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

Originally published in the Policyholder Advisor, Volume 24, Issue 4 (July/August 2015)

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...