Policyholder's Claim For "Bad Faith Claims Handling" Dismissed As Duplicative of Breach of Contract Claim

On October 27, 2015, the First Department issued a decision in Orient Overseas Assoc. v. XL Insurance America, Inc., 2015 NY Slip Op. 07788, dismissing a claim against an insurance carrier for "bad faith claims handling."

Orient Overseas involved "an insurance dispute related to property damage caused by Hurricane Sandy" in Lower Manhattan. In addition to its claim for breach of contract, the plaintiff policyholder sought to assert a tort claim against the insurance carrier for "bad faith claims handling." Justice Schweitzer dismissed the claim, finding that no such claim exists under New York law. (See our previous post about Justice Schweitzer's decision here.

The First Department affirmed, explaining:

The two causes of action against Westport are duplicative. In the breach of contract cause of action, plaintiff alleges the existence of the policy, the physical damage to the property, plaintiff's satisfaction of all terms and conditions of the policy, including submitting claims to Westport, and Westport's refusal to pay plaintiff for its covered losses. In the "unfair claim selling practices" cause of action, plaintiff repeats all of the allegations made in support of the breach of contract claim and adds that Westport "has misrepresented to Plaintiff Orient and Defendant Cushman the applicable sub-limit and deductible." Plaintiff also alleges that, despite its having informed Westport that its expenses were greater than the disputed deductible amount, Westport "continues to refuse and has failed to pay any amounts due and owing under the [policy]," and "has committed unfair claims handling practice under the law of the State of New York and has further acted in bad faith."

By alleging that Westport "misrepresented" the "applicable sub-limit and deductible," plaintiff is complaining that Westport, in bad faith, has not performed their agreement in accordance with plaintiff's understanding of it. Thus, the fifth cause of action is in fact a contract claim and is duplicative of the fourth cause of action, which alleges breach of contract against Westport.

As noted in our previous post on this lawsuit, there is long-standing (if seldom applied) authority in New York permitting a policyholder to recover attorneys' fees incurred in a coverage action where the insurance company engages in "such bad faith in denying coverage that no reasonable carrier would, under the given facts, be expected to assert it." Sukup v. State of New York, 19 N.Y.2d 519, 522 (1967). In this case, however, attorneys' fees could not be awarded on the breach of contract claim because the insurance policy expressly precluded such an award. Hence, the plaintiff's attempt to recast the claim as a separate tort claim. As the First Department made clear, however, such a claim does not exist under New York law.