In a huge win for policyholders, a New York appellate court, in D.K. Property, Inc. v National Union Fire Insurance Company of Pittsburgh, Pa., held that an insured need not provide a detailed factual description or explanation for why consequential damages are recoverable at the pleading stage. Rather, an insured's complaint must only (i) specify the types of consequential damages claimed; and (ii) allege that those damages reasonably were contemplated by the parties prior to contracting.
Here, D.K. Property's building was damaged as a result of construction on an adjoining building, and it timely filed a claim with National Union under a policy that covers "direct physical loss or damage to" the building. National Union neither paid the claim nor disclaimed coverage. Instead, according to D.K. Property, National Union made unreasonable and increasingly burdensome information demands over a three-year period, which it alleges was a "tactic" to make pursuing the claim so expensive that D.K. Property would abandon the claim. As a result of the delay, D.K. Property alleges the structural damage to its building has worsened.
D.K. Property filed suit, asserting claims for (1) breach of contract, and (2) breach of the implied covenant of good faith and fair dealing, seeking under both claims consequential damages for expenses incurred in mitigating further damage, including the costs of temporary repairs and mitigation efforts, lost rent, and legal fees. The trial court struck the majority of D.K. Property's consequential damages.
On appeal, the question presented was "whether, at the pleading stage, a claim for consequential damages arising from defendant's processing of plaintiff's insurance claim requires a detailed, factual description or explanation for why such damages, which do not directly flow from the breach, are also recoverable." The Court answered no—the insured need only specify the types of damages sought, and allege that those damages reasonably were contemplated by the parties at the time the policy was procured. The Court observed that proof that an insured will establish its claim for consequential damages is not required at the pleading stage.
The Court went on to reaffirm that insureds may seek consequential damages "resulting from an insurer's failure to provide coverage if such damages ('risks') were foreseen or should have been foreseen when the contract was made." Then—importantly for policyholders—the Court clarified that foreseeability is not something that can be decided on a motion to dismiss: "a determination of whether such damages were, in fact, foreseeable should not be decided on a motion to dismiss and must await a fully developed record." Finally, the Court held there is no heightened pleading standard for consequential damages: "there is no heightened pleading standard requiring plaintiff to explain or describe how and why the 'specific' categories of consequential damages alleged were reasonable and foreseeable at the time of contract." Applying those legal rulings, the Court determined that D.K. Property met its pleading burden and reinstated its claims for consequential damages.
D.K. Property provides policyholders with a path, under New York law, to recover consequential damages under contractual causes of action (including contractual bad faith). This ruling is particularly valuable for policyholders litigating coverage issues under New York law, which narrowly limits tort claims for bad faith. This case also serves as a reminder to policyholders that when procuring insurance, they should endeavor to anticipate the types of damages that might foreseeably arise in the event of a claim and ensure that those types of damages are expressly covered, or that the policy reflects the insurer's contemplation of the damages that may result if it wrongfully delays a coverage decision or denies coverage.
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