People purchase insurance to receive payment if they suffer a loss and for peace of mind in knowing their property, and potentially beneficiaries, are covered. Insurers know this, which is why we see so many marketing slogans discussing “good neighbors” and “good hands.” But what happens when we are beyond the marketing campaigns and involved in the claims process? Policyholders’ most important assets are often involved in claims, and sometimes their livelihoods are at stake. If insurers miss the mark in adjusting claims, these vital assets may be lost. It is reassuring to know New York’s highest court recognizes this fact, and holds insurers accountable for their actions when they fail to handle claims according to the contract and the law. Bi–Economy Mkt., Inc. v. Harleysville Ins. Co. of N.Y., 856 N.Y.S. 2d 505 (2008).

Bi–Economy Market was a family-owned wholesale and retail meat market located in Rochester, New York. It suffered a major fire, resulting in the complete loss of food inventory and heavy structural damage to the building and business-related equipment. At the time of the fire, Bi–Economy was insured by Harleysville Insurance Company. Following the fire, Bi–Economy submitted a claim to Harleysville pursuant to the terms of the contract. Harleysville disputed Bi–Economy’s claim for actual damages, and advanced only the sum of $163,161.92. More than a year later, following submission of their dispute to alternative dispute resolution, Bi–Economy was awarded an additional $244,019.88. During all this time, Harleysville offered to pay only seven months of Bi–Economy’s claim for lost business income, despite the fact that the policy provided for a full 12 months. Bi–Economy never resumed business operations.

Bi–Economy filed a lawsuit against Harleysville, asserting causes of action for bad faith claims handling, tortious interference with business relations, and breach of contract, seeking consequential damages for “the complete demise of its business operation in an amount to be proved at trial.” Bi–Economy alleged that Harleysville improperly delayed payment for its building and contents damage and failed to timely pay the full amount of its lost business income claim, and as a result of Harleysville’s breach of contract, its business collapsed. The issue was whether the insurer was responsible for consequential damages due to the delay in handling the claim and ultimate collapse of the business.

The court used powerful words in recognizing the importance the insurance contract and heart of the agreement between insurers and policyholders:

The purpose served by business interruption coverage cannot be clearer—to ensure that Bi–Economy had the financial support necessary to sustain its business operation in the event disaster occurred.

Certainly, many business policyholders, such as Bi–Economy, lack the resources to continue business operations without insurance proceeds. Accordingly, limiting an insured’s damages to the amount of the policy, i.e., money which should have been paid by the insurer in the first place, plus interest, does not place the insured in the position it would have been in had the contract been performed.

Thus, the very purpose of business interruption coverage would have made Harleysville aware that if it breached its obligations under the contract to investigate in good faith and pay covered claims it would have to respond in damages to Bi–Economy for the loss of its business as a result of the breach. Furthermore, … the purpose of the contract was not just to receive money, but to receive it promptly so that in the aftermath of a calamitous event, as Bi–Economy experienced here, the business could avoid collapse and get back on its feet as soon as possible. Thus, this insurance contract included an additional performance-based component: the insurer agreed to evaluate a claim, and to do so honestly, adequately, and—most importantly—promptly. The insurer certainly knew that failure to perform would (a) undercut the very purpose of the agreement and (b) cause additional damages that the policy was purchased to protect against in the first place. Here, the claim is that Harleysville failed to promptly adjust and pay the loss, resulting in the collapse of the business. When an insured in such a situation suffers additional damages as a result of an insurer’s excessive delay or improper denial, the insurance company should stand liable for these damages. This is not to punish the insurer, but to give the insured its bargained-for benefit. (Emphasis added).

In reaching its conclusion, the highest court in New York held the insurer could be responsible for Bi-Economy’s claim for consequential damages, including the demise of its business, and it was reasonably foreseeable and contemplated by the parties in their contract. Policyholders in New York should rest assured that New York’s highest court understands the importance of an insurance agreement and the necessity for claims to be handled promptly.

Happy New Year!