Unreasonably Lengthy and Frivolous Investigation Sufficient Basis for Breach of Implied Covenant of Good Faith and Fair Dealing

On September 15, 2017, Justice Kornreich of the New York County Commercial Division issued a decision in Max Jewelry, Inc. v. Those Certain Interested Underwriters at Lloyds London Subscribing to Certificate No. JB14/3995, 2017 NY Slip Op. 31976(U), holding than an insured’s complaint stated a claim against an insurance carrier for breach of the covenant of good faith and fair dealing.

Unlike other states, New York does not recognize a separate cause of action against an insurance company for bad faith claims handling. See, for example, our previous posts on this topic here and here. However, in certain circumstances, the insured can state a cause of action for breach of the implied covenant of good faith and fair dealing. In Max Jewelry, Justice Kornreich found that the insured had properly breach such a cause of action, explaining:

An insurance carrier has a duty to investigate in good faith and pay covered claims. Damages for breach of that duty include both the value of the claim, and consequential damages, which may exceed the limits of the policy, for failure to pay the claim within a reasonable time. Such a cause of action is not duplicative of a cause of action sounding in breach of contract to recover the amount of the claim. Such consequential damages may include loss of earnings not directly caused by the covered loss, but caused, instead, by the breach of the implied covenant of good faith and fair dealing.

Max Jewelry alleges that Underwriters conducted an unreasonably lengthy and frivolous investigation, thereby saddling it with a perpetually open-ended loss claim that prevents it from securing alternative insurance to replace the now-cancelled Policy. It seeks to recover consequential damages in excess of the policy limit for lost profits, alleging that its inability to secure new insurance coverage has compromised its business. . . .

To recover consequential damages, Max Jewelry is required to show that the damages sought were reasonably foreseeable and proximately caused by Underwriters' alleged breach of the implied covenant of good faith and fair dealing. Max Jewelry alleges that insurance coverage is a prerequisite to conducting business in the jewelry industry, that it contracted for coverage on a year-to-year basis, and that insurance is typically unavailable to those with pending loss claims. These allegations are sufficient, at this stage of the litigation, to support Max Jewelry's claim for consequential damages on the theory that Max Jewelry's inability to secure alternative insurance and its resulting loss in business opportunities, was the foreseeable consequence of Underwriters' alleged unreasonably lengthy investigation.

(Citations omitted).