for periods after settlement of the claims. The affidavit was properly considered for the limited purpose of remedying defects in the counterclaim only (Rovello v. Orofino Realty Co., 40 N.Y.2d 633, 636, 389 N.Y.S.2d 314, 357 N.E.2d 970).

It is plain from this recital that these counterclaims basically constitute a damage action for breach of contract or possibly for negligence in handling claims, brought by an insured against its insurer, with the usual remedies and relief available in such actions. Nothing in the counterclaim or the supporting affidavit provides a basis for punitive damages, either on the basis of Insurance Law § 40-d or otherwise.

The enactment of § 40-d was clearly intended to empower "the Insurance Department to regulate claims settlement practices and, based on an overall review of a company's practices, to impose sanctions where appropriate." (See the Governor's memorandum on approval of the measure, New York State Legislative Annual, 1970, p. 489).

The order appealed from, granting discovery not sought, would put the insured in the place of the Insurance Department with free rein to explore the general business practices of the insurer vis-a-vis all of those insured by it, and require plaintiff-insurer to lay bare to defendant all of plaintiff's other insurance accounts and records. Nothing in this case or in the statute warrants such inquiry.

The gravamen of Chock's counterclaim is not that Royal engaged in unfair business practices (e.g., rejecting reasonable settlement offers), but rather that it supervised the Chock workers' compensation files in a negligent manner, granted claims in higher than necessary amounts, and failed to pursue possible approaches to obtain refunds of money.

In essence, Royal is charged with a failure properly to perform its contractual obligations. This is an insufficient basis on which to ground a claim for punitive damages, whether or not Insurance Law § 40-d imports a private action for damages.

"Inasmuch as plaintiff's action is grounded upon private breach of contract, and does not seek to vindicate a public right or deter morally culpable conduct, punitive damages are not recoverable (e.g., Trans-State Hay & Feed Corp. v. Faberge, Inc., 35 N.Y.2d 669 affg. 42 A.D.2d 535 Walker v. Sheldon, 10 N.Y.2d 401, 404 see Garrity v. Lyle Stuart, Inc., 40 N.Y.2d 354, 358 ). Contrary to plaintiff's argument Gordon v. Nationwide Mut. Ins. Co., 30 N.Y.2d 427, 436-437 and similar cases do not hold otherwise. There, the court indicated that an insured may recover damages in excess of policy limits when such damages stem from an insurer's bad faith refusal to settle a liability claim made by a third party. That principle can find no application where the insurer has terminated disability benefits allegedly payable to the insured, for there is no possibility of the insured being cast in damages which exceed policy limits by reason of the insurer's conduct." (Halpin v. Prudential Ins. Co. of Amer., supra, 48 N.Y.2d at 907-908, 425 N.Y.S.2d 48, 401 N.E.2d 171).

The factual allegations in the counterclaim do not suggest such bad faith or morally culpable conduct. Like Halpin, supra, the cases treating attempts to recover punitive damages from insurance companies where the insurance company has allegedly failed in bad faith to settle or pay a claim by its own insured require a showing of something more than mere breach of contract, negligent or otherwise. There must be a showing of such morally culpable conduct and wanton dishonesty as to imply a criminal indifference to civil obligations.

"In order to prove an action for punitive damages against an insurance company, it is necessary to show that 'in its dealings with the general public had engaged in a fraudulent scheme evincing such "a high degree of moral turpitude and * * * such wanton dishonesty as to imply a criminal indifference to civil obligations" (Walker v. Sheldon, 10 N.Y.2d 401, 405 ).' (Buttignol Constr. Co. v. Allstate Ins. Co., 22 A.D.2d 689 affd. 17 N.Y.2d 476 M.S.R. Assoc. v. Consolidated Mut. Ins. Co., 58 A.D.2d 858 Hubbell v. Trans World Life Ins. Co. of N.Y., 70 A.D.2d 949 ). Plaintiffs' cause of action does not suggest that type of scheme and is therefore insupportable." (Granato v. Allstate Ins. Co., 70 A.D.2d 948, 949, 418 N.Y.S.2d 108.)

In Granato, one justice concurred on constraint, suggesting that the requirement for showing of fraud against the general public was no longer viable. However, it is notable that on the same date it decided the Halpin case, the Court of Appeals...