Earlier this month, I wrote about a few cases where insurance company motions for summary judgment failed. This week, I am writing about another. Although I prefer to write about reported appellate opinions, the state trial court opinion in Carden v. Allstate Insurance Company, issued by New York’s Supreme Court in Westchester County in December 2010, is of interest to policyholders both in New York and elsewhere.

Mr. and Mrs. Pelham were insured by Allstate when their home was left uninhabitable by a fire. Although Allstate offered $265,000 to resolve the claim, Mr. and Mrs. Pelham did not accept it. After it was determined that the home should be gutted, Allstate increased its offer to $575,000, which the insureds and rejected.

Mr. and Mrs. Pelham then invoked appraisal. J–Con Inc. prepared an estimate of $1,069,849 for the policyholders. Prism General Services prepared an estimate of $750,320 for Allstate. The Umpire determined the cost to repair the home to be $832,982, and Allstate agreed to pay it.

As happens with many remodeling and construction projects, when trying to repair or improve one aspect of the property, another part of the property is unintentionally damaged in the process. During the reconstruction of the Pelhams’ home, the driveway and landscaping were damaged and Allstate refused to reimburse them for those damages. Additionally, due to Allstate’s delay in settling the claim and the resulting complications during the reconstruction of the home, Mr. and Mrs. Pelham were unable to live in their home for 18 months. Although the policy entitled them to a maximum of 12 months of Additional Living Expenses (“ALE”), Allstate refused to pay any ALE whatsoever. Mr. and Mrs. Pelham then filed a lawsuit against Allstate seeking reimbursement of ALE, other costs and alleging bad faith.

The Supreme Court in New York ruled against Allstate on its motion for summary judgment, finding that because the driveway is considered an attached structure under the terms of the policy, the damage to the driveway during the reconstruction was covered. The Court also ruled against Allstate on the issue of damages to the landscaping. Although Allstate initially refused to reimburse the Pelhams for the landscape damage, Allstate later conceded coverage.

In their Complaint, the Pelhams sought payment from Allstate for 18 months of ALE, the cost of the mold inspection and appraisal expenses. The Pelhams, however, did not seek payment of these amounts under the terms of the policy, but instead were demanding payment of these costs as consequential damages resulting from Allstate’s breach of its covenant of good faith and fair dealing.

When evaluating these issues, the Court relied on this basic principle:

As in all contracts, implicit in contracts of insurance is a covenant of good faith and fair dealing, such that a reasonable insured would understand that the insurer promises to investigate in good faith and pay covered claims… While New York does not recognize an independent tort cause of action for an insurer’s failure to perform its contractual obligations under an insurance policy…where an insurer breaches its duty to investigate, bargain and settle claims in good faith, consequential damages for breach of contract may be recovered not limited by the amount specified in the insurance policy . . . .

The Supreme Court in New York found that Mr. and Mrs. Pelham proved they suffered damage due to the delay in the reconstruction of their home caused by Allstate’s bad faith. To settle the claim, Allstate initially offered $265,000, then $575,000 and later paid $832,982. The Court determined this constituted a prima facie claim for breach of the covenant of good faith and Allstate failed to submit any evidence that raised a question of fact requiring a trial.

Please keep in mind that this decision is unreported and is particular to New York. The law in other jurisdictions may differ.