Two NY Courts Rule That Insurance Companies May Have to Pay Attorneys' Fees

Policyholder Advisor & Alert

PUBLISHED ON: August 28, 2015

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When is a wrongful coverage denial just a breach of contract — and when is it an act of bad faith? This question is asked by almost every policyholder whose claim is denied.

The next question, typically, is whether insurance companies that acted in bad faith can be required to pay for the attorneys’ fees and costs that policyholders are forced to incur in order to redress the wrong. The good news for policyholders is that courts in New York are increasingly willing to hold insurance companies financially accountable for violations of their obligations of good faith and fair dealing. Under New York law, those obligations are implied in every insurance contract.

In two recent decisions — one federal and one state — courts made clear that attorneys’ fees and costs can constitute consequential damages that insurance companies may be obligated to pay.

One particularly important decision on this issue was handed down on July 31 in National Railroad Passenger Corp. v. Arch Specialty, et al., Case No. 14-cv-7510 (S.D.N.Y.) (Rakoff, J.). There, the Southern District of New York denied, in part, a motion of the insurance companies to dismiss plaintiff’s demand for consequential damages. The part of the motion that was denied was the policyholder’s demand for attorneys’ fees and costs.

The insurance companies had argued — as they usually do and as some New York courts have held — that consequential damages can never encompass attorneys’ fees and costs under the American rule.

By denying that part of the motion, therefore, the Southern District made clear that attorneys’ fees and costs can in fact constitute consequential damages in New York, pursuant to Panasia Estates, Inc. v. Hudson Ins. Co., 10 N.Y. 3d 200 (2008) and Bi-Economy Market., Inc. v. Harleysville Ins. Co. of New York, 10 N.Y. 3d 187 (2008).

The Southern District expressly recognized that, in decisions that post-dated Panasia and Bi-Economy, some “New York courts have since rejected the argument that [Plaintiff] makes here” — that attorneys’ fees and costs can constitute consequential damages.

But the Southern District declined to follow those decisions. Instead, it found precedential support for awarding attorneys’ fees and costs as consequential damages in a 1967 decision of the New York Court of Appeals, captioned Sukup v. State, 19 N.Y.2d 519:

“The New York Court of Appeals has suggested that an exception to the general rule prohibiting claims for attorneys’ fees may exist when the insured can make ‘a showing of such bad faith [on the part of the insurer] in denying coverage that no reasonable carrier would, under the given facts, be expected to assert it.”

On this basis, the Southern District held that the policyholder’s demand for an award of attorneys’ fees and costs as consequential damages was not subject to dismissal.

A state court in New York reached a similar decision on March 10, just a few months earlier. In Niesenbaum v. AXA/Equitable Life Ins. Co., Case No. 2013/600412 (N.Y. Sup. Ct., Nassau Cty), the Supreme Court in Nassau Country denied a motion for summary judgment dismissal of a claim for consequential damages. The denial was significant because the only consequential damages at issue were for attorneys’ fees and costs.

In refusing to dismiss the demand for consequential damages, the supreme court relied on Panasia and Bi-Economy. The court held that consequential damages may be appropriate because “the defendant failed to establish, prima facie that it acted in good faith in finding that the plaintiff was at first disabled, then reversing its finding and disclaiming coverage.

”The determination of whether an insurance company has breached its implied obligation of good faith and fair dealing is always fact-specific. The key questions vary, depending on the facts of the case. But the ultimate consideration is whether the insurance company fully and fairly considered the underlying facts before issuing the denial.

Depending on the facts, any number of other questions may arise. Examples include whether it initially approved the claim, then reversed its position without justification; whether it delayed making a decision for an inordinate length of time, waiting for a change of circumstances that would justify a denial.

But the bottom line is that, in New York at least, there is an increased trend in favor of holding insurance companies accountable and giving policyholders a fair shake when they encounter bad faith practices.

A real potential for recovering consequential damages, beyond policy limits, and of recovering attorneys’ fees can significantly impact the course of a claim or coverage litigation. It also can increase the chance of avoiding litigation entirely, or of reaching an settlement that ends the litigation once the insurance companies realize that they are on the risk for paying the policyholder’s fees.