implied covenant of good faith and fair dealing

Are “consequential damages” available on contract claim against an insurer in an action brought by an insured for breach of a commercial liability policy? In D.K. Prop., Inc. v. National Union Fire Ins.,  a recent case out of the First Department, the answer is a resounding “yes”.  There, the complaint alleged two causes of action, namely, breach of contract for failure to pay for covered losses and branch of the implied covenant of good faith and fair dealing.  Plaintiff sought consequential damages on both claims, and attorney’s fees as to the “bad faith” claim.

The insurer argued that consequential damages were unavailable in a breach of contract claim against a carrier when the policy itself covers only “direct and physical loss” to the building.   Indeed, as the complaint outlines, the insured is claiming damages for the carrier’s “unreasonable” and “burdensome” informational requests during the investigatory period which extended over a three-year period.  Engineering costs, ,water abatement equipment because of delays in repairs, monitoring equipment  and interim repairs were only a few of the “types” of damages alleged.

On a pre-answer motion to dismiss, the defendant insurer sought dismissal of the claim for consequential damages on the ground they did not state a claim, namely, that the pleading did not provide a detailed factual showing of why the damages, which do not flow directly from the breach, are recoverable.  The motion court, the Hon. Robert Reed agreed, and dismissed the claim for consequential damages.  On appeal, the First Department in an unanimous decision, reversed the dismissal and reinstated the claim for consequential damages, holding such claims are not subject to any degree of heightened pleading.  The foreseeability of such damages is not for a motion to dismiss, but rather proof at trial.  The court made clear that an insured has a claim against a carrier for consequential damages when a carrier doesn’t provide coverage “if such damages (“risks”) were foreseen or should have been foreseen when the contract was made.”

In one line, the court also rejected the insurer’s argument that a breach of contract claim and “bad faith” claim were duplicative:  such claims can coexist, so long as the claims allege different conduct which they did here.

The Takeaway:  “consequential” damages need not be particularized in your pleading in connection with contractual based claims (breach of contract or implied covenant).  Don’t worry, neither CPLR 3015 (pleading particularity with respect to specific matters) nor 3016 (pleading particularity in specific actions) apply.    A detailed pleading nevertheless should be alleged setting forth at least the types of damages sought that flow from the claimed breach.

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In May 2013, professional golfer Vijay Singh (“Singh”) brought suit against PGA Tour, an organizer of the leading men’s professional golf tours and events in North America, in Vijay Singh v. PGA Tour, Inc. PGA Tour enacted an Anti-Doping Program, which prohibits golfers from using certain substances. The list of prohibited substances was adopted from the list maintained by the World Anti-Doping Agency (“WADA”). A few years after the Anti-Doping Program was enacted, Singh began using a performance-enhancing substance, deer antler spray, for his knee and back problems.

Although Singh tested negative for any banned substance, PGA Tour, which sent the spray for testing, determined that the spray contained prohibited substances. As a result, PGA Tour concluded that Singh violated the Anti-Doping Program and, as a result, suspended him from activities related to PGA Tour’s organization. PGA Tour subsequently dropped its disciplinary action and revoked Singh’s suspension after WADA announced that deer antler spray is not a prohibited substance.

Singh sued PGA Tour in the New York County Commercial Division for, among other things, breach of the implied covenant of good faith and fair dealing, and conversion. Nearly three years later, Singh moved for partial summary judgment on his breach of the implied covenant of good faith and fair dealing cause of action. PGA Tour moved for summary judgment on the causes of action for conversion and breach of the implied covenant of good faith and fair dealing.

In May 2017, Justice Eileen Bransten granted in part and denied in part PGA Tour’s motion for summary judgment. She dismissed Singh’s claim for breach of the implied covenant of good faith and fair dealing and denied in part Singh’s motion for partial summary judgment on that claim. The Court determined there were issues of fact regarding whether PGA Tour breached the implied covenant of good faith by failing to consult with the WADA, upon which PGA Tour clearly relied in issuing its list of prohibited substances, prior to suspending Singh. The Court also concluded there were issues of fact pertaining to what, if any, damage Singh suffered as a result of his suspension and PGA Tour’s making public statements regarding his use of the substance. Justice Bransten also dismissed Plaintiff’s cause of action for conversion on the basis that PGA Tour demonstrated compliance with the Anti-Doping Program, thus establishing that PGA Tour was entitled to escrow Plaintiff’s funds from the date of Singh’s alleged violation to the end of his suspension.

Recently, the Appellate Division, First Department affirmed Justice Bransten’s decision. PGA Tour’s motion for summary judgment dismissing Singh’s cause of action for breach of the implied covenant of good faith and fair dealing was denied. The Court held that the determination as to whether PGA Tour exercised discretion “arbitrarily, irrationally or in bad faith by failing to confer with or defer to” the WADA prior to suspending Singh and making public statements regarding his use of the deer antler spray is an issue of fact for the jury to determine. The First Department relied on Dalton v. Educational Testing Serv., which held that “[w]here a contract contemplates the exercise of discretion, this pledge includes a promise not to act arbitrarily or irrationally.” Indeed, the Court went on to determine that within the obligation to exercise good faith are “promises which a reasonable person in the position of the promisee would be justified in understanding were included.” In that regard, the Court held that issues of fact exist on whether the public statements made by PGA Tour representatives implicating Singh’s substance use were a breach of the implied covenant of good faith and fair dealing, and whether and what damage Singh suffered as a result thereof. The Court also affirmed the earlier decision dismissing the claim to the extent it relied on Singh’s allegation that he was treated differently than other similarly situated professional golfers.